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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
[Amendment No. ]
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
CLASSIC BANCSHARES, INC.
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(Name of Registrant as Specified in Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22 (a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
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4) Proposed maximum aggregate value of transaction:
5) Total fee paid: $______
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*Set forth the amount on which the filing fee is calculated and state how it
was determined.
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:_______________________________________________
2) Form Schedule or Registration Statement No.:__________________________
3) Filing Party:_________________________________________________________
4) Date Filed:___________________________________________________________
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August 6, 1996
Dear Classic Stockholder:
On behalf of the Board of Directors and management, I cordially invite you to
attend a Special Meeting of Stockholders (the "Special Meeting") of Classic
Bancshares, Inc. ("Classic") to be held at 4:00 p.m. on September 16, 1996 at
the corporate headquarters of RAM Technologies, Inc., (formerly Mayo Mansion),
1516 Bath Avenue, Ashland, Kentucky.
At this important Special Meeting, stockholders will be asked to approve and
adopt, among other things, an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which First Paintsville Bancshares, Inc. ("First
Paintsville") will merge with and into Classic (the "Merger"). If the proposed
Merger is consummated, stockholders of First Paintsville would receive $125.00
per share in cash, for each share of First Paintsville common stock held. First
Paintsville is the holding company for The First National Bank of Paintsville,
which operates from its main office and one branch located in Paintsville,
Kentucky. As a result of the Merger, The First National Bank of Paintsville will
become a subsidiary of Classic.
In connection with the negotiation of the Merger Agreement, Classic entered into
Buy/Sell Agreements with certain stockholders of First Paintsville which provide
for the sale of the First Paintsville shares held by such individuals to Classic
provided certain conditions are met. As part of the Merger transaction,
stockholders are also being asked to approve the Buy/Sell Agreements.
The terms of the proposed Merger, including the terms of the Buy/Sell Agreements
with certain First Paintsville stockholders and the method for determining the
amount of cash to be paid as well as other important information relating to
Classic, First Paintsville and the combined company, are explained in the
accompanying Joint Proxy Statement. Please give this document your prompt
attention.
The Board of Directors of Classic has carefully reviewed and considered the
terms and conditions of the Merger Agreement. The Board of Directors of Classic
has concluded that the Merger Agreement and the proposed Merger are in the best
interest of the stockholders of Classic, and unanimously recommends that Classic
stockholders vote "FOR" the Merger Agreement proposal and the related Buy/Sell
Agreements.
Consummation of the Merger is subject to certain conditions, including
regulatory approvals and approval by the requisite vote of the stockholders of
both Classic and First Paintsville.
I encourage you to attend the Special Meeting in person. Whether or not you do,
I hope you will read the Joint Proxy Statement and then complete, sign and date
the proxy card and return it in the enclosed postage-paid envelope. This will
save Classic additional expense in soliciting proxies and will ensure that your
shares are represented. Please note that you may vote in person at the Special
Meeting even if you have previously returned the proxy.
Thank you for your attention to this important matter.
Sincerely,
David B. Barbour
President and Chief Executive Officer
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August 6, 1996
Dear First Paintsville Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of First Paintsville Bancshares, Inc. ("First Paintsville")
which will be held on September 17, 1996 at 9:00 a.m., at the administrative
office of The First National Bank of Paintsville located at 404 Euclid Avenue,
Paintsville, Kentucky.
At this important Special Meeting, stockholders will be asked to approve and
adopt, among other things, an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which First Paintsville will merge (the "Merger") with
and into Classic Bancshares, Inc. ("Classic"). If the proposed Merger is
consummated, stockholders of First Paintsville would receive $125.00 per share
in cash, for each share of First Paintsville common stock held. As a result of
the Merger, The First National Bank of Paintsville will become a subsidiary of
Classic. Classic is the holding company for Ashland Federal Savings Bank, which
serves primarily Boyd and Greenup Counties from its office located at 344
Seventeenth Street in Ashland, Kentucky.
The terms of the proposed Merger, including the method for determining the
amount of cash to be paid as well as other important information relating to
Classic, First Paintsville and the combined company, are explained in the
accompanying Joint Proxy Statement. Please give this document your prompt
attention.
The Board of Directors of First Paintsville has carefully reviewed and
considered the terms and conditions of the Merger Agreement. The Board of
Directors of First Paintsville has concluded that the Merger Agreement and the
proposed Merger are in the best interest of the stockholders of First
Paintsville, and unanimously recommends that First Paintsville stockholders vote
"FOR" the Merger Agreement.
Consummation of the Merger is subject to certain conditions, including
regulatory approvals and approval by the requisite vote of the stockholders of
both Classic and First Paintsville.
We encourage you to attend the Special Meeting in person. Whether or not you do,
we hope you will read the Joint Proxy Statement and then complete, sign and date
the proxy card and return it in the enclosed postage-paid envelope. This will
save First Paintsville additional expense in soliciting proxies and will ensure
that your shares are represented. Please note that you may vote in person at the
Special Meeting even if you have previously returned the proxy.
Thank you for your attention to this important matter.
Sincerely,
James C. Witten Robert L. Bayes
Chairman of the Board and Chief President and Chief Operations Officer
Executive Officer
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CLASSIC BANCSHARES, INC.
344 Seventeenth Street
Ashland, Kentucky 41101
(606) 325-4789
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on September 16, 1996
Notice is hereby given that the Special Meeting of Stockholders (the
"Classic Special Meeting") of Classic Bancshares, Inc. (the "Classic" or the
"Company") will be held at the corporate headquarters of RAM Technologies,
(formerly Mayo Mansion), 1516 Bath Avenue, Ashland, Kentucky at 4:00 p.m.,
Ashland, Kentucky time, on September 16, 1996.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
A proposal to approve the Agreement and Plan of Merger, dated April 22,
1996 including Amendment No. One thereto ("Merger Agreement") pursuant
to which (i) First Paintsville Bancshares, Inc. ("First Paintsville")
will be merged with and into Classic and (ii) each outstanding share of
First Paintsville common stock ("First Paintsville Common Stock") will
be converted into the right to receive $125.00 in cash, subject to
increase to the extent the Merger does not close by September 30, 1996,
all on and subject to the terms and conditions contained in the Merger
Agreement and approval of the Buy/Sell Agreements with certain First
Paintsville stockholders;
and such other matters as may properly come before the Meeting, or any
adjournments thereof. The Board of Directors is not aware of any other
business to come before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on
the date specified above, or on any date or dates to which the Meeting may be
adjourned. Stockholders of record at the close of business on July 31, 1996 are
the stockholders entitled to vote at the Meeting and any adjournments thereof. A
complete list of stockholders entitled to vote at the Meeting will be available
for inspection by stockholders at the offices of Classic during its normal
business hours of 9:00 a.m. and 4:00 p.m. during the ten days prior to the
Meeting, as well as at the Meeting.
You are requested to complete and sign the enclosed form of proxy,
which is solicited on behalf of the Board of Directors, and to mail it promptly
in the enclosed envelope. The proxy will not be used if you attend and vote at
the Meeting in person.
This Notice of Special Meeting of Stockholders and the accompanying
Proxy Statement and Form of Proxy are first being mailed to stockholders on or
about August 6, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
C. Cyrus Reynolds
Chairman of the Board
Ashland, Kentucky
August 6, 1996
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE CLASSIC THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF-
ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED WITHIN THE UNITED STATES.
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FIRST PAINTSVILLE BANCSHARES, INC.
240 Main Street
Paintsville, Kentucky 41240
(606) 789-2111
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on September 17, 1996
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"First Paintsville Special Meeting") of First Paintsville Bancshares, Inc., a
Kentucky corporation ("First Paintsville") will be held at the administrative
office of the First National Bank of Paintsville located at 404 Euclid Avenue,
Paintsville, Kentucky, on September 17, 1996 at 9:00 a.m., Paintsville, Kentucky
time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
A proposal to approve the Agreement and Plan of Merger, dated April 22,
1996 including Amendment No. One thereto ("Merger Agreement") pursuant
to which (i) First Paintsville will be merged with and into Classic
Bancshares, Inc. ("Classic"), and (ii) each outstanding share of First
Paintsville common stock will be converted into the right to receive
$125.00 in cash, subject to increase to the extent the Merger does not
close by September 30, 1996, all on and subject to the terms and
conditions contained in the Merger Agreement;
and such other matters as may properly come before the Meeting, or any
adjournments thereof. The Board of Directors is not aware of any other
business to come before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on
the date specified above, or on any date or dates to which the Meeting may be
adjourned. Stockholders of record at the close of business on July 31, 1996 are
the stockholders entitled to vote at the Meeting and any adjournments thereof.
Stockholders are entitled to assert dissenters' rights under Section
271B.13-010 et seq of the Kentucky Revised Statutes and a copy of such section
is attached hereto as Appendix III and will be available to any stockholder
entitled to vote at the First Paintsville Special Meeting upon request.
You are requested to complete and sign the enclosed form of proxy,
which is solicited on behalf of the Board of Directors, and to mail it promptly
in the enclosed envelope. The proxy will not be used if you attend and vote at
the Meeting in person.
This Notice of Special Meeting of Stockholders and the accompanying
Proxy Statement and Form of Proxy are first being mailed to stockholders on or
about August 6, 1996.
By Order of the Board of Directors,
James C. Witten
Chairman of the Board and
Chief Executive Officer
August 6, 1996
Paintsville, Kentucky
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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE FIRST PAINTSVILLE THE
EXPENSE OF FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING.
A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
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<PAGE>
TABLE OF CONTENTS
Page
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SUMMARY ....................................................................1
The Parties to the Merger..................................................1
Classic ..............................................................1
First Paintsville.....................................................2
The Meetings...............................................................2
Classic Special Meeting ..............................................2
First Paintsville Special Meeting ....................................3
The Merger.................................................................4
General ..............................................................4
Reasons for the Merger; Recommendations of the Boards of Directors....5
Effect of Merger .....................................................5
Merger Consideration .................................................5
Buy/Sell Agreements...................................................6
Opinion of Financial Advisor .........................................6
Effective Time and Closing Date ......................................6
Dissenters' Rights ...................................................7
Interests of Certain Persons in the Merger............................7
Conditions to the Merger..............................................7
Escrow Agreement .....................................................7
Regulatory Approvals .................................................8
Waiver and Amendment; Termination ....................................8
Conduct of Business Pending the Merger ...............................8
Surrender of Stock Certificates ......................................8
Expenses .............................................................9
Accounting Treatment .................................................9
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION............................10
SUMMARY HISTORICAL FINANCIAL INFORMATION OF CLASSIC..........................12
SUMMARY HISTORICAL FINANCIAL INFORMATION OF
FIRST PAINTSVILLE...........................................................14
COMPARATIVE UNAUDITED PER SHARE DATA.........................................16
THE MEETINGS.................................................................17
Classic Special Meeting.............................................17
First Paintsville Special Meeting...................................20
THE MERGER...................................................................23
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General...............................................................23
Merger Consideration..................................................23
Buy/Sell Agreements...................................................24
Background of and Reasons for the Merger..............................25
Recommendations of the Boards of Directors............................28
Opinion of Classic's Financial Advisor................................28
Effective Time and Closing Date.......................................33
Effect of Merger......................................................34
Rights of Dissenting Stockholders.....................................34
Interests of Certain Persons in the Merger............................36
Effect on Employees and Employee Benefit Plans of First Paintsville...37
Certain Federal Income Tax Consequences...............................37
Representations and Warranties........................................38
Conditions to the Merger..............................................38
Escrow Agreement......................................................39
Regulatory Approvals..................................................39
Waiver and Amendment; Termination.....................................40
Conduct of Business Pending the Merger................................40
Surrender of Stock Certificates.......................................41
Expenses..............................................................41
Accounting Treatment..................................................42
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION.......................................................42
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS........................................................45
SUPPLEMENTAL HISTORICAL REGULATORY CAPITAL INFORMATION.......................47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CLASSIC........................................48
Introduction..........................................................48
Forward-Looking Statements............................................49
Business Strategy.....................................................49
Financial Condition...................................................50
Results of Operations.................................................51
Analysis of Net Interest Income.......................................55
Asset/Liability Management............................................58
Liquidity and Capital Resources.......................................60
Impact of New Accounting Standards....................................62
Impact of Inflation and Changing Prices...............................64
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF FIRST PAINTSVILLE....................65
Introduction..........................................................65
Financial Condition...................................................65
Results of Operations.................................................66
Analysis of Net Interest Income.......................................69
Asset/Liablity Management.............................................71
Liquidity and Capital Resources.......................................73
Impact of New Accounting Standards....................................74
Impact of Inflation and Changing Prices...............................75
BUSINESS OF CLASSIC..........................................................76
General...............................................................76
Market Area...........................................................76
Lending Activities....................................................77
Originations, Purchases and Sales of Loans and Mortgage-Backed
and Related Securities...............................................86
Delinquencies and Non-Performing Assets...............................88
Investment Activities.................................................93
Sources of Funds......................................................97
Subsidiary Activities of Ashland Federal.............................101
Competition..........................................................101
Employees............................................................102
Description of Properties............................................102
Legal Proceedings....................................................102
BUSINESS OF FIRST PAINTSVILLE...............................................103
General..............................................................103
Lending Activities...................................................103
Loan Originations, Purchases and Sales...............................111
Non-Performing Assets, Classified Assets, Loan Delinquencies
and Defaults........................................................111
Allowance for Loan Losses and Real Estate............................114
Investment Activities................................................116
Sources of Funds.....................................................118
Trust Services.......................................................121
Competition..........................................................122
Employees............................................................122
Subsidiary Activities................................................122
Description of Property..............................................123
Legal Proceedings....................................................123
REGULATION..................................................................124
General..............................................................124
Federal Regulation of Savings Associations...........................124
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Insurance of Accounts and Regulation by the FDIC.....................125
Regulatory Capital Requirements of Federal Savings Associations......127
Regulatory Capital Requirements of National Banks....................129
Prompt Corrective Action.............................................130
Limitations on Dividends and Other Capital Distributions.............131
Liquidity............................................................132
Accounting...........................................................133
Qualified Thrift Lender Test.........................................133
Community Reinvestment Act...........................................133
Transactions with Affiliates.........................................134
Holding Company Regulation...........................................134
Federal Securities Law...............................................135
Federal Reserve System...............................................135
Federal Home Loan Bank System........................................136
Change in Control Regulations........................................136
Additional Regulation of Classic Following the Merger................138
Federal and State Taxation...........................................140
DESCRIPTION OF CLASSIC COMMON STOCK.........................................143
EXPERTS ...................................................................143
STOCKHOLDER PROPOSALS.......................................................144
OTHER MATTERS...............................................................144
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
APPENDICES
I. Agreement and Plan of Merger, including Amendment No. One......I-1
II. Fairness Opinion of Capital Resources, Inc....................II-1
III. Section 271B.13-010 et seq of the Kentucky Revised Statutes..III-1
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SUMMARY
The following is a brief summary of certain information contained
elsewhere or incorporated by reference in this Joint Proxy Statement. Certain
capitalized terms used in this summary are defined elsewhere in this Joint Proxy
Statement. This summary is not intended to be a complete description of all
material facts regarding Classic, First Paintsville and the matters to be
considered at the Meetings and is qualified in its entirety by, and reference is
made to, the more detailed information contained elsewhere in this Joint Proxy
Statement, the accompanying Appendices and the documents referred to and
incorporated herein by reference.
The Parties to the Merger
Classic
Classic, a Delaware corporation, is the holding company for Ashland
Federal Savings Bank ("AsAt March 31, 1996, Classic had total assets of $66.1
million, deposits of $46.2 million and stockholders' equity of $19.5 million. On
such date, Classic's assets consisted of all of the outstanding stock of Ashland
Federal and cash and cash equivalents.
As a community-oriented financial institution, Ashland Federal seeks to
serve the financial needs of communities in its market area. Ashland Federal's
business involves attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily one- to four-family
residential mortgage loans and, to a lesser extent, consumer and commercial real
estate, multi-family and construction loans in its market area. At March 31,
1996, $38.9 million, or 87.5%, of the total loan portfolio consisted of
residential one- to four-family mortgage loans. See "Business of Classic --
Lending Activities."
The Bank also invests in mortgage-backed and related securities and
investment securities and other permissible investments. See "Business of
Classic - Investment Activities."
During fiscal 1996, the Board of Directors formulated and began to
implement a new "community bank" oriented strategy designed to provide planned
and profitable growth, sustained profitability and maintain the safety and
soundness of Ashland Federal. The principal elements of this strategy include,
among other things, the attraction of lower cost deposits, through the offering
of transaction accounts, increasing the amount and type of consumer loan
products offered and expanding Ashland Federal's commercial real estate and
commercial business lending operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Classic -- Business
Strategy."
The Bank's operations are regulated by the Office of Thrift Supervision
(the "OTS"). The Bank is a member of the Federal Home Loan Bank System ("FHLB
System") and a stockholder in the Federal Home Loan Bank ("FHLB") of Cincinnati.
The Bank is also a member of the Savings Association Insurance Fund ("SAIF") and
its deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
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The executive offices of Classic are located at 344 Seventeenth Street,
Ashland, Kentucky 41101. Classic's telephone number at that address is (606)
325-4789.
First Paintsville
First Paintsville, a Kentucky corporation organized in 1984, is a bank
holding company registered under the Bank Holding Company Act of 1956, as
amended (the "Bank Holding Company Act"), and subject to regulation by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"). First
Paintsville, with its principal office located at 240 Main Street in
Paintsville, Kentucky, is a unitary-bank holding company that owns a majority of
the outstanding stock of The First National Bank of Paintsville ("First National
Bank"). The remaining shares of First National Bank are owned by 32 holders
("Minority Stockholders"). First National Bank is a national bank organized
under the laws of the United States. The deposits of First National Bank are
insured up to applicable limits by the Bank Insurance Fund ("BIF") of the FDIC.
At March 31, 1996, First Paintsville had consolidated total assets of
$59.1 million, consolidated total deposits of $51.8 million and consolidated
total stockholders' equity of $5.5 million.
First Paintsville, through its subsidiary, engages primarily in one- to
four-family lending and, to a lesser extent, commercial business, consumer,
commercial real estate and construction lending. First National Bank also
provides trust services. First Paintsville's customer base includes individuals
and small to medium sized businesses located in Johnson County, Kentucky and the
surrounding counties.
As a national bank, First National Bank is regulated by the Office of
the Comptroller of the Currency (the "OCC") and is a member of the Federal
Reserve System and owns stock in the Federal Reserve Bank of Cleveland. First
National Bank is also a member of the FHLB system and a stockholder in the FHLB
of Cincinnati. The Bank is a member of the BIF and its deposits are insured up
to applicable limit of the FDIC.
First Paintsville's office is located at 240 Main Street, Paintsville,
Kentucky. First Paintsville's number at that address is (606) 789-2111.
The Meetings
Classic Special Meeting
Meeting Date. The Special Meeting of Stockholders of Classic (the
"Classic Special Meeting") will be held on September 16, 1996, at the corporate
headquarters of RAM Technologies, Inc., (formerly Mayo Mansion), 1516 Bath
Avenue, Ashland, Kentucky, at 4:00 p.m., Ashland, Kentucky time, and any and all
adjournments or postponements thereof. See "The Meetings--Classic Special
Meeting."
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Record Date. Only holders of record of shares of Classic common stock
("Classic Common Stock") at the close of business on July 31, 1996 (the "Classic
Record Date") are entitled to notice of and to vote at the Classic Special
Meeting. See "The Meetings--Classic Special Meeting."
Matters to be Considered. At the Classic Special Meeting, holders of
shares of Classic Common Stock will vote on the approval of the Merger Agreement
and the transactions contemplated thereby, including the merger of First
Paintsville with and into Classic (the "Merger") and the Buy/Sell Agreements
entered into between Classic and certain First Paintsville stockholders.
Approval of the Merger Agreement constitutes approval of the Buy/Sell
Agreements. Classic stockholders will also consider and vote upon such other
matters as may properly be brought before the Classic Special Meeting. See "The
Meetings--Classic Special Meeting."
Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of Classic Common Stock is required for approval of the
Merger Agreement, the Buy/Sell Agreements and the transactions contemplated
thereby. As of the Classic Record Date, there were 1,322,500 shares of Classic
Common Stock entitled to be voted at the Classic Special Meeting.
With a quorum, or in the absence of such, the affirmative vote of a
majority of the shares represented at the Classic Special Meeting may authorize
the adjournment of the Classic Special Meeting.
Security Ownership. As of July 31, 1996, directors and executive
officers of Classic and their affiliates were beneficial owners of 123,310
shares, or 9.3% of the then outstanding shares, of Classic Common Stock. The
directors and executive officers of Classic have indicated that they intend to
vote such shares of Classic Common Stock for approval and adoption of the Merger
Agreement at the Classic Special Meeting. As of July 31, 1996, directors and
executive officers of First Paintsville and their affiliates were not beneficial
owners of any shares of Classic Common Stock.
First Paintsville Special Meeting
Meeting Date. The First Paintsville Special Meeting will be held on
September 17, 1996 at the administrative office of First National Bank located
at 404 Euclid Avenue, Paintsville, Kentucky, at 9:00 a.m., Paintsville, Kentucky
time, and any and all adjournments or postponements thereof. See "The
Meetings--First Paintsville Special Meeting."
Record Date. Only holders of record of First Paintsville Common Stock
at the close of business on July 31, 1996 (the "First Paintsville Record Date")
are entitled to notice of and to vote at the First Paintsville Special Meeting.
See "The Meetings--First Paintsville Special Meeting."
Matters to be Considered. At the First Paintsville Special Meeting,
holders of shares of Common Stock of First Paintsville will vote to approve the
Merger Agreement and the transactions contemplated thereby. First Paintsville
stockholders will also consider and vote
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upon such other matters as may properly be brought before the First Paintsville
Special Meeting. See "The Meetings--First Paintsville Special Meeting."
Vote Required. Approval of the Merger Agreement and the transactions
contemplated thereby at the First Paintsville Special Meeting will require the
affirmative vote of the holders of a majority of the votes that may be cast by
all holders of First Paintsville Common Stock entitled to vote at the First
Paintsville Special Meeting. As of the First Paintsville Record Date, there were
72,375 shares of First Paintsville Common Stock entitled to be voted at the
First Paintsville Special Meeting.
With a quorum, or in the absence of such, the affirmative vote of a
majority of the shares represented at the First Paintsville Special Meeting may
authorize the adjournment of the meeting.
Approval of the Merger Agreement by the stockholders of First
Paintsville is a condition to, and required for, consummation of the Merger. See
"The Merger--Conditions to the Merger."
Security Ownership. As of July 31, 1996, directors and executive
officers of First Paintsville and their affiliates were beneficial owners of
54,751 shares of First Paintsville Common Stock. Such directors and executive
officers, as well as, certain stockholders of First Paintsville have entered
into voting agreements with Classic pursuant to which such individuals agreed to
vote their shares of First Paintsville Common Stock for approval of the Merger
Agreement. Directors, officers and stockholders who entered into voting
agreements held an aggregate of 63,663 shares of First Paintsville Common Stock
as of July 31, 1996. On such date, directors and executive officers of Classic
and their affiliates were not beneficial owners of any shares of First
Paintsville Common Stock.
The Merger
The following summary is qualified in its entirety by reference to the
full text of the Merger Agreement, which is attached hereto as Appendix I and
incorporated by reference herein.
General
The stockholders of Classic and First Paintsville, respectively, are
each being asked to consider and vote upon, among other things, a proposal to
approve and adopt the Merger Agreement, which provides for (i) the merger of
First Paintsville with and into Classic SubCorp, a wholly-owned subsidiary of
Classic with First Paintsville surviving and; (ii) the subsequent merger of
First Paintsville with and into Classic with Classic surviving the merger (the
"Merger"). Classic shall maintain the First National Bank of Paintsville ("First
National Bank"), the majority owned subsidiary of First Paintsville as a
subsidiary of Classic after the consummation of the Merger and will assume debt
of First Paintsville in the amount of $722,000. Classic intends to finance the
acquisition of First Paintsville with cash and cash equivalents held by it and a
$4.5 million short-term bank loan. It is intended that the loan will be repayed
primarily with funds received from dividends from Ashland Federal. See "The
Merger--General."
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In connection with entering into the Merger Agreement, certain of the
stockholders of First Paintsville also entered into Buy/Sell Agreements with
Classic which provide that such individuals will sell and Classic will buy the
First Paintsville Common Stock owned by them.
Reasons for the Merger; Recommendations of the Boards of Directors
Classic. The Classic Board of Directors (the "Classic Board") has
unanimously adopted and approved the Merger Agreement and the transactions
contemplated thereby and has determined that the Merger is fair to, and in the
best interests of, Classic and its stockholders. The Classic Board therefore
recommends a vote FOR approval of the Merger Agreement.
For a discussion of the factors considered by the Classic Board in
reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby, see "The Merger--Background of and Reasons for the
Merger--Classic's Reasons for the Merger."
First Paintsville. The First Paintsville Board of Directors (the "First
Paintsville Board") has unanimously approved and adopted the Merger Agreement
and the transactions contemplated thereby and has determined that the Merger is
fair to, and in the best interests of, First Paintsville and its stockholders.
The First Paintsville Board therefore recommends a vote FOR approval of the
Merger Agreement.
For a discussion of the factors considered by the First Paintsville
Board in reaching its decision to approve the Merger Agreement and the
transactions contemplated thereby, see "The Merger--Background of and Reasons
for the Merger."
Effect of Merger
Upon completion of the Merger, Classic will become a bank holding
company. As a bank holding company, Classic will be required to register with
and will be subject to regulation by the Federal Reserve Board. National banks,
such as First National Bank, are subject to the supervision of and are regularly
examined by the OCC. The operations of a bank holding company and a national
bank are subject to certain requirements and restrictions under federal and
state law. For information regarding such regulatory requirements, see "The
Merger --Effect of Merger" and "Regulation."
Merger Consideration
At the effective time of the Merger, each of the outstanding shares of
First Paintsville Common Stock outstanding immediately prior thereto will be
converted into the right to receive $125.00 per share in cash, subject to
increase at the rate of $.83 per share for each month or portion thereof to the
extent the Merger is consummated after September 30, 1996 and at the rate of
$.17 per share (in addition to the $0.83 referred to above) for each month after
December 31, 1996. In addition, in connection with the Merger, Classic is
offering to purchase shares of First National Bank Common Stock from the
Minority Stockholders at a price of $114.00 per share. As of July 31, 1996,
there were 72,375 shares of First Paintsville Common Stock issued and
outstanding and 2,433 shares of First National Bank common stock held by
Minority Stockholders ("First National Bank Common Stock") for an aggregate
merger
5
<PAGE>
consideration on that date of approximately $9.3 million ("Merger
Consideration"). Upon completion of the Merger, the existing stockholders of
First Paintsville will no longer own any stock or have any interest in First
Paintsville, nor will they receive, as a result of the Merger, any stock of
Classic.
Buy/Sell Agreements
In connection with the execution of the Merger Agreement, Classic
entered into Buy/Sell Agreements with certain of the First Paintsville
stockholders including, James C. Witten, Chairman of First Paintsville, Robert
L. Bayes, President of First Paintsville, and Robert W. Witten, a director of
First Paintsville. Such agreements provide that such stockholders will sell and
Classic will buy the First Paintsville Common Stock owned by such individuals at
a purchase price of $125.00 per share subject to increase to the extent the
Merger is not consummated by September 30, 1996. The Buy/Sell Agreements cover
an aggregate of 61,701 of the outstanding shares of First Paintsville Common
Stock. Classic's obligation to purchase shares pursuant to the Buy/Sell
Agreements does not become effective unless, among other things, the Merger
Agreement is terminated. As part of the approval of the Merger Agreement,
stockholders of Classic are being asked to approve these Buy/Sell Agreements.
See "The Merger -- Buy/Sell Agreements."
Opinion of Financial Advisor
Classic. Classic has retained Capital Resources Group, Inc. ("CRG") as
its financial advisor in connection with the transactions contemplated by the
Merger Agreement and to evaluate the financial terms of the Merger. See "The
Merger--Background of and Reasons for the Merger."
CRG has delivered an opinion to the Classic Board that the Merger
Consideration is fair to Classic from a financial point of view. A copy of the
opinion of CRG is attached to this Joint Proxy Statement as Appendix II and is
incorporated by reference herein. See "The Merger-- Opinion of Classic's
Financial Advisor."
First Paintsville. First Paintsville has not retained a financial
advisor or investment banker. See "The Merger -- Background and Reasons for the
Merger."
Effective Time and Closing Date
The Merger shall become effective at the time and on the date specified
in the certificate of merger to be filed with the Secretary of State of Delaware
and the Secretary of State of the Commonwealth of Kentucky (the "Effective
Time"). Such filings will occur only after the receipt of all requisite
regulatory approvals, approval of the Merger Agreement by the requisite vote of
Classic's and First Paintsville's respective stockholders and the satisfaction
or waiver of all other conditions to the Merger. The consummation of the Merger
shall occur as soon as practicable after the conditions to Classic's and First
Paintsville's respective obligations to consummate the Merger have been
satisfied or waived (the "Closing Date").
6
<PAGE>
Dissenters' Rights
A stockholder of First Paintsville entitled to vote on the adoption of
the Merger Agreement may dissent from the Merger and obtain payment of the fair
value of his shares in accordance with Sections 271B.13-010 et seq. of the
Kentucky Revised Statutes, which is set forth in Appendix III to this Joint
Proxy Statement. Any stockholder of First Paintsville who desires to assert
dissenters' rights must not vote his shares of First Paintsville Common Stock in
favor of the proposed Merger and must deliver to First Paintsville before the
vote is taken written notice of his intent to demand payment for his shares if
the Merger is effectuated. If a stockholder does not initially satisfy these two
requirements, he is not entitled to demand payment for the shares owned by him
subsequent to the approval of the proposed Merger. See "The Merger -- Rights of
Dissenting Stockholders" and Appendix III for a more complete description of
dissenters' rights. A stockholder's failure to follow exactly the procedures
specified will result in a loss of such stockholder's dissenters rights. See
"The Merger --Rights of Dissenting Stockholders."
Interests of Certain Persons in the Merger
Certain members of First Paintsville's management and the First
Paintsville Board may be deemed to have certain interests in the Merger in
addition to their interests as stockholders of First Paintsville generally.
These include, among others, provisions in the Merger Agreement relating to
indemnification, maintenance of director and officer liability insurance
coverage and the entering into of a consulting agreement with James C. Witten,
Chairman of the Board and Chief Executive Officer of First Paintsville. The
First Paintsville Board was aware of these interests and considered them, among
other matters, in approving the Merger Agreement and the transactions
contemplated thereby. See "The Merger--Interests of Certain Persons in the
Merger."
Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the fulfillment or waiver of certain conditions specified in the
Merger Agreement, including, among other things, the receipt of the requisite
regulatory and stockholder approvals, the accuracy of the representations and
warranties contained therein, the performance of all obligations imposed
thereby, and certain other conditions customary in transactions of this nature.
See "The Merger--Conditions to the Merger."
Escrow Agreement
As required by the Merger Agreement, Classic deposited $300,000 in a
interest bearing account with a third-party escrow agent. Pursuant to the terms
of the escrow agreement between the escrow agent and Classic, the $300,000 will
be payable to First Paintsville in the event the Merger Agreement is terminated
because the Merger did not occur by March 31, 1997 and neither First Paintsville
or First National Bank committed a breach of any representation, warranty or
covenant applicable to them pursuant to the Merger Agreement. In the event the
Merger is consummated or terminated for any other reason other than that stated
above, the $300,000 plus accrued interest thereon shall be returned to Classic
by the escrow agent. See "The Merger -- Escrow Agreement."
7
<PAGE>
Regulatory Approvals
The Merger is subject to the approval of the Federal Reserve Board.
Classic submitted an application for approval of the Merger with the Federal
Reserve Board on August 2, 1996 and anticipates obtaining the approval of the
Federal Reserve Board in the third quarter of 1996. There can be no assurance as
to the timing of such approvals or that the Federal Reserve Board will approve
the Merger.
It is a condition to the consummation of the Merger that the Federal
Reserve Board approval be obtained on terms which do not differ from conditions
customarily imposed in orders approving acquisitions of the type contemplated by
the Merger Agreement and compliance with which would not materially adversely
affect the reasonably anticipated benefits of the Merger to Classic. There can
be no assurance that any such approval will not contain terms, conditions or
requirements which cause such approval to fail to satisfy such conditions to the
consummation of the Merger. See "The Merger -- Regulatory Approvals."
Waiver and Amendment; Termination
Prior to the Effective Time, the Classic and First Paintsville Boards
may extend the time for performance of any obligations under the Merger
Agreement, waive any inaccuracies in the representations and warranties
contained in the Merger Agreement and waive compliance with any agreements or
conditions of the Merger Agreement.
Subject to applicable law, the Merger Agreement may be amended by
action of the Classic and First Paintsville Boards at any time before or after
approval of the Merger Agreement by the stockholders of Classic and First
Paintsville except that no modification shall alter or change the amount or kind
of consideration to be received by the stockholders of First Paintsville after
such stockholders have voted on the Merger Agreement. See "The Merger--Waiver
and Amendment; Termination."
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether prior to or after approval of the matters presented
herein by Classic and First Paintsville stockholders, by mutual consent of the
parties, or by either party if, among other things: (i) the required regulatory
approvals are not obtained; (ii) the required stockholder approvals are not
obtained; or (iii) the other party has materially breached any representation,
warranty, covenant or agreement set forth in the Merger Agreement and has failed
to, or cannot, cure in a timely manner such breach after receiving written
notice of such breach. See "The Merger--Waiver and Amendment; Termination."
Conduct of Business Pending the Merger
First Paintsville has agreed to conduct its business prior to the
Effective Time in accordance with certain guidelines set forth in the Merger
Agreement. See "The Merger-- Conduct of Business Pending the Merger."
Surrender of Stock Certificates
Promptly after the Effective Time, a paying agent selected by Classic
or Classic acting as its own paying agent (such paying agent or Classic acting
as a paying agent shall hereinafter be referred to as "Paying Agent") will mail
written transmittal material concerning the surrender of stock certificates to
each record holder of shares of First Paintsville Common Stock
8
<PAGE>
outstanding at the Effective Time. The transmittal material will contain
instructions with respect to the proper method of surrender of stock
certificates formerly representing shares of First Paintsville Common Stock in
exchange for the Merger Consideration. DO NOT SEND STOCK CERTIFICATES AT THIS
TIME. See "The Merger -- Surrender of Stock Certificates."
Expenses
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses. See "The Merger -- Expenses."
Accounting Treatment
The Merger, if completed as proposed, will be treated as a purchase in
accordance with generally accepted accounting principles ("GAAP"). See "The
Merger -- Accounting Treatment."
9
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDEND INFORMATION
Classic Common Stock is included for quotation in the Nasdaq Small-Cap
Stock Market (symbol: CLAS ). The First Paintsville Common Stock has no
established trading market.
The following table sets forth the reported high and low sales prices
of shares of Classic Common Stock, as reported in the Nasdaq Small-Cap Stock
Market, and the quarterly cash dividends per share declared, for the periods
indicated. The stock prices do not include retail mark-ups, mark-downs or
commissions. Classic Common Stock began trading on December 29, 1995.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW DIVIDENDS
- ------------------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Third Quarter(1)............... $11.75 $10.50 N/A
Fourth Quarter................. $11.75 $10.50 N/A
- --------------
(1) Reflects the period from December 29, 1995 through December 31, 1995.
</TABLE>
First Paintsville declared and paid dividends of $1.00 per share on
April 11, 1995, July 12, 1995, October 16, 1995 and January 9, 1996. No
dividends were declared or paid by First Paintsville during the year ended
December 31, 1994.
The following table sets forth the last reported sale prices per share
of Classic Common Stock and First Paintsville Common Stock on (i) April 19,
1996, the last business day preceding public announcement of the signing of the
Merger Agreement; and (ii) July 31, 1996, the last practicable date prior to the
mailing of this Joint Proxy Statement.
<TABLE>
<CAPTION>
Classic First Paintsville
Common Stock Common Stock
------------ -----------------
<S> <C> <C>
April 19, 1996.......................... $11.00 $76.96(1)
July 31, 1996........................... $10.81 $76.96(1)
- -------------
(1) Represents the last sale price of First Paintsville Common Stock which
occurred on January 2, 1996.
</TABLE>
As of July 31, 1996, Classic's 1,322,500 outstanding shares of Classic
Common Stock were held by approximately 270 record owners and First
Paintsville's 72,375 outstanding shares of First Paintsville Common Stock were
held by approximately 30 record owners.
The timing and amount of dividends of Classic will depend upon
earnings, cash requirements, Classic's financial condition and other factors
deemed relevant by the Classic Board. Dividends may also be limited by certain
regulatory restrictions. Classic has not paid a cash dividend since its
incorporation. The Board of Directors may consider the payment of cash
dividends, dependent on the results of operations and financial condition of
Classic, Ashland Federal's compliance with its regulatory capital requirements,
tax considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors. Classic's ability to
pay dividends is dependent on the dividend payments it
10
<PAGE>
receives from its subsidiary, Ashland Federal, which are subject to regulations
and Ashland Federal's continued compliance with all regulatory capital
requirements.
Classic is a legal entity separate and distinct from Ashland Federal
and its revenues are comprised principally of dividends from Ashland Federal.
Ashland Federal's ability to pay dividends or make other capital distributions
to Classic is governed by OTS regulations. Under these regulations, "capital
distributions" include cash or in-kind dividends, payments by a savings
association to repurchase or otherwise acquire its own shares, payments other
than stock to stockholders of another institution in order to acquire that
institution, and other distributions charged against capital.
Generally, savings associations, such as Ashland Federal, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Ashland Federal
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns.
As of March 31, 1996, Ashland Federal's capital exceeded its tangible,
core and risk-based capital requirements by approximately $12.1 million, $11.2
million and $11.0 million, respectively. As of March 31, 1996, Ashland Federal
would have been permitted under these regulations to make capital distributions
of up to $5.6 million. Also, the Prompt Corrective Action provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Act")
bar institutions (with limited exceptions) from making capital distributions if,
after making the distribution, the institution would be undercapitalized (as
defined by the FDIC Act and regulations promulgated thereunder).
Classic is also subject to Delaware law which limits dividends to an
amount equal to the excess of a corporation's net assets over paid-in capital
or, if there is no excess, to its net profits for the current and immediately
preceding fiscal years.
11
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF CLASSIC(1)
The following tables set forth certain consolidated financial and other
data of Classic at the dates for the periods indicated. The information is
derived in part from and should be read in conjunction with Classic's
consolidated financial statements and the notes thereto included elsewhere in
this Joint Proxy Statement.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets......................................... $66,083 $60,911 $58,781 $54,733 $47,993
Loans receivable, net................................ 43,722 35,731 33,107 34,856 36,607
Mortgage-backed securities:
Held for investment................................. --- 7,746 3,806 6,719 5,145
Available for sale.................................. 2,840 387 --- --- ---
Investment securities:
Held for investment................................. --- 12,900 8,726 6,666 2,216
Available for sale.................................. 11,059 --- --- --- ---
Interest-earning deposits............................ 6,649 3,196 12,412 3,963 3,647
Deposits............................................. 46,200 48,510 51,644 47,938 41,450
FHLB advances........................................ --- 4,800 --- --- ---
Stockholders' equity................................. 19,500 7,386 6,992 6,645 6,342
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Total interest income................................ $4,414 $3,962 $3,769 $3,985 $4,096
Total interest expense............................... 2,851 2,409 2,312 2,457 2,739
------- ------- ------- ------- -------
Net interest income............................... 1,563 1,553 1,457 1,528 1,357
Provision for loan losses............................ 168 133 83 210 308
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses........................................ 1,395 1,420 1,374 1,318 1,049
------- ------- ------- ------- -------
Fees and service charges............................. 41 31 21 10 62
Gain on sale of mortgage-backed securities........... 53 --- 4 53 ---
Gain (loss) on sale of investment securities......... (17) --- 3 4 32
Provision for losses on mortgage-backed securities... --- --- --- (337) ---
Other noninterest income............................. 31 4 3 10 1
-------- --------- --------- -------- ---------
Total noninterest income.......................... 108 35 27 (260) 95
Total noninterest expense......................... 1,178 979 824 727 766
------- -------- -------- ------- --------
Income before income taxes........................... 325 476 577 331 378
Income tax expense................................... 32 53 135 35 99
-------- -------- -------- -------- --------
Net income........................................ $ 293 $ 423 $ 442 $ 296 $ 279
======= ======= ======= ======= =======
(1) Classic completed its initial public offering on December 28, 1995 and
purchased all of the outstanding stock of Ashland Federal. As a result, the
information above represents Ashland Federal only prior to December 28,
1995.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to average
total assets).................................. .5% .7% .8% .6% .6%
Return on equity (ratio of net income to average
equity)........................................ 2.5 5.8 6.5 4.6 4.4
Interest rate spread (average during period)....... 1.6 2.1 2.0 2.3 2.0
Net interest margin(1)............................. 2.5 2.6 2.6 2.9 2.9
Ratio of noninterest expense to average total
assets......................................... 1.8 1.6 1.4 2.0 1.6
Ratio of average interest-earning assets to
average interest-bearing liabilities........... 119.9 112.5 112.6 113.4 115.7
Quality Ratios:
Non-performing assets to total assets, at end of
year(2)........................................ .9 1.4 1.8 2.9 3.9
Allowance for loan losses to non-performing
loans(3)....................................... 48.1 38.6 30.3 24.8 19.9
Allowance for loan losses to loans receivable,
net............................................ .7 .9 1.0 1.0 .9
Capital Ratios:
Equity to total assets at end of period............. 29.5 12.1 11.9 12.1 13.2
Average equity to average assets.................... 18.0 12.2 11.8 12.3 13.5
Other Data:
Number of Bank full-service offices................. 1 1 1 1 1
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets include non-accruing loans, accruing loans 90 days or
more past due, restructured loans and real estate owned.
(3) Non-performing loans include non-accruing loans, accruing loans 90 days or
more past due and restructured loans.
</TABLE>
13
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION OF FIRST PAINTSVILLE
The following tables set forth certain consolidated financial and other
data of First Paintsville at the dates and for the periods indicated. The
information is derived in part from and should be read in conjunction with First
Paintsville's consolidated financial statements and the notes thereto included
elsewhere in this Joint Proxy Statement. In the opinion of management of First
Paintsville, all adjustments, consisting only of normal recurring adjustments,
which are necessary for a fair presentation of the results of operations for the
interim periods ended March 31, 1996 and 1995, are reflected. Results of
operations for the three months ended March 31, 1996 are not necessarily
indicative of the results of operations to be expected for the remainder of the
fiscal year.
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets................................. $59,060 $58,649 $67,672 $68,006 $64,030 $60,429
Loans receivable, net........................ 27,455 26,565 23,467 25,151 25,835 22,176
Investment and mortgage-backed
securities:
Held for investment......................... --- --- 38,083 32,821 26,012 25,652
Available for sale.......................... 21,602 26,478 --- --- --- ---
Deposits..................................... 51,841 51,565 60,926 61,586 57,182 54,192
Borrowings:
Treasury tax and loan note.............. 456 157 246 532 427 294
Notes payable........................... 722 735 782 --- --- ---
Debentures.............................. --- --- 67 455 455 455
Securities sold under repurchase
agreements............................. --- --- --- --- 563 262
Minority interest in subsidiary.............. 171 171 194 220 236 230
Stockholders' equity......................... 5,517 5,509 5,032 4,937 4,812 4,620
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Total interest income....................... $1,040 $1,127 $4,545 $4,031 $3,817 $4,417 $4,976
Total interest expense...................... 465 467 1,961 1,831 1,812 2,158 2,830
------- ------- ------ ------- ------ ------ ------
Net interest income...................... 575 660 2,584 2,200 2,005 2,259 2,146
Provision for loan losses................... --- --- 169 --- 105 125 380
-------- -------- ------ --------- ------- ------- -------
Net interest income after provision for
loan losses............................. 575 660 2,415 2,200 1,900 2,134 1,766
------- ------- ------ ------- ------- ------- ------
Fees and service charges.................... 75 81 319 337 318 325 326
Gain (loss) on sale of investment securities 2 --- 31 (22) --- --- ---
Other noninterest income.................... 4 7 19 30 32 20 22
-------- -------- ------- -------- ------- -------- -------
Total noninterest income................. 81 88 369 345 350 345 348
Total noninterest expense................ 381 417 1,727 1,766 1,808 1,933 1,718
------- ------- ------ ------- ------- ------- ------
Income before income taxes and minority
interest................................... 275 331 1,057 779 442 546 396
Income tax expense.......................... 93 109 353 262 147 180 127
-------- ------- ------- ------- ------- ------- ------
Income before minority interest............. 182 222 704 517 295 366 269
Minority interest in net income of subsidiary 5 9 21 20 14 18 15
-------- -------- ------- ------- ------- ------- -------
Net income............................... $ 177 $ 213 $ 683 $ 497 $ 281 $ 348 $ 254
======= ======= ====== ====== ====== ====== ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------ ------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to
average total assets)(1)......................... 1.2% 1.3% 1.1% 0.7% 0.4% 0.5% 0.4%
Return on equity (ratio of net income to average
equity)(1)...................................... 13.1 16.7 12.7 10.0 5.8 7.2 5.5
Interest rate spread (average during period)...... 4.2 4.3 4.3 3.4 2.8 3.3 3.1
Net interest margin(1)(2)......................... 4.3 4.3 4.4 3.4 3.2 3.8 3.9
Ratio of noninterest expense to average total
assets(1)....................................... 3.3 3.2 3.5 3.0 3.1 3.5 3.8
Ratio of average interest-earning assets to average
interest-bearing liabilities.................... 119.6 117.9 118.5 115.9 114.5 114.7 116.6
Dividend payout ratio (ratio of dividends declared
per share to net income per share).............. 40.8 --- 31.8 --- 55.6 44.9 61.5
Quality Ratios:
Non-performing assets to total assets, at end of .
period........................................... 1.5 1.0 1.6 8 .9 2.1 2.6
Allowance for loan losses to non-performing loans.. 45.7 42.1 46.6 55.9 44.5 19.0 17.6
Allowance for loan losses to loans receivable, net. 1.5 1.2 1.7 1.3 1.1 1.0 1.3
Capital Ratios:
Equity to total assets at end of period............ 9.3 8.0 9.4 7.4 7.3 7.5 7.7
Average equity to average assets................... 9.4 7.8 8.5 7.2 7.3 7.5 8.0
Other Data:
Number of full-service offices..................... 2 2 2 2 2 2 2
- -------------
(1) Ratios for the three-month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
</TABLE>
15
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows unaudited comparative per share data for
Classic and First Paintsville Common Stock on an historical basis, and pro forma
combined comparative per share data for Classic and First Paintsville giving
effect to the Merger and for Classic and First Paintsville giving effect to the
Merger. The Merger will be accounted for as a purchase in accordance with GAAP.
<TABLE>
<CAPTION>
Classic/
Historical First Paintsville
----------------------------- -----------------
First Pro Forma
Classic Paintsville Combined
------- ----------- ---------
<S> <C> <C> <C>
Book value per share at:
March 31, 1996 (1)............................... $14.75 $76.23 $14.75
Cash dividends declared per share for the
year ended(2):
March 31, 1996.................................... --- 4.00 ---
March 31, 1995.................................... N/A --- N/A
March 31, 1994.................................... N/A 1.00 N/A
Income per share(3):
March 31, 1996.................................... .24 8.94 .42
March 31, 1995.................................... N/A 8.58 N/A
March 31, 1994.................................... N/A 3.41 N/A
- ---------------
(1) The pro forma combined book value per common share represents the historical
combined stockholders' equity of Classic and First Paintsville, including
the effect of pro forma adjustments, divided by 1,322,500 shares
outstanding.
(2) Classic does not currently pay dividends to its stockholders. No assurance
can be made that Classic will pay dividends in the future. The amount of
dividends payable, if any, will depend upon, among other things, the
earnings and financial condition of Classic and its subsidiaries following
completion of the Merger. See "Comparative Stock Prices and Dividend
Information."
(3) Gives effect to the Merger as if it had occurred at the dates indicated. In
calculating pro forma earnings per share, no adjustments to pro forma
amounts have been made to reflect potential reductions or revenue
enhancements which might result from the Merger.
</TABLE>
The information shown above should be read in conjunction with the
historical consolidated financial statements of Classic and First Paintsville
and related notes thereto, which are included elsewhere herein, and the
unaudited pro forma financial data included herein. See "Summary Historical
Financial Information of Classic," "Summary Historical Financial Information of
First Paintsville" and "Unaudited Pro Forma Combined Financial Information" for
a description of the assumptions and adjustments used in preparing the unaudited
pro forma financial data. The pro forma comparative per share data has been
included for comparative purposes only and does not purport to be indicative of
the results of operations that actually would have been obtained if the Merger
had been effected on the dates indicated or of those results that may be
obtained in the future.
16
<PAGE>
THE MEETINGS
Classic Special Meeting
Place, Time and Date. The Classic Special Meeting will be held at the
corporate headquarters of RAM Technologies, Inc., (formerly Mayo Mansion), 1516
Bath Avenue, Ashland, Kentucky at 4:00 p.m., Ashland, Kentucky time, on
September 16, 1996. This Joint Proxy Statement is being sent to holders of
common stock, par value $.01 per share, of Classic Common Stock and accompanies
a form of proxy (the "Classic Proxy") which is being solicited by the Classic
Board of Directors (the "Classic Board") for use at the Classic Special Meeting
and at any and all adjournments or postponements thereof.
Matters to Be Considered. At the Classic Special Meeting, holders of
shares of Classic Common Stock will vote on the approval and adoption of the
Merger Agreement and the transactions contemplated thereby, pursuant to which:
(i) First Paintsville will be merged with and into Classic and (ii) each
outstanding share of First Paintsville Common Stock will be converted into the
right to receive $125.00 in cash, all on and subject to the terms and conditions
contained in the Merger Agreement. The purchase price paid per share is subject
to increase as provided in the Merger Agreement to the extent the Merger is not
consummated by September 30, 1996. See "The Merger -- Merger Consideration." In
addition, in connection with the Merger, Classic is offering to purchase each
share of First National Bank Common Stock held by Minority Stockholders for
$114.00 per share in cash.
In connection with the Merger Agreement, Classic also entered into
Buy/Sell Agreements with certain First Paintsville stockholders. As part of the
approval of the Merger Agreement, Classic stockholders are also being asked to
approve the related Buy/Sell Agreements with certain First Paintsville
stockholders. See "The Merger."
Classic stockholders will also consider and vote upon such other
matters as may properly be brought before the Classic Special Meeting. As of the
date hereof, the Classic Board knows of no business that will be presented for
consideration at the Classic Special Meeting other than the matters described in
this Joint Proxy Statement.
Classic Record Date; Vote Required. The Classic Board has fixed the
close of business on July 31, 1996 (the "Classic Record Date") as the date for
determining holders of Classic Common Stock who will be entitled to notice of,
and to vote at the Classic Special Meeting. Only holders of record of Classic
Common Stock at the close of business on the Classic Record Date will be
entitled to notice of and to vote at the Classic Special Meeting. As of the
Classic Record Date, there were outstanding and entitled to vote at the Classic
Special Meeting 1,322,500 shares of Classic Common Stock.
Each holder of record of shares of Classic Common Stock on the Classic
Record Date will be entitled to cast one vote per share on the Merger Agreement
(including the related Buy/Sell Agreements) at the Classic Special Meeting. Such
vote may be exercised in person or by properly executed proxy. The presence, in
person or by properly executed proxy, of the
17
<PAGE>
holders of one-third of the outstanding shares of Classic Common Stock entitled
to vote at the Classic Special Meeting is necessary to constitute a quorum. With
a quorum, or in the absence of such, the affirmative vote of the majority of
shares represented at the Classic Special Meeting may authorize adjournment of
the meeting. Abstentions and broker non-votes (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owners or other persons as to certain proposals on which such
beneficial owners or persons are entitled to vote their shares but with respect
to which the brokers or nominees have no discretionary power to vote without
such instructions) will be treated as shares present at the Classic Special
Meeting for purposes of determining the presence of a quorum.
The affirmative vote of the holders of a majority of the outstanding
shares of Classic Common Stock is required for approval of the Merger Agreement
and Buy/Sell Agreements. Therefore, abstentions and broker non-votes will have
the same effect as votes against approval of the Merger Agreement and Buy/Sell
Agreements.
As of July 31, 1996, the directors and executive officers of Classic
and their affiliates beneficially owned in the aggregate 123,310 shares of
Classic Common Stock, or approximately 9.3% of the then outstanding shares of
Classic Common Stock entitled to vote at the Classic Special Meeting. The
directors and executive officers of Classic have indicated their intention to
vote such shares for the Merger Agreement and Buy/Sell Agreements at the Classic
Special Meeting. As of such date, neither First Paintsville and its
subsidiaries, nor the directors and executive officers of First Paintsville and
their affiliates, beneficially owned any outstanding shares of Classic Common
Stock. As of that date, First Paintsville subsidiaries, acting as fiduciaries,
custodians or agents, did not have sole or shared power over any shares of
Classic Common Stock.
Proxies. Shares of Classic Common Stock represented by properly
executed proxies received prior to or at the Classic Special Meeting will,
unless such proxies have been revoked, be voted at the Classic Special Meeting
and any adjournments or postponements thereof, in accordance with the
instructions indicated in the proxies. If no instructions are indicated on a
properly executed Classic Proxy, the shares will be voted FOR the Merger
Agreement and Buy/Sell Agreements.
Any Classic Proxy given pursuant to this solicitation or otherwise may
be revoked by the person giving it at any time before it is voted either by
delivering to the Secretary of Classic at 344 Seventeenth Street, Ashland,
Kentucky 41101 on or before the taking of the vote at the Classic Special
Meeting, a written notice of revocation bearing a later date than the date of
the proxy or a later dated proxy relating to the same shares or by attending the
Classic Special Meeting and voting in person. Attendance at the Classic Special
Meeting will not in itself constitute the revocation of a proxy.
If any other matters are properly presented at the Classic Special
Meeting for consideration, the persons named in the Classic Proxy or acting
thereunder will have discretion to vote on such matters in accordance with their
best judgment. As of the date hereof, the Classic Board knows of no such other
matters.
18
<PAGE>
Classic has retained Regan & Associates, Inc. to assist in the
solicitation of proxies for a fee estimated to be $2,750, plus expenses. In
addition to solicitation by mail, directors, officers and employees of Classic,
who will not be specifically compensated for such services, may solicit proxies
from the stockholders of Classic, personally or by telephone, telegram or other
forms of communication. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy material to beneficial owners. Classic will bear its own expenses in
connection with the solicitation of proxies for the Classic Special Meeting. See
"The Merger--Expenses."
HOLDERS OF CLASSIC COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND
SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO CLASSIC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
Voting Securities and Certain Holders Thereof. Classic stockholders of
record as of the close of business on July 31, 1996 will be entitled to one vote
for each share then held on all matters brought before the Classic Special
Meeting. As of July 31, 1996, Classic had 1,322,500 shares of Classic Common
Stock issued and outstanding. The following table sets forth, as of July 31,
1996, certain information as to (i) those persons who were known by management
to be beneficial owners of more than 5% of the outstanding shares of Classic
Common Stock and (ii) as to the shares of Classic Common Stock beneficially
owned by the directors named below and (iii) all directors and executive
officers as a group.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percent
Beneficially Owned of
Over 5% Beneficial Owners at July 31, 1996 Class
- ----------------------------------------------------------------------- ------------------------------ --------
<S> <C> <C>
Classic Bancshares, Inc. Employee Stock Ownership Plan 105,800(1) 8.0%
344 Seventh Street
Ashland, Kentucky 41101
Directors
- ---------------------------------------
David B. Barbour 19,836 1.5
John W. Clark 18,111 1.4
E. B. Gevedon, Jr. 20,000 1.5
Robert L. Goodpaster 10,000 0.8
Robert B. Keifer, Jr. 10,000 0.8
David A. Lang 10,000 0.8
Robert A. Moyer, Jr. 10,000 0.8
C. Cyrus Reynolds 10,000 0.8
All directors and executive officers
as a group (10 persons) 123,310(2) 9.3
- ---------------
(1) The amount reported represents shares held by the Employee Stock Ownership
Plan ("ESOP"), 5,290 of which have been allocated to accounts of
participants. First Bankers Trust Company, N.A., Quincy, Illinois, the
trustee of the ESOP, may
19
<PAGE>
be deemed to beneficially own the shares held by the ESOP which have not
been allocated to accounts of participants. Participants in the ESOP are
entitled to instruct the trustee as to the voting of shares allocated to
their accounts under the ESOP. Unallocated shares held in the ESOP's
suspense account or allocated shares for which no voting instructions are
received are voted by the trustee in the same proportion as allocated shares
voted by participants.
(2) Amount includes shares held directly, as well as shares held jointly with
family members, shares held in retirement accounts, 3,595 shares allocated
to the ESOP accounts of the group members, held in a fiduciary capacity or
by certain family members, with respect to which shares the group members
may be deemed to have sole voting and/or investment power. Excludes 112,412
options to acquire shares awarded under Classic's Stock Option and Incentive
Plan which vest over a five-year period commencing on July 29, 1997 and
47,211 shares awarded pursuant to Classic's Recognition and Retention Plan
which vest over a five-year period commencing on July 29, 1997 over which
such individuals have no voting or dispositive power.
</TABLE>
First Paintsville Special Meeting
Place, Time and Date. The First Paintsville Special Meeting will be
held at the administrative office of First National Bank located at 404 Euclid
Avenue, Paintsville, Kentucky at 9:00 a.m., Paintsville, Kentucky time, on
September 17, 1996. This Joint Proxy Statement is being sent to holders of First
Paintsville Common Stock and accompanies a form of proxy (the "First Paintsville
Proxy") which is being solicited by the First Paintsville Board for use at the
First Paintsville Special Meeting and at any and all adjournments or
postponements thereof.
Matters to Be Considered. At the First Paintsville Special Meeting,
holders of Common Stock of First Paintsville will vote upon a proposal to
approve and adopt the Merger Agreement and the transactions contemplated thereby
pursuant to which: (i) First Paintsville will be merged with and into Classic
and (ii) each outstanding share of First Paintsville Common Stock will be
converted into the right to receive $125.00 in cash, all on and subject to the
terms and conditions contained in the Merger Agreement. The purchase price paid
per share is subject to increase as provided in the Merger Agreement to the
extent the Merger is not consummated by September 30, 1996. In addition, in
connection with the Merger, Classic is offering to purchase each share of First
National Bank Common Stock held by Minority Stockholders for $114.00 per share
in cash. See "The Merger."
Holders of Common Stock will also consider and vote upon such other
matters as may properly be brought before the First Paintsville Special Meeting.
As of the date hereof, the First Paintsville Board knows of no business that
will be presented for consideration at the First Paintsville Special Meeting,
other than the matters described in this Joint Proxy Statement.
First Paintsville Record Date; Vote Required. The First Paintsville
Board has fixed the close of business on July 31, 1996 (the "First Paintsville
Record Date"), as the date for determining holders of Common Stock of First
Paintsville who will be entitled to notice of, and to vote at, the First
Paintsville Special Meeting. Only holders of record of Common Stock of First
Paintsville at the close of business on the First Paintsville Record Date will
be entitled to notice of and to vote at the First Paintsville Special Meeting.
As of the First Paintsville Record Date, there were outstanding and entitled to
vote at the First Paintsville Special Meeting 72,375 shares of First Paintsville
Common Stock.
Each holder of First Paintsville Common Stock is entitled to one vote
per share. The presence, in person or by properly executed proxy, of the holders
of a majority of the
20
<PAGE>
outstanding shares of Common Stock of First Paintsville entitled to vote at the
First Paintsville Special Meeting is necessary to constitute a quorum. With a
quorum, or in the absence of such, the affirmative vote of a majority of the
shares represented at the First Paintsville Special Meeting may authorize the
adjournment of the meeting. Abstentions and broker non-votes will be treated as
shares present at the First Paintsville Special Meeting for purposes of
determining a quorum.
Approval of the Merger Agreement at the First Paintsville Special
Meeting will require the affirmative vote of the holders of a majority of the
votes that may be cast by all holders of Common Stock of First Paintsville
entitled to vote at the First Paintsville Special Meeting, voting as a single
class. Abstentions and broker non-votes will have the same effect as votes
against the Merger Agreement.
As of July 31, 1996, the directors and executive officers of First
Paintsville and their affiliates beneficially owned in the aggregate 54,751
shares of First Paintsville Common Stock or 75.7% of the then outstanding shares
of First Paintsville Common Stock entitled to vote at the First Paintsville
Special Meeting. The directors and executive officers of First Paintsville, as
well as certain stockholders, have entered into voting agreements with Classic
pursuant to which such individuals agreed to vote their shares for the Merger
Agreement at the First Paintsville Special Meeting. Directors, officers and
stockholders who entered into voting agreements held an aggregate of 63,663
shares of First Paintsville Common Stock as of July 31, 1996. On such date, the
directors and executive officers of Classic and their affiliates did not
beneficially own any shares of First Paintsville Common Stock.
Proxies. Shares of Common Stock of First Paintsville represented by
properly executed proxies received prior to or at the First Paintsville Special
Meeting will, unless such proxies have been revoked, be voted at the First
Paintsville Special Meeting and any adjournments or postponements thereof in
accordance with the instructions indicated in the proxies. If no instructions
are indicated on a properly executed First Paintsville Proxy, the shares will be
voted FOR the Merger Agreement.
Any First Paintsville Proxy given pursuant to this solicitation or
otherwise may be revoked by the person giving it at any time before it is voted
by delivering to the Secretary of First Paintsville at 240 Main Street,
Paintsville, Kentucky 41240 on or before the taking of the vote at the First
Paintsville Special Meeting, a written notice of revocation bearing a later date
than the proxy or a later dated proxy relating to the same shares of First
Paintsville Common Stock or by attending the First Paintsville Special Meeting
and voting in person. Attendance at the First Paintsville Special Meeting will
not in itself constitute the revocation of a proxy.
If any other matters are properly presented at the First Paintsville
Special Meeting for consideration, the persons named in the First Paintsville
Proxy or acting thereunder will have discretion to vote on such matters in
accordance with their best judgment. As of the date hereof, the First
Paintsville Board knows of no such other matters.
In addition to solicitation by mail, directors, officers, and
employees of First Paintsville, who will not be specifically compensated for
such services, may solicit proxies from the stockholders of First Paintsville,
personally or by telephone, telegram or other forms of
21
<PAGE>
communication. Brokerage houses, nominees, fiduciaries and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy material to
beneficial owners. First Paintsville will bear its own expenses in connection
with the solicitation of proxies for the First Paintsville Special Meeting. See
"The Merger--Expenses."
HOLDERS OF FIRST PAINTSVILLE COMMON STOCK ARE REQUESTED TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY TO FIRST PAINTSVILLE IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
HOLDERS OF FIRST PAINTSVILLE COMMON STOCK SHOULD NOT
FORWARD STOCK CERTIFICATES WITH THEIR PROXY CARDS.
Voting Securities and Certain Holders Thereof. First Paintsville
stockholders of record as of the close of business on July 31, 1996 will be
entitled to one vote for each share then held on all matters brought before the
First Paintsville Special Meeting. As of July 31, 1996, First Paintsville had
72,375 shares of Common Stock issued and outstanding. The following table sets
forth, as of July 31, 1996, certain information as to (i) those persons who were
known by management to be beneficial owners of more than 5% of the outstanding
shares of First Paintsville Common Stock and (ii) as to the shares of First
Paintsville Common Stock beneficially owned by the directors named below and
(iii) all directors and executive officers of First Paintsville as a group.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock Percent
Beneficially Owned of
Over 5% Beneficial Owners at July 31, 1996 Class
--------------------------- ---------------------------------- ------
<S> <C> <C>
James C. Witten 50,621 69.9%
4349 Palm Place
Ft. Myers, Florida
Directors
- --------------------------------------------
Robert L. Bayes, President, Chief Operations
Officer, Trust Officer and Director 1,000 1.4
J.K. Wells, Director 1,050 1.5
James C. Witten, Chairman of the Board and
Chief Executive Officer 50,621 69.9
Robert W. Witten, Director 2,080 2.9
All directors and executive officers
as a group (5 persons) 54,751 75.7
</TABLE>
22
<PAGE>
THE MERGER
The information in this Joint Proxy Statement concerning the terms of
the Merger is qualified in its entirety by reference to the full text of the
Merger Agreement, which is attached hereto as Appendix I and incorporated herein
by reference. All stockholders are urged to read the Merger Agreement in its
entirety.
General
Pursuant to the Merger Agreement, First Paintsville will be merged with
and into Classic SubCorp, a wholly-owned subsidiary of Classic with First
Paintsville surviving. First Paintsville will then be merged into Classic with
Classic being the surviving entity. Classic shall maintain First National Bank,
the majority-owned subsidiary of First Paintsville, as a subsidiary of Classic
after the consummation of the Merger and will assume debt of First Paintsville
in the amount of $722,000. Classic intends to finance the acquisition of First
Paintsville with cash and cash equivalents held by it and a $4.5 million short
term bank loan. It is intended that the loan will be repayed primarily with
funds received from dividends from Ashland Federal. In connection with entering
into the Merger Agreement, certain of the stockholders of First Paintsville also
entered into Buy/Sell Agreements with Classic which provide that such
individuals will sell and Classic will buy the First Paintsville Common Stock
owned by them. As soon as possible after the conditions to consummation of the
Merger described below have been satisfied or waived, and unless the Merger
Agreement has been terminated as provided below, Classic and First Paintsville
will file a certificate of merger with the Secretary of State of Delaware and
with the Secretary of State of the Commonwealth of Kentucky for the Merger. The
Merger will become effective at the time the certificates of merger are filed
with Delaware and Kentucky. The time at which the Merger becomes effective is
referred to herein as the "Effective Time." It is presently contemplated that
the Effective Time will be as soon as practical following the fulfillment or
waiver of each of the conditions to the Merger.
Upon consummation of the Merger, the stockholders of First Paintsville
shall be entitled to receive the Merger Consideration in consideration for their
shares of First Paintsville Common Stock held and thereupon shall cease to be
stockholders of First Paintsville, and the separate existence and corporate
organization of First Paintsville shall cease. Classic shall succeed to all the
rights and property of First Paintsville. No changes will be made to the
membership of the Board of Directors of Classic as a result of the Merger.
Merger Consideration
At the Effective Time, each of the shares of First Paintsville Common
Stock outstanding immediately prior to the Effective Time will be converted into
the right to receive $125.00 per share in cash, without any interest thereon
subject to increase at the rate of $.83 per share for each month or portion
thereof to the extent the Closing takes place after September 30, 1996 and at
the rate of $.17 per share (in addition to the $0.83 referred to above) for each
month after December 31, 1996. The First National Bank common stock is also
owned by 31 Minority Stockholders. In connection with the Merger, Classic is
offering to purchase shares of First National Bank Common Stock from the
Minority Stockholders at a price of $114.00 per share. As of the First
Paintsville Record Date, there were 72,375 shares of First Paintsville Common
23
<PAGE>
Stock issued and outstanding and 2,433 shares of First National Bank issued and
outstanding and held by Minority Stockholders for an aggregate Merger
Consideration on that date of approximately $9.3 million. Immediately after the
Effective Time, the Paying Agent will mail to holders of First Paintsville
Common Stock a letter of transmittal and instructions for surrendering
certificates evidencing their Common Stock. See "-- Surrender of Stock
Certificates."
Buy/Sell Agreements
In connection with the execution of the Merger Agreement, Classic
entered into Buy/Sell Agreements with certain of the First Paintsville
stockholders including Chairman of the Board James C. Witten, President Robert
L. Bayes and Director Robert W. Witten. Such agreements provide that such
stockholders will sell and Classic will buy the First Paintsville Common Stock
owned by such individuals at a purchase price of $125.00 per share subject to
increase as described below to the extent the Merger is not consummated by
September 30, 1996. The Buy/Sell Agreements cover an aggregate of 61,701 of the
outstanding shares of First Paintsville Common Stock. As part of the approval of
the Merger, stockholders of Classic are being asked to approve these Buy/Sell
Agreements. The form of Buy/Sell Agreement is attached hereto as Exhibit A to
the Merger Agreement.
The purchase price for shares subject to the Buy/Sell Agreements is
subject to increase by $0.83 per share for each month or portion thereof if the
Closing takes place after September 30, 1996 and further increases by an
additional $0.17 per share for each month or portion thereof if the Closing
takes place after December 31, 1996. The Buy/Sell Agreements terminate if the
First Paintsville Common Stock is not purchased by March 31, 1997.
The respective obligations of Classic and the selling stockholders to
consummate the sale of shares pursuant to the Buy/Sell Agreements are subject to
the satisfaction of the following conditions: (i) the Buy/Sell Agreements shall
have been approved by the requisite vote of Classic stockholders; (ii) all
requisite regulatory approvals for the purchase of shares shall have been
obtained without the imposition of any conditions which could, in the good faith
opinion of Classic, adversely affect the reasonably anticipated benefits of the
purchase of the First Paintsville Common Stock and all applicable waiting
periods shall have expired, (iii) neither Classic nor the selling stockholders
shall be subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the purchase of the shares by
Classic as contemplated by the Buy/Sell Agreements; and (iv) the Merger
Agreement shall have been terminated.
In addition, the obligation of Classic to purchase shares pursuant to
the Buy/Sell Agreements is subject to the satisfaction by the selling
stockholders or waiver by Classic of the following conditions: (i) the
representations and warranties of the selling stockholders contained in the
Buy/Sell Agreements shall be true and correct in all material respects on the
date of the Buy/Sell Agreements and as of the Closing Date; (ii) the selling
stockholders shall have performed in all material respects all obligations
required to be performed by them under the Buy/Sell Agreements at or prior to
the Closing Date; and (iii) First Paintsville shall not have experienced a
Material Adverse Change.
24
<PAGE>
For purposes of the Buy/Sell Agreements, a "Material Adverse Change"
means a change of 15% or more of stockholders' equity or value of First
Paintsville or First National Bank computed in accordance with GAAP by adding
back certain expenses, charges and similar amounts paid or accrued by First
Paintsville or First National Bank.
Finally, the obligation of the selling stockholders to sell their
shares to Classic is subject to the satisfaction by Classic or waiver by the
selling stockholders of the following conditions: (i) the representations and
warranties of Classic contained in the Buy/Sell Agreements shall be true and
correct in all material respects on the date of the Buy/Sell Agreements and as
of the Closing Date; and (ii) Classic shall have performed in all material
respects all obligations required to be performed by it under the Buy/Sell
Agreements at or prior to the Closing Date.
Background of and Reasons for the Merger
Background of the Merger. In December 1995, Ashland Federal converted
from the mutual to stock form of organization and simultaneously reorganized
into a holding company structure. The stock conversion enabled Classic to make a
significant capital contribution to its principal subsidiary, Ashland Federal,
which at March 31, 1996 exceeded all its regulatory capital requirements. The
capital raised as part of its mutual to stock conversion was intended to be used
for general corporate purposes, including expansion by acquisition and merger as
opportunities arise for Classic and Ashland Federal. As part of its corporate
plan, Classic sought to leverage its capital and enhance long-term shareholder
value through an acquisition strategy to acquire assets and liabilities and/or
institutions having the appropriate characteristics to enhance overall franchise
value such as location, size and quality. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Classic -- Business
Strategy."
In January 1996, Classic and First Paintsville began discussions to
determine if a possible interest existed on both parties part for a business
combination. Numerous discussions and meetings between management of Classic and
First Paintsville took place between January and April 1996 regarding various
aspects of a potential business combination, including cash versus stock
structure, the role of First Paintsville's management in the combined
organization, the timing of any potential transaction and the total
consideration paid to First Paintsville's shareholders. Classic specifically
considered the advantages and disadvantages to its shareholders of a stock
versus cash transaction, including the impact of potential dilution in a stock
transaction compared to the impact on future earnings as a result of the
creation of goodwill on Classic's consolidated balance sheet in a cash
transaction; the importance of retaining certain of the executive officers of
First Paintsville in a senior capacity in the combined organization; the
anticipated cost reductions and economies of scale that would result from the
business combination and their effect on future earnings; and the total
consideration Classic could afford while offering a price and terms that would
be attractive to First Paintsville. Classic retained CRG in January 1996 as its
financial advisor, primarily to assist Classic in the evaluation and negotiation
of the Merger and to render an opinion with respect to the fairness to Classic
from a financial point of view, of the total consideration being offered to
First Paintsville shareholders. Mr. Barbour solicited First Paintsville as a
potential Merger candidate and initiated the discussions with management of
First Paintsville which resulted in the Merger. Mr. Witten was the primary
motivating force behind the Merger on behalf of First Paintsville.
25
<PAGE>
Mr. Witten was also primarily responsible for the negotiation and facilitation
of the Merger on behalf of First Paintsville. Due diligence commenced in
February 1996 and was completed by March 1996. Negotiations regarding the
definitive agreement commenced in February 1996. The Boards of Directors of
Classic and First Paintsville met separately on April 22, 1996 and each board
unanimously approved the Merger Agreement and related documents.
Reasons for the Merger. The First Paintsville Board has determined that
the Merger and the Merger Agreement are fair to, and in the best interests of,
First Paintsville and its stockholders. In determining that the Merger and
Merger Agreement are fair to, and in the best interest of, First Paintsville and
its stockholders, the First Paintsville Board of Directors consulted with its
senior management and considered a number of factors which are summarized below.
The Merger Consideration consists of cash and therefore, the First Paintsville
Board considered the adequacy of the cash consideration compared to similar
transactions. In doing so, the First Paintsville Board focused primarily on the
book value and earnings of First Paintsville. In doing so, the First Paintsville
Board considered the prospective earnings of the combined entity, its financial
condition, (including capital levels and asset quality), dividend potential,
market share and management capabilities. The First Paintsville Board also
analyzed the alternatives available to First Paintsville, including remaining
independent, being acquired in the future, raising additional equity capital
(either privately or publicly in order to sustain additional growth and earnings
and thus increase franchise value), providing liquidity for its stock through
the establishment of a public market, or taking advantage of Classic's ability
to pay cash and the potential for success of the combined institution. Given
that First Paintsville is a privately-held institution with a limited number of
stockholders and no market for its stock, the First Paintsville Board was
cognizant of the need to provide a method by which stockholders could realize a
return on their investment. Creating a public market for the First Paintsville
Common Stock, at a price which would provide a fair return on the shareholders'
investment, was considered not to be a viable alternative in the foreseeable
future. Consequently, the sale of First Paintsville within a reasonable period
of time (which the First Paintsville Board determined to be a two to three year
period) became the goal of the First Paintsville Board. The First Paintsville
Board did not solicit offers for First Paintsville, but rather focused on a
combination with Classic at a fair price, because of the contiguous markets that
each served, the relative size of the two institutions, the strong capital
position of Classic, the management ability of the combined entity, and the cost
savings that could be achieved without a negative effect on First Paintsville's
personnel. After reviewing and comparing the Merger Consideration with that
received in transactions involving other companies with comparable earnings and
book value, the First Paintsville Board determined that Classic's offer was fair
and would not likely be surpassed in the event other offers were solicited.
In analyzing the Merger, the First Paintsville Board also considered
the taxability of the Merger to its shareholders. Although requested by First
Paintsville, Classic did not offer to enter into a transaction which would be
"tax free" to First Paintsville stockholders. The First Paintsville Board
determined that the tax consequences of the Merger to its stockholders were
outweighed by the benefits of the Merger Consideration.
The First Paintsville Board has not retained an investment banker or
other financial advisor to assist the Board in analyzing the Merger or its
fairness to the stockholders of First Paintsville. Although "fairness opinions"
are often obtained by merger participants such as First
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Paintsville, the First Paintsville Board determined that it had the expertise to
analyze the fairness of the Merger to First Paintsville's stockholders and
further determined that the additional benefit of a "fairness opinion" from an
independent investment banker or financial advisor was outweighed by its cost.
In analyzing the Merger Agreement, stockholders should be aware that no
independent financial consultant has reviewed or opined upon the fairness of the
Merger to the stockholders of First Paintsville.
The Classic Board has determined that the Merger and the Merger
Agreement (including the related Buy/Sell Agreements) are fair to, and in the
best interests of, Classic and its stockholders. In reaching this determination,
the Classic Board consulted with its legal and financial advisors, as well as
with senior management, and considered a number of factors, including the
following: (i) information concerning the businesses, earnings, operations,
financial condition, prospects, capital levels and asset quality of Classic and
First Paintsville, both individually and as combined; (ii) the financial advice
rendered by Classic's financial advisor, and the opinion of such financial
advisor described below that the Merger is fair to Classic from a financial
point of view, (iii) the terms of the Merger Agreement and the other documents
executed in connection with the Merger; (iv) the anticipated cost savings and
efficiencies available to the combined institution from the Merger; (v) the
current and prospective economic and competitive environment facing each
institution and other financial institutions; and (vii) the results of the due
diligence investigations conducted by senior management of Classic and Classic's
independent consultants, including preliminary assessments of credit policies
and asset portfolio qualities. In addition, Classic considered the impact of the
Merger on its depositors, employees, customers and communities.
The Classic Board approved the Merger with First Paintsville, in part,
because it believes that the Merger provides a cost-effective means for Classic
to expand into markets in close proximity to Classic's current markets. To
assess the financial impact of the transaction, the Classic Board reviewed
annual financial projections for Classic, assuming the acquisition of First
Paintsville and no acquisition of First Paintsville. The projections indicated
that the acquisition would be accretive to both earnings and book value per
share in each of the five years. The projections were net of purchase accounting
amortization and lost earnings on acquisition cost and assume historically-based
rates of loan and deposit growth. In addition, the projections assumed annual
cost savings, to commence upon the Merger, of approximately $200,000 pre-tax, of
the combined entity's general and administrative expense. The cost savings are
anticipated to result from the consolidation of data processing functions and
administrative expense. Cost savings are also expected from a reduction of
professional expenses. Certain of the assumptions utilized in the financial
projections for Classic were applied by CRG to Classic's financial performance
at and for the year ended March 31, 1996. This analysis indicated that for such
period the acquisition of First Paintsville would be approximately $0.29
accretive to earnings per share. Classic's board also reviewed the report
prepared by a consulting firm retained by Classic to assist in the performance
of the due diligence review of First Paintsville.
The First Paintsville Board approved the Merger, in substantial part
because it believes the transaction provides fair value to First Paintsville's
stockholders and such value may or may not be available in the future. Classic
and First Paintsville believe that the Merger creates two institutions combined
under one holding company structure that should be stronger than Classic or
First Paintsville alone. Each of the Classic Board of Directors and the First
Paintsville Board
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of Directors also believes that the enhanced size of the consolidated holding
company and its institution will improve its ability to take advantage of future
acquisition opportunities which otherwise might be unavailable to either
institution alone. The Classic Board and the First Paintsville Board also
believe that the Merger will provide the institutions with an improved
competitive position in the rapidly changing marketplace for banking and
financial services and to take advantage of opportunities for growth and
diversification that would not be available to either institution on its own.
The expansion possibilities and ability to effectively blend organizational
capabilities and product introduction between the two franchises and into
contiguous markets is expected to increase future revenue opportunities. The
Merger will also result in the reduction of Classic's tangible equity to assets
from 29.5% to 13.2%, based upon March 31, 1996 data, which provides
significantly improved opportunities to enhance future returns on equity.
The Classic Board and the First Paintsville Board did not assign any
specific or relative weight to the foregoing factors in their consideration.
Recommendations of the Boards of Directors
Classic. The Classic Board has unanimously adopted and approved the
Merger Agreement (including the related Buy/Sell Agreements) and the
transactions contemplated thereby and has determined that the Merger (including
the related Buy/Sell Agreements) is in the best interests of Classic and its
stockholders. The Classic Board therefore recommends a vote FOR approval of the
matters presented at the Classic Special Meeting.
For a discussion of the factors considered by the Classic Board in
reaching its decision to approve the Merger Agreement (including the related
Buy/Sell Agreements), see "--Background of and Reasons for the Merger--Classic's
Reasons for the Merger."
First Paintsville. The First Paintsville Board has unanimously adopted
and approved the Merger Agreement and the transactions contemplated thereby and
has determined that the Merger is fair to, and in the best interests of, First
Paintsville and its stockholders. The First Paintsville Board therefore
recommends a vote FOR approval of the matters presented at the First Paintsville
Special Meeting.
For a discussion of the factors considered by the First Paintsville
Board in reaching its decision to approve the Merger Agreement, see
"--Background of and Reasons for the Merger--First Paintsville's Reasons for the
Merger."
Opinion of Classic's Financial Advisor
General. Classic has retained the investment banking firm of CRG to act
as its financial advisor in connection with the Merger. The Classic Board
selected CRG on the basis of the firm's reputation and its experience and
expertise in transactions similar to the Merger and its prior work for and
relationship with Classic in connection with its initial public offering of
common stock. Representatives of CRG rendered an oral opinion to the Classic
Board at its meeting held on April 22, 1996, at which the Classic Board approved
the Merger Agreement. CRG rendered its oral opinion to the effect that, as of
such date, the Merger Consideration in
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the Merger is fair to Classic from a financial point of view. CRG subsequently
confirmed its oral opinion in writing, but addressed the Merger only as of April
22, 1996.
No limitations were imposed by Classic on the scope of CRG's
investigation or on the procedures followed by CRG in rendering its opinion. The
full text of CRG's written opinion is attached as Appendix II to the Joint Proxy
Statement and is incorporated herein by reference to Appendix II. Classic's
stockholders are urged to read the opinion in its entirety for a description of
the procedures followed, assumptions made, matters considered, and
qualifications and limitations on the review undertaken, by CRG in connection
therewith.
In rendering its opinion, CRG has made inquiries of members of
Classic's and First Paintsville's management, representatives of the accounting
firm of Smith, Goolsby, Artis & Reams, P.S.C. and Classic's legal counsel, the
firm of Silver, Freedman and Taff, L.L.P. CRG has informed Classic that in
arriving at its written opinion, CRG has, among other things, (i) reviewed the
proposed terms of the Merger Agreement; (ii) reviewed First Paintsville's
audited financial statements for the five fiscal years ended December 31, 1995;
(iii) reviewed Classic's audited financial statements for the five fiscal years
ended March 31, 1996; (iv) reviewed Classic's Form 10-KSB and Annual Report to
Stockholders for fiscal 1996; (v) reviewed certain other information, including
financial and regulatory reports through March 31, 1996 and budget reports
furnished to CRG by First Paintsville relating to the businesses, earnings,
assets and prospects of First Paintsville, and reviewed certain other
information, including financial, regulatory and budget reports furnished to CRG
by Classic relating to the businesses, earnings, assets and prospects of
Classic; (vi) conducted discussions with members of senior management of First
Paintsville concerning the financial condition, businesses, assets, and
prospects of First Paintsville and such senior management's views as to the
financial performance of First Paintsville; (vii) conducted discussions with
members of senior management of Classic concerning the financial condition,
businesses, assets, and prospects of Classic and such senior management's views
as to the future financial performance of Classic; (viii) reviewed the
historical market prices and trading activity for Classic Common Stock and
compared them with those of certain publicly traded companies which it deemed to
be relevant; (ix) compared the respective results of operations of First
Paintsville and Classic with those of certain companies which it deemed to be
relevant; (x) performed such other financial and pricing analyses and
investigations as deemed necessary, including a comparative financial analysis
and review of the financial terms of other pending and completed acquisitions of
companies considered to be generally similar to First Paintsville; (xi) examined
First Paintsville's economic operating environment and the competitive
environment of First Paintsville's market area; (xii) considered the pro forma
effect of the Merger on Classic's capitalization ratios, earnings and book value
per share; and (xiii) reviewed such other financial studies and analyses and
performed such other investigations and took into account such other matters as
it deemed necessary.
CRG assumed and relied, without independent verification, upon the
accuracy and completeness of all of the financial and other information reviewed
by it for the purpose of rendering its opinion. CRG also assumed and relied upon
the senior management of Classic as to the reasonableness and achievability of
the financial and operating forecasts (and the assumptions and bases therefor)
discussed with it. In that regard, CRG assumed with Classic's consent that such
information, including, without limitations, projected cost savings and
operating synergies resulting from the merger analysis and projections regarding
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underperforming and non-performing assets, net chargeoffs and the adequacy of
reserves, reflect the best currently available estimates and judgments of such
management as to the future financial performance of Classic and First
Paintsville following the Merger.
CRG is not an expert in the evaluation of allowances for loan losses or
liabilities, including, in particular, environmental liabilities, and it did not
make an independent evaluation of the adequacy of the allowance for loan losses
of Classic or First Paintsville. CRG also assumed that the level of First
Paintsville's allowance for loan losses and future agreed upon allowances are
adequate to cover such losses and did not, and has not, made an independent
evaluation or appraisal of the assets and liabilities (contingent or otherwise)
of Classic or First Paintsville or any of its subsidiaries. In rendering its
opinion, CRG based its analysis on economic, market and other conditions as in
effect on, and the information made available to it as of, the date of its
opinion. Also the projections that CRG relied upon were based on numerous
variables and assumptions which are inherently uncertain including, without
limitation, factors relating to future economic and competitive conditions, the
future financial condition and operating results of Classic and First
Paintsville and future cost savings and operating synergies stemming from the
Merger. Accordingly, actual results could vary significantly from those
reflected in such projections. Finally, CRG rendered its fairness opinion
without regard to the necessity for, or level of, any restrictions which may be
imposed or any divestitures which may be required in the course of obtaining
regulatory approvals for the Merger.
CRG's opinion is directed only to the fairness of the Merger
Consideration to Classic from a financial point of view and does not constitute
a recommendation to any stockholder of Classic as to how such stockholder should
vote at the Classic Special Meeting with respect to the Merger.
Overview of Valuation Methodology. In preparing its fairness opinion,
CRG has evaluated whether Classic's financial proposal for acquisition is fair
from a financial point of view to Classic. The fairness of Classic's acquisition
offer to First Paintsville is determined by comparing the offer to acquisition
offers received by other comparable types of companies over a time-frame that
reflects a similar economic environment. The comparison included an examination
of key financial characteristics of the comparative acquisition companies,
including balance sheet, earnings and credit risk characteristics.
First Paintsville's key operating statistics and ratios were compared
to a select group of commercial banks that have also been the subject of a
proposed or completed acquisition. It is important to note that the comparative
group utilized in the fairness opinion was comprised only of commercial banks,
given the distinctive financial, operating and regulatory characteristics of the
commercial banking industry. These commercial banks were divided into two broad
categories for purposes of the analysis: (i) institutions that have recently
completed an acquisition; and (ii) institutions subject to a pending
acquisition. CRG reviewed relevant acquisition pricing ratios, notably offer
price-to-earnings, offer price-to-book value (and price-to-tangible book value),
offer price-to-deposits, and offer price-to-assets of the comparative group and
compared these ratios to those of First Paintsville. The analysis included a
review and comparison of the mean and median pricing ratios represented by a
sample of 37 comparative group banks concentrated in the Midwestern and
Southeastern United States. The comparative group institutions chosen also had
below average asset sizes, similar equity ratios and similar
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profitability as First Paintsville. The average (and median) asset size,
equity-to-assets ratio and return on assets ("ROA") of the comparative group was
$82.8 million ($67.1 million), 9.6% (9.1%) and 104 basis points (108 basis
points), respectively.
Pricing Comparison. Based on a cash offer price of $125.00 by Classic
for each outstanding share of First Paintsville Common Stock, there resulted the
following acquisition pricing ratios for First Paintsville relative to those of
the comparative group:
o First Paintsville's price/earnings multiple of 14.04x was substantially
below the average (or mean) and median price/earnings multiples of the
comparative group. First Paintsville's adjusted price/earnings multiple
(based on the adjustment of reported net income to exclude the impact
of non-recurring loan loss provisions) was 12.61x. The mean and median
price/earnings multiples of the comparative group were 19.30x and
18.58x, respectively;
o First Paintsville's price/tangible book value ratio of 163.9% compared
to the mean and median price/tangible book value ratios of 194.4% and
182.3%, respectively, for the comparative group;
o First Paintsville's price/deposits ratio of 18.0% compared to a mean
and median price/deposits ratio of 21.0% and 21.2%, respectively, for
the comparative group;
o First Paintsville's price/assets ratio of 15.8% compared to a mean and
median price/assets ratio of 18.2% and 19.1%, respectively, for the
comparative group.
In analyzing the reasonableness of First Paintsville's acquisition
pricing ratios relative to those of the comparative group, CRG considered the
following factors:
o First Paintsville generates a similar level of reported profitability
by modestly higher level of core profitability compared to that of the
comparative group. First Paintsville's reported ROA of 104 basis points
and adjusted ROA of 116 basis points compared to an average reported
ROA of 104 basis points for the comparative group;
o First Paintsville's similar reported level of core profitability was
attributable to a modestly lower net interest margin and non-interest
income level, which was more then offset by a lower non-interest
operating expense ratio relative to the comparative group;
o First Paintsville's modestly higher ROA but slightly lower equity ratio
(First Paintsville equity ratio of 9.3% compared to an average equity
ratio of 9.6% for the comparative group) translated into a higher
return on equity ("ROE"). First Paintsville's ROE of 12.00% (13.4%
based on adjusted net income) compared to an average and median ROE for
the comparative peer group of 11.0% and 10.9%, respectively; and,
o A review of other important financial ratios, indicated that First
Paintsville's non-performing asset level compared unfavorably to that
of the comparative peer group.
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Therefore, based on the above financial comparisons, CRG believed that,
on balance, First Paintsville's acquisition pricing ratios were reasonable when
compared to the comparative group's acquisition pricing ratios.
Pro Forma Analysis. CRG conducted an analysis of the pro forma effects
of the Merger on Classic's key financial ratios and statistics. CRG calculated
Classic's post-merger pro forma earnings per share, tangible book value per
share, and return on equity, in addition to other pro forma financial ratios
based on the Merger Consideration and based on (i) Classic's financial position
at March 31, 1996 and projected fiscal 1997 income of Classic as provided by
Classic's management; (ii) First Paintsville's adjusted net income for the
twelve months ended March 31, 1996 and First Paintsville's projected net income
as provided by Classic's management; and, (iii) cost savings and operating
synergies anticipated as a result of the acquisition as provided by Classic's
management. Such projections were based on numerous variables and assumptions
which are inherently uncertain, including without limitation, factors related to
general economic and competitive conditions. CRG then compared Classic's pro
forma earnings per share, pro forma tangible book value per share and pro forma
return on equity, which reflected the acquisition of First Paintsville, with
Classic's pre-merger tangible book value per share and pre-merger projected
earnings per share and return on equity.
Based on the anticipated financial contribution of First Paintsville
and assuming certain anticipated cost savings and operating synergies resulting
from the Merger, the Merger would be accretive to Classic's earnings per share,
increase Classic's return on equity, but be dilutive to tangible book value per
share, as follows:
o Based on First Paintsville's adjusted net income for the twelve months
ended March 31, 1996, Classic's post-merger pro forma earnings per
share and return on equity would increase by 42% and 42%, respectively.
o Based on First Paintsville's projected net income, Classic's
post-merger pro forma earnings per share and return on equity would
increase by 51% and 51%, respectively.
o The Merger would result in dilution to Classic's pro forma tangible
book value per share of 18.6%.
The results of the above described analyses confirmed that the Merger
Consideration being offered by Classic is fair to Classic from a financial point
of view.
The summary of the CRG opinion set forth above provides a description
of the principal elements of CRG's presentation to the Classic Board on April
22, 1996. It does not purport to be a complete description of the analyses
performed by CRG. The description of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. CRG believes that its
analyses and the summary set forth above must be considered as a whole and that
selected portions of its analyses, without considering all analyses, would
create an incomplete view of the procedures underlying the analyses set forth in
the CRG presentation and opinion. In addition, while CRG gave the various
analyses approximately similar weight it may have used them for different
purposes, and may have deemed various assumptions more or less probable
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than other assumptions. The fact that any specific analysis has been referred to
in the summary above is not meant to indicate that such analysis was given more
weight than any other analyses.
In performing its analyses, CRG made numerous assumptions with respect
to industry performance, general business and economic conditions, and other
matters, many of which are beyond the control of Classic. The analyses performed
by CRG are not necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as a part of CRG's analysis of the
fairness of the Merger Consideration to Classic from a financial point of view
and were provided to the Classic Board in connection with the delivery of CRG's
opinion. The analyses do not purpose to be appraisals or to reflect the prices
at which a company might actually be sold or the prices at which any securities
may trade at the present time or at any time in the future. In addition, as
described above, CRG's opinion and presentation to the Classic Board is just one
of many factors taken into consideration by the Classic Board.
CRG is a nationally recognized consulting firm with substantial
experience in transactions similar to the Merger and is familiar with Classic,
First Paintsville and their respective businesses. As part of its investment
banking business, CRG is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisition. CRG has in the past
provided financial advisory and financing services to Classic and has received
fees for the rendering of such services.
CRG will receive a fee of approximately $50,000 for investment banking
services related to the Merger and related advisory work. Classic has agreed to
pay CRG on an hourly rate basis for its services. CRG will also be reimbursed
for its reasonable attorneys' fees and other disbursements, and will be
indemnified against certain liabilities relating to or arising out of the
Merger, including liabilities arising under federal and state securities laws.
In the ordinary course of their securities business, CRG and its affiliates may
trade the securities of Classic for their own accounts and the accounts of their
customers, and, accordingly, may from time to time hold a long or short position
in such securities. CRG was paid fees and commissions of $207,000 in connection
with the services it performed in connection with Ashland Federal's mutual to
stock conversion.
Effective Time and Closing Date
The Merger shall become effective at the time and on the date specified
in the certificate of merger to be filed with the Secretary of State of Delaware
and the Secretary of State of the Commonwealth of Kentucky (the "Effective
Time"). Such filings will occur only after the receipt of all requisite
regulatory approvals and the approval of the Merger Agreement by the requisite
vote of Classic's and First Paintsville's respective stockholders and the
satisfaction or waiver of all other conditions to the Merger. The consummation
of the Merger shall occur as soon as practicable after the conditions to
Classic's and First Paintsville's respective obligations required to consummate
the Merger have been satisfied or waived (the "Closing Date").
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Effect of Merger
Upon completion of the Merger, Classic will become a bank holding
company. Like savings and loan holding companies and their subsidiaries, bank
holding companies and banks are extensively regulated under both federal and
state law. To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions.
As a bank holding company, Classic will be required to register with
and will be subject to regulation by the Federal Reserve Board. A bank holding
company is required to file with the Federal Reserve Board an annual report and
such additional information as the Federal Reserve Board may require pursuant to
the Bank Holding Company Act.
The Federal Reserve Board may also make examinations of a holding
company and each of its subsidiaries. The Bank Holding Company Act requires each
bank holding company to obtain the prior approval of the Federal Reserve Board
before it may acquire substantially all of the assets of any bank, or before it
may acquire ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control directly or indirectly, more than 5% of the
voting shares of such bank.
The Bank Holding Company Act also restricts the types of businesses and
operations in which a bank holding company and its subsidiaries (other than bank
subsidiaries) may engage. Generally, permissible activities are limited to
banking and activities found by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto.
The operations of a national bank such as First National Bank are
subject to 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 which may be offered. Various state consumer laws and
regulations also affect the operations of national banks.
National banks, such as First National Bank, are subject to the
supervision of and are regularly examined by the Comptroller of the Currency. In
addition, national banks may be members of the Federal Reserve System and their
deposits are insured by the FDIC and, as such, may be subject to regulation and
examination by each agency. For additional information regarding regulatory
requirements applicable to national banks and bank holding companies, see
"Regulation."
Rights of Dissenting Stockholders
The following is only a general summary of the Kentucky Revised
Statutes relating to dissenters' rights and should not be considered to be a
comprehensive description. A copy of the Kentucky dissenters' rights statue
(Kentucky Revised Statutes Sections 271B.13-010 et seq.) is appended hereto as
Appendix III as a complete description of the rights and obligations of First
Paintsville and of any stockholder who desires to exercise dissenters' rights.
EACH STEP MUST BE TAKEN IN STRICT COMPLIANCE WITH THE APPLICABLE PROVISIONS OF
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THE DISSENTERS' RIGHTS STATUTE IN ORDER FOR HOLDERS OF FIRST PAINTSVILLE COMMON
STOCK TO PERFECT DISSENTERS' RIGHTS.
A stockholder of First Paintsville entitled to vote on the ratification
of the Merger Agreement may dissent from the Merger and obtain payment of the
fair value of his shares in accordance with Sections 271B.13-010 et seq. of the
Kentucky Revised Statutes. Any shareholder of First Paintsville who desires to
assert dissenters' rights must not vote his shares of First Paintsville Common
Stock in favor of the proposed Merger and must deliver to First Paintsville
before the vote is taken on such matter written notice of his intent to demand
payment for his shares if the Merger is effectuated. If a stockholder does not
initially satisfy these two requirements, he is not entitled to demand payment
for the shares owned by him subsequent to the approval of the proposed Merger.
If the stockholder delivers the notice to First Paintsville as required
above, First Paintsville shall deliver to him a written dissenters' notice no
later than ten days after the date on which the vote of the proposed merger was
taken: (a) stating where the payment demand must be sent and where and when
certificates for certificated shares must be deposited; (b) stating the
restrictions on transfer after the payment demand is received, if any, on
holders of uncertificated shares; (c) supplying a form for demanding payment
that includes the date of the first announcement to the news media or to
shareholders of the terms of the Merger and requiring that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership of
the shares before that date; (d) indicating a date by which First Paintsville
must receive the payment demand, which date may not be fewer than thirty nor
more than sixty days after the date the notice to be provided in this paragraph
is delivered; and (e) providing a copy of Sections 271B.13-010 et seq of the
Kentucky Revised Statutes.
If the stockholder is sent a dissenter's notice as described in the
immediately preceding paragraph, he shall demand payment, certify whether he
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenter's notice and deposit his certificates in accordance with
the terms of the notice. IF THE STOCKHOLDER DOES NOT DEMAND PAYMENT OR DEPOSIT
HIS SHARE CERTIFICATES WHERE REQUIRED IN ACCORDANCE WITH THE TERMS SET FORTH IN
THE DISSENTER'S NOTICE, HE SHALL NOT BE ENTITLED TO PAYMENT FOR HIS SHARES UNDER
SECTIONS 271B.13-010 ET SEQ OF THE KENTUCKY REVISED STATUTES.
Upon receipt of a payment demand, First Paintsville shall pay the
stockholder who has taken all of the steps enumerated above the amount First
Paintsville estimates to be the fair value of his shares, plus accrued interest.
The payment shall be accompanied by: (1) First Paintsville's balance sheet as of
the end of a fiscal year ending not more than 16 months before the date of
payment, an income statement for that year, a statement of changes in
stockholders' equity for that year, and the latest available interim financial
statements, if any; (2) a statement of First Paintsville's estimate of the fair
value of the shares; (3) an explanation of how the interest was calculated; and
(4) a statement of the dissenter's right to demand payment under Kentucky
Revised Statutes 271B.13-280.
The stockholder may notify First Paintsville in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any
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payment already made to the stockholder) if: (a) the dissenter believes that the
amount to be paid as set out in the preceding paragraph is less than the fair
value of his shares or that the interest due is incorrectly calculated; (b)
First Paintsville fails to make payment within 60 days after the date set for
demanding payment; or (c) First Paintsville, having failed to take the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the date set
for demanding payment. A DISSENTER WAIVES HIS RIGHT TO DEMAND PAYMENT AS
DESCRIBED IN THIS PARAGRAPH UNLESS HE NOTIFIES FIRST PAINTSVILLE OF HIS DEMAND
IN WRITING WITHIN 30 DAYS AFTER FIRST PAINTSVILLE MADE OR OFFERED PAYMENT FOR
HIS SHARES.
If the dissenting stockholder and First Paintsville are unable to
resolve the fair market value of and interest owned upon the shares, First
Paintsville shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If First Paintsville does not commence the proceeding
within the 60 day period, it shall pay the dissenting shareholder the amount
demanded. First Paintsville shall commence the proceeding in Johnson County,
Kentucky. The court may appoint one (1) or more persons as appraisers to receive
evidence and recommend decision on the question of fair value. The dissenter
shall be entitled to the same discovery rights as parties in other civil
proceedings. The dissenter shall be entitled to judgment for the amount, if any,
by which the court finds the fair value of his shares, plus interest, exceeds
the amount paid by First Paintsville.
Interests of Certain Persons in the Merger
Certain directors and executive officers of First Paintsville have
certain interests in the Merger in addition to their interests as stockholders
of First Paintsville generally. The First Paintsville Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
Indemnification. Pursuant to the Merger Agreement, Classic shall
maintain all rights of indemnification existing prior to the Effective Time in
favor of employees, agents, officers and directors of First Paintsville pursuant
to First Paintsville's Articles of Incorporation and Bylaws.
Consulting Agreement. Mr. James C. Witten, who currently serves as
Chairman of the Board and Chief Executive Officer of First Paintsville, will
upon consummation of the Merger, enter into a four year consulting agreement
with Classic. Under the terms of the agreement, Mr. Witten will provide Classic
with advice and support with respect to integrating the operations and staff of
First Paintsville and First National Bank, advice relating to retail deposit
gathering activities in Eastern Kentucky, promote the business, reputation and
community standing of Classic and its subsidiaries in Eastern Kentucky, and
perform such other similar functions and duties as Classic may reasonably
request. Mr. Witten will receive $30,000 a year for the services provided
pursuant to the agreement. Under the terms of the agreement, Mr. Witten will not
compete with Classic and Classic has the right to terminate Mr. Witten for
cause.
36
<PAGE>
Effect on Employees and Employee Benefit Plans of First Paintsville
The Merger Agreement provides that each of First Paintsville and
Classic shall use its reasonable efforts to coordinate the conversion or merger
of any pension or other qualified employee benefits plans of First Paintsville
into the qualified plans of Classic, to provide all employees of First
Paintsville and its subsidiaries who become employees of Classic or its
subsidiaries with those same employee benefits uniformly offered to employees of
such entity, and to give all employees of First Paintsville and its subsidiaries
who become employees of Classic or its subsidiaries credit for all service with
First Paintsville or any of its subsidiaries prior to the Effective Time for
purposes of eligibility, participation and vesting (but not benefit accruals)
with respect to the qualified plans of Classic, to the extent permissible under
all applicable laws and regulations.
Certain Federal Income Tax Consequences
The receipt of cash for First Paintsville Common Stock pursuant to the
Merger will be a taxable transaction for federal income tax purposes to
stockholders receiving such cash (and may be a taxable transaction for state,
local and foreign tax purposes as well). A holder of First Paintsville Common
Stock will recognize a gain or loss measured by the difference between such
stockholder's tax basis for the First Paintsville Common Stock owned by or her
at the time of the Merger and the amount of cash received therefor. Such gain or
loss will be a capital gain or loss if the stock is a capital assets in the
hands of the stockholder.
The cash payments due the holders of First Paintsville Common Stock
upon the exchange of such First Paintsville Common Stock pursuant to the Merger
(other than certain exempt persons or entities) will be subject to "backup
withholding" for federal income tax purposes unless certain requirements are
met. Under federal law, the Paying Agent must withhold 31% of the cash payments
to holders of First Paintsville Common Stock to whom backup withholding applies,
and the federal income tax liability of such persons will be reduced by the
amount so withheld. To avoid backup withholding, a holder of First Paintsville
Common Stock must provide the Paying Agent with his or her taxpayer
identification number and complete a form in which he or she certifies that he
or she has not been notified by the Internal Revenue Service ("IRS") that he or
she is subject to backup withholding as a result of a failure to report interest
and dividends. The taxpayer identification number of an individual is his or her
Social Security number.
No ruling has been or will be requested from the IRS as to any of the
tax effects to First Paintsville's stockholders of the transactions discussed in
this Joint Proxy Statement, and no opinion of counsel has been or will be
rendered to First Paintsville's stockholders with respect to any of the tax
effects of the Merger to stockholders.
THE TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER. THEREFORE, EACH STOCKHOLDER IS
URGED TO CONSULT HIS OR HER TAX ADVISOR TO DETERMINE THE PARTICULAR TAX
CONSEQUENCES OF THE MERGER TO SUCH HOLDER, INCLUDING THOSE RELATING TO STATE,
LOCAL AND/OR OTHER TAXES.
37
<PAGE>
Representations and Warranties
In the Merger Agreement each of First Paintsville and Classic has made
certain customary representations and warranties relating to, among other
things, the parties' respective organization, capitalization, qualification to
do business and compliance with applicable law, authority relative to the Merger
Agreement, the timely filing of all regulatory reports, reliability of financial
statements, taxes, employee benefit plans, environmental matters, Community
Reinvestment Act compliance, the truth and accuracy of information prepared and
provided by them in connection with the Merger, the absence of certain legal
proceedings and other events, including material adverse changes in the parties'
business, financial condition and operations or properties. For detailed
information on such representations and warranties, see the Merger Agreement
attached hereto as Appendix I.
Conditions to the Merger
The respective obligations of First Paintsville and Classic to
consummate the Merger are subject to the fulfillment at or prior to the
Effective Time of the following conditions: (i) the Merger Agreement shall have
been approved by the requisite vote of the stockholders of both Classic and
First Paintsville; (ii) all requisite regulatory approvals of the Merger shall
have been obtained and shall remain in full force and effect without the
imposition of any condition which differs from conditions customarily imposed by
regulatory authorities in orders approving acquisitions of the type contemplated
by the Merger Agreement and compliance with which would materially adversely
affect the reasonably anticipated benefits of the Merger to Classic and all
applicable waiting periods shall have expired; and (iii) none of Classic, First
Paintsville or First National Bank shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the Merger.
In addition, the obligation of Classic to consummate the Merger is
subject to the satisfaction by First Paintsville or waiver by Classic of the
following conditions: (i) the representations and warranties of First
Paintsville and First National Bank contained in the Merger Agreement shall be
true and correct in all material respects on the date of the Merger Agreement
and as of the Effective Time; (ii) First Paintsville and First National Bank
shall have performed in all material respects all obligations required to be
performed by it under the Merger Agreement at or prior to the Effective Time;
(iii) Classic shall have received an opinion from counsel to First Paintsville
dated the Closing Date regarding certain legal matters; (iv) First Paintsville
shall not have experienced a Material Adverse Change; and (v) prior to the
consummation of the Merger, Classic shall receive audited financial statements
of First Paintsville and its subsidiaries for the year ended December 31, 1995,
included an unqualified opinion of First Paintsville's accountants regarding the
same.
In addition, the obligation of First Paintsville and First National
Bank to consummate the Merger is subject to the satisfaction by Classic or
waiver by First Paintsville of the following conditions: (i) the representations
and warranties of Classic contained in the Merger Agreement shall be true and
correct in all material respects on the date of the Merger Agreement and as of
the Effective Time; (ii) Classic shall have performed in all material respects
all obligations required to be performed by it under the Merger Agreement at or
prior to the Effective Time;
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<PAGE>
and (iii) First Paintsville shall have received an opinion from counsel to
Classic dated the Closing Date regarding certain legal matters.
For purposes of the Merger Agreement, a "Material Adverse Change" means
a change of 15% or more of shareholders' equity or value of First Paintsville or
First National Bank computed in accordance with GAAP by adding back certain
expenses, charges and similar amounts paid or accrued by First Paintsville or
First National Bank.
Escrow Agreement
As required by the Merger Agreement, Classic deposited $300,000 in an
interest bearing account with a third-party escrow agent. The form of escrow
agreement is attached hereto as Exhibit C to the Merger Agreement. Pursuant to
the terms of the escrow agreement between Classic and the escrow agent, the
$300,000 will be payable to First Paintsville in the event the Merger Agreement
is terminated because the Merger did not occur by March 31, 1997 and neither
First Paintsville or First National Bank committed a breach of any
representation, warranty or covenant applicable to them pursuant to the Merger
Agreement. In such event all interest earned on such deposit shall be paid to
Classic. Such funds in deposit with the escrow agent, plus interest accrued
thereon should be payable to Classic in the event that (i) the Merger is
consummated; (ii) the Merger Agreement is terminated by First Paintsville in the
event of a material breach of any representation, warranty or covenant contained
in the Merger Agreement by Classic, and First Paintsville and First National
Bank are not in breach of the Merger Agreement or (iii) the Merger Agreement is
terminated other than by First Paintsville.
Regulatory Approvals
The Merger is subject to the approval of the Federal Reserve Board.
Classic submitted an application for approval of the Merger with the Federal
Reserve Board on August 2, 1996 and anticipates obtaining the approval of the
Federal Reserve Board in the third quarter of 1996. There can be no assurance as
to the timing of such approval or that the Federal Reserve Board will approve
the Merger.
It is a condition to the consummation of the Merger that the Federal
Reserve Board approval be obtained on terms which do not differ from conditions
customarily imposed in orders approving acquisitions of the type contemplated by
the Merger Agreement and compliance with which would materially adversely affect
the reasonably anticipated benefits of the Merger to Classic. There can be no
assurance that any such approval will not contain terms, conditions or
requirements which cause such approval to fail to satisfy such condition to the
consummation of the Merger. See "--Conditions to the Merger."
In addition, under federal law, a period of 30 days must expire
following approval by the Federal Reserve Board within which period the United
States Department of Justice (the "Department of Justice") may file objections
to the Merger under the federal antitrust laws. The Department of Justice could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the Merger unless divestiture
of an acceptable number of branches to a competitively suitable purchaser could
be made. While Classic believes that the likelihood of such action by the
Department of Justice is remote in this
39
<PAGE>
case, there can be no assurance that the Department of Justice will not initiate
such a proceeding.
Waiver and Amendment; Termination
Prior to the Effective Time, the Boards of Directors of Classic and
First Paintsville may by written action (i) extend the time for performance of
any obligations or other acts required by the Merger Agreement; (ii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant to the Merger Agreement; and
(iii) waive compliance with any agreements or conditions contained in the Merger
Agreement. Subject to applicable law, any of the provisions of the Merger
Agreement may be amended or modified by action of the Boards of Directors of
Classic and First Paintsville at any time before or after approval of the Merger
Agreement by Classic or First Paintsville stockholders, provided that any
amendment effected after approval by the stockholders of any constituent
corporation may not alter the amount or kind of consideration to be received by
such stockholders in exchange for their own shares or the applicable timetable
or dates provided in the Merger Agreement adversely affect such stockholders.
The Merger Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the stockholders of Classic
or First Paintsville (i) by mutual consent of the Boards of Directors of Classic
and First Paintsville; (ii) by Classic or First Paintsville (A) if any
regulatory authority has denied approval of the Merger and such denial has
become final and nonappealable; and (B) if any approval of the stockholders of
First Paintsville or Classic, as the case may be, required for consummation of
the Merger shall not have been obtained by reason of the failure to obtain the
required vote at a duly held meeting of stockholders; and (iii) by Classic or
First Paintsville if there has been a material breach of their respective
representations, warranties, covenants or other agreements contained in the
Merger Agreement, which breach is not cured within 30 business days after
written notice of such breach has been provided by the non-breaching party.
Conduct of Business Pending the Merger
First Paintsville has agreed that, prior to the Effective Time, it
will, with respect to it and its subsidiaries, conduct its business in the
ordinary and usual course consistent with sound business and banking practices
and use its best efforts to maintain and preserve its business organization,
employees and advantageous business relationships and retain the services of its
officers and key employees, and it will not: (i) declare or pay any dividends on
its capital stock, other than ordinary, normal dividends from First National
Bank to First Paintsville; (ii) enter into or amend any employment, severance or
similar agreement or arrangement with any director, officer or employee, or
modify any employee plans or loans, or grant any salary increase, other than
increases or amendments consistent with past practice or required by applicable
law or contract; (iii) authorize, recommend or propose or enter into an
agreement in principle with respect to, any other merger, consolidation or
business combination; (iv) propose or adopt any amendments to its articles of
incorporation or bylaws; (v) issue, sell, grant, confer or award any of its
common stock or effect any stock split or adjust, combine, reclassify or
otherwise change its capitalization; (vi) purchase, redeem, retire, repurchase
or exchange or otherwise acquire or dispose of, directly or indirectly, any of
its common stock; (vii) without
40
<PAGE>
first obtaining the consent of Classic, (a) enter into or increase any loan or
credit commitment to, or invest or agree to invest in, any person or entity or
modify any of the material provisions or renew or otherwise extend the maturity
date of any existing loan or credit commitment in an amount in excess of
$75,000, except for single-family residential loans or credits not exceeding
$150,000 that are saleable in recognized secondary markets pursuant to First
National Bank's lending policies, (b) enter into, or increase in an amount in
excess of $150,000, any commercial or multi-family real estate loan or credit
commitment to, or invest or agree to invest in, any commercial, multi-family
real estate project or entity, (c) lend to any person or entity, with respect to
any loans or other extensions of credit on a "watch list" or similar internal
report; (d) enter into any agreement or engage in any transaction which
reasonably could be construed as materially affecting the asset/liability
management or interest rate risk management position of First National Bank, or
(e) change lending, credit, investment, liability management and other material
banking policies in any material respect; (viii) initiate, solicit or encourage
any discussions, inquiries or proposals with any third party relating to the
disposition of any significant portion of its business or assets; (ix) take any
action that would materially impede the consummation of the transactions
contemplated by the Merger Agreement or the ability of Classic to obtain
regulatory approval; (x) other than in the ordinary course of business, incur
any indebtedness for borrowed money, assume, guarantee, endorse or otherwise
become responsible or liable for the obligations of any other individual,
corporation or other entity; or (xi) take any actions or engage in any activity,
enter into any transaction or take or omit to take any other act which would
make any of the representations and warranties of the Merger Agreement untrue or
incorrect in any material respect.
Surrender of Stock Certificates
Promptly after the Effective Time, a paying agent selected by Classic
will mail written transmittal material concerning the surrender of stock
certificates to each record holder of shares of First Paintsville Common Stock
outstanding at the Effective Time. The transmittal material will contain
instructions with respect to the proper method of surrender of stock
certificates formerly representing shares of First Paintsville Common Stock in
exchange for the Merger Consideration. DO NOT SEND STOCK CERTIFICATES AT THIS
TIME.
Upon delivery to the paying agent of certificates formerly representing
shares of First Paintsville Common Stock for cancellation, together with
properly completed transmittal material, each such stockholder will receive a
check in payment of the Merger Consideration for the shares represented by such
certificates. First Paintsville stockholders will not be entitled to receive
interest on any cash to be received in the Merger.
Expenses
All expenses incurred in connection with the Merger Agreement and the
transactions contemplated thereby are to be paid by the party incurring such
expenses.
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<PAGE>
Accounting Treatment
The Merger, if completed as proposed, will be treated as a purchase in
accordance with GAAP. Accordingly, the assets and liabilities of First
Paintsville will be recorded on the books of Classic at their respective fair
values at the time of consummation of the Merger.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet as of March
31, 1996 and the pro forma condensed consolidated statement of income for the
year ended March 31, 1996, give effect to the acquisition of First Paintsville
based on the historical consolidated financial statements of Classic and First
Paintsville and their subsidiaries under the assumptions and adjustments set
forth below and in the accompanying notes to the pro forma financial statements.
The acquisition of First Paintsville will be accounted for as a
purchase transaction and, therefore, is included in the pro forma condensed
consolidated balance sheet as of March 31, 1996, as if the transaction had
become effective on such date. The acquisition of First Paintsville is also
reflected in the pro forma condensed consolidated statements of income for the
year ended March 31, 1996 as if the transaction had become effective at the
beginning of the period presented, giving effect to the pro forma adjustments
described therein. The purchase accounting adjustments reflected in the pro
forma financial statements are based on management estimates of fair value of
First Paintsville assets and liabilities. Final purchase adjustments may vary
due to changes in estimated value resulting from changes in market interest
rates, independent appraisals and other factors impacting First Paintsville's
net assets prior to consummation of the acquisition.
The pro forma financial statements have been prepared by the
managements of Classic and First Paintsville based upon their respective
consolidated financial statements. These pro forma financial statements may not
be indicative of the results that actually would have occurred if the
acquisition of First Paintsville had been in effect on the dates indicated or
which may be obtained in the future.
42
<PAGE>
CLASSIC BANCSHARES, INC. AND FIRST PAINTSVILLE BANCSHARES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
First Acquisition Pro Forma
Classic Paintsville Adjustments Consolidated
------- ----------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks............................... $ 1,532 $ 2,984 $ --- $4,516
Securities purchased under resell agreements.......... 340 --- a (340) ---
Certificates of deposit in other financial
institutions........................................ 4,600 --- a (3,850) 750
Investment securities available for sale.............. 10,438 21,602 --- 32,040
Mortgage-backed securities available for
sale................................................ 2,840 --- --- 2,840
Investment in subsidiary.............................. --- --- a 9,324 ---
c (9,324)
Federal funds sold.................................... 635 4,725 a (635) 4,725
Loans receivable, net................................. 43,722 27,455 b (206) 70,971
Foreclosed real estate................................ 5 321 --- 326
Accrued interest receivable........................... 332 444 --- 776
FHLB stock............................................ 621 219 --- 840
Office properties and equipment, net.................. 724 784 b 325 1,833
Goodwill.............................................. b 3,622 3,622
Deferred income taxes................................. 26 5 --- 31
Other assets.......................................... 268 521 --- 789
------- ------- ------- --------
TOTAL ASSETS...................................... $66,083 $59,060 $(1,084) $124,059
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits.............................................. $46,201 $51,841 b $ (104) $ 98,146
Accrued interest on deposits.......................... 140 155 295
Accounts payable and accrued expenses................. 242 198 440
Borrowings............................................ --- 1,178 a 4,500 5,678
------- ------- ------- --------
Total liabilities................................. 46,583 53,372 4,604 104,559
------- ------- ------- --------
Minority interest in subsidiary........................ --- 171 c (171) ---
------- ------- ------- --------
Stockholders' equity
Common stock.......................................... 13 1,446 c (1,446) 13
Additional paid-in capital............................ 12,711 --- --- 12,711
Retained earnings..................................... 7,708 4,162 c (4,162) 7,708
Net unrealized gain on securities available for
sale................................................. 86 (91) c 91 86
Minimum pension liability adjustment.................. (13) --- --- (13)
Unearned ESOP shares.................................. (1,005) --- --- (1,005)
------- ------- ------- --------
Total stockholders' equity........................ 19,500 5,517 (5,517) 19,500
------- ------- ------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............................. $66,083 $59,060 $(1,084) $124,059
======= ======= ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
43
<PAGE>
CLASSIC BANCSHARES, INC. AND FIRST PAINTSVILLE BANCSHARES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
First Acquisition Pro Forma
Classic Paintsville Adjustments Consolidated
------- ----------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans................................................. $2,895 $2,614 d$ 29 $5,538
Investment securities................................. 763 1,756 --- 2,519
Mortgage-backed securities............................ 438 --- --- 438
Other interest and dividend income.................... 318 89 e (123) 284
-------- -------- ------ -------
Total interest income............................. 4,414 4,459 (94) 8,779
-------- -------- ------ -------
Interest expense:
Interest on deposits................................ 2,603 1,862 f (52) 4,413
Other interest expense.............................. 248 98 k 183 529
-------- -------- ------ -------
Total interest expense........................... 2,851 1,960 131 4,942
-------- -------- ------ -------
Net interest income.................................... 1,563 2,499 (225) 3,837
Provision for loan losses.............................. 168 169 --- 337
-------- -------- ------ -------
Net interest income after provision for
loan losses........................................... 1,395 2,330 (225) 3,500
Non-interest income.................................... 108 362 --- 470
Non-interest expense................................... 1,178 1,691 g 16 3,126
-------- -------- -------
h 241
------
Income before tax and minority interest................ 325 1,001 (482) 844
Income tax expense.................................... 32 337 i (82) 287
-------- -------- ------ -------
Income before minority interest........................ 293 664 (400) 557
Minority interest in net income of subsidiary.......... --- 17 j (17) ---
-------- -------- ------ -------
Net income............................................. $ 293 $ 647 $(383) $ 557
======== ======= ===== ======
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
General:
The pro forma financial statements reflect the merger of First
Paintsville into Classic assuming the use of the purchase method of
accounting. The purchase price is calculated as follows:
FIRST FIRST
PAINTSVILLE NATIONAL
BANCSHARES BANK
Cash paid
Shares to be required 72,375 2,433
Price per share $ 125 $ 114
---------- --------
Total cash payment $9,046,875 $277,362
========== ========
a) To record the acquisition of First Paintsville and First National Bank
Common Stock and the liquidation of securities purchased under resell
agreements, certificates of deposit in other financial institutions,
and $4,500,000 of short-term borrowings to raise funds to purchase
First Paintsville and First National Bank shares.
b) To allocate the excess of purchase price over net book value of assets
and liabilities acquired. The market adjustments for loans, deposits,
and borrowings have been estimated based on current market rates at
March 31, 1996. Current market value of fixed assets is based on
managements' estimates at March 31, 1996. Final market value
adjustments will be made upon consummation of the Merger and based upon
data available at that time. The following table sets forth the
estimated purchase adjustments as of March 31, 1996:
Loans receivable (all market related adjustments) $ (206)
Premises and equipment 325
Deposits 104
Goodwill 3,622
45
<PAGE>
c) To eliminate investment in First Paintsville.
d) Amortization of loan market value using the straight-line method over
the expected average remaining life of seven years.
e) To raise funds for this purchase Classic intends to liquidate
securities purchased under resell agreements and certificates of
deposit in other financial institutions. The impact of liquidating
these assets is reflected as an adjustment to interest income.
f) To record the amortization of the deposit market adjustment using the
straight-line method over the expected average remaining life of two
years.
g) Amortization of premises market value adjustment over 20 years
straight-line.
h) Amortization of goodwill over 15 years straight-line.
i) The tax rate assumed for the pro forma adjustments is 34% exclusive of
the adjustment for goodwill.
j) To record effect of acquiring minority interest of First National Bank.
k) To record interest on short-term borrowings for 180 days at 8.25%.
46
<PAGE>
SUPPLEMENTAL HISTORICAL REGULATORY CAPITAL INFORMATION
Savings associations are subject to capital requirements that are no
less stringent than the requirements applicable to national banks. The OTS
capital regulations require institutions to maintain intangible capital equal to
1.5% of adjusted total assets, core capital equal to 3% of adjusted total
assets, and total (or risk-based) capital equal to 8% of risk-weighted assets.
Under the risk-based capital requirement, on-balance sheet assets and
off-balance sheet items (that have been converted to credit-equivalent amounts)
are assigned a risk weight based upon their relative risk ranging from 0% for
assets backed by the full faith and credit of the United States Government or
that pose no risk to the institution to 100% for assets such as delinquent or
repossessed assets. See "Regulation -- Regulatory Capital Requirements of
Federal Savings Associations."
National banks are subject to two capital standards, a leverage
requirement and a risk-based capital requirement. The leverage ratio requires a
minimum ratio of "Tier 1 capital" to adjusted total assets of 3% for national
banks rated composite 1 under the CAMEL rating system for banks, which includes
First National Bank. The risk-based capital requirement requires national banks
to maintain "total capital" equal to at least 8% of total risk-weighted assets.
See "Regulation -- Regulatory Capital Requirements of National Banks."
The following table sets forth the historical tangible, core and
risk-based capital information for Ashland Federal and the historical leverage
and risk-based capital information for First National Bank, as of March 31,
1996, under the regulations discussed above. The information set forth below
should be read in conjunction with and is qualified in its entirety by (i) the
historical consolidated financial information, including the accompanying notes,
of Classic, which are contained elsewhere herein, and (ii) the historical
consolidated financial information, including the accompanying notes, of First
Paintsville which are contained elsewhere herein.
<TABLE>
<CAPTION>
FIRST
ASHLAND NATIONAL
FEDERAL REGULATORY BANK AS REGULATORY
AS REPORTED REQUIREMENTS REPORTED REQUIREMENTS
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Capital Amounts
Tangible capital(1) $13,023 $ 908 N/A N/A
Core/leverage capital 13,023 1,816 $6,428 $1,753
Risk-based capital 13,225 2,227 6,787 2,290
Capital Ratios 21.5% 1.50% N/A N/A
Tangible capital(1)
Core/leverage capital 21.5 3.00 11.00% 3.00%
Risk-based capital 47.5 8.00 23.70 8.00
- -------------
(1) Defined as common shareholders' equity less intangible assets and all other
deductions.
</TABLE>
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CLASSIC
Introduction
Classic is a Delaware corporation. Since Classic only recently began
operations, certain of the financial information presented herein prior to
December 28, 1995 relates primarily to Ashland Federal, a wholly owned
subsidiary and predecessor of Classic. All references to Classic at or before
December 28, 1995 refer to Ashland Federal and its subsidiary on a consolidated
basis.
Ashland Federal is a federally chartered stock savings bank
headquartered in Ashland, Kentucky. Ashland Federal currently serves the
financial needs of communities in its market area through its office located at
344 Seventeenth Street, Ashland, Kentucky 41101. Its deposits are insured up to
applicable limits by the FDIC. Ashland Federal's business involves attracting
deposits from the general public and using such deposits, together with other
funds, to originate primarily one- to four-family residential mortgage and, to a
much lesser extent, commercial real estate, multi-family, consumer and
construction loans primarily in its market area. Ashland Federal also invests in
mortgage-backed and related securities, investment securities and other
permissible investments.
Classic's primary market area includes the Kentucky Counties of Boyd
and Greenup. The economic base in these counties is primarily industrial in
nature and relies heavily upon a small number of large employers. Downsizing by
these employers has contributed to the decline in the population and economic
difficulties experienced in these counties in recent years. Per capita income
for both counties remains below the national average. In addition, the
unemployment rate, while declining, continues to exceed the unemployment rate
for Kentucky.
Classic's revenues are derived principally from interest earned on
loans and, to a lesser extent, from interest earned on investments and
mortgage-backed and related securities. The operations of Classic are influenced
significantly by general economic conditions and by policies of financial
institution regulatory agencies, including the OTS and the FDIC. Classic's cost
of funds is influenced by interest rates on competing investments and general
market interest rates. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn is affected by
the interest rates at which such financings may be offered.
Classic's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable, net
and investments and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. Classic is subject to interest rate risk
to the degree that its interest-bearing liabilities mature or reprice at
different times, or on a different basis, than its interest-earning assets.
In recent years, Classic maintained short- and intermediate-term
investments substantially above the levels required by the OTS regulations due
to a lack of lending opportunities in Ashland Federal's primary market area. As
a result, Classic's loan originations remained low as compared to peer
institutions. The level of Classic's loan originations during this period was
adversely affected by Classic's limited product line and marketing efforts, as
well as economic conditions in Classic's market area.
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of Classic.
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<PAGE>
The information contained in this section should be read in conjunction with the
financial statements and accompanying notes thereto contained elsewhere herein.
Forward-Looking Statements
When used herein and in future filings by Classic with the Securities
and Exchange Commission (the "SEC"), in Classic's press releases or other public
or shareholder communications, and in oral statements made with the approval of
an authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including changes in
economic conditions in Classic's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in Classic's market
area and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Classic wishes
to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. Classic wishes to advise
readers that the factors listed above could affect Classic's financial
performance and could cause Classic's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
Classic does not undertake--and specifically declines any
obligation--to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Business Strategy
During fiscal 1996, the Board of Directors formulated and began to
implement a new "community bank" oriented strategy designed to provide planned
and profitable growth, sustained profitability and maintain the safety and
soundness of Ashland Federal. The principal elements of this strategy include
(i) the attraction of lower cost deposits, through the offering of transaction
accounts (ii) increasing the amount and type of consumer loan products offered,
(iii) expanding Ashland Federal's commercial real estate and commercial business
lending operations, (iv) enhancing traditional and non-traditional branch
locations, including the acquisition of other financial institutions to the
extent opportunities arise, (v) improving operating efficiencies through the
utilization of technology and low cost delivery systems, (vi) continuous review
of loan underwriting standards, asset quality and maintenance of a capital
position that exceeds regulatory guidelines.
There are a number of risks related to this business strategy. First,
commercial real estate and consumer loans are generally considered to carry a
higher level of credit risk than residential loans. Ashland Federal's new senior
officers plan to address such risks through prudent loan underwriting standards
and their experience in underwriting such loans. However, there can be no
assurance that increased provisions to Ashland Federal's loan loss allowance
will not be required. A second result of this business strategy has been a
decline in liquidity, although based on the availability of borrowings from the
FHLB of Cincinnati and other sources, the Board does not believe that Ashland
Federal will have any difficulties in meeting its liquidity needs. A third
result of this business strategy has been that an increase in the variety and
volume of Ashland Federal's financial products has required an increase in
overhead expense, in the form of both start-up costs and maintenance and
administration. Finally, although most
49
<PAGE>
of the elements of the new business strategy have been utilized by new
management in their positions with previous employers, for the most part, the
new operating strategy represents a significant departure from Ashland Federal's
previous strategy and from the modes of operation with which many of Ashland
Federal's employees are most familiar. There can be no assurance that Ashland
Federal's new operating strategy will be successful.
Although Ashland Federal's prior use of brokered deposits and adjusted
rate mortgage ("ARM") loans tied to indices, including the National Monthly
Median Cost of Funds Index and the National Average Interest Contract Rate on
the Purchase of Previously Occupied Homes for all major types of lenders
(collectively, the "Cost of Funds Indices") will continue to negatively impact
Ashland Federal's interest rate spread for some time in the future, it is
anticipated that the investment of the proceeds from Ashland Federal's
conversion to stock form (the "Conversion") into higher yielding and more
interest rate sensitive consumer and commercial real estate loans will have a
positive impact on Ashland Federal's interest rate spread which could result in
an increase in net interest income. Any increase in net increase income will be
partially offset by the increased operating expenses associated with operations
as a public company and the implementation of the new stock-based and
supplemental retirement plans to be implemented by Classic and Ashland Federal.
Financial Condition
March 31, 1996 compared to March 31, 1995. Total assets increased $5.2
million, or 8.5%, from $60.9 million at March 31, 1995 to $66.1 million at March
31, 1996. Loans increased $8.0 million, or 22.4%, from $35.7 million at March
31, 1995 to $43.7 at March 31, 1996 as a result of increased marketing efforts
and Ashland Federal's new strategy to increase originations of commercial real
estate, consumer and commercial business loans. Certificates of deposit with
other financial institutions increased $3.5 million from $1.1 million at March
31, 1995 to $4.6 million at March 31, 1996 as a result of the investment of
remaining proceeds from the sale of common stock. Investment securities
decreased $1.8 million from $11.1 million at March 31, 1995 to $10.4 million at
March 31, 1996 as a result of sales and redemptions of securities prior to
maturity. The proceeds were used to fund the increase in loan demand.
Mortgage-backed securities decreased $5.3 million, or 65.4%, from $8.1
million at March 31, 1995 to $2.8 million at March 31, 1996 primarily due to the
sale of $4.8 million of floating rate mortgage derivative securities which were
funded by a floating rate advance from the FHLB. Deposits decreased $2.3
million, or 4.7%, from $48.5 million at March 31, 1995 to $46.2 million at March
31, 1996. This decrease was attributable to transfers of $1.3 million in
deposits for the purpose of stock subscriptions and a decrease in brokered
deposits. Brokered deposits decreased $4.8 million, from $6.9 million at March
31, 1995 to $2.1 million at March 31, 1996 as a result of management's efforts
to reduce reliance on such deposits. These deposit outflows were partially
offset by new deposits received in the normal course of business.
The increase in loans and decrease in deposits were funded with a
decrease in investment securities of $1.8 million, net proceeds from the sale of
common stock of $11.7 million, and borrowings of $3.2 million from the FHLB. The
$3.2 million of FHLB borrowings received during the twelve months ended March
31, 1996 were repaid with conversion proceeds. During the fiscal year, Classic
also repaid $4.8 million of FHLB advances with funds received from the sale of
mortgage derivative securities.
The allowance for loan losses decreased $26,000, or 8.3%, from $312,000
at March 31, 1995 to $286,000 at March 31, 1996. The level of the allowance at
March 31, 1996 reflects
50
<PAGE>
the reduction in non-performing assets from $857,000 at March 31, 1995 to
$600,000 at March 31, 1996.
Stockholders' equity increased $12.1 million to $19.5 million at March
31, 1996 from $7.4 million at March 31, 1995. The increase in stockholders'
equity was primarily due to net proceeds from Classic's initial public offering.
March 31, 1995 compared to March 31, 1994. Total assets increased $2.1
million, or 3.6%, from $58.8 million at March 31, 1994 to $60.9 million at March
31, 1995. Loans increased $2.6 million, or 7.9%, from $33.1 million at March 31,
1994 to $35.7 million at March 31, 1995, due to increased ARM demand and
competitive pricing. Investment securities to be held to maturity increased $4.1
million, or 50.6%, from $8.2 million at March 31, 1994, to $12.3 million at
March 31, 1995 due to management's decision to invest cash equivalents in higher
yielding assets.
Mortgage-backed securities increased $4.3 million, or 113.7%, from $3.8
million at March 31, 1994 to $8.1 million at March 31, 1995 as prior management
purchased $4.8 million of floating rate mortgage derivative securities which
were funded by a floating rate FHLB advance which floats in accordance with the
same index. Deposits decreased $3.1 million, or 6.5%, from $51.6 million at
March 31, 1994 to $48.5 million at March 31, 1995 due to the conservative
pricing of retail deposits. Brokered deposits increased from $6.5 million at
March 31, 1994 to $6.9 million at March 31, 1995 as brokered deposits were
utilized to fund operations in light of an outflow of savings deposits. The
increase in loans, investment securities and mortgage-backed securities and the
decrease in deposits were funded with a $4.8 million FHLB advance and with cash
and cash equivalents which decreased $8.0 million, or 78.8%, from $10.2 million
at March 31, 1994 to $2.2 million at March 31, 1995, and with the proceeds from
maturing certificates of deposit with other financial institutions which
decreased $1.3 million, or 54.5%, from $2.4 million at March 31, 1994 to $1.1
million at March 31, 1995.
The allowance for loan losses decreased $6,000, or 1.9%, from $318,000
at March 31, 1994 to $312,000 at March 31, 1995. The level of the allowance at
March 31, 1995 reflects the reduction in non-performing assets from $1.1 million
at March 31, 1994 to $857,000 at March 31, 1995.
Results of Operations
Classic's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and investments, and the costs of
Classic's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of Classic's noninterest
income, including fee income and service charges, and affected by the level of
its noninterest expenses, including its general and administrative expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Comparison of Operating Results for the Years Ended March 31, 1996
and March 31, 1995
Net Income. Net income decreased by $130,000, or 30.7%, from $423,000
at March 31, 1995 to $293,000 for the year ended March 31, 1996. The decrease
was due to increases
51
<PAGE>
in noninterest expense of $199,000 and in the provision for loan losses of
$35,000, which were partially offset by increases in net interest income of
$10,000 and noninterest income of $74,000 and a decrease in income taxes of
$21,000.
Net Interest Income. Net interest income increased $10,000, or 0.6%, to
approximately $1.6 million at March 31, 1996 due to an increase in interest
income which more than offset the increase in interest expense. Interest income
increased $452,000 due to the transfer of funds from lower yielding investments
to higher yielding loans. The average balance of interest-earning assets
increased from $59.4 million for fiscal 1995 to $62.3 million for fiscal 1996.
The increase in the average balance of interest-earning assets was due primarily
to an increase in loans as described above. The average balance of loans
increased $5.1 million from fiscal 1995 to fiscal 1996 due to increased
marketing efforts and the new strategy of originating commercial real estate,
consumer and commercial business loans. The average yield on interest-earning
assets increased from 6.7% for the year ended March 31, 1995 to 7.1% for the
year ended March 31, 1996 due to an increase in higher yielding loans and
investments.
Interest expense increased $500,000 from $2.4 million in fiscal 1995 to
$2.9 million in fiscal 1996 due to an increase in the average rate paid on
deposits and FHLB advances. While the average balance of FHLB advances increased
only slightly, from $3.6 million at March 31, 1995 to $3.7 million at March 31,
1996, the average rate paid on FHLB advances increased from 4.9% for fiscal 1995
to 6.8% for fiscal 1996 due to higher rates charged by the FHLB on these
advances. Interest on deposits increased $400,000 as a result of an increase in
the average rate paid on deposits. The average balance of deposits actually
decreased from $49.2 million at March 31, 1995 to $48.2 million at March 31,
1996. However, the average yield on deposits increased from 4.5% for the year
ended March 31, 1995 to 5.3% for the year ended March 31, 1996. The increase in
rates paid on deposits was the result of management's decision to price deposits
more competitively with the market in order to attract new deposits to fund loan
demand.
Provision for Loan Losses. The provision for loan losses increased by
$35,000 from $133,000 for fiscal 1995 to $168,000 for fiscal 1996 based on
management's overall assessment of the loan portfolio. The increase was due to
an increase in foreclosed assets that were sold during the year. Management
maintains the allowance for loan losses based on the analysis of various
factors, including the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, historical loss experience, delinquency trends and
prevailing and projected economic conditions. Although Classic maintains its
allowance for loan loses at a level it considers adequate to provide for losses,
there can be no assurance that such losses will not exceed the estimated amounts
or that additional substantial provisions for loan losses will not be required
in future periods. At March 31, 1996, the allowance for loan losses totaled
$286,000, or 0.7%, of total loans and 48.1% of non-performing loans. The ratio
of the allowance for loan losses to non-performing assets increased March 31,
1996 from the level of March 31, 1995. Non-performing assets decreased from
$857,000 at March 31, 1995 to $600,000 at March 31, 1996 while the allowance
decreased $26,000 resulting in an increase in the ratio of the allowance for
loan losses to non-performing assets as compared to fiscal 1995.
Management believes that the historical level of the allowance reflects
Classic's primary emphasis on one- to four-family lending. In addition, Ashland
Federal's non-performing assets as a percentage of total assets have declined in
recent years. The allowance for loan losses is subject to management's ongoing
review and may fluctuate based upon management's analysis of the composition and
quality of the loan portfolio. In this regard, there can be no assurance
52
<PAGE>
that Classic's allowance for loan losses will not increase in the future as the
proportion of Classic's portfolio comprised of consumer and commercial real
estate loan increases as a result of the implementation of Ashland Federal's new
business strategy.
Noninterest Income. Noninterest income increased approximately $74,000
from $34,000 for fiscal 1995 to $108,000 for fiscal 1996, due to increases of
$10,000 in late charges and other fees on loans, $36,000 in net gains on sale of
mortgage-backed and investment securities and $27,000 in other income.
Noninterest Expense. Noninterest expense increased approximately
$200,000, or 20.4%, from approximately $979,000 for the year ended March 31,
1995 to approximately $1.2 million for the year ended March 31, 1996.
Compensation and benefits expenses increased $66,000 from $359,000 for the year
ended March 31, 1995 to $425,000 for the year ended March 31, 1996 due to the
net increase in the number of employees, the establishment of a supplemental
executive retirement plan and the establishment of an employee stock ownership
plan.
Other general and administrative expenses increased approximately
$174,000, or 43.9%, from $396,000 for 1995 to $570,000 for 1996. Data processing
expense increased $12,000, audit and examination expense increased $28,000,
consulting fees increased $15,000 due to the implementation of checking accounts
and other new products, office supplies increased $7,000 due to a name change
which required the purchase of all new paper and other supplies, directors' fees
and retirement increased $12,000, charitable contributions increased $16,000,
collection and repossession expense increased $20,000 due to increased
collection efforts, and other general and administrative expenses increased
$64,000 due to higher operating costs and increased costs relative to operations
as a public company.
These increases were partially offset by decreases in occupancy and
equipment expenses of approximately $8,000, or 7.8%, deposit insurance premiums
of approximately $7,000, or 5.9%, due to an additional assessment of $5,000 that
was paid in fiscal 1995 and a decrease in deposits and an increase in gains on
foreclosed real estate of $25,000. Losses on foreclosed real estate were $1,000
for the year ended March 31, 1995 while gains on foreclosed real estate for the
year ended March 31, 1996 were $24,000 resulting in an increase of $25,000.
The deposits of savings associations such as Ashland Federal are
presently insured by the SAIF, which, along with the BIF, is one of the two
insurance funds administered by the FDIC. Financial institutions which are
members of the BIF are experiencing substantially lower deposit insurance
premiums because the BIF has achieved its required level of reserves while the
SAIF has not yet achieved its required reserves. A recapitalization plan for the
SAIF under consideration by Congress reportedly provides for a special
assessment of 0.80% to 0.90% of deposits to be imposed on all SAIF-insured
institutions to enable the SAIF to achieve its required level of reserves. If
the proposed assessment of 0.90% was effected based on deposits as of March 31,
1995 (as proposed), Ashland Federal's special assessment would amount to
approximately $261,000, after taxes. Accordingly, this special assessment would
significantly increase non-interest expense and adversely affect Classic's
results of operations. Conversely, depending upon Ashland Federal's capital
level and supervisory rating, and assuming the insurance premium levels for BIF
and SAIF members are again equalized, future deposit insurance premiums are
expected to decrease significantly, to as low as $2,000 per year from the 0.23%
of deposits currently paid by Ashland Federal, which would significantly reduce
non-interest expense for future periods if enacted as proposed. No prediction
can be made as to whether or in what form this proposed legislation will be
adopted.
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<PAGE>
Income Tax Expense. Income tax expense decreased $21,000 due to lower
income before income taxes of $151,000.
Comparison of the Years Ended March 31, 1995 and March 31, 1994
Net Income. Net income decreased by $19,000, or 4.3%, from $442,000 for
the year ended March 31, 1994 to $423,000 for the year ended March 31, 1995. The
decrease was due to increases in noninterest expense of $155,000 and in the
provision for loan losses of $49,000, which were offset by increases in net
interest income of $96,000 and noninterest income of $8,000 and a decrease in
income taxes of $82,000.
Net Interest Income. Net interest income increased $96,000, or 6.6%,
from $1.5 million for the year ended March 31, 1994 to $1.6 million for the year
ended March 31, 1995 due to an increase in interest income which more than
offset the increase in interest expense. Interest income increased $193,000
primarily due to an increase in the average balance of interest-earning assets
which increased from $56.9 million for fiscal 1994 to $59.4 million for fiscal
1995. The increase in the average balance of interest-earning assets was due
primarily to an increase in mortgage-backed and investment securities as a
result of an increase in mortgage-backed securities funded by FHLB advances, as
described above. The average yield on interest-earning assets increased slightly
from 6.6% for the year ended March 31, 1994 to 6.7% for the year ended March 31,
1995.
Interest expense increased $100,000 from $2.3 million in fiscal 1994 to
$2.4 million in fiscal 1995 due to an increase in the average balance of FHLB
advances which have more than offset the decline in the average balance of
deposits during the same period. The average balance of FHLB advances increased
from $0 for 1994 to $3.6 million for fiscal 1995 as management utilized floating
rate advances to purchase floating rate mortgage-backed securities. The average
rate paid on FHLB advances was 4.9% for fiscal 1995. Interest on deposits
decreased $81,000 primarily as a result of a decrease in average balance of
deposits of $1.3 million from $50.5 million in fiscal 1994 to $49.2 million in
fiscal 1995 due to competition and conservative pricing. The average yield on
deposits decreased from 4.6% for the year ended March 31, 1994 to 4.5% for the
year ended March 31, 1995.
Provision for Loan Losses. The provision for loan losses increased by
$49,000 from $84,000 for fiscal 1994 to $133,000 for fiscal 1995 based upon
management's overall assessment of the loan portfolio. At March 31, 1995, the
allowance for loan losses totaled $312,000, or 0.9% of total loans and 38.6% of
non-performing loans. The ratio of the allowance for loan losses to
non-performing assets increased March 31, 1995 from the level of March 31, 1994.
Non-performing assets decreased from $1.1 million at March 31, 1994 to $857,000
at March 31, 1995 while the allowance was virtually unchanged resulting in an
increase in the ratio of the allowance for loan losses to non-performing assets
as compared to fiscal 1994.
Noninterest Income. Noninterest income increased approximately $8,000
from $26,000 in fiscal 1994 to $34,000 in fiscal 1995, due to increases of
$8,000 in late charges and other fees on loans, $2,000 in insurance service fees
and $1,000 in other income partially offset by a decrease in gain on sale of
investment securities of approximately $3,000.
Noninterest Expense. Noninterest expense increased approximately
$155,000, or 18.8%, from approximately $824,000 for fiscal 1994 to approximately
$979,000 for fiscal 1995. Compensation and benefits increased from $317,000 for
fiscal 1994 to $359,000 for fiscal 1995
54
<PAGE>
due to management restructuring expense as well as normal increases in salaries,
retirement plan and health insurance expense.
Occupancy and equipment expense increased by approximately $29,000, or
39.2%, from $74,000 for fiscal 1994 to $103,000 for fiscal 1995, as a result of
an increase in depreciation expense of $13,000 and an increase in building
maintenance and repairs of $14,000. Deposit insurance premiums increased by
approximately $19,000, or 19.2%, from $99,000 for 1994 to $118,000 for 1995, as
a result of the application of the remaining credit from the former Federal
Savings and Loan Insurance Corporation secondary reserve of $10,000 in 1994 and
the payment in fiscal 1995 of an additional assessment of $5,000.
Other general and administrative expenses and losses on foreclosed real
estate increased by $65,000, or 19.5%, from $334,000 for 1994 to $399,000 for
1995. Audit and examination expense increased $10,000, data processing expense
increased $8,000 and other general and administrative expenses increased $47,000
due to higher operating costs.
Income Tax Expense. Income tax expense decreased $82,000 due to lower
income before income taxes and an increase in tax exempt income related to
Classic's investments in tax exempt bonds.
Analysis of Net Interest Income
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
55
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- ----------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- ------- ------ ----------- -------- ------ ---------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)......... $39,487 $2,895 7.3% $34,371 $2,433 7.1% $33,702 $2,635 7.8%
Mortgage-backed securities.. 6,057 439 7.2 7,208 525 7.3 4,372 328 7.5
Investment securities....... 11,448 774 6.8 10,787 704 6.5 8,103 466 5.8
Interest-earning deposits... 4,670 265 5.7 6,487 265 4.1 10,193 316 3.1
FHLB stock.................. 598 41 6.9 561 35 6.2 532 24 4.5
------- ------ ------- ------ ------- ------
Total interest-earning
assests(1) $62,260 4,414 7.1 $59,414 3,962 6.7 $56,902 3,769 6.6
======= ------ ======= ------ ======= ------
Interest-Bearing Liabilities:
Savings accounts............ $ 2,773 90 3.2 $ 3,539 115 3.2 $ 4,096 140 3.4
Money market deposits....... 6,096 203 3.3 8,940 301 3.4 10,626 388 3.7
Certificate accounts........ 39,377 2,310 5.9 36,735 1,815 4.9 35,793 1,784 5.0
FHLB advances............... 3,660 248 6.8 3,600 178 4.9 --- --- ---
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities $51,906 2,851 5.5 $52,814 2,409 4.6 $50,515 2,312 4.6
======= ------ ======= ------ ======= ------
Net interest income.......... $1,563 $1,553 $1,457
====== ====== ======
Net interest rate spread..... 1.6% 2.1% 2.0%
=== === ===
Net earning assets........... $10,354 $ 6,600 $ 6,387
======= ======= =======
Net yield on average
interest-earning assets.... 2.5% 2.6% 2.6%
=== === ===
Average interest-earning
assets to average
interest-bearing
liabilities................ 1.20x 1.12x 1.13x
==== ==== ====
- ------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
</TABLE>
56
<PAGE>
The following table presents the weighted average rate earned on loans,
investments and other interest-earning assets, and the weighted average rates
paid on deposits and the resultant interest rate spread at the date indicated.
March 31, 1996
--------------
Weighted average rate:
Loans receivable......................................... 7.5%
Mortgage-backed securities............................... 6.5
Investment securities.................................... 6.7
FHLB stock............................................... 7.0
Other interest-earning assets ........................... 5.0
Combined weighted average yield on
interest-earning assets.............................. 7.1
Weighted average rate paid on:
Savings accounts......................................... 3.0
Money market accounts.................................... 3.1
Certificate accounts..................................... 5.7
Combined weighted average rate paid on
interest-bearing liabilities ........................ 5.3
Interest rate spread...................................... 1.8
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable..................... $388 $ 74 $462 $ 57 $(259) $(202)
Mortgage-backed securities........... (80) (6) (86) 206 (9) 197
Investment securities................ 40 30 70 174 64 238
Other ............................... 2 4 6 (138) 98 (40)
---- ----- ----- ----- ----- -----
Total interest-earning assets.... $350 $102 $452 $ 299 $(106) $ 193
==== ==== ==== ===== ===== =====
Interest-bearing liabilities:
Savings accounts .................... $ (25) $ -- $ (25) $ (18) $ (7) $(25)
Money market accounts................ (90) (8) (98) (61) (26) (87)
Certificate accounts................. 129 366 495 71 (40) 31
FHLB advances........................ 2 68 70 178 -- 178
---- ----- ----- ----- ----- -----
Total interest-bearing liabilities $ 16 $426 $442 $ 170 $ (73) 97
===== ==== ==== ===== ===== =====
Net interest income..................... $ 10 $ 96
===== =====
</TABLE>
57
<PAGE>
Asset/Liability Management
Classic's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as loans
and investments, and its interest expense on interest-bearing liabilities, such
as deposits. When interest-bearing liabilities mature or reprice more quickly
than interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income. Finally, a flattening of the "yield curve" (i.e., a decline in the
difference between long- and short-term interest rates), such as has occurred
during recent months, could adversely impact net interest income to the extent
that Classic's assets have a longer average term than its liabilities.
Classic is also subject to interest rate risk to the extent that the
value of its net assets fluctuates with interest rates. In general, the value of
most of Classic's assets decline in the event of an increase in interest rates.
Prior to adoption of the new business strategy, the Board and
management met informally to monitor Ashland Federal's assets and liabilities.
In 1995, Ashland Federal formed an Asset/Liability Committee, comprised of
Ashland Federal's chief executive officer, chief financial officer, senior
lending officer and two non-employee members of the Board of Directors to meet
quarterly to review Ashland Federal's interest rate risk position and product
mix and to make recommendations for adjustments to Ashland Federal's Board of
Directors. New management also monitors Ashland Federal's interest rate risk
position on a monthly basis and also reviews Ashland Federal's portfolio,
earnings, liquidity, asset quality, formulates investment strategies and
oversees the timing and implementation of transactions to assure attainment of
the Board's objectives in the most effective manner.
In connection with the adoption of Ashland Federal's new business
strategy, the Board adopted a new asset/liability management policy. The
principal goals of this policy are to enhance Ashland Federal's net interest
margin while better managing its interest rate position. Depending upon market
conditions, Ashland Federal may place more emphasis on enhancing the net
interest margin rather than better matching the interest rate sensitivity of
Ashland Federal's assets and liabilities. As a result and in view of the need to
enhance Ashland Federal's interest rate spread, despite the Board and
management's efforts to more effectively manage Ashland Federal's interest rate
risk in the future, Classic's results of operations and net portfolio values
will remain significantly vulnerable to increases in interest rates and declines
in the difference between long- and short-term interest rates.
The principal elements of the new asset/liability management policy are
as follows. First, Ashland Federal will require that future ARM loans be indexed
to changes in rates paid on U.S. Treasury securities rather than one of the Cost
of Funds Indices. Management believes that U.S. Treasury securities are
significantly more interest rate sensitive than the Cost of Funds Indices and
that therefore, ARMs indexed to such securities will be more interest rate
sensitive than ARM loans originated by Ashland Federal in the past. Second,
management intends to significantly increase Ashland Federal's commercial real
estate and consumer loans, subject to market conditions. In general, such loans
carry shorter terms to maturity and/or repricing, are more interest rate
sensitive and generate higher levels of noninterest income than most of Ashland
Federal's current assets. Third, management intends to use marketing and other
initiatives to increase Ashland Federal's transaction and other non-certificate
deposit accounts.
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Management believes that such accounts generally carry lower costs and are more
interest rate resistant than Ashland Federal's certificates of deposit. There
can be no assurance as to whether or when any or all of the elements of the new
asset/liability management program will be successfully implemented.
Net Portfolio Value ("NPV") analysis provides a quantification of
interest rate risk. In essence, this approach calculates the difference between
the present value of liabilities, expected cash flows from assets and cash flows
from off balance sheet contracts. Under OTS regulations, an institution's
"normal" level of interest rate risk in the event of an immediate and sustained
200 basis point change in interest rates is a decrease in the institution's NPV
in an amount not exceeding 2% of the present value of its assets. Pursuant to
this regulation, thrift institutions with greater than "normal" interest rate
exposure must take a deduction from their total capital available to meet their
risk-based capital requirement. The amount of that deduction is one-half of the
difference between (a) the institution's actual calculated exposure to the 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the present value of its assets. Savings institutions, however, with less than
$300 million in assets and a total capital ratio in excess of 12%, will be
exempt from this requirement unless the OTS determines otherwise. The OTS has
postponed the implementation of the rule until further notice.
At March 31, 1996, 2.0% of the present value of Ashland Federal's
assets was approximately $1.2 million, which was less than $3.2 million, the
decrease in NPV resulting from a 200 basis point change in interest rates. As a
result, if the rule were in effect and were applicable to Ashland Federal,
Ashland Federal would have been required to make a $1.0 million deduction from
total capital in calculating its risk-based capital requirement, although
Ashland Federal's capital would have remained far in excess of regulatory
minimums.
The following table sets forth, as of March 31, 1996, the estimated
changes in Ashland Federal's NPV (i.e., the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts).
Net Portfolio Equity
-------------------------------------------------------------------------
Change in
Interest Rates Amount of Percent of
(Basis Points) Estimated NPV Change Change
--------------- ------------- ----------- ----------
(Dollars in Thousands)
+400 $ 7,813 $-6,349 -45%
+300 9,328 -4,834 -34
+200 10,948 -3,214 -23
+100 12,594 -1,567 -11
0 14,162
-100 15,493 1,331 +9
-200 16,591 2,429 +17
-300 17,686 3,524 +25
-400 18,999 4,837 +34
As noted above, the market value of Ashland Federal's net assets would
be anticipated to decline significantly in the event of certain designated
increases in interest rates. For instance, in the event of a 200 basis point
increase in interest rates, NPV is anticipated to fall by $3.2 million or 23%.
On the other hand, a 200 basis point decrease in interest rates is
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anticipated to cause a $2.4 million, or 17% increase in NPV. Ashland Federal's
level of interest rate risk at March 31, 1996, as measured by changes in its
NPV, was due in part to its $18.9 million of Ashland Federal's ARMs adjust based
on the Cost of Funds Indices which tend to adjust more slowly to changes in
market rates of interest than Ashland Federal's interest-bearing liabilities.
Subject to market conditions, management intends to continue to restructure
Ashland Federal's assets and liabilities over time to attempt to better manage
Ashland Federal's NPV volatility.
Certain assumptions utilized by the OTS in assessing the interest rate
risk of thrift institutions were employed in preparing the previous table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay rates
and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. In the event that interest rates do not change in the
designated amounts, there can be no assurance that Ashland Federal's assets and
liabilities would perform as set forth above. In addition, a change in Treasury
rates in the designated amounts accompanied by a change in the shape of the
Treasury yield curve would cause significantly different changes to the NPV than
indicated above.
Liquidity and Capital Resources
Classic's principal sources of funds are deposits and borrowings,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities of investment securities and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, floors and caps
on loan rates, general economic conditions and competition. Classic generally
manages the pricing of its deposits to be competitive and increase core deposit
relationships, but has from time to time decided not to pay deposit rates that
are as high as those of its competitors and, when necessary, to supplement
deposits with longer term and/or less expensive alternative sources of funds.
Federal regulations require Ashland Federal to maintain minimum levels
of liquid assets. The required percentage has varied from time to time based
upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. Ashland Federal has historically maintained
its liquidity ratio for regulatory purposes at levels in excess of those
required. At March 31, 1996, Ashland Federal's liquidity ratio for regulatory
purposes was 5.13%.
Classic's most liquid assets are cash and cash equivalents, which
consist of short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash and
interest-bearing deposits. The level of these assets is dependent on Classic's
operating, financing and investing activities during any given period.
At March 31, 1996, cash and cash equivalents totaled $6.5 million.
Operating activities provided positive cash flows for the fiscal years
March 31, 1996, 1995 and 1994.
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The primary investing activities of Classic are originating loans and,
to a lesser extent, purchasing mortgage-backed and investment securities. During
the fiscal years ended March 31, 1996, 1995 and 1994, mortgage loan originations
totaled $15.4 million, $8.8 million and $8.3 million, respectively. Purchases of
mortgage-backed and investment securities totaled $7.4 million, $7.8 million and
$1.5 million during each of the fiscal years ended March 31, 1996, 1995 and
1994, respectively. A substantial portion of loan originations and purchases of
mortgage-backed securities and other investments were funded by proceeds of loan
repayments, Conversion proceeds and the maturity or sale of securities, and with
FHLB advances.
The primary financing activities of Classic are deposits and, to a
lesser extent, borrowings. During the fiscal years ended March 31, 1996 and
1995, Classic experienced a decrease in deposits of $2.3 million and $3.1
million and during the fiscal year ended March 31, 1994, an increase in deposits
of $3.7 million was experienced. During the fiscal years ended March 31, 1996,
1995 and 1994, Classic's net (proceeds less repayments) financing activity with
the FHLB totaled $0, $4.8 million and $0, respectively.
At March 31, 1996, Classic had $2.1 million of brokered deposits.
Management anticipates that the majority of Classic's brokered deposits will not
remain with Classic upon their maturity. Management believes that Classic will
be able to replace such deposits with retail deposits; however, no prediction
can be made as to whether Classic will be successful in replacing all brokered
deposits.
Liquidity management is both a daily and long-term responsibility of
management. Classic adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short- and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If Classic requires funds beyond
its ability to generate them internally, Ashland Federal has additional
borrowing capacity with the FHLB of Cincinnati and can also utilize brokered
deposits, although it currently plans to reduce its reliance on each of these
funding sources, subject to market conditions.
Classic anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 1996, Classic had outstanding loan
commitments totaling $811,000, which includes $504,000 of unfunded loans in
process.
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As a federally chartered savings bank, Ashland Federal is required to
maintain a minimum level of regulatory capital. At March 31, 1996, Ashland
Federal exceeded all of its capital requirements. The following table sets forth
Ashland Federal's compliance with its capital requirements at March 31, 1996.
<TABLE>
<CAPTION>
At March 31, 1996
---------------------------------
Amount(1) Percent
--------- -------
<S> <C> <C>
Tangible Capital:
Capital level............. $13,023 21.51%
Requirement............... 908 1.50
------- -----
Excess.................... $12,115 20.01%
======= =====
Core Capital:
Capital level............. $13,023 21.51%
Requirement(2)............ 1,816 3.00
------- -----
Excess.................... $11,207 18.51%
======= =====
Risk-Based Capital:
Capital level............. $13,225 47.50%
Requirement(3)............ 2,227 8.00
------- -----
Excess.................... $10,998 39.50%
======= =====
- -------------
(1) Tangible and core capital levels are shown as a percentage of adjusted total
assets; risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that became
effective December 31, 1990. The proposal calls for an OTS core capital
requirement of at least 3% of total adjusted assets for thrifts that receive
the highest supervisory rating for safety and soundness, with a 4% to 5%
core capital requirement for all other thrifts.
(3) Includes $286,000 of general valuation allowances.
</TABLE>
Impact of New Accounting Standards
Accounting for Employee Stock Plans. In November 1993, the American
Institute of Certified Public Accountants (the "AICPA") issued Statement of
Position ("SOP") 93-6 "Employers' Accounting for Employee Stock Ownership Plans"
which addresses the accounting for shares of stock issued to employees by an
employee stock ownership plan ("Employee Plan"). SOP 93-6 requires that the
employer record compensation expense in an amount equal to the fair value of
shares committed to be released from the Employee Plan to employees. SOP 93-6 is
effective for fiscal years beginning after December 15, 1993 and relates to
shares purchased by an Employee Plan after December 31, 1992. Assuming shares of
Classic common stock appreciate in value over time, the adoption of SOP 93-6
will likely increase compensation expense relative to the Employee Plan
established in conjunction with the Conversion, as compared with prior guidance
which required the recognition of compensation expense based on the cost of
shares acquired by the Employee Plan.
Derivative Financial Instruments. In October 1994, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 119 ("SFAS 119"), "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." SFAS 119 requires
disclosures about derivative financial instruments, which include futures,
forward, swap and option contracts, and other financial instruments with similar
characteristics. It amends Statement of Financial Accounting Standards No. 105
("SFAS 105"), "Disclosures of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk" and Statement of Financial Accounting Standards No. 107
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("SFAS 107"), "Disclosures about Fair Value of Financial Instruments." It is
effective for financial statements issued for fiscal years ending after December
15, 1994, except for entities with less than $150 million in total assets. For
those entities, it is effective one year later. SFAS 119 requires disclosures
about the amount, nature, and terms of derivative financial instruments that are
not subject to SFAS 105 because they do not result in off-balance sheet risk of
accounting loss. The reporting enterprise is required to make a distinction
between financial instruments held or issued for trading purposes and those held
or issued for purposes other than trading. Classic is currently not involved in
any derivative financial instruments which would require these additional
disclosures.
Accounting for the Impairment of Long-Lived Assets. Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," is
effective for fiscal years beginning after December 15, 1995. The statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized if the sum of the expected future
cash flows is less than the carrying amount of the asset. Management does not
expect the implementation of SFAS 121 to have a material impact on Classic's
consolidated financial position or results of operations.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. SFAS 122 requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. Management does not believe the adoption of SFAS 122 will have a
material effect on Classic's financial position or results of operations.
Disclosure of Certain Significant Risks and Uncertainties. In April
1995, the AICPA issued SOP 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." This SOP applies to financial statements prepared in conformity
with GAAP by all nongovernmental entities. The disclosure requirements in SOP
94-6 focus primarily on risks and uncertainties that could significantly affect
the amounts reported in the financial statements in the near-term functioning of
the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem
from the nature of the entity's operations, from the necessary use of estimates
in the preparation of the entity's financial statements, and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6 is
effective for financial statements issued for fiscal years ending after December
15, 1995 and did not have any impact on Classic's operations.
Accounting for Stock-Based Compensation. In October 1995, the FASB
issued Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
The statement defines a fair value based method of accounting for an employee
stock option and allows companies to continue to measure compensation cost for
such plans using the intrinsic value based method of accounting prescribed in
APB Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25").
Beginning in 1996, companies electing to remain with accounting under APB 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of
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accounting had been applied. Management does not believe the adoption of SFAS
123 will have a material effect on Classic's consolidated financial position or
results of operations.
The foregoing does not constitute a comprehensive summary of all
material changes or developments affecting the manner in which Classic keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
Impact of Inflation and Changing Prices
Classic's Consolidated Financial Statements and Notes have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation can be found in the increased cost of
Classic's operations. Nearly all the assets and liabilities of Classic are
financial, unlike most industrial companies. As a result, Classic's performance
is directly impacted by changes in interest rates, which are indirectly
influenced by inflationary expectations. Classic's ability to match the
financial assets to the financial liabilities in its asset/liability management
will tend to minimize the change of interest rates on Classic's performance.
Changes in investment rates do not necessarily move to the same extent as
changes in the price of goods and services.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF FIRST PAINTSVILLE
Introduction
Management's discussion and analysis is intended to assist in
understanding the financial condition and results of operations of First
Paintsville. The information contained in this section should be read in
conjunction with the financial statements and accompanying notes thereto
contained elsewhere herein. Since First Paintsville does not engage in any
activities other than owning the stock of First National Bank, the following
discussion relates primarily to the activities of First National Bank.
The principal business of First National Bank has historically
consisted of attracting deposits from the general public and making loans
secured by real estate and loans for commercial and consumer purposes. First
National Bank's earnings are primarily dependent on net interest income, the
difference between interest income and interest expense. Interest income is a
function of the balances of loans and investments outstanding during the period
and the yield earned on such assets. Interest expense is a function of the
balances of deposits and borrowings, outstanding during the same period and the
rates paid on such deposits and borrowings. First National Bank's earnings are
also affected by provisions for loan losses, service charges and fee income,
operating expenses and income taxes. Operating expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses, data
processing, federal deposit insurance premiums and other general and
administrative expenses.
First National Bank is significantly affected by prevailing economic
conditions as well as federal regulations concerning monetary and fiscal
policies of financial institutions. Deposit balances are influenced by a number
of factors including interest rates paid on competing personal investments and
the level of personal income and savings within First National Bank's market. In
addition, growth of deposit balances is influenced by the perceptions of
customers regarding the stability of the financial services industry. Lending
activities are influenced by the demand for housing lenders, economic conditions
in First National Bank's market area and competition from other lending
institutions. The primary sources of funds for lending activities include
deposits, loan payments, borrowings and funds provided from operations.
Financial Condition
Comparison of March 31, 1996 and December 31, 1995
Total assets increased $411,000, or 0.7%, from $58.65 million at
December 31, 1995 to $59.06 million at March 31, 1996. Net loans increased
$890,000, or 3.4%, from $26.57 million at December 31, 1995 to $27.46 million at
March 31, 1996 due primarily to increased originations of one- to four-family
loans in First Paintsville's market area due to increased advertising and
marketing efforts, and the purchase of $788,000 of commercial real estate loan
participations from correspondent banks. Federal funds sold increased by $4.7
million due to management's use of funds from the sale of $4.9 million
securities classified as available for sale to purchase such assets.
Total deposits increased $276,000, or 0.5%, from $51.6 million at
December 31, 1995 to $51.8 million at March 31, 1996. Borrowings totaled $1.2
million at March 31, 1996 as compared to $892,000 at December 31, 1995. The
increase was due to an increase in treasury
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<PAGE>
tax and loan notes as a result of quarterly tax payments made by First National
Bank's loan customers.
The allowance for loan losses decreased from $447,000 to $405,000 from
December 31, 1995 to March 31, 1996. This decrease was due to net charge offs
during the first quarter of 1996.
Stockholders' equity increased $8,000 to $5.5 million at March 31,
1996. Such increase was due to an increase in net earnings in excess of
dividends paid.
Comparison of December 31, 1995 and 1994
Total assets decreased $9.1 million, or 13.4%, from $67.7 million at
December 31, 1994 to $58.6 million at December 31, 1995. Investment securities
decreased $11.6 million, or 30.4%, from $38.1 million at December 31, 1994 to
$26.5 million at December 31, 1995 due to sales and maturities of such
securities. The funds generated were used to fund loan demand in light of the
outflow of deposits, primarily public deposits, as described herein. Net loans
increased $3.1 million, or 13.2%, from $23.5 million at December 31, 1994 to
$26.6 million at December 31, 1995 due to increased originations of one- to
four-family real estate, commercial and consumer loans in First Paintsville's
market area due to increased advertising and marketing efforts and the purchase
of $600,000 of commercial real estate loan participation interests from
correspondent banks.
Total deposits decreased $9.3 million, or 15.4%, from $60.9 million at
December 31, 1994 to $51.6 million at December 31, 1995. The decrease in
deposits was a result of management's ongoing policy of matching deposit growth
to loan demand to achieve the desired ratio of loans to deposits and
management's decision not to retain public funds from a local school system
obtained through a competitive bidding process. In addition, competition from a
local financial institution also contributed to the decline in deposits during
the three months ended March 31, 1996. Total borrowings decreased $203,000 from
$1,095,000 to $892,000 as a result of management's decision to utilize $67,000
of excess funds to repay debentures outstanding, periodic principal payments of
$47,000 on notes outstanding and a $89,000 decrease in treasury tax and loan
notes.
The allowance for loan losses increased $146,000, or 48.5%, from
$301,000 at December 31, 1994 to $447,000 at December 31, 1995. The level of the
allowance at December 31, 1995 reflects management's ongoing analysis of the
loan portfolio and loan growth.
Stockholders' equity increased from $5.0 million at December 31, 1994
to $5.5 million at December 31, 1995 due to an increase in net earnings in
excess of dividends paid.
Results of Operations
Comparison of Three Month Periods Ended March 31, 1996 and 1995
General. Net income decreased $36,000, or 16.9%, from $213,000 for the
three months ended March 31, 1995 to $177,000 for the three months ended March
31, 1996. This decrease was primarily due to a decrease in net interest income
of $85,000 partially offset by a decrease in non-interest expense of $36,000 and
a decrease in income taxes of $16,000.
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Interest Income. Interest income decreased $87,000, or 7.6%, from $1.13
million for the three months ended March 31, 1995 to $1.04 million for the three
months ended March 31, 1996, primarily due to a decrease in the average balance
of interest-earning assets of $7.8 million, from $61.8 million for the three
months ended March 31, 1995 to $54.0 million for the three months ended March
31, 1996. This decrease was due to sales and maturities of mortgage-backed and
investment securities. The proceeds from the sale of these assets were used to
fund operations in light of the decline in deposits experienced during the
period. The average yield on interest-earning assets increased from 7.39% for
the three months ended March 31, 1995 to 7.81% for the three months ended March
31, 1996. The increase in average yield was primarily due to the investment of
funds from the maturities and sales of investment securities into higher
yielding loans, increased market rates on securities purchased and the upward
adjustment of rates received on adjustable rate securities.
Interest Expense. Interest expense remained relatively unchanged for
the three months ended March 31, 1996 compared to the three months ended March
31, 1995. Average interest bearing deposits and borrowings decreased $6.6
million and $684,000, respectively, for the three months ended March 31, 1996
compared to the three months ended March 31, 1995. The average balance of
deposits decreased due to the withdrawal of approximately $8.0 million of public
funds as a result of management's decision not to competitively bid for such
deposits. The average cost of interest-bearing liabilities increased from 3.61%
for the three months ended March 31, 1995 to 4.18% for the three months ended
March 31, 1996 due primarily to an increase in market rates of interest.
Provision for Loan Losses. Management determines the allowances for
loan losses based on a quarterly analysis which takes into consideration
knowledge of the loan portfolio, size and composition of the portfolio, current
delinquency information as well as past loss experience. The analysis also
considers such factors as the current economic and regulatory environment. In
addition, management reviews individual problem credits to determine the need
for specific reserves. Management maintains the allowance for loan losses at a
level deemed adequate based on the quarterly analysis and management will
continue to provide a provision for loan losses based upon its continuing
analysis of the loan portfolio. Future additions to the allowance for loan
losses are dependent upon the performance of the loan portfolio, the economy,
changes in real estate values and interest rates and inflation.
There was no provision for loan losses for the three months ended March
31, 1996 and 1995. No provision was made in either of these periods as a result
of management's continuing analysis of the allowance for loan losses during such
periods.
Noninterest Income. Noninterest income decreased $7,000, or 8.0%, from
$87,000 for the three months ended March 31, 1995 to $80,000 for the three
months ended March 31, 1996, primarily as a result of a $2,000 decrease in
service charge income on checking accounts and a $5,000 decrease in
miscellaneous income.
Noninterest Expense. Noninterest expense decreased $36,000, or 8.6%,
from $417,000 for the three months ended March 31, 1995 to $381,000 for the
three months ended March 31, 1996, primarily as a result of a $33,000 decrease
in FDIC assessments, a decrease in occupancy expense of $16,000, partially
offset by increases in salaries and benefits of $4,000 and travel expenses of
$9,000.
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Income Taxes. Income tax expense decreased $16,000, or 14.7%, from
$109,000 for the three months ended March 31, 1995, to $93,000 for the three
months ended March 31, 1996, primarily as a result of a decrease in income
before income tax of $56,000.
Comparison of Years Ended December 31, 1995 and 1994
General. Net income increased $186,000, or 37.4%, from $497,000 for the
year ended December 31, 1994 to $683,000 for the year ended December 31, 1995.
This increase was due primarily to an increase in net interest income of
$384,000, an increase in noninterest income of $24,000 and a decrease in
noninterest expense of $39,000 partially offset with an increase in provision
for loan losses of $169,000 and an increase in income taxes of $91,000.
Interest Income. Interest income increased $514,000, or 12.8%, from
$4.0 million for the year ended December 31, 1994 to $4.5 million for the year
ended December 31, 1995, primarily as a result of an increase in the average
yield on interest-earning assets to 7.67% for the year ended December 31, 1995,
from 6.27% for the year ended December 31, 1994. The increase in average yield
was due to an increase in market rates of interest generally and an increase in
higher yielding loans which were funded with cash from maturities of lower
yielding investment securities. The average balance of interest-earning assets
decreased $5.1 million, or 7.8%, from $64.3 million at December 31, 1994 to
$59.2 million for the year ended December 31, 1995. The decrease in the average
balance of interest-earning assets was due to sales and maturities of
investment securities the proceeds of which were used to fund operations in
light of deposit outflows.
Interest Expense. Interest expense increased $130,000, or 7.1%, from
$1.83 million for the year ended December 31, 1994 to $1.96 million for the year
ended December 31, 1995, primarily as a result of an increase in the average
rates paid on interest-bearing liabilities from 3.30% for the year ended
December 31, 1994 to 3.92% for the year ended December 31, 1995 due to an
increase in the average rates paid on deposits due to the increase in market
rates of interest generally and increased competition from local institutions in
the solicitation of deposits. The increase in average rates paid on
interest-bearing liabilities was partially offset by a decrease in the average
balance of interest-bearing liabilities of $5.4 million. The average balance of
deposits decreased $6.1 million due to the withdrawal of public funds on deposit
at First Paintsville due to management's decision not to competitively bid to
retain such deposits. The average balance of borrowings increased $656,000 as
borrowings were utilized to fund deposit outflows and payoff debentures.
Provision for Loan Losses. The provision for loan losses increased
$169,000 from $0 for the year ended December 31, 1994 to $169,000 for the year
ended December 31, 1995, due primarily to an increase in nonperforming loans of
$413,000, or 75.4%, from $548,000 at December 31, 1994 to $961,000 at December
31, 1995. The increase in the provision for loan losses reflects management's
ongoing analysis of its loan portfolio.
Noninterest Income. Noninterest income increased $24,000, or 7.0%, from
$345,000 for the year ended December 31, 1994 to $369,000 for the year ended
December 31, 1995, due primarily to a $53,000 increase in realized securities
gains, partially offset by a $18,000 decrease in service charges and fees and a
$11,000 decrease in other revenues.
Noninterest Expense. Noninterest expense decreased $40,000, or 2.2%,
from $1.77 million for the year ended December 31, 1994 to $1.73 million for the
year ended December 31, 1995, due primarily to decreases in salaries and
employee benefits of $10,000,
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occupancy expense of $23,000, and other operating expenses of $24,000, partially
offset by a $17,000 increase in advertising expense.
Income Taxes. Income tax expense increased $91,000, or 34.7%, from
$262,000, for the year ended December 31, 1994 to $353,000 for the year ended
December 31, 1995, primarily due to an increase in income before income taxes of
$278,000.
Analysis of Net Interest Income
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and those due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1996 vs. 1995 1995 vs. 1994
------------------------------ -------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ---- --------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................... $ 86 $ 21 $107 $ 57 $254 $311
Mortgage-backed securities..................... (9) 9 -- (34) 37 3
Investment securities.......................... (173) (49) (222) (129) 401 272
Other.......................................... 27 1 28 (126) 55 (71)
----- ----- ----- ----- ----- -----
Total interest-earning assets................ $ (69) $(18) $ (87) $(232) $747 $515
----- ---- ----- ----- ---- -----
Interest-bearing liabilities:
NOW and money market........................... $ (51) $(22) $ (73) $(132) $12 $(120)
Savings........................................ (10) 1 (9) (50) -- (50)
Certificates of deposit of $100,000 or more.... 13 13 26 23 59 82
Other time deposits............................ 11 52 63 (19) 200 181
Treasury tax notes............................. (1) 1 -- -- 5 5
Notes payable and other borrowings............. (12) 3 (9) 84 -- 84
Debentures..................................... -- -- -- (51) -- (51)
------ ----- ------ ------ ----- -----
$ (50) $ 48 (2) $(145) $276 131
===== ===== ------- ====== ===== -----
Net interest income............................. $ (85) $384
===== ====
</TABLE>
69
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
At March 31, Three Months Ended
1996 March 31, 1996
---------------- --------------------------------------
Average Interest
Yield/ Outstanding Earned/ Yield/
Rate Balance Paid Rate
------- ------------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).................... 9.9% $27,152 $ 674 10.1%
Mortgage-backed securities............. 7.7 3,896 74 7.7
Investment securities(2)............... 5.2 19,737 253 5.2
Other.................................. 5.1 3,226 40 5.0
------- -------
Total interest-earning assets(1)...... 54,011 1,041 7.8
------- ------
Interest-Bearing Liabilities:
NOW and money market deposits.......... 2.6 11,076 71 2.6
Savings deposits....................... 3.0 9,639 72 3.0
Certificates of deposit of $100,000
or more............................... 5.4 4,424 59 5.4
Other time deposits.................... 5.2 19,097 245 5.2
Treasury tax and loan notes............ 5.1 208 3 5.9
Notes Payable.......................... 8.3 735 16 8.9
Debentures............................. --- --- --- ---
------- ------
Total interest-bearing liabilities.... $45,179 466 4.2
======= ------
Net interest income..................... $ 575
======
Net interest rate spread................ 3.6%
===
Net earning assets...................... $ 8,832
========
Net interest margin..................... 4.3%
===
Average interest-earning assets to 1.20x
average interest-bearing liabilities... ====
</TABLE>
<PAGE>
Average Balances, Interest Rates and Yields (Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------- ------------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1).................... $24,883 $2,507 10.1% $24,265 $2,196 9.1%
Mortgage-backed securities............. 4,270 302 7.1 4,789 299 6.2
Investment securities(2)............... 28,696 1,652 5.8 31,440 1,380 4.4
Other.................................. 1,386 85 6.1 3,772 156 4.1
-------- ------- ------- ------
Total interest-earning assets(1)...... 59,235 4,546 7.7 64,266 4,031 6.3
------- ------ ------- ------
Interest-Bearing Liabilities:
NOW and money market deposits.......... 15,359 455 3.0 19,852 575 2.9
Savings deposits....................... 10,395 313 3.0 12,050 363 3.0
Certificates of deposit of $100,000
or more............................... 4,126 212 5.1 3,545 130 3.7
Other time deposits.................... 18,601 875 4.7 19,104 694 3.6
Treasury tax and loan notes............ 328 14 4.3 314 9 2.9
Notes Payable.......................... 1,172 93 7.9 112 9 8.0
Debentures............................. 7 -- -- 425 51 12.0
--------- ------- -------- -------
Total interest-bearing liabilities.... $49,988 1,962 3.9 $55,402 1,831 3.3
======= ------ ======= ------
Net interest income..................... $2,584 $2,200
====== ======
Net interest rate spread................ 3.8% 3.0%
=== ===
Net earning assets...................... $ 9,247 $ 8,864
======== ========
Net interest margin..................... 4.4% 3.4%
=== ===
Average interest-earning assets to 1.18x 1.16x
average interest-bearing liabilities... ==== ====
- -----------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Includes U.S. Treasury and agency obligations.
</TABLE>
70
<PAGE>
Asset/Liability Management
One of First National Bank's principal financial objectives is to
achieve long-term profitability while reducing its exposure to fluctuating
interest rates and maintaining asset quality. First National Bank has sought to
reduce exposure of its earnings to changes in market interest rates by managing
the mismatch between asset and liability maturities and interest rates. The
principal elements in achieving its objective is to increase the interest-rate
sensitivity of First National Bank's assets, as follows: (i) emphasize the
origination of ARM loans, (ii) increase originations of loans with shorter terms
to maturity than one to four family loans, subject to market conditions, and
(iii) purchase investment and other securities with terms to maturity of seven
years or less, and federal funds to supplement loan demand.
The Board of Directors of First Paintsville monitors First
Paintsville's interest rate risk position on a quarterly basis and formulates
investment strategies in light of changes therein. The asset/liability
management committee of First National Bank, comprised of the Chief Executive
Officer, the President, the Comptroller, the Cashier, the Senior Lending Officer
and one outside director, meets on a quarterly basis to review First
Paintsville's interest rate risk position and product mix, and to make
recommendations for adjustments to the Board of Directors.
71
<PAGE>
The following table sets forth the interest rate sensitivity of the
First Paintsville's interest earning assets and interest bearing liabilities at
March 31, 1996 on the basis of the assumptions set forth following the table.
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------------------
Over Over
0 - 90 91 - 180 181 - 365 1 Year to 2 Years to Over
Days Days Days 2 Years 3 Years 3 Years
-------- -------- -------- -------- -------- --------
Amount Amount Amount Amount Amount Amount
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVE ASSETS
Federal funds sold and interest-bearing bank
balances................................... $ 4,731 $ --- $ --- $ --- $ --- $ ---
Investment securities......................... 11,984 1,699 1,826 1,012 3,043 2,512
Loans:
Commercial and real estate.................. 6,766 3,693 4,033 2,206 1,155 7,202
Installment................................. 756 448 773 1,128 678 636
Other....................................... 282 --- --- --- --- ---
-------- --------- ---------- --------- --------- ---------
Total interest rate sensitive assets..... 24,519 5,840 6,632 4,346 4,876 10,350
-------- --------- ---------- --------- --------- ---------
INTEREST RATE SENSITIVE LIABILITIES
Time Deposits:
Certificates of deposit of $100,000 and over 1,667 625 1,514 501 --- 100
All other time deposits..................... 13,506 5,086 17,594 2,128 698 1,049
Treasury tax and other borrowings........... 456 --- --- --- --- ---
-------- --------- ---------- --------- --------- ---------
Total interest rate sensitive liabilities 15,629 5,711 19,108 2,629 698 1,149
-------- --------- ---------- --------- --------- ---------
Interest rate sensitive assets less interest rate
sensitive liabilities......................... $ 8,890 $ 129 $(12,476) $ 1,717 $ 4,178 $ 9,201
======= ======== ======== ======== ======== ========
Cumulative interest rate sensitivity gap...... $ 8,890 $ 9,109 $ (3,457) $ (1,740) $ (2,438) $ 11,639
======= ======= ======== ======== ======== ========
Cumulative interest rate sensitivity gap as a
percentage of total assets at March 31, 1996.. 15.00% 15.22% -5.83% -2.94% 4.11% 19.64%
===== ===== ====== ====== ====== =====
Cumulative interest rate sensitivity gap as a
percentage of interest earning assets......... 16.38% 16.62% -6.37% -3.21% 4.49% 21.44%
===== ===== ====== ====== ====== =====
</TABLE>
The preceding table was prepared utilizing the following assumptions
regarding prepayment and decay ratios which were determined by management of
First Paintsville based upon its review of historical prepayment speeds. All
loans and investment securities were assumed to reprice at the earlier of
maturity date or the next rate repricing date (if applicable). Certificate
accounts are assumed not to be withdrawn prior to maturity, NOW and savings
accounts are assumed to reprice within 181 to 365 days and Super NOW and money
market deposit accounts are assumed to reprice in 90 days or less.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rate. The interest rates on certain types of assets
and liabilities my fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
72
<PAGE>
significantly from those assumed in calculating the foregoing table. The ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Liquidity and Capital Resources
Liquidity refers to the ability of First Paintsville to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. While funds are available to meet short-term
liquidity needs from the Federal Reserve Bank and access to national federal
funds markets, First Paintsville's primary source of liquidity is cash and cash
due from banks and federal funds sold. Additional sources of liquidity are
securities available for sale, securities maturing within one year, and
scheduled maturities and repayments of loans. First Paintsville may also sell
loans for additional liquidity, if necessary. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by market interest rates, economic
conditions and competition. First Paintsville attempts to price its deposits to
meet asset/liability objectives discussed above, consistent with local market
conditions.
First Paintsville's most liquid assets are cash, cash due from banks
and federal funds. The levels of these assets are dependent on First
Paintsville's operating, financing and investing activities. At March 31, 1996,
December 31, 1995 and 1994, cash, cash due from banks and federal funds totaled
$7.7 million, $3.4 million and $4.1 million, respectively.
First Paintsville's primary sources of funds are deposits, borrowings,
and principal and interest payments on loans. While the scheduled amortization
of loans are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
Operating activities provided positive cash flows for the three months
ended March 31, 1996 and 1995 and the fiscal years ended December 31, 1995 and
1994.
The primary investing activities of First Paintsville are originating
loans and, to a lesser extent, purchasing mortgage-backed and investment
securities. During the three months ended March 31, 1996 and the fiscal year
ended December 31, 1995, mortgage loan originations, net of payments received,
totaled $890,000, and $3.3 million, respectively. During the three months ended
March 31, 1995 and the fiscal year ended December 31, 1994, payments received
exceeded loan originations by $20,000 and $1.7 million, respectively. Purchases
of mortgage-backed and investment securities totaled $2.0 million, $0 during
each of the three months ended March 31, 1996 and 1995, respectively and $0 and
$21.6 million during each of the fiscal years ended December 31, 1995 and 1994,
respectively. Sales, maturities and calls of mortgage-backed and investment
securities totaled $6.7 million, $1.6 million, $11.7 million and $16.2 million
during the three months ended March 31, 1996 and 1995, and the fiscal years
ended December 31, 1995 and 1994, respectively.
The primary financing activities of First Paintsville generally are
deposits and to a lesser extent, borrowings. For the three months ended March
31, 1996 and 1995, deposits increased $276,000 and decreased $2.2 million,
respectively. During the fiscal years ended December 31, 1995 and 1994, First
Paintsville experienced a decrease in deposits of $9.4 million and $659,000,
respectively. The decrease in deposits were funded primarily with the proceeds
from the sales, calls and maturities of mortgage-backed and investment
securities. During the three months ended March 31, 1996, proceeds from
borrowings exceeded repayments by $286,000 and for the three months ended March
31, 1995, repayments exceeded borrowings by $84,000.
73
<PAGE>
During the fiscal year ended December 31, 1995, repayments exceed borrowings by
$203,000 and during the fiscal year ended December 31, 1994, proceeds from
borrowings exceeded repayments by $108,000.
At March 31, 1996, First Paintsville had outstanding commitments to
originate approximately $2.0 million in loans, including loans with an aggregate
balance of $274,000 at a fixed rate of interest. These loans were to be secured
by properties in First Paintsville's market area. First Paintsville anticipates
that it will have sufficient funds available to meet its current commitments.
At March 31, 1996, First National Bank exceeded all of its capital
requirements. See "Supplemental Historical Regulatory Capital Information" and
"Regulation -- Regulatory Capital Requirement Applicable to National Banks."
Impact of New Accounting Standards
Derivative Financial Instruments. In October 1994, the FASB issued
Statement of Financial Accounting Standards No. 119 ("SFAS 119"), "Disclosure
about Derivative Financial Instruments and Fair Value of Financial Instruments."
SFAS 119 requires disclosures about derivative financial instruments, which
include futures, forward, swap and option contracts, and other financial
instruments with similar characteristics. It amends Statement of Financial
Accounting Standards No. 105 ("SFAS 105"), "Disclosures of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" and Statement of Financial Accounting Standards
No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments."
It is effective for financial statements issued for fiscal years ending after
December 15, 1994, except for entities with less than $150 million in total
assets. For those entities, it is effective one year later. SFAS 119 requires
disclosures about the amount, nature, and terms of derivative financial
instruments that are not subject to SFAS 105 because they do not result in
off-balance sheet risk of accounting loss. The reporting enterprise is required
to make a distinction between financial instruments held or issued for trading
purposes and those held or issued for purposes other than trading. First
Paintsville is currently not involved in any derivative financial instruments
which would require these additional disclosures.
Accounting for the Impairment of Long-Lived Assets. Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," is
effective for fiscal years beginning after December 15, 1995. The statement
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized if the sum of the expected future
cash flows is less than the carrying amount of the asset. Management does not
expect the implementation of SFAS 121 to have a material impact on First
Paintsville's consolidated financial position or results of operations.
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
Statement of Financial Accounting Standards No. 122 ("SFAS 122"), "Accounting
for Mortgage Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 ("SFAS 65"), Accounting for Certain Mortgage Banking
Activities," to require that a mortgage banking enterprise recognize as separate
assets rights to service mortgage loans for others, however those servicing
rights are acquired. SFAS 122 requires that a mortgage banking
74
<PAGE>
enterprise assess its capitalized mortgage servicing rights for impairment based
on the fair value of those rights. SFAS 122 is effective for fiscal years
beginning after December 15, 1995. Management does not believe the adoption of
SFAS 122 will have a material effect on First Paintsville's financial position
or results of operations.
Disclosure of Certain Significant Risks and Uncertainties. In April
1995, the AICPA issued SOP 94-6, "Disclosure of Certain Significant Risks and
Uncertainties." This SOP applies to financial statements prepared in conformity
with GAAP by all nongovernmental entities. The disclosure requirements in SOP
94-6 focus primarily on risks and uncertainties that could significantly affect
the amounts reported in the financial statements in the near-term functioning of
the reporting entity. The risks and uncertainties discussed in SOP 94-6 stem
from the nature of the entity's operations, from the necessary use of estimates
in the preparation of the entity's financial statements, and from significant
concentrations in certain aspects of the entity's operations. SOP 94-6 is
effective for financial statements issued for fiscal years ending after December
15, 1995 and did not have any impact on First Paintsville's operations.
Impact of Inflation and Changing Prices
First Paintsville's Consolidated Financial Statements and Notes have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars without
consideration for changes in the relative purchasing power of money over time
due to inflation. The impact of inflation can be found in the increased cost of
First Paintsville's operations. Nearly all the assets and liabilities of First
Paintsville are financial, unlike most industrial companies. As a result, First
Paintsville's performance is directly impacted by changes in interest rates,
which are indirectly influenced by inflationary expectations. First
Paintsville's ability to match the financial assets to the financial liabilities
in its asset/liability management will tend to minimize the change of interest
rates on First Paintsville's performance. Changes in investment rates do not
necessarily move to the same extent as changes in the price of goods and
services.
75
<PAGE>
BUSINESS OF CLASSIC
General
Classic is a Delaware corporation which was organized in 1995 by
Ashland Federal and owns all of the outstanding stock of Ashland Federal. As a
community-oriented financial institution, Ashland Federal seeks to serve the
financial needs of communities in its market area. Ashland Federal's business
involves attracting deposits from the general public and using such deposits,
together with other funds, to originate primarily one- to four-family
residential mortgage loans and, to a lesser extent, consumer and commercial real
estate, multi-family and construction loans in its market area.
Ashland Federal also invests in mortgage-backed and related securities
and investment securities and other permissible investments.
Market Area
Classic serves primarily Boyd and Greenup Counties, Kentucky through
its office located at 344 Seventeenth Street in Boyd County, Kentucky. In
connection with the adoption of its new business strategy, Ashland Federal
expanded its market area to include portions of Lawrence and Carter Counties,
Kentucky, Lawrence County, Ohio and Wayne and Cabell Counties, West Virginia.
Ashland, Kentucky is the largest city in Boyd County and is located 125
miles east of Lexington, Kentucky. The population of Greenup and Boyd Counties
is approximately 88,000. From 1985 to 1994, the population of Greenup and Boyd
Counties declined 1.3% and 3.9%, respectively, as compared to increases in
population for the Commonwealth of Kentucky and the United States during the
same period.
Although the per capita income for Boyd and Greenup Counties of $18,661
and $15,269, respectively, for 1993 (the latest date such information was
available) exceeded the per capita income for the Commonwealth of Kentucky of
$16,889, per capita income for both counties was below the national average.
Classic's market area is an industrial river community which evolved
from original settlements dating before the Civil War. Historically, the
regional economy in and around Ashland Federal's market area has been based on
the coal, oil and railroad industries and dependent upon a small number of large
employers. Local companies which have a significant presence in the area include
Ashland Inc., Corbin, Ltd., AK Steel Corp., and CSX Railroad. While the coal
industry and some heavy industry remains, the market area has experienced
industrial decline during the past several years due to layoffs and transfers of
some of the operations of these companies to other locations. Classic's primary
market area also has a large medical community. Providers of medical services
include King's Daughter Medical Center and Our Lady of Bellefonte Hospital.
The economy of Ashland Federal's market area is in a period of
transition from a primarily industrial-based economy to a service- and
retail-based economy. In the past two years, Classic's market area has
experienced increases in the retail and service sectors which has somewhat
offset the impact of job losses and consolidations from heavy industry.
Notwithstanding recent economic diversification in Boyd and Greenup Counties,
the unemployment rate for both counties continues to exceed the rates for the
Commonwealth of
76
<PAGE>
Kentucky and the United States. Although new housing starts have diminished
during the past several years, the valuation of homes in the market area has
generally increased.
Lending Activities
General. The principal lending activity of Classic is originating for
its portfolio mortgage loans secured by one- to four-family residences located
primarily in Classic's market area. To a much lesser extent, Classic also
originates consumer, commercial real estate, multi-family and construction loans
in its market area. At March 31, 1996, loans receivable, net totaled $43.7
million. See "--Originations, Purchases and Sales of Loans and Mortgage--Backed
and Related Securities."
77
<PAGE>
Loan Portfolio Composition. The following information concerning the
composition of the loan portfolios in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
One- to four-family.............. $38,944 87.5% $35,005 96.9% $32,239 95.8%
Commercial....................... 2,509 5.7 630 1.7 805 2.4
Multi-family..................... 215 0.5 118 0.3 161 0.5
Construction..................... 1,132 2.5 --- --- --- ---
------- ----- ------- ----- ------- -----
Total real estate loans...... 42,800 96.2 35,753 98.9 33,205 98.7
------- ----- ------- ----- ------- -----
Other Loans
Consumer Loans:
Deposit account................. 389 0.9 383 1.1 429 1.3
Other........................... 229 0.5 --- --- --- ---
------- ----- ------- ----- ------- -----
Total consumer loans......... 618 1.4 383 1.1 429 1.3
------- ----- ------- ----- ------- -----
Commercial business loans........ 1,063 2.4 --- --- --- ---
------- ----- ------- ----- ------- -----
Total other loans............ 1,681 3.8 383 1.1 429 1.3
------- ----- ------- ----- ------- -----
Total loans.................. 44,481 100.0% 36,136 100.0% 33,634 100.0%
======= ===== ======= ===== ======= =====
Less
Loans in process................. 504 97 167
Deferred fees and discounts...... (31) (4) 42
Allowance for loan losses........ 286 312 318
------- ------- -------
Total loans receivable, net...... $43,722 $35,731 $33,107
======= ======= =======
</TABLE>
<PAGE>
Loan Portfolio Composition (Continued)
<TABLE>
<CAPTION>
1993 1992
------------------------- -------------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Real Estate Loans
One- to four-family.............. $33,920 95.8% $35,538 95.4%
Commercial....................... 887 2.5 918 2.5
Multi-family..................... 161 0.5 342 0.9
Construction..................... --- --- --- ---
------- ----- ------- -----
Total real estate loans...... 34,968 98.8 36,798 98.8
------- ----- ------- -----
Other Loans
Consumer Loans:
Deposit account................. 433 1.2 445 1.2
Other........................... --- --- --- ---
------- ----- ------- -----
Total consumer loans......... 433 1.2 445 1.2
------- ----- ------- -----
Commercial business loans........ --- --- --- ---
------- ----- ------- -----
Total other loans............ 433 1.2 445 1.2
------- ----- ------- -----
Total loans.................. 35,401 100.0% 37,243 100.0%
======= ===== ======= =====
Less
Loans in process................. 111 104
Deferred fees and discounts...... 85 193
Allowance for loan losses........ 349 339
-------- --------
Total loans receivable, net...... $34,856 $36,607
======= =======
</TABLE>
78
<PAGE>
The following table shows the composition of the loan portfolios by
fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............. $15,013 33.8% $11,811 32.7% $13,275 39.5%
Commercial...................... 721 1.6 424 1.2 525 1.5
Multi-family.................... 138 .3 34 .1 35 .1
Construction..................... 1,132 2.5 --- --- --- ---
------- ------ ------- ------ ------- -----
Total real estate loans...... 17,004 38.2 12,269 34.0 13,835 41.1
Consumer......................... 567 1.3 383 1.1 429 1.3
------- ------ ------- ------ ------- -----
Commercial business.............. 51 .1 383 1.1 429 1.3
------- ------ ------- ------ ------- -----
Total fixed-rate loans....... 17,622 39.6 12,652 35.1 14,264 42.4
Adjustable-Rate Loans:
Real estate:
One- to four-family............. 23,931 53.8 23,194 64.2 18,964 56.4
Commercial...................... 1,788 4.0 206 .5 280 .8
Multi-family.................... 77 .2 84 .2 126 .4
Construction.................... --- --- --- --- --- ---
------- ------ ------- ------ ------- -----
Total real estate loans...... 25,796 58.0 23,484 64.9 19,370 57.6
------- ------ ------- ------ ------- -----
Consumer......................... 51 .1 --- --- --- ---
Commercial business.............. 1,012 2.3 --- --- --- ---
------- ------ ------- ------ ------- -----
Total adjustable-rate loans.. 26,859 60.4 23,484 64.9 19,370 57.6
------- ------ ------- ------ ------- -----
Total loans.................. 44,481 100.0% 36,136 100.0% 33,634 100.0%
===== ===== =====
Less:
Loans in process................. 504 97 167
Deferred fees and discounts...... (31) (4) 42
Allowance for loan losses........ 286 312 318
------- ------- -------
Total loans receivable, net... $43,722 $35,731 $33,107
======= ======= =======
</TABLE>
<PAGE>
Loan Portfolio by Fixed and Adjustable Rates (Continued)
<TABLE>
<CAPTION>
1993 1992
-------------------- --------------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............. $12,197 34.5% $11,742 31.5%
Commercial...................... 634 1.8 344 .9
Multi-family.................... 35 .1 35 .1
Construction..................... --- --- --- ---
------- ----- ------- -----
Total real estate loans...... 12,866 36.4 12,121 32.5
Consumer......................... 433 1.2 445 1.2
------- ----- ------- -----
Commercial business.............. 433 1.2 445 1.2
------- ----- ------- -----
Total fixed-rate loans....... 13,299 37.6 12,566 33.7
Adjustable-Rate Loans:
Real estate:
One- to four-family............. 21,723 61.4 23,796 64.0
Commercial...................... 253 .7 574 1.5
Multi-family.................... 126 .3 307 .8
Construction.................... --- --- --- ---
------- ----- ------- -----
Total real estate loans...... 22,102 62.4 24,677 66.3
------- ----- ------- -----
Consumer......................... --- --- --- ---
Commercial business.............. --- --- --- ---
------- ----- ------- -----
Total adjustable-rate loans.. 22,102 62.4 24,677 66.3
------- ----- ------- -----
Total loans.................. 35,401 100.0% 37,243 100.0%
===== =====
Less:
Loans in process................. 111 104
Deferred fees and discounts...... 85 193
Allowance for loan losses........ 349 339
------- -------
Total loans receivable, net... $34,856 $36,607
======= =======
</TABLE>
79
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
loan portfolio at March 31, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------
Multi-family and Commercial
One- to Four-Family Commercial Construction Consumer Business Total
------------------- ----------------- ----------------- ---------------- -------------- --------------
Weighted Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------- ------ --------- ------ ------- ------ ------
(Dollars in Thousands)
Due
- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within one year(1).... 188 6.9% 35 9.3% $1,132 9.9% $572 8.8% 121 8.4% $ 2,048 9.2%
One to two years...... 75 8.0 --- --- --- --- 3 8.0 --- --- 78 8.0
Two to three years.... 106 8.5 27 7.4 --- --- --- --- --- --- 133 8.3
Three to five years... 427 8.4 --- --- --- --- 14 7.5 29 8.5 470 8.4
Five to ten years..... 4,492 7.9 1,081 8.5 --- --- 29 7.5 913 8.6 6,515 8.0
Ten to 15 years....... 10,178 7.4 1,213 8.8 --- --- --- --- --- --- 11,391 7.6
Over 15 years......... 23,478 7.2 368 7.6 --- --- --- --- --- --- 23,846 7.2
------- ------ ------ ---- ----- -------
Totals.......... $38,944 $2,724 $1,132 $618 $1,063 $44,481
======= ====== ====== ==== ====== =======
- ------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
The total amount of loans due after March 31, 1997 which have
predetermined interest rates is $15.7 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $26.7
million.
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<PAGE>
Under federal law, the aggregate amount of loans that Ashland Federal
is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At March
31, 1996, based on the above, Ashland Federal's regulatory loans-to-one borrower
limit was approximately $2.0 million. On the same date, Ashland Federal had no
borrowers with outstanding balances in excess of this amount. As of March 31,
1996, the largest dollar amount outstanding to one borrower or, group of related
borrowers, was $1.2 million. This loan represents permanent financing of a
medical office building and equipment located in Classic's market area. The
second largest amount outstanding to one borrower or group of related borrowers
totaled $962,000 at March 31, 1996. These loans represent permanent financing of
a personal residence, medical office building and related equipment located in
Classic's market area.
Classic's President and Senior Vice President have the authority to
approve loans up to $250,000 and $200,000, respectively. Loans of $250,000 or
more up to 10% of Classic's capital require approval of the Loan Committee of
the Board of Directors. Loans in excess of such amount required approval of the
Board of Directors. In addition, approval of the Loan Committee is required on
all loans secured by collateral located outside Classic's market area.
All of Classic's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Board established appraisal policy). The loan applications are designed
primarily to determine the borrower's ability to repay and the more significant
items on the application are verified through use of credit reports, financial
statements, tax returns or confirmations.
Classic requires a title opinion or other evidence of title on its
mortgage loans, as well as, fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. Classic also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
Classic's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Substantially all of Classic's
one- to four-family residential mortgage originations are secured by properties
located in its market area. In addition, substantially all mortgage loans
originated by Classic are retained and serviced by it. At March 31, 1996, $38.9
million, or 87.6% of Classic's loan portfolio, consisted of mortgage loans on
one- to four-family residences. On that date, approximately $5.3 million of
Classic's one- to four-family residential real estate loans were secured by
non-owner occupied properties.
Since the early 1980s, Classic has offered ARM loans at rates and on
terms determined in accordance with market and competitive factors. Prior to
April 1995, Classic utilized a variety of ARM loan products. Most of these loans
provided for a 1.0% maximum annual cap and a life-time cap of 5.0% over the
initial rate and adjusted to a stated margin over the Cost of Funds Indices.
Because these indices generally react more slowly to changes in interest rates
as compared to other indices commonly used for ARMs (including those based on
rates paid on U.S. Treasury securities), during a period of rising interest
rates, the use of these lagging indices results in Classic's adjustable-rate
loans repricing upward a slower rate which could result in a reduction in
interest rate spread. Classic's average interest rate spread was 1.6% for the
fiscal year ended March 31, 1996. At March 31, 1996, Classic had $18.9 million
of ARM loans
81
<PAGE>
representing 49.2% of the one- to four-family loan portfolio, which reprice
based upon one of the Cost of Funds Indices. On the same date, these loans had a
weighted average yield of 6.8% and a weighted average contractual term to
maturity of 227 months.
Prior to April 1995, when competing lenders offered ARMs with interest
rates during the initial adjustment period (i.e., typically the first year of
the loan term) below that which would be indicated by reference to the
applicable index plus the stated margin (i.e., "teaser" rates), Classic would
often respond not by matching the discounted rate for the initial adjustment
period but rather by discounting the interest rate for the entire life of the
loan. Effective April 1, 1995, Classic discontinued this practice of offering
teaser rates for the entire loan term although it may from time to time offer
ARMs with initial rates below the fully indexed rates.
In order to increase the interest rate sensitivity of its ARMs, Classic
currently requires that ARM loans adjust in accordance with the one-year U.S.
Treasury Constant Maturity Index. At March 31, 1996, Classic had $5.5 million of
ARM loans which reprice based upon this index. However, since these loans
generally provide for a 1.0% maximum annual cap and a life-time cap of 5.0% over
the initial rate, the interest rates on these loans may not be as rate sensitive
as is Classic's cost of funds. Currently, all ARM loans originated do not
provide for a minimum interest rate and are not convertible to fixed-rate loans.
ARM loans decrease the risk to Classic associated with changes in
interest rates but may involve other risks, primarily because as interest rates
rise, the payment by the borrower may rise to the extent permitted by the terms
of the loan, thereby increasing the potential for default. At the same time, the
market value of the underlying property may be adversely affected by higher
interest rates.
Classic currently offers fixed-rate mortgage loans with maturities from
10 to 30 years. Interest rates and fees charged on these fixed-rate loans are
established on a regular basis according to market conditions. See
"--Originations, Purchases and Sales of Loans and Mortgage-Backed Securities."
In underwriting one- to four-family residential real estate loans,
Classic currently evaluates both the borrower's ability to make principal,
interest and escrow payments, the value of the property that will secure the
loan and debt to income ratios. Prior to April 1995, Classic's underwriting
standards placed more emphasis on the collateral securing the loan than on the
borrower's ability to make principal and interest payments. As a result, Classic
may experience a higher delinquency rate on loans originated during such
periods.
Currently, Classic will lend up to 90% (or up to 100% on a case-by-case
basis) of the lesser of the sales price or appraised value of the security
property on owner occupied one- to four-family loans. In the future, Classic may
require that private mortgage insurance be obtained in an amount sufficient to
reduce Classic's exposure to not more than 80% of the appraised value or sales
price, as applicable. The loan-to-value ratio on non-owner occupied, one- to
four-family loans is generally 85% of the lesser of the sales price or appraised
value of the security property.
Residential loans do not include prepayment penalties, are
non-assumable and do not produce negative amortization. Properties securing one-
to four-family residential real estate loans made by Classic are appraised by
independent appraisers.
82
<PAGE>
Classic's loans are currently underwritten pursuant to Federal Home
Loan Mortgage Corporation ("FHLMC") guidelines. Under current policy, Classic
originates all mortgage loans for its portfolio.
Classic's residential mortgage loans customarily include due-on-sale
clauses giving Classic the right to declare the loan immediately due and payable
in the event that, among other things, the borrower sells or otherwise disposes
of the property subject to the mortgage and the loan is not repaid.
Multi-Family and Commercial Real Estate Lending. In the past, Classic
has originated a limited amount of permanent multi-family and commercial real
estate loans. In order to increase the proportion of Classic's assets which
carry adjustable interest rates and to enhance the yield thereof, and in
connection with the adoption of its new business strategy, since March 1995,
Classic has increased its emphasis on commercial real estate lending. Classic
generally focuses its commercial real estate lending efforts on borrowers (such
as professionals) who occupy some or all of the collateral property. At March
31, 1996, Classic had $215,000 in multi-family loans, representing 0.5% of
Classic's total loan portfolio, and $2.5 million in commercial real estate
loans, or 5.7% of Classic's total loan portfolio.
Classic's multi-family and commercial real estate loan portfolio
includes or is anticipated to include loans secured by apartment buildings,
office and professional buildings, medical facilities, churches, and other
non-residential building properties. Classic's multi-family and commercial real
estate loans are secured by properties located in Classic's market area.
Permanent multi-family and commercial real estate loans are generally
originated for a maximum term of 15 years and have fixed or adjustable rates
which are generally based on a specified index plus a margin. Multi-family and
commercial real estate loans are written in amounts of up to 75% of the
appraised value of the property.
Appraisals on properties serving multi-family and commercial real
estate loans originated by Classic are performed by an independent appraiser
prior to the time the loan is made. All appraisals on commercial and
multi-family real estate are reviewed by Classic's management. Classic's
underwriting procedures require verification of the borrower's credit history,
income and financial statements, banking relationships and references. Classic
generally requires personal guarantees on loans secured by multi-family and
commercial real estate.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. At March 31,
1996, Classic had no multi-family loans and $43,000 of commercial real estate
loans which were 90 days or more delinquent.
The acquisition of First Paintsville is anticipated to impact Classic's
commercial real estate lending by increasing the volume of commercial real
estate loans originated, subject to market conditions.
83
<PAGE>
Construction Lending. Classic originates a modest amount of
construction loans for the construction of residential and commercial real
estate. At March 31, 1996, Classic's construction loan portfolio totaled $1.1
million, or 2.5% of its total loan portfolio.
Construction loans to individuals for the construction of their
residences are structured to convert to permanent loans at the end of the
construction phase, which typically run up to six months. These construction
loans have rates and terms comparable to one- to four-family loans offered by
Classic, except that during the construction phase, the borrower pays interest
only at a specified margin over the prime rate. The maximum loan-to-value ratio
of owner-occupied, single-family construction loans is 85%. Residential
construction loans are underwritten pursuant to the same guidelines used for
originating permanent residential loans. At March 31, 1996, there were $747,000
gross residential construction loans outstanding.
From time to time, subject to market conditions, Classic originates
construction loans to builders of one- to four-family residences. Such loans
generally have terms of up to six months and require the payment of interest
only for the loan term. Classic generally limits loans to builders for the
construction of homes for sale to one home per builder. At March 31, 1996,
Classic had $287,000 of construction loans to builders of one- to four-family
residences.
Classic also originates a limited number of loans for the construction
of commercial real estate, particularly professional facilities. Such loans
typically carry adjustable rates and convert to a permanent loans following
completion of the construction period. Commercial real estate construction loans
are generally underwritten pursuant to the same guidelines utilized for
commercial real estate loans. At March 31, 1996, Classic had a $385,000
outstanding loan commitment for the construction of a gasoline and convenience
store, of which $164,000 had been funded.
Classic's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. Classic reviews
the progress of the construction of the dwelling before disbursements are made.
Construction loans are obtained principally through referrals from
Classic's and management's contacts in the business community as well as
existing and walk-in customers. The application process includes a submission to
Classic of accurate plans, specifications and costs of the project to be
constructed/developed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value and/or the cost of construction (land plus building).
Construction lending is generally considered to involve a higher level
of credit risk than one- to four-family residential lending since the risk of
loss on construction loans is dependent largely upon the accuracy of the initial
estimate of the individual property's value upon completion of the project and
the estimated cost (including interest) of the project. If the cost estimate
proves to be inaccurate, Classic may be required to advance funds beyond the
amount originally committed to permit completion of the project. To the extent
Classic's construction lending increases in the future, there can be no
assurance that Classic will not experience an increase in delinquencies on its
construction loans.
Consumer Lending. Federally chartered savings institutions may invest
up to 35% of assets in consumer loans (including any investment in investment
grade and commercial paper and corporate debt securities). Prior to April 1995,
Classic originated primarily consumer loans secured by deposit accounts. At
March 31, 1996, consumer loans totaled $618,000, or 1.4%
84
<PAGE>
of Classic's total loan portfolio. In order to increase the yield and interest
rate sensitivity of its loan portfolio as part of its new business strategy and
as a result of the acquisition of First Paintsville, Classic intends to increase
the type and volume of its consumer loans to include unsecured and secured
consumer loans, with emphasis on direct automobile financing and home equity
lending. Consumer loan terms will vary according to the type and value of
collateral, length of contract and creditworthiness of the borrower.
Classic's consumer loans secured by deposit accounts are made in
amounts not to exceed 100% of the deposit holder's available passbook or
certificate of deposit balance and carry no maximum term when secured by
passbook accounts and a maximum term of no later than the certificate maturity
date for loans secured by certificates of deposit. Currently, loans secured by
deposit accounts carry an interest rate which is 2.0% to 3.0% above the stated
rate on the pledged account, subject to adjustment based upon changes in the
interest rate on pledged accounts.
The underwriting standards to be employed by Classic for consumer loans
include a determination of the applicant's payment history on other debts and
ability to meet existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is of primary consideration, the underwriting
process will also include a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans, other than loans secured by deposit accounts, may
entail greater credit risk than do residential mortgage loans, particularly in
the case of consumer loans which are unsecured or are secured by rapidly
depreciable assets, such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be affected by adverse personal circumstances. Furthermore, the
application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. At
March 31, 1996, none of Classic's consumer loans were non-performing. However,
in view of the projected increase in the amount and scope of Classic's consumer
lending activities, there can be no assurance that delinquencies in the consumer
loan portfolio will not increase in the future.
Commercial Business Lending. Federally chartered savings institutions
are authorized to make secured or unsecured loans and letters of credit for
commercial, corporate, business and agricultural purposes and to engage in
commercial leasing activities, up to a maximum of 10% of total assets. Classic
from time to time makes secured and unsecured commercial business loans,
primarily in the form of fixed asset loans, to local businesses. At March 31,
1996, Classic's commercial business loans totaled $1.1 million, or 2.4% of total
loans. In addition, on such date, Classic had one outstanding commercial
business loan commitment totaling $75,000, which was not yet funded.
Classic's commercial business loans generally have terms of one to
seven years and generally carry adjustable rates of interest over the prime
rate. Such loans are generally secured by inventory, accounts receivable and
fixed assets.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial
85
<PAGE>
business loans are of higher risk and typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself. Further, the collateral securing the loans may depreciate over time, may
be difficult to appraise and may fluctuate in value based on the success of the
business.
As a result of the acquisition of First Paintsville, it is anticipated
that the amount and variety of commercial business lending activities will
increase, subject to market conditions.
Originations, Purchases and Sales of Loans and Mortgage-Backed and Related
Securities
Real estate loans are originated by Classic's staff of salaried loan
officers through referrals.
Classic's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
See "--Market Area." Under current policy, all loans originated by Classic will
be retained in Classic's portfolio.
From time to time, in order to supplement loan originations, Classic
has acquired mortgage-backed and related securities which are held, depending on
the investment intent, in the "held-to-maturity" or "available-for-sale"
portfolios. See "--Investment Activities --Mortgage-Backed and Related
Securities" and Notes 4 and 6 to the Notes to Consolidated Financial Statements
of Classic.
86
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------
1996 1995 1994
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family........................... $5,145 $8,173 $ 2,602
- commercial.................................... 1,997 --- ---
Non-real estate - consumer.................................. 75 --- ---
- commercial business....................... 1,855 --- ---
------- ------- -------
Total adjustable-rate loans.......................... 9,072 8,173 2,602
------- ------- -------
Fixed rate:
Real estate - one- to four-family........................... 5,447 588 5,683
- multi-family.................................. 106 --- ---
- commercial.................................... 591 --- ---
- construction.................................. 2,142 --- ---
Non-real estate - consumer.................................. 552 147 241
- commercial business....................... 54 --- ---
------- ------- -------
Total fixed-rate loans............................... 8,892 735 5,924
------- ------- -------
Total loans originated............................... 17,964 8,908 8,526
------- ------- -------
Purchases:
Real estate - commercial..................................... 25 --- ---
Non-real estate - commercial................................ 250 --- ---
------- ------- -------
Total purchases...................................... 275 --- ---
Participations sold:
Real estate - commercial..................................... 250 --- ---
Non-real estate - commercial business....................... 538 --- ---
------- ------- -------
Total participations sold............................ 788 --- ---
Repayments:
Real estate - one- to four-family........................... 6,558 5,871 9,513
- multi-family.................................. 8 44 ---
- commercial.................................... 317 155 424
- construction.................................. 1,010 --- ---
Non-real estate - consumer.................................. 392 193 245
- commercial business....................... 559 --- ---
------- ------- -------
Total principal repayments................................. 8,844 6,263 10,182
------- ------- -------
Increase (decrease) in other items, net....................... (262) (143) (111)
------- ------- -------
Net increase (decrease).............................. $8,345 $2,502 $(1,767)
====== ====== =======
</TABLE>
87
<PAGE>
The following table shows mortgage-backed and related securities
purchase, sale and repayment activities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------
1996 1995 1994
-------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Purchases:
Adjustable-rate(1)................ $ 488 $ --- $ ---
Fixed-rate(1)..................... --- 498 ---
CMOs and REMICs................... 2,022 5,308 ---
------ ------- ---------
Total purchases............ 2,510 5,806 ---
------ ------- ---------
Sales:
Adjustable-rate(1)................ 156 --- ---
Fixed-rate(1)..................... 451 --- ---
CMOs and REMICs................... 6,542 --- ---
------ --------- ---------
Total sales................ 7,149 --- ---
------ --------- ---------
Principal repayments................ 659 1,419 1,392
Other increases (decreases), net.... (3) (16) 75
-------- ------ --------
Net increase (decrease)........ $(5,301) $4,371 $(1,317)
======== ====== ========
- ----------
(1) Consists of pass-through securities.
</TABLE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, Classic attempts to cure the delinquency by contacting the
borrower. A late notice is sent on all delinquent loans over 15 days delinquent.
Additional written and verbal contacts may be made with the borrower between 30
and 90 days after the due date. If the loan is contractually delinquent 90 days,
Classic institutes appropriate action to foreclose on the property. If a
borrower agrees to a payment plan to bring a delinquent loan current, a
designated lending officer monitors the loan for compliance with the payment
agreement. If foreclosed, the property is sold at public sale and may be
purchased by Classic. Delinquent consumer loans will generally be handled in a
similar manner. However, a late notice will be sent on all delinquent consumer
loans after ten days.
Real estate acquired by Classic as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold. When
property is acquired by foreclosure or deed in lieu of foreclosure, it is
recorded at the lower of cost or estimated fair value less estimated selling
costs. After acquisition, all costs incurred in maintaining the property are
expensed. Costs relating to the development and improvement of the property,
however, are capitalized.
88
<PAGE>
The following table sets forth loan delinquencies by type, by amount
and by percentage of type at March 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------
60 - 90 Days 90 Days and Over Total Delinquent Loans
------------------------------ --------------------------------- --------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family. 36 $1,091 2.8% 6 $142 0.4% 42 $1,233 3.2%
Commercial.......... --- --- --- 1 43 1.7 1 43 1.7
--- ------ --- --- ---- --- --- ------ ---
Total............ 36 $1,091 2.5 7 $185 0.4 43 $1,276 2.9
=== ====== === ==== === ======
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the institution will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of Substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as Substandard or Doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as a loss, the institution charges
off such amount against the loan loss allowance. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the District Director of the OTS.
On the basis of management's review of its assets, at March 31, 1996,
Classic had classified a total of $600,000 of its loans and other assets as
follows:
March 31, 1996
--------------
(In Thousands)
Substandard.............................. $592
Doubtful................................. 8
Loss..................................... ---
-----
Total............................... $600
====
Classic's classified assets consist of the non-performing loans and
foreclosed assets. As of the date hereof, these asset classifications are
materially consistent with those of the OTS and FDIC. When loans are classified
as a "loss," they are charged off against the loan loss allowance.
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<PAGE>
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest become
doubtful. For all years presented, Classic has had no troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ----- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family................................ $552 $ 447 $1,051 $1,332 $1,704
Commercial real estate............................. 43 301 --- --- ---
----- ------- ------ ------ ------
Total........................................... 595 748 1,051 1,332 1,704
----- ------- ------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family................................ --- 60 --- --- ---
Foreclosed assets:
One- to four-family................................ 5 49 --- 179 156
---- ------ ------- ------- -------
Total non-performing assets.......................... $600 $ 857 $1,051 $1,511 $1,860
==== ====== ====== ====== ======
Total as a percentage of total assets................ 0.9% 1.4% 1.8% 2.8% 3.9%
=== === === === ===
</TABLE>
For the year ended March 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $47,000. The amount that was included in
interest income on such loans was $35,000 for the year ended March 31, 1996. The
average balance of non-accrual loans for the year ended March 31, 1996 was
$677,000. The allowance for loan losses on non-accrual loans amounted to $0 at
March 31, 1996.
At March 31, 1996, Classic's non-accruing loans included 17 loans
secured by single-family real estate totaling $552,000 and one loan secured by
commercial real estate totaling $43,000. At March 31, 1996, real estate owned
included a vacant lot totaling $5,000.
As part of its new business strategy, management has revised Classic's
underwriting guidelines and implemented increased collection efforts in an
attempt to reduce the level of non-performing assets. No prediction can be made
as to whether management will be successful in reducing the level of
non-performing assets.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 1996, there were no loans or other
assets with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the security properties have
caused management to have concerns as to the ability of the borrowers to comply
with present loan repayment terms and which may result in the future inclusion
of such items in the non-performing asset categories.
Management considers non-performing and "of concern" assets in
establishing its allowance for loan losses.
90
<PAGE>
Allowance for Loan Losses. The following table sets forth an analysis
of the allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at beginning of period................................ $311 $318 $349 $339 $165
---- ---- ---- ---- ----
Charge-offs:
One- to four-family......................................... 44 130 184 223 134
Multi-family................................................ 149 --- --- --- ---
Commercial real estate...................................... 21 19 --- --- ---
---- ----- ------ ------ ------
Total charge-offs....................................... 214 149 184 223 134
---- ---- ---- ---- ----
Recoveries:
One- to four-family......................................... 12 9 70 23 ---
Multi-family................................................ 9 --- --- --- ---
---- ------ ------ ------ ------
Total recoveries........................................ 21 9 70 23 ---
Net charge-offs............................................... 193 140 114 200 134
---- ---- ---- ---- ----
Additions charged to operations............................... 168 133 83 210 308
---- ---- ----- ---- ----
Balance at end of period...................................... $286 $311 $318 $349 $339
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to average loans
outstanding during the period............................. 0.5% 0.4% 0.3% 0.6% 0.4%
=== === === === ===
Ratio of net charge-offs during the period to average non-
performing assets......................................... 25.4% 17.5% 11.5% 10.2% 7.4%
==== ==== ==== ==== ===
</TABLE>
91
<PAGE>
The distribution of the allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ----------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------------------- ----------------------------------------- -----------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family... $59 $38,944 87.5% $ 47 $35,005 96.9% $ --- $32,239 95.8%
Multi-family.......... --- 215 0.5 --- 118 0.3 --- 161 0.5
Commercial real estate 4 2,509 5.7 75 630 1.7 --- 805 2.4
Construction.......... --- 1,132 2.5 --- --- --- --- --- ---
Consumer.............. --- 618 1.4 --- 383 1.1 --- 429 1.3
Commercial business... --- 1,063 2.4 --- --- --- --- --- ---
Unallocated........... 223 --- --- 190 --- --- 318 --- ---
---- ------- ----- ---- ------- ----- ---- ------- -----
Total............ $286 $44,481 100.0% $312 $36,136 100.0% $318 $33,634 100.0%
==== ======= ===== ==== ======= ===== ==== ======= =====
</TABLE>
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------
1993 1992
-------------------------------- ----------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
------------- -------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family... $ --- $33,920 95.8% $ --- $35,538 95.4%
Multi-family.......... --- 161 0.5 --- 342 0.9
Commercial real estate --- 887 2.5 --- 918 2.5
Construction.......... --- --- --- --- --- ---
Consumer.............. --- 433 1.2 --- 445 1.2
Commercial business... --- --- --- --- --- ---
Unallocated........... 349 --- --- 339 --- ---
---- ------- ----- ---- ------- -----
Total............ $349 $35,401 100.0% $339 $37,243 100.0%
==== ======= ===== ==== ======= =====
</TABLE>
92
<PAGE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation, which includes a review of all loans of
which full collectibility may not be reasonably assured, considers the market
value of the underlying collateral, growth and composition of the loan
portfolio, the relationship of the allowance to outstanding loans, historical
loss experience, delinquency trends, prevailing and projected economic
conditions and other factors that warrant recognition in providing for an
adequate allowance for loan losses. In determining the general reserves under
these policies, historical charge-offs and recoveries, changes in the mix and
levels of the various types of loans, net realizable values, the current loan
portfolio and current economic conditions are considered.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Investment Activities
General. Ashland Federal must maintain minimum levels of investments
and other assets that qualify as liquid assets under OTS regulations. Liquidity
may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, Ashland Federal has maintained liquid assets at levels
significantly above the minimum requirements imposed by the OTS regulations and
above levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At March 31, 1996, Ashland Federal's
liquidity ratio for regulatory purposes was 5.1%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Classic --
Asset/Liability Management" and "-- Liquidity and Capital Resources."
Generally, the investment policy of Classic and Ashland Federal is to
invest funds among categories of investments and maturities based upon the
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Prior to April 1, 1994,
Classic recorded its investments in its investment securities portfolio at the
lower of cost or current market value if held for sale or at amortized cost if
held for investment. Unrealized declines in the market value of securities held
to maturity were not reflected in the financial statements; however, unrealized
losses in the market value of securities held for sale were recorded as a charge
to current earnings. Effective April 1, 1994, Classic adopted SFAS 115. As
required by SFAS 115, securities are classified into three categories: trading,
held to maturity and available-for-sale. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of operations.
Securities that Classic has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities not classified as trading or held-to-maturity are classified as
available-for-sale. At March 31, 1996, Classic had no securities which were
classified as trading. Available-for-sale securities are reported at fair value
with unrealized gains and losses included, on an after-tax basis, in a separate
component of retained earnings. At March 31, 1996, $13.9 million of investment
securities or mortgage-backed and related securities were classified as
available-for-sale.
93
<PAGE>
Securities. Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
Prior to April 1995, Classic used investment securities to supplement
loan volume and to improve the yield on its interest-earning assets. Since the
new business strategy resulted in an increase in lending activities (in part
because loans generally carry higher yields than investment securities), Classic
experienced a decline in the volume of investment securities. However, Classic
continues to invest in liquidity investments and in high-quality investments,
such as U.S. Treasury and agency obligations, in order to supplement lending
volume and provide collateral for FHLB borrowing and public funds deposited with
Classic. Investment securities may also be used to adjust the term to repricing
of Classic's assets. At March 31, 1996, Classic's investment securities
portfolio totaled $11.1 million. At March 31, 1996, Classic did not own any
investment securities of a single issuer which exceeded 10% of Classic's
stockholders' equity, other than U.S. government securities and federal agency
obligations. See Note 4 of the Notes to the Consolidated Financial Statements of
Classic for additional information regarding Classic's investment securities
portfolio.
The following table sets forth the composition of Classic's securities
at the dates indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------------
1996(1) 1995 1994
--------------------- ---------------------- ----------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ------- -------- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government securities..................... $1,266 11.5 $ 1,245 9.7 $ 500 5.7
Federal agency obligations..................... 4,415 39.9 6,446 49.9 2,899 33.2
Municipal bonds................................ 4,757 43.0 4,629 35.9 4,781 54.8
FHLB stock....................................... 621 5.6 580 4.5 546 6.3
------- ----- ------- ----- ------- -----
Total securities and FHLB stock............. $11,059 100.0% $12,900 100.0% $ 8,726 100.0%
======= ===== ======= ===== ======= =====
Average remaining life of investment securities.. 13 yrs. 11 yrs. 13 yrs.
Other interest-earning assets:
Interest-bearing deposits with banks........... $6,649 100.0% $ 3,195 100.0% $12,612 100.0%
====== ===== ======= ===== ======= =====
- ---------------
(1) At March 31, 1996, all investment securities held by Classic were classified
as available for sale.
</TABLE>
94
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
------------ ------------ ------------ ----------- -----------------------
Carrying Carrying Carrying Carrying Carrying Market
Value Value Value Value Value Value
----------- ----------- ---------- --------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities.......... $252 $1,014 $ --- $ --- $ 1,266 $ 1,266
Federal agency obligations.......... --- --- 989 3,426 4,415 4,415
Municipal bonds..................... --- --- 652 4,105 4,757 4,757
---- ------ ------ ------ ------- -------
Total securities.................... $252 $1,014 $1,641 $7,531 $10,438 $10,438
==== ====== ====== ====== ======= =======
Weighted average yield(1)........... 7.2% 6.4% 6.4% 6.8% 6.7% 6.7%
=== === === === === ===
- --------------
(1) Yields have not been computed on a tax-equivalent basis.
</TABLE>
See Note 4 of the Notes to the Consolidated Financial Statements of
Classic for a discussion of Classic's securities portfolio.
Mortgage-Backed and Related Securities. In order to supplement loan and
investment activities, Classic has invested in mortgage-backed and related
securities.
Consistent with its asset/liability management strategy at March 31,
1996, $480,000, or 16.9% of Classic's mortgage-backed and related securities
have adjustable interest rates. For information regarding the mortgage-backed
and related securities portfolio, see Note 6 of the Notes to the Consolidated
Financial Statements of Classic.
As of March 31, 1996, all of the mortgage-backed and related securities
owned by Classic were issued, insured or guaranteed either directly or
indirectly by a federal agency. As a result, Classic did not have any
mortgage-backed or related securities in excess of 10% of stockholders' equity
except for federal agency obligations.
In addition to its conventional mortgage-backed securities, from time
to time, Classic invests in collateralized mortgage obligations ("CMOs") and
real estate mortgage investment conduits ("REMICs"). CMOs and REMICs are
securities derived by reallocating the cash flows from mortgage-backed
securities or pools of mortgage loans in order to create multiple classes, or
tranches, of securities with coupon rates and average lives that differ from the
underlying collateral as a whole. The terms to maturity of any particular
tranche is dependent upon the prepayment speed of the underlying collateral as
well as the structure of the particular CMO or REMIC. As a result, the cash flow
and hence the value of CMOs and REMICs are subject to substantial change. At
March 31, 1996, Classic had $2.0 million of REMICs.
In past, Classic had invested in interest only strips ("IO Strips"), a
mortgage derivative security consisting essentially of a portion of the interest
payments on a pool of mortgages. Since the effective life of such interest
payments, and hence its value of the related IO Strips is highly dependent upon
prepayment levels which in turn are highly variable, the market value of IO
Strips are highly volatile. Classic established a $160,000 valuation allowance
on the IO
95
<PAGE>
Strips due to an other than temporary decline in the market value of this asset.
In order to reduce the volatility of its mortgage-backed securities portfolio,
Classic sold the remaining $19,000 of its IO Strips at a gain of approximately
$9,000 during fiscal 1996. At March 31, 1996, Classic had no IO Strips in its
portfolio.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires Ashland Federal to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in high-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's trading account or as assets held
for sale. At March 31, 1996, none of Ashland Federal's mortgage-backed
securities were classified as "high-risk."
The following table sets forth the contractual maturities of the
mortgage-backed securities at March 31, 1996.
<TABLE>
<CAPTION>
Due In
--------------------------------------------------------------- March 31, 1996
1 Year Over 1 to 5 Over 5 to Over 10 to Over 20 Balance
or Less Years 10 Years 20 Years Years Outstanding
------------ ----------- ----------- ------------ ------------ --------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation....................... $--- $--- $365 $--- $ --- $365
Other............................. --- --- --- --- 480 480
CMOs and REMICs................... --- --- 985 --- 1,010 1,995
---- ---- ------ ---- ------ ------
Total........................ $--- $--- $1,350 $--- $1,490 $2,840
==== ==== ====== ==== ====== ======
</TABLE>
At March 31, 1996, the dollar amount of all mortgage-backed and related
securities due after March 31, 1996, which had fixed interest rates and floating
or adjustable rates totaled $2.3 million and $480,000, respectively.
The market values of a portion of Classic's mortgage-backed and related
securities held-to-maturity have been from time to time lower than their
carrying values. However, for financial reporting purposes, such declines in
value are considered to be temporary in nature since they have been due to
changes in interest rates rather than credit concerns. See Note 6 of the Notes
to the Consolidated Financial Statements of Classic.
96
<PAGE>
The following table sets forth the composition of the mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------ -------- ------ ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held for investment:
Federal National Mortgage Association
("FNMA").................................... $ --- $ --- $ 170 $ 172 $ 209 $ 214
FHLMC.......................................... --- --- 743 754 1,064 1,090
CMOs/REMICs(1)................................. --- --- 6,833 6,710 2,533 2,530
------- ------- ------ ------ ------ ------
Total held for investment................. $ --- $ --- $7,746 $7,636 $3,806 $3,834
------- ------- ------ ------ ------ ------
Mortgage-backed securities available for sale:
FHLMC.......................................... $371 $365 $ --- $ --- $ --- $ ---
Other.......................................... 484 480 --- --- --- ---
CMOs/REMICs(2)................................. 2,021 1,995 $ 431 $ 387 $ --- $ ---
------ ------ ------- ------ ------ ------
Total mortgage-backed securities.......... $2,876 $2,840 $8,177 $8,023 $3,806 $3,834
====== ====== ====== ====== ====== ======
- ---------------
(1) Included $106,000 and $81,000 of FNMA REMIC IOs at March 31, 1993 and 1994,
respectively.
(2) Included $19,000 of FNMA REMIC IOs at March 31, 1995.
</TABLE>
Sources of Funds
General. Classic's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
As a result of the acquisition of First Paintsville, Classic intends to
increase, subject to market conditions, the current level of consumer deposits
through increased marketing efforts and additional product offerings.
Deposits. Classic offers deposit accounts having a wide range of
interest rates and terms. Classic's deposits consist of passbook, money market,
various certificate and interest- and noninterest-bearing checking accounts. In
order to increase the volume of checking accounts, Classic employed a new
accounts specialist in fiscal 1996. Classic also cross markets to current
customers and utilizes newspaper and radio advertisements. Classic currently
relies primarily on competitive pricing policies and customer service to attract
and retain deposits. Classic has entered into a contract with a nationally
recognized ATM network to obtain access to automated teller machines in order to
increase fees and attract customers.
From October 1991 to April 1995, Classic utilized wholesale deposits
through deposit brokers which solicit funds from their customers for deposit
with Classic to fund loan originations in light of deposit outflows. Brokered
deposits totaled $2.1 million at March 31, 1996. Brokered deposits are generally
believed to be more responsive to changes in interest rates than retail deposits
and, thus, are more likely to be withdrawn from Classic upon maturity as changes
in interest rates and other factors are perceived by investors to make other
investments more attractive. Since brokered deposits generally earn a higher
rate than that paid on retail deposits, the use of brokered deposits may also
increase an institution's cost of funds.
97
<PAGE>
The brokered deposits held by Classic at March 31, 1996 will mature no later
than December 31, 1997. Management currently anticipates that, based upon its
current policy, substantially all of Classic's brokered deposits will not be
renewed upon maturity. Effective September 25, 1995, the Board of Directors
revised the its policies to limit the use of brokered deposits to 10% of
deposits. Classic reduced the level of brokered deposits from $6.9 million at
March 31, 1995 to its current level primarily through the solicitation of retail
deposits in Classic's market area.
From time to time, Classic offers "step up" certificates of deposits
which permit upward adjustments of interest rates depending on market conditions
but do not permit downward adjustments below the initial rate. At March 31,
1996, Classic had $9.4 million of "step up" certificates of deposit with an
average cost of 6.4%.
Classic currently manages the pricing of its deposits in keeping with
its asset/liability management, profitability and growth objectives. For
additional information regarding Classic's deposit accounts, see Note 11 of the
Notes to the Consolidated Financial Statements of Classic.
The following table sets forth the savings flows at Classic during the
periods indicated.
Year Ended March 31,
---------------------------------------------
1996 1995 1994
------- -------- --------
(Dollars in Thousands)
Opening balance................. $48,510 $ 51,644 $ 47,938
Deposits........................ 15,671 16,325 21,693
Withdrawals..................... (19,587) (20,717) (19,331)
Interest credited............... 1,606 1,258 1,344
-------- -------- --------
Ending balance.................. $46,200 $ 48,510 $ 51,644
======= ======== ========
Net increase (decrease)......... $(2,310) $ (3,134) $ 3,706
======= ======== ========
Percent increase (decrease)..... (4.8)% (6.1)% 7.7%
==== ==== ====
98
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered as of the dates indicated.
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- --------- -------- ---------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Deposits:
- ---------
Interest bearing demand deposits - 3.25%(1)... $ 15 --- --- --- --- ---
Savings Accounts - 3.00%(1)................... 2,683 0.1% $ 3,045 6.3% $ 3,831 7.4%
Money Market Accounts - 3.10%(1).............. 5,494 11.9 6,674 13.8 10,674 20.7
------- ---- -------- ---- ------- ----
Total Deposits........................... $8,192 17.7% $ 9,719 20.1% $14,505 28.1%
====== ==== ======= ==== ======= ====
Certificates:
- ------------
0.00 - 4.00%................................. 2,582 5.6 2,561 5.3 10,466 20.3
4.01 - 6.00%................................. 18,421 39.9 20,599 42.4 22,543 43.6
6.01 - 8.00%................................. 16,792 36.3 14,912 30.7 2,610 5.1
8.01 - 10.00%................................. 213 0.5 719 1.5 1,520 2.9
-------- ----- -------- ------ ------- ----
Total Certificates............................ 38,008 82.3 38,791 79.9 37,139 71.9
------- ----- ------- ----- ------- -----
Total Deposits........................... $46,200 100.0% $48,510 100.0% $51,644 100.0%
======= ===== ======= ===== ======= =====
- -------------
(1) Interest rate offered at March 31, 1996.
</TABLE>
The following table shows rate and maturity information for Classic's
certificates of deposit as of March 31, 1996.
<TABLE>
<CAPTION>
0.00- 4.01- 6.01- 8.01- Percent
4.00% 6.00% 8.00% or greater Total of Total
----------- --------- ------------ ------------- --------- ---------------
(Dollars in Thousands)
Certificate accounts maturing in
quarter ending:
<S> <C> <C> <C> <C> <C> <C>
June 30, 1996........................ $2,583 $ 4,220 $ 3,276 $ 91 $10,170 26.8%
September 30, 1996................... --- 3,464 3,985 --- 7,449 19.6
December 31, 1996.................... --- 1,608 3,013 --- 4,621 12.2
March 31, 1997....................... --- 3,913 755 --- 4,668 12.3
June 30, 1997........................ --- 851 1,090 --- 1,941 5.1
September 30, 1997................... --- 1,163 1,767 --- 2,930 7.7
December 31, 1997.................... --- 289 1,208 --- 1,497 3.9
March 31, 1998....................... --- 807 668 22 1,497 3.9
June 30, 1998........................ --- 242 321 --- 563 1.5
September 30, 1998................... --- 657 301 --- 958 2.5
December 31, 1998.................... --- 74 10 --- 84 0.2
March 31, 1999....................... --- 140 84 100 324 0.9
Thereafter........................... --- 992 314 --- 1,306 3.4
-------- -------- -------- ------ -------- -----
Total............................. $2,583 $18,420 $16,792 $213 $38,008 100.0%
====== ======= ======= ==== ======= =====
Percent of total.................. 6.8% 48.5% 44.2% 0.5%
=== ==== ==== ===
</TABLE>
99
<PAGE>
The following table indicates the amount of the certificates of deposit
and other deposits by time remaining until maturity as of March 31, 1996.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------- ------- ---------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000........... $6,708 $6,934 $7,789 $9,670 $31,101
Certificates of deposit of $100,000 or more.......... 3,461 515 1,500 1,431 6,907
------- ------- ------ -------- --------
Total certificates of deposit........................ $10,170 $7,449 $9,289 $11,101 $38,008
======= ====== ====== ======= =======
</TABLE>
Ashland Federal did not have any deposits from governmental or other
public entities at March 31, 1996.
For additional information regarding the composition of Classic's
deposits, see Note 11 of the Notes to the Consolidated Financial Statements of
Classic.
Borrowings. Other available sources of funds include advances from the
FHLB of Cincinnati and other borrowings. As a member of the FHLB of Cincinnati,
Ashland Federal is required to own capital stock in the FHLB of Cincinnati and
is authorized to apply for advances from the FHLB of Cincinnati. Each FHLB
credit program has its own interest rate, which may be fixed or variable, and
range of maturities. The FHLB of Cincinnati may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions.
FHLB borrowings are also used to fund loan demand and other investment
opportunities and to offset deposit outflows. At March 31, 1996, Classic had no
FHLB advances outstanding. See Note 12 of the Notes to the Consolidated
Financial Statements of Classic.
The following table sets forth the maximum month-end balance and
average balance of Classic's FHLB advances for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances................................................. $7,975 $4,800 $ ---
Average Balance:
FHLB advances................................................. 3,660 3,600 ---
Weighted average interest rate of FHLB advances................. 5.9% 3.4% ---%
</TABLE>
100
<PAGE>
The following table sets forth certain information as to Classic's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------
1996 1995 1994
----------------- ----------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances................................................. $ --- $4,800 $ ---
</TABLE>
Subsidiary Activities of Ashland Federal
As a federally chartered savings bank, Ashland Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
association may engage in directly.
At March 31, 1996, Ashland Federal had one wholly owned service
corporation, AFS Service Corporation (the "Subsidiary"). The Subsidiary, a
Kentucky corporation, was incorporated in 1978 for the purpose of acquiring the
stock of Intrieve, Inc. ("Intrieve") (formerly the Savings and Loan Data
Corporation, Inc.). Since its incorporation, the Subsidiary has not engaged in
any activity other than holding the stock of Intrieve.
At March 31, 1996, the Subsidiary's assets consisted entirely of
Intrieve stock. At that date, the Subsidiary had no liabilities and equity
consisted of $15,000 of capital stock owned by Ashland Federal.
Competition
Classic faces strong competition both in originating real estate loans
and in attracting deposits. Competition in originating loans comes primarily
from commercial banks, credit unions mortgage bankers and other savings
institutions, which also make loans secured by real estate located in Boyd and
Greenup Counties, Kentucky. At March 31, 1996, there were five savings
institutions, six commercial banks and five credit unions located in Boyd and
Greenup Counties, Kentucky. On that date, Classic accounted for approximately
5.0% of the loans originated in Boyd and Greenup Counties, Kentucky. Classic
competes for loans principally on the basis of the interest rates and loan fees
it charges, the types of loans it originates and the quality of services it
provides to borrowers.
Ashland Federal's new business strategy allows for the origination of
consumer and commercial real estate loans which, at the time current management
was hired, were not offered by Ashland Federal. Management has strong
competition from commercial banks and other financial institutions currently
providing these loan products in Ashland Federal's market area. Management
believes that Ashland Federal's ability to penetrate these markets is dependent
upon the pricing of loan products, marketing efforts and knowledge of the
market. Ashland Federal's
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current lending staff has over 40 years of combined lending experience in this
market area, including relationships with a large number of potential customers
to whom Ashland Federal intends to market.
Competition for deposits is principally from commercial banks, credit
unions, mutual funds, securities firms and other savings institutions located in
the same communities. The ability of Classic to attract and retain deposits
depends on its ability to provide an investment opportunity that satisfies the
requirements of investors as to rate of return, liquidity, risk, convenient
locations and other factors. Classic competes for these deposits by offering
competitive rates, convenient business hours and a customer oriented staff. At
March 31, 1996, Classic's share of deposits in its market area was approximately
4.0%.
Employees
At March 31, 1996, Classic and its subsidiaries had a total of ten
full-time employees. None of Classic's employees are represented by any
collective bargaining agreement. Management considers its employee relations to
be good.
Description of Properties
Classic conducts its business at its office located at 344 Seventeenth
Street, Ashland, Kentucky. Classic's 6,000 square foot office was acquired in
1963 and had a net book value of $192,000 at March 31, 1996. At March 31, 1996,
the total net book value of Classic's premises and equipment (including land,
building and leasehold improvements, and furniture, fixtures and equipment) was
approximately $724,000.
In June 1994, Classic acquired the 1,200 square foot office building
and land located adjacent to its current office building at 1737 Carter Avenue
in Ashland, Kentucky for a purchase price of $90,000. At March 31, 1996, the
current book value of this building was approximately $93,000. Classic's
improvements to this building totaled approximately $8,000. This building, which
is currently rented, is intended to be used for Classic's future expansion.
Except for negotiations currently in process related to the purchase of
land to be used to construct a branch office, Classic believes that its current
facilities (including the adjacent office building) are adequate to meet the
present and foreseeable future needs.
Classic's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by Classic at March 31, 1996 was approximately
$51,000.
Legal Proceedings
Classic and Ashland Federal are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing Classic and Ashland Federal in the
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proceedings, that the resolution of these proceedings should not have a material
effect on Classic's financial condition or results of operations on a
consolidated basis.
BUSINESS OF FIRST PAINTSVILLE
General
First Paintsville is a Kentucky corporation which was organized in 1984
for the purpose of becoming a bank holding company. The principal asset of First
Paintsville is the outstanding stock of First National Bank, its only
subsidiary. First Paintsville presently has no separate operations and its
business will consist only of the business of First National Bank, therefore,
the information presented herein relates principally to First National Bank.
At March 31, 1996, First Paintsville had $59.1 million in assets,
deposits of $51.8 million and stockholders' equity of $5.5 million.
Originally chartered in 1933, First National Bank operates as a
national bank. First National Bank's primary business involves the attraction of
deposits from the general public and the use of such deposits, together with
borrowed funds, to originate loans secured by real estate and to a lesser
extent, commercial business and consumer loans. First National Bank also
provides trust services to its customers.
Through its subsidiary, First National Bank, First Paintsville conducts
business through its main office and one branch office located in Paintsville,
Kentucky. First Paintsville's customer base includes individuals and small to
medium sized businesses located in its market area. First Paintsville's market
area includes Johnson County, Kentucky and portions of Martin, Floyd, Magoffin
and Lawrence Counties in Kentucky.
Paintsville, Kentucky is located in Johnson County, approximately 60
miles south of Ashland. Although the economy in First Paintsville's market area
was historically based on the manufacturing and coal mining related industries,
the economy in this area currently includes retail, medical and government
sectors and, to a lesser extent, manufacturing. Major employers include WalMart,
American Standard, the Paul B. Hall Regional Medical Center, the Mayo State
Vocational Technical School and the Carl D. Perkins Rehabilitation Center.
First Paintsville's office is located at 240 Main Street, Paintsville,
Kentucky 41240. First Paintsville's telephone number is (606) 789-2111.
Lending Activities
General. The principal lending activity of First Paintsville is the
origination of conventional first mortgage real estate loans secured by owner
occupied one- to four-family residential property. First Paintsville also
originates commercial business, consumer, commercial real estate and
construction loans.
Loan originations come primarily from walk-in customers, continued
business from existing customers and real estate brokers. All completed loan
applications are reviewed by
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First Paintsville's loan officers. As part of the application process,
information is obtained concerning the income, financial condition, employment
and credit history of the applicant. If commercial real estate is involved,
information may also be obtained concerning cash flow after debt service. The
quality of loans is analyzed based on First Paintsville's experience and
guidelines with respect to credit underwriting. All loans in excess of $100,000
are appraised by independent appraisers.
The Executive Committee, comprised of the Chief Executive Officer, the
President, the Senior Loan Officer and one outside director have authority to
approve loans over $120,000 up to the First National Bank's legal lending limit
discussed below. Various officers have combined lending authority to approve
loans up to $120,000.
The aggregate amount of loans that First National Bank is permitted to
make under applicable federal regulations to any one borrower, including related
entities, and the aggregate amount that First National Bank could have invested
in any one real estate project is generally the greater of 15% of unimpaired
capital and surplus or $500,000. At March 31, 1996, the maximum amount which
First National Bank could have lent to any one borrower and the borrower's
related entities and invested in any one project was $1.0 million. At March 31,
1996, First National Bank's largest lending relationship to a single borrower or
group of related borrowers was a line of credit secured by inventory totaling
$800,000, none of which was drawn upon.
Loan Portfolio Composition. The following information concerning the
composition of First Paintsville's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees and discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------------------
1996 1995 1994
----------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family................... $14,211 50.2% $13,892 50.6% $12,554 52.3%
Commercial............................ 4,142 14.6 3,696 13.4 2,294 9.5
Construction.......................... 270 1.0 277 1.0 302 1.3
------- ----- ------- ----- ------- -----
Total real estate loans........... 18,623 65.8 17,865 65.0 15,150 63.1
------- ----- ------- ----- ------- -----
Commercial Loans:
Business.............................. 3,888 13.7 3,577 13.0 3,963 16.5
Agricultural and other................ 24 .1 58 .2 74 .3
------- ------ -------- ------ -------- ------
Total commercial loans............ 3,912 13.8 3,635 13.2 4,037 16.8
------- ----- ------- ----- ------- -----
Consumer Loans:
Credit card.......................... 269 1.0 269 1.0 188 .8
Installment and other................ 5,493 19.4 5,698 20.8 4,649 19.3
------- ----- ------- ----- ------- -----
Total consumer loans.............. 5,762 20.4 5,967 21.8 4,837 20.1
------- ----- ------- ----- ------- -----
Total loans....................... 28,297 100.0% 27,467 100.0% 24,024 100.0%
===== ===== =====
Less:
Unearned discount..................... (437) (455) (256)
Allowance for losses.................. (405) (447) (301)
------ -------- --------
Total loans receivable, net........... $27,455 $26,565 $23,467
======= ======= =======
</TABLE>
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The following schedule illustrates the contractual maturity of First
Paintsville's loan portfolio at March 31, 1996. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------
One- to Four-Family Commercial Construction Consumer
--------------------- ------------------------ ---------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------- -------- ------- ------- ------ ------- ------ --------
(Dollars in Thousands)
Due
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year or less(1)............ $ 433 9.8% $ 143 10.4% $ --- ---% $1,494 10.4
after 1 year to 5 years...... 1,870 9.9 1,468 9.0 22 8.6 3,984 12.0
after 5 years................ 11,908 8.6 2,531 9.3 248 8.4 284 12.9
------- ------ ---- ------
$14,211 8.8 $4,142 9.2 $270 8.4 $5,762 11.6
======= ====== ==== ======
- --------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<TABLE>
<CAPTION>
Commercial
----------------------------------------------------
Business Agricultural Total
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due
- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year or less(1).................... $1,474 9.8% $ 4 11.3% $ 3,548 10.1%
after 1 year to 5 years.............. 1,350 9.7 20 10.7 8,714 10.7
after 5 years........................ 1,064 9.6 --- --- 16,035 8.9
------ --- -------
$3,888 9.7 $24 10.8 $28,297 9.6
====== === =======
- ---------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
The total amount of loans due after March 31, 1997 which have
predetermined interest rates is $12.7 million while the total amount of loans
due after such dates which have floating or adjustable interest rates is $12.0
million.
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One- to Four-Family Residential Real Estate Lending. First
Paintsville's primary lending program is the origination of permanent loans,
secured by mortgages on owner-occupied one- to four-family residences. At March
31, 1996, $14.2 million, or 50.2% of First Paintsville's total loan portfolio,
consisted of loans on one- to four-family residences. Substantially all of these
loans were secured by properties located in the State of Kentucky, with a
majority located in First Paintsville's primary market area.
First Paintsville originates a variety of different types of
residential mortgage loans including conventional 10-, 15- and 20-year
fixed-rate loans, one-year ARMs and three-, five-and ten-year balloon payment
loans.
First Paintsville's current one- to four-family residential ARMs are
fully amortizing loans with contractual maturities of up to 20 years. The
interest rates on substantially all the ARMs originated by First Paintsville are
subject to adjustment at one-year intervals. First Paintsville's ARM products
generally carry interest rates which adjust based on a stated margin over the
one-year U.S. Treasury Constant Maturities Index. Adjustments in the interest
rate of First Paintsville's ARMs are generally limited to 2% at any adjustment
date and 6% over the life of the loan. At March 31, 1996, the total balance of
one- to four-family ARMs was $6.3 million, or 22.3% of First Paintsville's total
loan portfolio.
First Paintsville also offers conventional fixed-rate loans with
maximum terms of up to 20 years, although First Paintsville has recently
emphasized originations of fixed-rate loans with terms to 15 years. The interest
rate on such loans is generally based on competitive factors. First Paintsville
typically retains all fixed rate loans it originates for its portfolio. As a
result, such loans are generally not underwritten to permit their sale in the
secondary market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of First Paintsville -- Asset/ Liability
Management."
First Paintsville evaluates both the borrower's ability to make
principal and interest payments and the value of the property that will secure
the loan. First Paintsville generally originates residential mortgage loans with
loan-to-value ratios up to 80%, although the Board of Directors has authorized
originations of mortgage loans with loan to value ratios up to 100%.
First Paintsville generally requires, in connection with the
origination and purchase of residential real estate loans, a title opinion and
fire and casualty insurance coverage, as well as flood insurance where
appropriate, to protect First Paintsville's interest.
First Paintsville's residential mortgage loans customarily include
"due-on-sale" clauses, which are provisions giving First Paintsville the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not repaid.
Commercial Business Lending. First Paintsville originates secured or
unsecured loans and letters of credit for commercial, corporate, business and
agricultural purposes to local businesses. Such loans are primarily in the form
of fixed asset loans. At March 31, 1996, First Paintsville had $3.9 million of
commercial business loans outstanding, or 13.7% of the total loan
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<PAGE>
portfolio. In addition, on such date, First Paintsville had 22 outstanding
commercial business loan commitments totaling $1.2 million which were not
funded.
First Paintsville's commercial business loans have terms of up to 10
years and typically have rates which adjust monthly based upon a stated margin
over the prime rate.
First Paintsville's commercial business lending policy includes credit
file documentation and analysis of the borrower's character, capacity to repay
the loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of First
Paintsville's current credit analysis.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income, and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself. Further, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
A portion of First Paintsville's commercial business loans consist of
loans secured by agricultural operating equipment (primarily farm equipment,
livestock, crops and farm real estate). These loans are generally originated in
amounts up to 80% of the appraised value of the property. These loans typically
are adjustable rate loans with monthly adjustments. Loans secured by
agricultural operating equipment generally involve a greater degree of risk than
residential mortgage loans. This increased credit risk is a result of several
factors, including the effects of general economic conditions on income
producing property and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by
agricultural operating equipment is typically dependent upon the successful
operation of the related property. If the cash flow from the property is
reduced, the borrower's ability to repay the loan may be impaired. In addition,
farm equipment, livestock and crops serving as collateral for such loans may
depreciate rapidly, may be stolen or may be destroyed or damaged a variety of
ways. The outstanding balance of such agricultural loans was $24,000 at March
31, 1996.
Consumer Lending. In order to increase the interest rate sensitivity of
the loan portfolio and provide a broader range of loan products to its retail
customers, First Paintsville originates a variety of secured and unsecured
consumer loans, including automobile, boat, second mortgage, deposit account,
installment and demand loans and credit card receivables. All of First
Paintsville's consumer loans are originated in its market area. At March 31,
1996, consumer loans totaled $5.8 million, or 20.4% of total loans outstanding.
Consumer loan terms vary according to the type of loan and value of
collateral, length of contract and creditworthiness of the borrower. First
Paintsville's consumer loans are generally made at fixed interest rates, with
terms of up to five years.
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<PAGE>
First Paintsville offers Mastercard credit card accounts. At March 31,
1996, 369 credit card accounts had been issued, with an aggregate outstanding
balance of $269,000 and unused credit available of $528,000. First Paintsville
presently does not charge an annual membership fee for its credit cards. The
annual rate of interest on the credit cards adjusts monthly based upon the prime
rate.
The underwriting standards employed by First Paintsville for consumer
loans include a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Although creditworthiness of
the applicant is of primary consideration, the underwriting process also
includes a comparison of the value of the security in relation to the proposed
loan amount.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loan such as First Paintsville, and a borrower may
be able to assert against such assignee claims and defenses which it has against
the seller of the underlying collateral. Consumer loan delinquencies often
increase over time as the loans age. Accordingly, although the level of
non-performing assets in First Paintsville's consumer loan portfolio are
generally low ($64,000 as of March 31, 1996), there can be no assurance that
delinquencies will not increase in the future.
Commercial Real Estate Lending. In order to increase the interest rate
sensitivity and yield of its loan portfolio, First Paintsville originates
permanent and, to a lesser extent, construction loans secured by commercial real
estate. At March 31, 1996, First Paintsville had $4.1 million in commercial real
estate loans, representing 14.6% of the total loan portfolio.
First Paintsville's commercial real estate loan portfolio includes
loans secured by apartment buildings, nursing homes, churches, office buildings,
farm land and other income producing properties located in its market area.
First Paintsville's permanent commercial real estate loans generally
carry a maximum term of 10 years and have adjustable rates generally based on
the prime rate plus a margin. These loans are generally made in amounts of up to
80% of the lesser of the appraised value or the purchase price of the property,
with a projected debt service coverage ratio of at least 40%. Appraisals on
properties securing commercial real estate loans in excess of $100,000 are
performed by an independent appraiser designated by First Paintsville at the
time the loan is
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made. All appraisals on commercial real estate loans are reviewed by First
Paintsville's management. In addition, First Paintsville's underwriting
procedures require verification of the borrower's credit history, income and
financial statements, banking relationships, references and income projections
for the property. First Paintsville generally obtains personal guarantees on
these loans.
To a lesser extent, First Paintsville originates a limited number of
loans for the construction of commercial real estate. These loans typically have
terms of up to one year and are structured as a line of credit. Following the
construction phase, First Paintsville may provide permanent financing on the
property. Commercial real estate construction loans typically have adjustable
rates of interest. Such loans are typically underwritten based upon the same
standards discussed above. At March 31, 1996, First Paintsville had no
commercial real estate construction loans outstanding.
From time to time, First Paintsville purchases loan participations in
commercial real estate originated by other financial institutions. The
properties securing such loans are generally located in Kentucky. First
Paintsville generally does not purchase a commercial real estate loan with a
balance of greater than 80% of the appraised value. All purchased loan
participations must comply with First Paintsville's underwriting standards.
First Paintsville requires that any appraisal of the property be performed by
independent, professionally designated qualified appraisers, to determine that
the property securing the loan satisfies these loan-to-value requirements. At
March 31, 1996, First Paintsville had $2.3 million of participation interests in
commercial real estate loans.
The table below sets forth, by type of security property, the number
and amount of First Paintsville's commercial real estate loans at March 31,
1996. Substantially all of the loans referred to in the table below are secured
by properties located in the Commonwealth of Kentucky.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
--------- ------------ ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial real estate:
Small business facilities....................................... 8 $ 913 $---
Office buildings................................................ 3 190 ---
Health care facilities.......................................... 3 1,366 ---
Churches........................................................ 1 97 ---
Farm land....................................................... 1 26 ---
Restaurant/hotel................................................ 1 621 ---
Golf course and subdivision..................................... 13 250 2
Other........................................................... 13 250 2
---- ------- ----
Total commercial real estate loans........................... 43 $3,713 $ 4
==== ======= ====
</TABLE>
At March 31, 1996, First Paintsville's largest commercial real estate
loan outstanding was its $621,000 participation interest in a $2.0 million loan
secured by residential lots and a golf course.
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Commercial real estate lending entails a higher level of risk than
loans secured by one-to four-family residences. This greater risk is due to
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project and thus may be subject to a greater extent to adverse
conditions in the real estate market or the economy generally. If the cash flow
from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired.
Construction Lending. First Paintsville originates a modest amount of
construction loans to individuals for the construction of residential real
estate. At March 31, 1996, First Paintsville's construction loan portfolio
totaled $270,000, or 1.0% of its total loan portfolio. All of these loans are
secured by properties located in First Paintsville's market area.
Construction loans to individuals for the construction of their
residences are structured to convert to permanent loans at the end of the
construction phase, which typically runs up to one year. These construction
loans have rates and terms comparable to one- to four-family loans then offered
by First Paintsville, except that during the construction phase, the borrower
pays interest only at a specified margin over the prime rate. The maximum
loan-to-value ratio of owner occupied single-family construction loans is 80%.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans.
First Paintsville's construction loan agreements generally provide that
loan proceeds are disbursed in increments as construction progresses. First
Paintsville reviews the progress of the construction of the dwelling before
disbursements are made.
Construction loans are obtained principally through referrals from
management's contacts in the community as well as existing and walk-in
customers. The application process includes a submission to First Paintsville of
accurate plans, specifications and costs of the home to be constructed. These
items are used as a basis to determine the appraised value of the subject
property. Loans are based on the lesser of current appraised value and/or the
cost of construction (land plus building).
Construction lending generally affords First Paintsville an opportunity
to receive interest at rates higher than those obtainable from permanent
residential loans and to receive higher origination and other loan fees. In
addition, construction loans are generally made with adjustable rates of
interest. Nevertheless, construction lending is generally considered to involve
a higher level of credit risk than one- to four-family residential lending due
to, among other things, the effects of general economic conditions on builders
and cost increases associated with delays in the construction process. In
addition, the nature of these loans is such that they are more difficult to
evaluate and monitor. Finally, the risk of loss on construction loans is
dependent largely upon the accuracy of the initial estimate of the individual
property's value upon completion of the project and the estimated cost
(including interest) of the project. If the cost estimate proves to be
inaccurate, First Paintsville may be required to advance funds beyond the amount
originally committed to permit completion of the project.
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Loan Originations, Purchases and Sales
Real estate loans are originated by an in-house staff of salaried loan
officers. Loan applications are taken and processed in First Paintsville's
offices, and then submitted to the loan or executive committee for approval.
While First Paintsville originates both adjustable-rate and fixed-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market. Demand is also affected by the interest rate
environment. Since First Paintsville originates fixed-rate loans for its
portfolio, such loans are generally not documented to permit their sale in the
secondary market.
First Paintsville has occasionally sold loan participations primarily
without recourse when the loan exceeds First Paintsville's lending limits. Sales
of loans and loan participations generally have been beneficial to First
Paintsville since these sales usually generate income at the time of sale,
produce future servicing income and provide funds for additional lending and
other investments. When loans are sold, First Paintsville typically retains the
responsibility for collecting and remitting loan payments, and otherwise
servicing the loans. First Paintsville receives a servicing fee for performing
these services. The servicing fee is recognized as income over the life of the
loans. First Paintsville services for others mortgage loans that it originated
and sold amounting to approximately $208,000 at March 31, 1996.
From time to time, First Paintsville purchases commercial real estate
loan participations. These participation interests were primarily secured by
properties located in Kentucky. Loan participations were presented to First
Paintsville by contacts at other financial institutions, particularly those
which had previously done business with First Paintsville. Usually, First
Paintsville received written offers from the selling institutions to purchase
participation interests in commercial real estate loans. The loans are then
underwritten in accordance with First Paintsville's standards. The seller
typically continues to service these purchased participations.
Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, First
Paintsville attempts to cause the deficiency to be cured by contacting the
borrower. A notice is mailed to the borrower and First Paintsville imposes late
charges after a payment is 10 days past due. After a payment is 30 days past
due, First Paintsville's collections department will either contact the borrower
by telephone or letter. After a payment is 90 days past due, First Paintsville
sends the borrower a demand letter and a property inspection is ordered. When
deemed appropriate by management and the Board of Directors, First Paintsville
institutes action to foreclose on the property or to acquire it by deed in lieu
of foreclosure. If foreclosed on, real property is sold at a public sale and may
be purchased by First Paintsville. A decision as to whether and when to initiate
foreclosure proceedings is based on such factors as the amount of the
outstanding loan in relation to the original indebtedness and the current value
of the property, the extent of delinquency and the borrower's ability and
willingness to cooperate in curing delinquencies. Generally, when a loan becomes
delinquent 90 days or more, First Paintsville will place the loan on a
non-accrual status and, as a result, previously accrued interest income on the
loan is taken out of current income. Future interest income is recognized on a
cash basis. The loan will
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remain on a non-accrual status as long as the loan is 90 days delinquent, unless
a repayment plan is being followed.
The table below sets forth the amounts and categories of non-performing
assets in First Paintsville's loan portfolio. Loans are placed on non-accrual
status when the collection of principal and/or interest become doubtful. For all
years presented, First Paintsville has had no troubled debt restructurings
(which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates). Foreclosed
assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------------
1996 1995 1994
--------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
Commercial business......................................... $ 50 $ 65 $ 37
One- to four-family......................................... 183 165 135
Commercial real estate...................................... 2 --- ---
------ ------ ------
Total.................................................... 235 230 172
------ ------ ------
Accruing loans delinquent more than 90 days:
Commercial business......................................... 131 59 6
One- to four-family......................................... 135 226 15
Consumer.................................................... 64 125 2
------ ----- ------
Total.................................................... 330 410 23
------ ----- ------
Foreclosed assets:
Commercial business......................................... 321 321 344
Consumer.................................................... --- --- 9
------ ------ ------
Total.................................................... 321 321 353
------ ------ ------
Total non-performing assets................................... $886 $961 $548
==== ==== ====
Total as a percentage of total assets......................... 1.5% 1.6% .8%
==== === ===
</TABLE>
For the year ended December 31, 1995 and for the three months ended
March 31, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $17,000 and $5,700, respectively. No amounts were included in interest income
on such loans for the year ended December 31, 1995, and for the three months
ended March 31, 1996.
As of March 31, 1996, there were $676,000 of loans which were not
included in the table above where known information about the possible credit
problems of borrowers caused management to have serious doubts as to the ability
of the borrower to comply with present loan repayment terms, have certain
deficiencies in loan documentation or lack current financial information on the
borrower which may result in disclosure of such loans in the future.
As of March 31, 1996, there were no concentrations of loans in any
types of industry which exceeded 10% of First Paintsville's total loans, that
are not included as a loan category in the preceding table.
112
<PAGE>
Non-Performing Assets. Included in non-accruing loans at March 31, 1996
were six loans totaling $183,000 secured by one- to four-family real estate
located in First Paintsville's market area, six commercial business loans
totaling $50,000 secured by equipment and inventory and one loan totaling $2,000
secured by commercial real estate. At March 31, 1996, accruing loans delinquent
more than 90 days included five commercial business loans totaling $131,000
secured by equipment and other business assets, three loans secured by one- to
four-family real estate totaling $135,000 and eight consumer loans totaling
$64,000. Foreclosed assets at March 31, 1996 consisted of commercial real estate
located in Paintsville, Kentucky totaling $304,000 described below and eight
acres of land totaling $17,000. This eight-acre property was sold subsequent to
March 31, 1996 for $45,000.
In November 1988, First Paintsville originated a $180,000 loan to a
local business secured by 200 acres of land used for strip mining coal. The
borrower utilized the property for mining and leased a portion of the property
to an unrelated party which established a coal preparation plant on the
property. From November 1988 to April 1991, First Paintsville had three
additional loans to the same borrower totaling $261,000 which were secured by
this property. In October 1993, the borrower declared bankruptcy and First
Paintsville acquired the property through foreclosure. Such property had a book
value of $344,000 and an appraised value of $350,000 on the date of foreclosure.
Based upon annual appraisals received since First Paintsville acquired the
property additional writedowns of $40,000 were incurred related to this
property. The property is currently being marketed as a commercial property. At
March 31, 1996, the property had a book value of $304,000.
Classified Assets. Federal regulations require that each national bank
classify its own assets on a regular basis. In addition, in connection with
examinations of national banks, OCC and FDIC examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: "substandard," "doubtful" or
"loss." An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the national bank will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the national bank to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses,
are required to be designated "Special Mention" by management.
When a national bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a national bank classifies problem assets as
"loss," it is required either to establish a specific allowance for losses equal
to 100% of that portion of the asset so classified or to charge-off such amount.
A national bank's determination
113
<PAGE>
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OCC's examination staff who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OCC and
in accordance with its classification of assets policy, First National Bank
regularly reviews the assets in its portfolio to determine whether any assets
require classification in accordance with applicable regulations. On the basis
of management's review of its assets, at March 31, 1996, First National Bank had
classified a total of $962,000 of its assets as substandard, $35,000 as doubtful
and $4,000 as loss. In addition, First National Bank had $561,000 of assets
classified as special mention.
Allowance for Loan Losses and Real Estate
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan activity. Such
evaluation, which includes a review of all loans of which full collectibility
may not be reasonably assured, considers among other matters, the nature and
volume of the loan portfolio, overall portfolio quality, the estimated fair
value of the underlying collateral, current economic conditions, historical loan
loss experience and other factors that warrant recognition in providing for an
adequate loan allowance.
Real estate properties acquired through foreclosure are recorded at
fair value at the date of foreclosure. Valuations are periodically updated by
management and a specific provision for losses on such property is established
by a charge to operations if the carrying value of the property exceeds its
estimated fair value.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to First Paintsville's allowance will be the
result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. At March 31, 1996, First Paintsville had a total allowance
for loan losses of $405,000, or 1.4% of total loans.
114
<PAGE>
The following table sets forth an analysis of First Paintsville's
allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended -----------------------
March 31,1996 1995 1994
------------------ ------ ------
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at beginning of period................................ $447 $301 $274
---- ---- ----
Charge-offs:
Commercial business......................................... 33 10 16
One- to four-family......................................... --- 1 6
Consumer.................................................... 15 71 54
----- ---- ----
48 82 76
----- ---- ----
Recoveries:
Commercial business......................................... 3 6 ---
One- to four-family......................................... --- 1 3
Consumer.................................................... 3 52 100
----- ---- ----
6 59 103
----- ---- ----
Net (charge-offs)/recoveries.................................. (42) (23) 27
Additions charged to operations............................... --- 169 2
----- ---- -----
Balance at end of period...................................... $405 $447 $303
==== ==== ====
Ratio of net charge-off/recoveries during the period to
average loans outstanding during the period................... .2% .1% .1%
== == ==
Ratio of net charge-off/recoveries during the period to
average non-performing assets................................. 3.8% 2.9% 4.2%
=== === ===
</TABLE>
The distribution of First Paintsville's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
March 31, 1996 1995 1994
------------------------------ -----------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Amount Loan in Each Amount Loan in Each Amount Loan in Each
of Loan Amounts Category of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial business....... $ 85 $ 3,888 13.7% $ 26 $ 3,577 13.0% $ 9 $ 3,963 16.5%
Agricultural and other ---
commercial real estate.. --- 24 .1 --- 58 .2 74 .3
One- to four-family....... 52 14,211 50.2 45 13,892 50.6 15 12,554 52.3
Commercial real estate.... --- 4,142 14.6 --- 3,696 13.4 --- 2,294 9.5
Construction.............. --- 270 1.0 --- 277 1.0 --- 302 1.3
Consumer.................. 9 5,762 20.4 8 5,967 21.8 10 4,837 20.1
Unallocated............... 259 --- --- 368 --- --- 267 --- ---
------- ------- ----- ------- ------- ----- ------- ------- -----
Total................ $ 405 $28,297 100.0% $ 447 $27,467 100.0% $ 301 $24,024 100.0%
======= ======= ===== ======= ======= ===== ======= ======= =====
</TABLE>
115
<PAGE>
Investment Activities
General. First Paintsville utilizes mortgage-backed and other
securities in virtually all aspects of its asset/liability management strategy.
In making investment decisions, the Board of Directors considers, among other
things, First Paintsville's yield and interest rate objectives, its interest
rate and credit risk position and its liquidity and cash flow.
Generally, the investment policy of First Paintsville is to invest
funds among categories of investments and maturities based upon First
Paintsville's asset/liability management policies, investment quality, loan and
deposit volume, liquidity needs and performance objectives. Effective January 1,
1994, First Paintsville adopted SFAS No. 115. As required by SFAS No. 115,
securities are classified into three categories: trading, held to maturity and
available for sale. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and are reported at fair value with unrealized gains and losses included in
earnings. Debt securities that First Paintsville has the positive intent and
ability to hold to maturity are classified as held to maturity and reported at
amortized cost. All other securities not classified as trading or held to
maturity are classified as available for sale. Available-for-sale securities are
reported at fair value with unrealized gains and losses included, on an
after-tax basis, in a separate component of equity.
During December 1995, First Paintsville made a one-time transfer of
$26.5 million of investment securities from its held-to-maturity to
available-for-sale portfolio, as allowed under the Financial Accounting Series
Special Report, "A Guide to Implementation of Statement 115," issued in November
1995. The investments were transferred at fair value at the date of transfer.
The unrealized gain on transfer is included in the net change in unrealized gain
on securities available for sale in the statements of stockholders' equity. See
Note 2 of the Notes to Consolidated Financial Statements of First Paintsville.
At March 31, 1996, First Paintsville had no securities classified as
trading. At March 31, 1996, all of First Paintsville's mortgage-backed and other
securities were classified as available for sale.
First Paintsville's assets, other than loans receivable, are invested
primarily in United States government agency securities, municipal bonds and
other short-term investments, including federal funds sold. At March 31, 1996,
First Paintsville's interest-bearing deposits in other financial institutions
totaled $6,000, or 0.01% of its total assets, federal funds sold totaling $4.7
million, or 8.0% of its total assets, and investment securities totaled $17.7
million, or 29.9% of its total assets. On the same date First Paintsville's
mortgage-backed securities totaled $3.9 million or 6.6% total assets.
116
<PAGE>
The following table sets forth the composition of First Paintsville's
investment and mortgage-backed securities, excluding FHLB and Federal Reserve
Bank stock, at the dates indicated. At December 31, 1994, all investment and
mortgage-backed securities were held to maturity. At December 31, 1995 and March
31, 1996, all investment and mortgage-backed securities are available for sale.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
March 31, 1996 1995 1994
--------------------- -------------------- ---------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government securities....................... $ --- ---% $ --- ---% $ 1,997 6.0%
Federal agency obligations....................... 17,308 97.7 21,922 98.1 30,926 92.1
Municipal bonds.................................. 415 2.3 423 1.9 407 1.2
Other debt securities............................ --- --- --- --- 250 .7
------- ----- ------- ----- ------- -----
Total investment securities................... $17,723 100.0% $22,345 100.0% $33,580 100.0%
======= ===== ======= ===== ======= =====
2.7 years
Average remaining life of investment securities....1.9 years 1.6 years
Other interest-earning assets:
Interest-bearing deposits with banks............. $ 6 .1% $ 6 100.0% $ --- ---%
Federal funds sold............................... 4,725 99.9 --- --- 1,240 100.0
------- ----- ------- ----- ------- -----
Total......................................... $4,731 100.0% $ 6 100.0% $1,240 100.0%
====== ===== ======= ===== ====== =====
Mortgage-backed securities:
Government National Mortgage Association
("GNMA")........................................ $1,798 46.4% $1,876 45.4% $2,000 44.4%
FNMA and FHLMC................................... 2,081 53.6 2,257 54.6 2,503 55.6
------- ----- ------- ----- ------ -----
Total mortgage-backed securities.............. $3,879 100.0% $4,133 100.0% $4,503 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Investment Securities. It is First Paintsville's general policy to
purchase investment securities which are U.S. Government or agency securities,
municipal securities and overnight federal funds. At March 31, 1996, the average
term to maturity or repricing of the investment securities portfolio was 1.9
years.
First Paintsville's investment securities portfolio at March 31, 1996
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of First Paintsville's stockholders'
equity, excluding those issued by the United States Government agencies.
117
<PAGE>
The composition and maturities of the First Paintsville's investment
securities portfolio are indicated in the following table.
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------------------------------
1 Year Over 1 to Over 5 to Over
or Less 5 Years 10 Years 10 Years Total Investment Securities
---------- ---------- ---------- ---------- ---------------------------
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal agency obligations....... $7,996 $8,542 $1,000 $ --- $17,538 $17,308
Municipal bonds.................. 10 18 200 165 393 415
------- ------- ------- ---- -------- --------
Total investment securities...... $8,006 $8,560 $1,200 $165 $17,931 $17,723
====== ====== ====== ==== ======= =======
Weighted average yield........... 5.2% 5.3% 6.1% 6.6% 5.3% 5.4%
</TABLE>
Mortgage-Backed Securities. In order to supplement loan production and
achieve its asset/liability management goals, First Paintsville invests in
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings and, through repayments, as a source of liquidity. First
Paintsville had a portfolio of mortgage-backed securities totaling $3.9 million
at March 31, 1996. All of the mortgage-backed securities owned by First
Paintsville at March 31, 1996 were issued, insured or guaranteed either directly
or indirectly by a federal agency. As of March 31, 1996, First Paintsville did
not have any mortgage-backed securities of a single issuer in excess of 10% of
First Paintsville's equity, except for federal agency obligations.
The following table sets forth the contractual maturities of First
Paintsville's mortgage-backed securities at March 31, 1996.
<TABLE>
<CAPTION>
Due in
-------------------------------------- March 31,1996
1 Year Over 1 Year Over 5 Balance
or Less to 5 Years Years Outstanding
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
FHLMC................................................ $--- $--- $ 56 $ 56
FNMA................................................. --- --- 2,025 2,025
GNMA --- --- 1,798 1,798
--- ---- ------ ------
Total........................................... $--- $--- $3,879 $3,879
==== ==== ====== ======
</TABLE>
Sources of Funds
General. Deposit accounts are the principal source of First
Paintsville's funds for use in lending and for other general business purposes.
In addition to deposits, First Paintsville derives funds from loan repayments
and cash flows generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related cost of such funds have varied. Borrowings may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit inflows at
less than projected levels and may be used on a longer term basis to support
expanded lending activities.
Deposits. First Paintsville attracts both short-term and long-term
deposits from First Paintsville's primary market area. First Paintsville offers
regular passbook accounts, NOW
118
<PAGE>
accounts, money market deposit and checking accounts, fixed interest rate
certificates of deposit with varying maturities, and certificates of deposit.
Deposit account terms vary, according to the minimum balance required, the time
period the funds must remain on deposit and the interest rate, among other
factors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, competition
and First Paintsville's pricing policies and capital requirements.
First Paintsville serves as a depository for public funds for various
municipalities and related entities. At March 31, 1996, the amount of public
funds on deposit with First Paintsville was $1.4 million. These accounts are
subject to volatility depending on government funding needs and First
Paintsville's desire to attract such funds.
First Paintsville regularly evaluates the internal cost of funds,
surveys rates offered by competing institutions, reviews its cash flow
requirements for liquidity and executes rate changes when deemed appropriate.
First Paintsville utilizes newspaper advertising and pricing to obtain deposits.
First Paintsville only solicits deposits in its market area. First Paintsville
does not utilize brokered deposits.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the First Paintsville as of the
dates indicated.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------
As of March 31, 1996 1995 1994
----------------------- ------------------------ -----------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ----------- ------- ----------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings Deposits:
- -----------------
Savings Accounts -3.0%(1).............. $ 9,426 18.2% $ 9,984 19.4% $11,531 18.9%
Money Market - 2.7%(1) and NOW
Accounts - 2.5%(1)................ 11,802 22.7 10,899 21.1 18,936 31.1
Demand Accounts........................ 7,369 14.2 7,169 13.9 9,113 15.0
------- ---- ------- ---- ------- -----
Total Savings Deposits............ $28,597 55.1% $28,052 54.4% $39,580 65.0%
======= ==== ======= ==== ======= =====
Certificates:
- -------------
0.00 - 4.00%.......................... 1,909 3.7 2,549 5.0 14,924 24.5%
4.01 - 6.00%.......................... 17,357 33.4 16,769 32.5 6,231 10.2
6.01 - 8.00%.......................... 4,048 7.8 4,195 8.1 191 .3
8.01 - 10.00%.......................... --- --- --- --- --- ---
------- ---- ------- ---- ------- -----
Total Certificates................ 23,314 44.9 23,513 45.6 21,346 35.0
------- ----- ------- ----- ------- -----
Total Deposits................ $51,911 100.0% $51,565 100.0% $60,926 100.0%
======= ===== ======= ===== ======= =====
- ---------------
(1) Interest rate offered at March 31, 1996.
</TABLE>
119
<PAGE>
The following table indicates the amount of First Paintsville's
certificates of deposit and other deposits by time remaining until maturity as
of March 31, 1996.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- ------- ------- --------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $5,460 $4,946 $4,206 $3,875 $18,487
Certificates of deposit of $100,000 or more...... 1,667 625 1,514 601 4,407
Public funds (1)................................. 230 140 50 --- 420
------ ------ ------ ------ -------
Total certificates of deposit................ $7,357 $5,711 $5,770 $4,476 $23,314
====== ====== ====== ====== =======
- --------------------------
(1) Deposits from governmental and other public entities.
</TABLE>
Borrowings. First Paintsville's borrowings include treasury tax and
loan notes, notes payable, federal funds and advances from the FHLB of
Cincinnati.
National banks, such as First National Bank, are authorized to borrow
from the Federal Reserve Bank's "discount window." At March 31, 1996, First
National Bank had no borrowings from the Federal Reserve Bank of Cleveland.
As a member of the FHLB of Cincinnati, First National Bank is required
to own capital stock in the FHLB of Cincinnati and is authorized to apply for
advances from the FHLB of Cincinnati. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The FHLB
of Cincinnati may prescribe the acceptable uses to which these advances may be
put, as well as limitations on the size of the advances and repayment
provisions. Federal law requires that all long-term FHLB advances be for the
purpose of financing residential housing and members must meet community lending
standards, to be established by regulation, in order to have continued access to
long-term FHLB advances. First Paintsville does not expect that these
limitations will have a significant impact on its access to FHLB advances.
From time to time, First Paintsville also utilizes repurchase
agreements with individuals and borrowings from other financial institutions. At
March 31, 1996, First Paintsville had $722,000 of 8 1/4% of notes payable to a
local community bank. The funds from such notes were used to repurchase
debentures outstanding and to repurchase stock of First Paintsville. Such notes
are due to mature in December 2004 and will be assumed by Classic in connection
with the Merger.
120
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of securities sold under agreements to repurchase and other
borrowings for the periods indicated.
<TABLE>
<CAPTION>
Three months ended March 31 Year Ended December 31,
----------------------------- -------------------------
1996 1995 1995 1994
----------- ----------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Maximum Balance:
Repurchase agreements..................... $ --- $ --- $1,000 $ ---
Other borrowings:
Treasury tax and loan note............. 456 591 997 639
Notes payable.......................... 735 797 797 782
Debentures............................. --- 29 29 437
FHLB borrowings........................ --- 800 800 ---
Federal funds purchased................ --- --- --- ---
Average Balance:
Repurchase agreements..................... $ --- $ --- $ 253 $ ---
Other borrowings:
Treasury tax and loan note............. 208 313 328 314
Notes payable.......................... 735 797 779 112
Debentures............................. --- 28 7 427
FHLB borrowings........................ --- 466 135 ---
Federal funds purchased................ --- 23 5 ---
</TABLE>
The following table sets forth certain information as to First
Paintsville's borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------------
1996 1995 1994
------ ------ ------
(Dollars In Thousands)
<S> <C> <C> <C>
Repurchase agreements............................................ $ --- $ --- $ ---
Other borrowings:
Treasury tax and loan note.................................. 456 157 246
Notes payable............................................... 722 735 782
Debentures.................................................. --- --- 67
-------- ---------- --------
Total borrowings............................................ $ 1,178 $ 892 $ 1,095
======= ======== =======
Weighted average interest rate of repurchase agreements.......... ---% 5.9% ---%
Weighted average interest rate of other borrowings............... 7.0% 7.8% 7.3%
</TABLE>
Trust Services
In order to generate fee income and provide a broad range of services
to its customers, First Paintsville provides a variety of trust services to its
customers. Such services include managing and investing trust assets, disbursing
funds as required by trust agreements and arranging for maintenance at two local
cemeteries.
121
<PAGE>
For the fiscal year ended December 31, 1995 and the three months ended
March 31, 1996, income from trust services totaled approximately $2,000 and
$1,000, respectively.
Competition
First Paintsville faces strong competition in originating loans and in
attracting deposits. Competition in originating loans comes primarily from other
commercial banks, thrift institutions and mortgage bankers who also make loans
secured by real estate located in First Paintsville's primary market area. First
Paintsville competes for loans principally on the basis of the interest rates
and loan fees it charges, the types of loans it originates and the quality of
service it provides to borrowers.
First Paintsville faces substantial competition in attracting deposits
from other commercial banks, thrift institutions, money market and mutual funds,
credit unions and other investment vehicles. The ability of First Paintsville to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. First Paintsville competes for these deposits
by offering a variety of deposit accounts at competitive rates and convenient
business hours.
First Paintsville considers its primary market area to be Johnson
County, Kentucky and portions of Martin, Floyd, Magoffin and Lawrence Counties,
Kentucky. At March 31, 1996, there were approximately four financial
institutions with offices in Johnson County. First Paintsville estimates that
its market share in Johnson County of savings deposits is 25%.
Employees
At March 31, 1996, First Paintsville and First National Bank had a
total of 33 full-time and two part-time employees. None of First Paintsville's
employees are represented by any collective bargaining group. Management
considers its employee relations to be good.
Subsidiary Activities
First Paintsville has no direct subsidiaries other than First National
Bank.
A national bank, such as First National Bank may invest unlimited
amounts in subsidiaries that are engaged in activities in which the parent bank
may engage. In addition, a national bank may invest limited amounts in
subsidiaries that provide banking services, such as data processing, to other
financial institutions. At March 31, 1996, First National Bank had no
subsidiaries.
122
<PAGE>
Description of Property
The following table sets forth information at March 31, 1996 with
respect to the property owned by First Paintsville and First National Bank.
<TABLE>
<CAPTION>
Owned or Gross Net Book Value of Land,
Year Leased/ Square Buildings, Improvements,
Location Acquired Expiration Footage Furniture and Fixtures
- ------------------------------- -------- ----------- ------- ------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office
240 Main Street 1933 Owned 8,400 $470
Paintsville, Kentucky
Branch Office
602 South Mayo Trail 1971 Owned 2,200 102
Paintsville, Kentucky
Administrative Office
404 Euclid Avenue(1) 1994 Owned 6,700 211
Paintsville, Kentucky ----
Total $783
====
- -------------
(1) Approximately 45% of this building is leased to an unaffiliated party.
Rental income from this property is approximately $20,000 per year.
</TABLE>
Legal Proceedings
First Paintsville and First National Bank are, from time to time,
parties to certain legal proceedings arising in the ordinary course of business.
First Paintsville and First National Bank believe that none of these proceedings
would, if adversely determined, have a material adverse effect on financial
condition.
123
<PAGE>
REGULATION
General
Ashland Federal is a federally chartered savings association, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Classic is subject to broad
federal regulation and oversight extending to all its operations. Ashland
Federal is a member of the FHLB of Cincinnati and is subject to certain limited
regulation by the Federal Reserve Board. As the savings and loan holding company
of Ashland Federal, Classic also is subject to federal regulation and oversight.
The purpose of the regulation of Classic and other holding companies is to
protect subsidiary savings associations. Ashland Federal is a member of the SAIF
and the deposits of Classic are insured by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over Classic. This regulatory
oversight by the OTS will continue to apply to Ashland Federal and Classic
following consummation of the Merger.
First National Bank is a national bank and its deposit accounts are
insured by the BIF of the FDIC. As a national bank, First National Bank is
required to file reports with the OCC concerning its activities and financial
condition and is required to obtain regulatory approvals prior to entering into
certain transactions, including mergers with, or acquisitions of, other
depository institutions. As a national bank, First National Bank is a member of
the Federal Reserve System. Upon consummation of the Merger, the deposits of
First National Bank will continue to be insured by the BIF, and, as such, First
National Bank will continue to be subject to regulation and supervision by the
OCC and the FDIC. As the bank holding company of First National Bank, First
Paintsville is subject to supervision, examination and regulation by the OCC and
to OCC regulations governing such matters as capital standards, mergers,
establishment of branch offices, subsidiary investments and activities and
general investment authority, and is subject to the FDIC's authority to conduct
special examinations.
In connection with the Merger, Classic will register with the Federal
Reserve Board as a bank holding company under the Bank Holding Company Act. As a
bank holding company, Classic will be subject to the same requirements and
restrictions applicable to First Paintsville.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Ashland Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of Ashland Federal were
as of June 30, 1995 and April 13, 1993, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require Ashland Federal to provide for higher general or specific
loan loss reserves. All savings associations are subject to a semi-annual
assessment, based upon the savings
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association's total assets, to fund the operations of the OTS. Ashland Federal's
OTS assessment for the fiscal year ended March 31, 1996, was $21,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Ashland Federal and Classic.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of Ashland
Federal is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. Ashland Federal is in compliance with the noted
restrictions. First National Bank is able to branch only within the county in
which its principal office is located. See "--Interstate Banking and Branching"
for restrictions applicable to interstate branching by First National Bank.
Ashland Federal's general permissible lending limit for loans to one
borrower is equal to the greater of $500,000 or 15% of unimpaired capital and
surplus (except for loans fully secured by certain readily marketable
collateral, in which case this limit is increased to 25% of unimpaired capital
and surplus). At March 31, 1996, Ashland Federal's lending limit under this
restriction was $2.0 million. On such date, Ashland Federal was in compliance
with the loans-to-one-borrower limitation. These percentage limitations also
apply to First National Bank. At March 31, 1996, First National Bank's lending
limit was $1.0 million. On such date, First National Bank was in compliance with
this limit.
The OTS, as well as other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted. First National Bank is subject to substantially
similar guidelines adopted by the OCC.
Insurance of Accounts and Regulation by the FDIC
Ashland Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance
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premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core or Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
In light of the BIF achieving its statutory reserve ratio, the FDIC revised the
premium schedule for BIF-insured institutions to provide a range of 0% to .27%
of deposits, with an annual statutory minimum payment of $2,000. As a result,
such institutions will generally pay lower premiums. The revisions became
effective in January 1996.
The SAIF is not expected to attain the designated reserve ratio until
the year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members will generally
be subject to higher deposit insurance premiums than BIF members until, all
things being equal, the SAIF attains the required reserve ratio.
The effect of this disparity on Ashland Federal and other SAIF members
is uncertain at this time. It may have the effect of permitting BIF-insured
institutions, such as First National Bank, to offer loan and deposit products on
more attractive terms than SAIF members due to the cost savings achieved through
lower deposit premiums, thereby placing SAIF members at
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a competitive disadvantage. In order to eliminate this disparity a number of
proposals to recapitalize the SAIF have been recently considered by the United
States Congress. The plan currently under consideration in the Congress provides
for a one-time assessment of .80% to .90% to be imposed on all deposits assessed
at the SAIF rates, as of March 31, 1995, including those held by commercial
banks, and for BIF deposit insurance premiums to be used to pay the FICO bond
interest on a pro rata basis together with SAIF premiums. The BIF and SAIF would
be merged into one fund as soon as practicable, but no later than January 1,
1998. There can be no assurance that any particular proposal will be implemented
or that premiums for either BIF or SAIF members will not be adjusted in the
future by the FDIC or by legislative action.
The FDIC has promulgated regulations implementing limitations on
brokered deposits pursuant to the requirements of federal law. Under the FDIC
regulations, well-capitalized institutions (generally defined as an institution
with a 5% or greater core capital ratio, a 6% or greater Tier 1 risk-based
capital and a 10% or greater risk-based capital ratio) are not subject to any
brokered deposit limitations, while adequately capitalized institutions are able
to accept, renew or roll over brokered deposits only (i) with a waiver from the
FDIC and (ii) subject to the limitation as to all such deposits that they do not
pay an effective yield which exceeds by more than (a) 75 basis points the
effective yield paid on deposits of comparable size and maturity in such
institution's normal market area for deposits accepted in its normal market area
or (b) 120% for retail deposits and 130% for wholesale deposits, respectively,
the current yield on comparable maturity U.S. Treasury obligations for deposits
accepted outside the institution's normal market area. Undercapitalized
institutions are not permitted to accept brokered deposits, and may not solicit
any deposits by offering any effective yield that exceeds by more than 75 basis
points the prevailing effective yields on insured deposits of comparable
maturity in the institution's normal market area or in the market area in which
such deposits are being solicited. At March 31, 1996, the Bank qualified as a
well capitalized institution and, as a result, was not subject to regulatory
restrictions on the level of its brokered deposits.
Regulatory Capital Requirements of Federal Savings Associations
Federally insured savings associations, such as Ashland Federal, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 1996, Classic did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries
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engaged solely in activities permissible for national banks or engaged in
certain other activities solely as agent for its customers are "includable"
subsidiaries that are consolidated for capital purposes in proportion to
Classic's level of ownership. For excludable subsidiaries the debt and equity
investments in such subsidiaries are deducted from assets and capital. The
subsidiary of Ashland Federal is an includable subsidiary.
At March 31, 1996, Ashland Federal had tangible capital of $13.0
million, or 21.5% of adjusted total assets, which is approximately $12.0 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At March 31, 1996, Ashland
Federal had no intangibles which were subject to these tests.
At March 31, 1996, Ashland Federal had core capital equal to $13.0
million, or 21.5% of adjusted total assets, which is $11.2 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At March 31, 1996, Ashland Federal
had no capital instruments that qualify as supplementary capital and $286,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Ashland Federal had one
loan totaling $84,000 which was required to be excluded from capital and assets
at March 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
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The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS completes its
evaluation of newly adopted procedures by which savings associations may appeal
an interest rate risk deduction determination. Any savings association with less
than $300 million in assets and a total capital ratio in excess of 12% is exempt
from this requirement unless the OTS determines otherwise. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Classic - Asset/Liability Management."
On March 31, 1996, Ashland Federal had total capital of $13.2 million
(including $13.0 million in core capital and $286,000 in qualifying
supplementary capital) and risk-weighted assets of $27.8 million or total
capital of 47.1% of risk-weighted assets. This amount was $11.0 million above
the 8% requirement in effect on that date.
Regulatory Capital Requirements of National Banks
First National Bank is subject to the capital regulations of the OCC.
The OCC's regulations establish two capital standards for national banks: a
leverage requirement and a risk-based capital requirement. In addition, the OCC
may, on a case-by-case basis, establish individual minimum capital requirements
for a national bank that vary from the requirements which would otherwise apply
under OCC regulations. A national bank that fails to satisfy the capital
requirements established under the OCC's regulations will be subject to such
administrative action or sanctions as the OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMEL rating system for banks. National banks not rated composite 1
under the CAMEL rating system for banks are required to maintain a minimum ratio
of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level
and nature of risks of their operations. For purposes of the OCC's leverage
requirement, Tier 1 capital generally consists of the same components as core
capital under the OTS's capital regulations, except that no intangibles, other
than certain purchased mortgage servicing rights, and purchased credit card
receivables may be included in capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital" (as described below), provided that the amount of Tier 2
capital may not exceed the amount of Tier 1 capital, less certain assets. The
components of Tier 2 capital under the OCC's regulations generally correspond to
the components of supplementary capital under OTS regulations. Total
risk-weighted assets generally are determined under the OCC's
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regulations in the same manner as under the OTS's regulations. At March 31,
1996, First National Bank was in compliance with its capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of First Paintsville - Liquidity and Capital Resources" for
additional information regarding First National Bank's compliance with its
capital requirements.
The OCC has revised its risk-based capital requirements to permit the
OCC to require higher levels of capital for an institution in light of its
interest rate risk. In addition, the OCC has proposed that a bank's interest
rate risk exposure would be quantified using either the measurement system set
forth in the proposal or the institution's internal model for measuring such
exposure, if such model is determined to be adequate by the institution's
examiner. Small institutions that are highly capitalized and have minimal
interest rate risk, such as First National Bank, would be exempt from the rule
unless otherwise determined by the OCC. Management of First National Bank has
not determined what effect, if any, the OCC's proposed interest rate risk
component would have on First National Bank's capital if adopted as proposed.
Prompt Corrective Action
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
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The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Ashland Federal may have a substantial adverse effect on such Bank's operations
and profitability and the value of Classic's common stock. Company shareholders
do not have preemptive rights, and therefore, if Classic is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of current stockholders of
Classic.
The OCC has the authority to enforce such requirements against First
National Bank.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions or requirements on
associations with respect to their ability to pay dividends or make other
distributions of capital. OTS regulations prohibit an association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result,
the regulatory capital of the association would be reduced below the amount
required to be maintained for the liquidation account established in connection
with its mutual to stock conversion.
Generally, savings associations, such as Ashland Federal, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Ashland Federal
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income
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to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
First National Bank's ability to pay dividends is governed by the
National Bank Act and OCC regulations. Under such statute and regulations, all
dividends by a national bank must be paid out of current or retained net
profits, after deducting reserves for losses and bad debts. The National Bank
Act further restricts the payment of dividends out of net profits by prohibiting
a national bank from declaring a dividend on its shares of common stock until
the surplus fund equals the amount of capital stock or, if the surplus fund does
not equal the amount of capital stock, until one-tenth of First National Bank's
net profits for the preceding half year in the case of quarterly or semi-annual
dividends, or the preceding two half-year periods in the case of annual
dividends, are transferred to the surplus fund. In addition, the prior approval
of the OCC is required for the payment of a dividend if the total of all
dividends declared by a national bank in any calendar year would exceed the
total of its net profits for the year combined with its net profits for the two
preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, First National Bank would be prohibited by
federal statute and the OCC's prompt corrective action regulations from making
any capital distribution if, after giving effect to the distribution, First
National Bank would be classified as "undercapitalized" under the OCC's
regulations. See "--Prompt Corrective Action."
Liquidity
All savings associations, including Ashland Federal, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. For a discussion of what is included in
liquid assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Classic -- Liquidity and Capital Resources." This
liquid asset ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all savings
associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At March 31, 1996, Ashland Federal was in compliance with
both requirements, with an overall liquid asset ratio of 5.1% and a short-term
liquid assets ratio of 3.8%.
National banks are not subject to any prescribed liquidity
requirements.
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Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. Ashland Federal is in compliance with
these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
First National Bank is subject to similar requirements.
Qualified Thrift Lender Test
All savings associations, including Ashland Federal, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At March 31, 1996, Ashland Federal met the test and has always met
the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "-- Holding Company Regulation."
The QTL requirements do not apply to national banks.
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution, including Ashland Federal and First National Bank, has a continuing
and affirmative obligation
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consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low- and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the appropriate Federal
regulator, in connection with the examination of an insured institution, to
assess the institution's record of meeting the credit needs of its community and
to take such record into account in its evaluation of certain applications, such
as a merger or the establishment of a branch, by Ashland Federal or First
National Bank. An unsatisfactory rating may be used as the basis for the denial
of an application by the OTS or the OCC.
The federal banking agencies, including the OTS and the OCC, recently
revised the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Ashland Federal and First National Bank may be required
to devote additional funds for investment and lending in its local community.
Ashland Federal was examined for CRA compliance in May 1996 and received a
satisfactory rating. First National Bank was examined for CRA compliance in
November 1993 and received a needs to improve rating.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Ashland Federal include Classic and any
company which is under common control with Ashland Federal. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. Ashland Federal's subsidiary is not deemed an affiliate, however;
the OTS has the discretion to treat a subsidiary of savings associations as an
affiliate on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
First National Bank is subject to virtually identical rules on
transactions with affiliates and loans to Insiders.
Holding Company Regulation
Classic is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, Classic is registered and files
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over Classic and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
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As a unitary savings and loan holding company, Classic generally is not
subject to activity restrictions. If Classic acquires control of another savings
association as a separate subsidiary, it would become a multiple savings and
loan holding company, and the activities of Classic and any of its subsidiaries
(other than Ashland Federal or any other SAIF-insured savings association) would
become subject to such restrictions unless such other associations each qualify
as a QTL and were acquired in a supervisory acquisition.
If Ashland Federal fails the QTL test, Classic must obtain the approval
of the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure Classic must register as, and will become subject to,
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "-- Qualified
Thrift Lender Test."
Classic must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of Classic is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Classic is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of Classic may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
Classic meets specified current public information requirements, each affiliate
of Classic is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain noninterest-bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At March 31, 1996, Ashland Federal and First National Bank were in compliance
with these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements that may be imposed by the OTS. See "-- Liquidity."
Savings associations such as Ashland Federal are authorized to borrow
from the Federal Reserve Bank "discount window," but Federal Reserve Board
regulations require associations to exhaust other reasonable alternative sources
of funds, including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
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As a national bank, First National Bank is a member of the Federal
Reserve System and owns stock in the Federal Reserve Bank of Cleveland in an
amount equal to 3% of First National Bank's paid in capital and surplus (an
additional 3% will be subject to call by the Federal Reserve Bank of Cleveland).
At March 31, 1996, First National Bank was in compliance with this requirement.
Federal Home Loan Bank System
Ashland Federal and First National Bank are members of the FHLB of
Cincinnati, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, Ashland Federal and First National Bank are required to
purchase and maintain stock in the FHLB of Cincinnati. At March 31, 1996,
Ashland Federal had $621,000 in FHLB stock, which was in compliance with this
requirement. On the same date, First National Bank had $219,000 in FHLB stock.
In past years, Ashland Federal and First National Bank have received substantial
dividends on its FHLB stock. Over the past five fiscal years such dividends paid
to Ashland Federal have averaged 5.6% and were 5.9% for fiscal year 1996.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Ashland Federal's FHLB stock may result in a corresponding
reduction in Ashland Federal's capital.
For the fiscal year ended March 31, 1996, dividends paid by the FHLB of
Cincinnati to Ashland Federal totaled $41,000, which constitute a $8,000
increase over the amount of dividends received in fiscal year 1995.
Change in Control Regulations
For three years following Ashland Federal's conversion to stock form,
federal regulations prohibit any person, without the prior approval of the OTS,
from acquiring or making an offer to acquire (if the offer is opposed by the
savings association) more than 10% of the stock of any converted savings
institution if such person is, or after consummation of such acquisition would
be, the beneficial owner of more than 10% of such stock. In the event that any
person, directly or indirectly, violates this regulation, the securities
beneficially owned by such person in excess
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of 10% may not be counted as shares entitled to vote and may not be voted by any
person or counted as voting shares in connection with any matter submitted to a
vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF-insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
The Change in Bank Control Act (the "CIBC"), the Bank Holding Company
Act and the regulations of the Federal Reserve Board promulgated under those
acts, require that the consent of the Federal Reserve Board be obtained prior to
any person or company acquiring "control" of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires more than
25% of any class of voting stock of a bank holding company. Control is
rebuttably presumed to exist if the person acquires 10% or more of any class of
voting stock of a bank holding company if either (i) the bank holding company
has registered securities under Section 12 of the Exchange Act or (ii) no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure to rebut
the rebuttable control presumption. Since Classic's Common Stock is registered
under Section 12 of the Exchange Act, any acquisition of 10% or more of
Classic's Common Stock will give rise to a rebuttable presumption that the
acquiror of such stock controls Classic, requiring the acquiror, prior to
acquiring such stock, to rebut the presumption of control
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to the satisfaction of the Federal Reserve Board or obtain Federal Reserve Board
approval for the acquisition of control.
Additional Regulation of Classic Following the Merger
General. Upon consummation of the Merger, Classic, as the sole
shareholder of First National Bank, will become a bank holding company and will
register as such with the Federal Reserve Board. Bank holding companies are
subject to comprehensive regulation by the Federal Reserve Board under the Bank
Holding Company Act, and the regulations of the Federal Reserve Board. As a bank
holding company, Classic will be required to file reports with the Federal
Reserve Board and such additional information as the Federal Reserve Board may
require, and will be subject to regular examinations by the Federal Reserve
Board. The Federal Reserve Board also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulations and unsafe or unsound practices.
Under Federal Reserve Board policy, a bank holding company must serve
as a source of strength for its subsidiary banks. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the Bank Holding Company Act, a bank holding company must obtain
Federal Reserve Board approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The Bank Holding Company Act also prohibits a bank holding company,
with certain exceptions, from acquiring direct or indirect ownership or control
of more than 5% of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve Board includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. Classic has
no present plans to engage in any of these activities.
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Interstate Banking and Branching. On September 29, 1994, the
Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") was enacted
to ease restrictions on interstate banking. Effective September 29, 1995, the
Act allows the Federal Reserve Board to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a state
other than such holding company's home state, without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of the bank that has not been in existence for
the minimum time period (not exceeding five years) specified by the statutory
law of the host state. The Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act. The Commonwealth of Kentucky currently
provides for deposit concentration limits, reciprocal requirements and age
protection for new banks.
Additionally, beginning on June 1, 1997, the federal banking agencies
will be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Act by adopting a law after the date
of enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above.
The Act authorizes the OCC and FDIC to approve interstate branching de
novo by national and state banks, respectively, only in states which
specifically allow for such branching. The Act also requires the appropriate
federal banking agencies to prescribe regulations by June 1, 1997 which prohibit
any out-of-state bank from using the interstate branching authority primarily
for the purpose of deposit production. These regulations must include guidelines
to ensure that interstate branches operated by an out-of-state bank in a host
state are reasonably helping to meet the credit needs of the communities which
they serve.
Dividends. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that Classic's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with Classic's capital needs, asset quality and overall financial
condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any
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dividends if the holding company's bank subsidiary is classified as
"undercapitalized". See "-- Prompt Corrective Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
Capital Requirements. The Federal Reserve Board has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks. For bank holding companies with consolidated
assets of less than $150 million, such as Classic, compliance is measured on a
bank-only basis. See "-- Regulatory Capital Requirements of National Banks."
Federal and State Taxation
Federal Taxation. Savings associations such as Ashland Federal that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code") are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
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If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. No representation
can be made as to whether Classic will meet the 60% test for subsequent taxable
years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
March 31, 1996, the 6% and 12% limitations restricted the percentage bad debt
deduction available to Ashland Federal. See Note 14 of the Notes to Consolidated
Financial Statements of Classic. It is currently anticipated that these
limitations will continue to be a factor in the future.
In addition to the regular income tax, corporations, including savings
associations such as Ashland Federal, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
Ashland Federal, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for loan losses ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1996, Ashland Federal's Excess for tax purposes totaled
approximately $1.9 million.
Classic and its subsidiaries file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. Savings
associations, such as Ashland Federal, that file federal income tax returns as
part of a consolidated group are required by applicable Treasury regulations to
reduce their taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings association
members of the consolidated group that are functionally related to the
activities of the savings association member.
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Classic and its consolidated subsidiaries have been audited by the IRS
with respect to consolidated federal income tax returns through December 31,
1993. With respect to years examined by the IRS, either all deficiencies have
been satisfied or sufficient reserves have been established to satisfy asserted
deficiencies. In the opinion of management, any examination of still open
returns (including returns of subsidiary and predecessors of, or entities merged
into, Classic) would not result in a deficiency which could have a material
adverse effect on the financial condition or results of operations of Classic
and its consolidated subsidiaries.
Commercial banks, such as First National Bank, utilize a different
method in connection with the deduction of bad debt than savings associations.
Small banks (i.e., those with assets of $500 million or less), like First
National Bank, deduct bad debt under either the experience method, discussed
above, or the specific charge-off method. The specific charge-off method allows
a commercial bank to deduct the amount of any debt that becomes wholly or
partially worthless during the year.
First Paintsville and First National Bank have not been audited by the
IRS in at least 10 years. In the opinion of management, any examination of still
open returns (including returns of subsidiary and predecessors of, or entities
merged into, First Paintsville) would not result in a deficiency which could
have a material adverse effect on the financial condition or results of
operations of First Paintsville and its consolidated subsidiary.
Kentucky Taxation. The Commonwealth of Kentucky imposes no income or
franchise taxes on savings institutions. Ashland Federal is subject to an annual
Kentucky ad valorem tax. This tax is .1% of the financial institution's deposit
accounts, common stock and retained income, with certain deductions for amounts
borrowed by depositors and securities guaranteed by the U.S. Government or
certain of its agencies. The First National Bank is subject to a state franchise
tax equal to 1.1% of First National Bank's average five year equity capital
adjusted to eliminate the effect of certain U.S. Government obligations held by
the Bank. Classic is subject to Kentucky income tax at a rate of 4% - 8.25% and
a Kentucky corporate licensing fee equal to .0021 times capital employed.
Delaware Taxation. As a Delaware holding company, Classic is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. Classic is also subject to an
annual franchise tax imposed by the State of Delaware.
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DESCRIPTION OF CLASSIC COMMON STOCK
The Classic Certificate authorizes the issuance by Classic of up to
1,700,000 shares of Classic Common Stock (par value $.01 per share), of which
1,322,500 shares were issued and outstanding as of July 31, 1996. The Classic
Common Stock is quoted on the Nasdaq Small-Cap Stock Market under the symbol
"CLAS." See "Comparative Stock Prices and Dividend Information." Classic's stock
transfer agent and registrar is the Fifth Third Bank, Cincinnati, Ohio.
Each share of the Classic Common Stock has the same relative rights and
is identical in all respects with each other share of the Classic Common Stock.
The Classic Common Stock represents non-withdrawable capital, is not of an
insurable type and is not insured by the FDIC or any other government agency.
Subject to any prior rights of any preferred stock of Classic then
outstanding, holders of the Classic Common Stock are entitled to receive such
dividends as are declared by the Classic Board out of funds legally available
therefor. Full voting rights are vested in the holders of Classic Common Stock,
each share being entitled to one vote, subject to the rights of any Classic
Preferred Stock then outstanding. The Classic Certificate authorizes the Classic
Board to issue authorized shares of Classic Common Stock without stockholder
approval. Subject to any prior rights of any such preferred stock, in the event
of liquidation, dissolution or winding up of Classic, holders of shares of
Classic Common Stock are entitled to receive pro rata, any assets distributable
to stockholders in respect of shares held by them. Holders of shares of Classic
Common Stock do not have any preemptive rights to subscribe for any additional
securities which may be issued by Classic. The outstanding shares of Classic
Common Stock are fully paid and non-assessable.
Certain provisions of the Classic Certificate may have the effect of
delaying, deferring or preventing a change in control of Classic pursuant to an
extraordinary corporate transaction involving Classic, including a merger,
reorganization, tender offer, transfer of substantially all of its assets or a
liquidation.
EXPERTS
The Consolidated Financial Statements of Classic as of March 31, 1996
and 1995, and for the years ended March 31, 1996 and 1995, included herein have
been included in reliance upon the report of Smith, Goolsby, Artis & Reams,
P.S.C., independent certified public accountants upon the authority of said firm
as experts in accounting and auditing.
The Consolidated Financial Statements of Classic as of March 31, 1994,
and for the year ended March 31, 1994, included herein have been included in
reliance upon the report of Griffith, Delaney, Hillman & Co., independent
certified public accountants upon the authority of said firm as experts in
accounting and auditing.
On March 31, 1995, Classic engaged the firm of Smith, Goolsby, Artis &
Reams, P.S.C. as independent certified public accountants replacing the firm of
Griffith, Delaney, Hillman &
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Co. This change in independent certified public accountants was recommended by
the Audit Committee and subsequently approved by the Board of Directors.
There have been no disagreements between Classic or Ashland Federal and
Griffith, Delaney, Hillman & Co. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope of procedure in
connection with the audit of the consolidated financial statements for the two
years ended March 31, 1994 and subsequent period through March 31, 1995 which,
if not resolved to the satisfaction of Griffith, Delaney, Hillman & Co., would
have caused them to make reference to the subject matter of the disagreement(s)
in connection with the reports of Griffith, Delaney, Hillman & Co. on the
consolidated financial statements of Classic's for the two years ended March 31,
1994 did not contain an adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
In addition, there has not been any "reportable events" as defined by Item
304(a)(1)(iv)(B) of Regulation S-B during the periods referred to above.
The Consolidated Financial Statements of First Paintsville as of
December 31, 1995, and for each of the years in the two-year period ended
December 31, 1995, included herein have been included in reliance upon the
report of Eskew & Gresham, PSC, independent certified public accountants upon
the authority of said firm as experts in accounting and auditing.
Representatives of Smith, Goolsby, Artis & Reams, P.S.C. and Eskew &
Gresham, PSC are expected to attend the Classic Special Meeting and the First
Paintsville Special Meeting, respectively, to respond to appropriate questions
and will have an opportunity to make a statement if they so desire.
STOCKHOLDER PROPOSALS
In order to be eligible for inclusion in Classic's proxy materials for
the Classic 1997 Annual Meeting of Stockholders, any stockholder proposal to
take action at such meeting must be received at the office of Classic, 344
Seventeenth Street, Ashland, Kentucky 41101, no later than March 31, 1997. Any
such proposals shall be subject to the requirements of the proxy rules adopted
under the Securities Exchange Act of 1934, as amended.
First Paintsville will hold a 1996 Annual Meeting of Stockholders only
if the Merger is not consummated before the time of such meeting, which is
presently expected to be held after December 31, 1996. In such event, any
stockholder who wishes to present a proposal for inclusion in the proxy
materials for the 1996 Annual Meeting of Stockholders must have been received by
First Paintsville not later than December 1, 1996.
OTHER MATTERS
The Boards of Directors of Classic and First Paintsville are not aware
of any business to come before the Meetings other than those matters described
above in this Joint Proxy Statement. However, if any other matter should
properly come before the Meetings, it is intended that holders of the proxies
will act in accordance with their best judgment.
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INDEX TO FINANCIAL STATEMENTS
Page
----
CLASSIC BANCSHARES, INC.:
Independent Auditors' Report of Smith, Goolsby,
Artis & Reams, P.S.C................................................... F-3
Independent Auditors' Report of Griffith, DeLaney,
Hillman & Company...................................................... F-4
Consolidated Statements of Financial Condition at
March 31, 1996 and 1995............................................... F-5
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994........................................ F-6
Consolidated Statements of Changes in Stockholders' Equity
for Years Ended March 31, 1996, 1995 and 1994........................ F-7
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1995 and 1994........................................ F-8
Notes to Consolidated Financial Statements............................... F-10
FIRST PAINTSVILLE BANCSHARES, INC.:
Independent Auditors' Report of Eskew & Gresham.......................... F-35
Consolidated Balance Sheets at
December 31, 1995 and 1994............................................ F-36
Consolidated Statements of Income for the Years Ended
December 31, 1995 and 1994............................................ F-37
Consolidated Statements of Changes in Stockholders' Equity
for Years Ended December 31, 1995 and 1994........................... F-38
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994........................................... F-39
Notes to Consolidated Financial Statements............................... F-41
F-1
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Unaudited Consolidated Balance Sheets at March 31,
1996 and 1995......................................................... F-53
Unaudited Consolidated Income Statements for the Three Months
Ended March 31, 1996 and 1995......................................... F-54
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995................................. F-55
Notes to Unaudited Consolidated Financial Statements..................... F-56
All schedules are omitted because the required information is not applicable or
is included in the Financial Statements and related Notes.
F-2
<PAGE>
Board of Directors
Classic Bancshares, Inc. and Subsidiary
Ashland, Kentucky
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated statements of condition of Classic
Bancshares, Inc. and Subsidiary as of March 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. 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 audit. The Company's March
31, 1994 financial statements, prior to their restatement, were audited by other
auditors whose report dated May 11, 1994, expressed an unqualified opinion on
those statements.
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 provides a reasonable basis for our opinion.
In our opinion, the March 31, 1996 and 1995 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Classic Bancshares, Inc. and Subsidiary, as of March 31, 1996 and
1995, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
We also reviewed the adjustments described in Note 3 that were applied to
restate the March 31, 1994 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
As discussed in Note 1 to the consolidated financial statements, Classic
Bancshares, Inc. and subsidiary changed its method of accounting for investment
securities and mortgage-backed and related securities, effective April 1, 1994.
SMITH, GOOLSBY, ARTIS & REAMS, P.S.C.
Ashland, Kentucky
May 22, 1996
F-3
<PAGE>
GRIFFITH, DELANY, HILLMAN & COMPANY
Board of Directors
Ashland Federal Savings Bank
Ashland, Kentucky
INDEPENDENT AUDITOR'S REPORT
We have audited the consolidated statement of financial condition of Ashland
Federal Savings Bank (formerly Ashland Federal Savings and Loan Association) and
subsidiary as of March 31, 1994, and the related consolidated statement of
operations, retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ashland Federal Savings Bank
and subsidiary as of March 31, 1994, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Griffith, DeLaney, Hillman & Company
Ashland, Kentucky
May 11, 1994
F-4
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ------ ---- ----
<S> <C> <C>
Cash (including interest bearing deposits of $1,074,511 in 1996
and $2,111,310 in 1995) $ 1,531,862 $ 2,165,148
Federal funds sold and securities purchased under agreement to resell 975,000 --
Certificates of deposit in other financial institutions 4,599,600 1,084,266
Investment securities to be held to maturity (estimated fair value of $12,272,755) -- 12,319,930
Investment securities available for sale, at estimated fair value (amortized cost
$10,271,772) 10,438,445 --
Mortgage-backed and related securities available for sale, at estimated fair value
(amortized cost $2,876,277 in 1996 and $431,291 in 1995) 2,840,339 387,267
Mortgage-backed and related securities to be held to maturity (estimated fair
value of $7,635,795) -- 7,745,983
Loans, net of allowance for loan losses of $286,384 in 1996 and $311,785 in 1995 43,721,967 35,731,167
Real estate acquired in the settlement of loans, net of valuation allowance of
$7,853 in 1995 5,000 41,550
Accrued interest receivable 331,991 280,211
Federal Home Loan Bank stock 620,800 579,900
Office properties and equipment, at cost less accumulated depreciation of
$545,327 in 1996 and $487,527 in 1995 723,930 330,547
Deferred income taxes 26,180 77,450
Other assets 267,880 167,149
----------- -----------
Total Assets $66,082,994 $60,910,568
=========== ===========
LIABILITIES
Deposits $46,200,423 $48,509,700
Advances from Federal Home Loan Bank -- 4,800,000
Accrued interest on deposits 140,035 112,959
Accounts payable and accrued expenses 242,273 101,844
----------- -----------
Total Liabilities 46,582,731 53,524,503
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value;
authorized and unissued - 100,000 shares -- --
Common stock $.01 par value; authorized 1,700,000 shares; issued
and outstanding, 1,322,500 shares 13,225 --
Additional paid-in capital 12,710,898 --
Retained earnings, substantially restricted 7,707,753 7,415,121
Net unrealized gain (loss) on securities available for sale 86,285 ( 29,056)
Unearned ESOP shares ( 1,005,100) --
Minimum pension liability adjustment ( 12,798) --
----------- -----------
Total Stockholders' Equity 19,500,263 7,386,065
----------- -----------
Total Liabilities and Stockholders' Equity $66,082,994 $60,910,568
=========== ===========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
INTEREST INCOME 1996 1995 1994
- --------------- ---- ---- ----
<S> <C> <C> <C>
Loans $2,894,721 $2,432,462 $2,648,884
Investment securities 814,845 739,097 709,066
Mortgage-backed securities 438,501 524,752 411,474
Other interest 265,891 265,468 --
---------- ---------- ----------
Total interest income 4,413,958 3,961,779 3,769,424
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 2,603,140 2,230,771 2,311,953
Interest on FHLB advances 247,988 177,729 --
---------- ---------- ----------
Total interest expense 2,851,128 2,408,500 2,311,953
---------- ---------- ----------
Net interest income 1,562,830 1,553,279 1,457,471
Provision for loss on loans 168,000 132,939 83,500
---------- ---------- ----------
Net interest income after
provision for loss on loans 1,394,830 1,420,340 1,373,971
---------- ---------- ----------
NONINTEREST INCOME
Late charges and other fees on loans 26,593 17,871 9,679
Insurance service fees 14,267 12,745 11,150
Gain on sale of securities 36,306 -- 2,725
Other income 31,249 3,528 2,834
---------- ---------- ----------
Total noninterest income 108,415 34,144 26,388
---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and benefits 425,182 359,152 317,180
Occupancy and equipment expense 95,760 102,584 73,867
Deposit insurance premiums 111,342 117,713 98,523
Loss (gain) on foreclosed real
estate ( 24,112) 2,832 5,648
Other general and administrative
expenses 570,266 396,323 328,303
---------- ---------- ----------
Total noninterest expense 1,178,438 978,604 823,521
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 324,807 475,880 576,838
- --------------------------
Income tax expense 32,175 52,873 135,209
---------- ---------- ----------
NET INCOME $ 292,632 $ 423,007 $ 441,629
- ---------- ========== ========== ==========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balances, April 1, 1993 after
restatement adjustment
described in Note 3 $ $ $6,550,485
Net income for the year ended March 31,
1994, net of restatement adjustment
described in Note 3 441,629
--------- ------- ----------- ----------
Balances, March 31, 1994 6,992,114
Effect of adopting SFAS No. 115 April 1,
1994, net of applicable deferred income taxes
of $792
Net income for the year ended March 31, 1995 423,007
Change in unrealized gain (loss) on available
for sale securities, net of applicable deferred
income taxes of $14,968
--------- ------- ----------- ----------
Balances March 31, 1995 7,415,121
Net income for the year ended March 31, 1996 292,632
Common stock issued in conversion, net of costs 1,322,500 13,225 12,704,127
Contribution for unearned ESOP shares
ESOP shares earned 6,771
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $59,418
Excess of minimum pension liability over
recognized prior service cost on directors
retirement plan
--------- ------ ----------- ----------
Balances, March 31, 1996 1,322,500 $13,225 $12,710,898 $7,707,753
========= ======= =========== ==========
</TABLE>
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
NET UNREAL-
IZED GAIN
MINIMUM (LOSS) ON
UNEARNED PENSION SECURITIES
ESOP LIABILITY AVAILABLE
SHARES ADJUSTMENT FOR SALE TOTAL
------ ---------- -------- -----
<S> <C> <C> <C> <C>
Balances, April 1, 1993 after
restatement adjustment
described in Note 3 $ $ $ $ 6,550,485
Net income for the year ended March 31,
1994, net of restatement adjustment
described in Note 3 441,629
--------- ------- -------- -----------
Balances, March 31, 1994 6,992,114
Effect of adopting SFAS No. 115 April 1,
1994, net of applicable deferred income taxes
of $792 ( 1,536) ( 1,536)
Net income for the year ended March 31, 1995 423,007
Change in unrealized gain (loss) on available
for sale securities, net of applicable deferred
income taxes of $14,968 ( 27,520) ( 27,520)
---------- ------- -------- -----------
Balances March 31, 1995 ( 29,056) 7,386,065
Net income for the year ended March 31, 1996 292,632
Common stock issued in conversion, net of costs 12,717,352
Contribution for unearned ESOP shares ( 1,058,000) ( 1,058,000)
ESOP shares earned 52,900 59,671
Change in unrealized gain (loss) on securities
available for sale, net of applicable deferred
income taxes of $59,418 115,341 115,341
Excess of minimum pension liability over
recognized prior service cost on directors
retirement plan ( 12,798) ( 12,798)
---------- ------- -------- -----------
Balances, March 31, 1996 ($1,005,100) ($12,798) $ 86,285 $19,500,263
========== ======= ======== ===========
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-7
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995 AND 1994
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1996 1995 1994
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Net income $ 292,632 $ 423,007 $ 441,629
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 57,801 52,912 40,271
Provision for loss on loans 168,000 132,939 83,500
Provision for loss on foreclosed
real estate -- 7,853 --
Provision for loss on mortgage-
backed securities -- -- 75,571
Loss (gain) on sale of mortgage
backed securities ( 53,099) -- 13,991
Federal Home Loan Bank stock dividends ( 40,900) ( 34,400) ( 24,000)
Deferred income tax (benefit) expense ( 8,148) ( 15,808) 64,284
Gain on sale of foreclosed real estate ( 24,112) ( 7,731) --
Loss (gain) on sale of investment
securities 16,793 -- ( 2,725)
Net amortization (accretion) of in-
vestment securities and mortgage-
backed securities 2,823 ( 21,687) --
ESOP shares earned 59,671 -- --
Decrease (increase) in:
Accrued interest receivable ( 51,780) ( 80,677) ( 6,204)
Other assets ( 100,731) ( 39,865) ( 48,079)
Increase (decrease) in:
Accrued interest payable 27,076 55,789 1,879
Accrued income taxes payable -- ( 5,868) ( 15,390)
Accounts payable and accrued expenses 127,631 20,257 8,766
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 473,657 486,721 633,493
----------- ---------- -----------
INVESTING ACTIVITIES
Investment securities:
Held to maturity or for investment
Proceeds from sales, maturities and calls -- 850,000 596,197
Purchased -- ( 4,995,078) ( 748,472)
Available for sale
Proceeds from sales, maturities and calls 6,880,500 -- --
Purchased ( 4,850,000) -- --
Mortgage-backed securities:
Held to maturity or for investment
Principal payments -- 1,462,598 1,840,843
Purchased -- ( 5,806,262) ( 800,000)
Available for sale
Proceeds from sale 7,175,371 -- --
Principal payments 686,543 -- --
Purchased ( 2,509,776) -- --
Loans:
Originations and principal payments, net ( 8,744,300) ( 2,864,741) 1,427,242
Purchased ( 275,000) -- --
Proceeds from sale of participating interest 788,000 -- --
Certificates of deposit with other financial institutions:
Proceeds from maturities 501,266 1,397,975 198,000
Purchased -- ( 99,548) ( 1,386,046)
Proceeds from sale of foreclosed real estate 133,162 65,841 313,333
Purchased office properties and equipment ( 451,184) ( 193,620) ( 43,486)
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
INVESTMENT ACTIVITIES ( 665,418) ( 10,182,835) 1,397,611
----------- ----------- -----------
</TABLE>
F-8
<PAGE>
CLASSIC BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995 AND 1994
(Continued)
<TABLE>
<CAPTION>
FINANCING ACTIVITIES 1996 1995 1994
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Net change in NOW, Savings and certificates of deposits ( 2,309,277) ( 3,134,488) 3,705,999
Federal Home Loan Bank borrowings 3,175,000 4,800,000 --
Repayment of Federal Home Loan Bank borrowings ( 7,975,000) -- --
Sale of common stock, net of costs 11,659,352 -- --
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 4,550,075 1,665,512 3,705,999
----------- ----------- -----------
Net change in cash and cash equivalents 4,358,314 ( 8,030,602) 5,737,103
Cash and cash equivalents, beginning of year 2,165,148 10,195,750 4,458,647
----------- ----------- -----------
Cash and cash equivalents, end of year $ 6,523,462 $ 2,165,148 $10,195,750
=========== =========== ===========
Additional cash flows and supplementary
information
Cash paid during the year for:
Interest on deposits and advances $ 1,217,000 $ 1,095,000 $ 966,000
Income taxes $ -- $ 143,322 $ --
Real estate acquired in foreclosure of loans $ 72,500 $ 107,513 $ 134,780
Common stock issued to ESOP leveraged with an employer loan $ 1,058,000 $ -- $ --
Net unrealized gain (loss) on available for sale securities $ 115,341 ($ 29,056) $ --
</TABLE>
NOTE: The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization
Classic Bancshares, Inc. (the Company) was organized as a savings
and loan holding company primarily for the purpose of acquiring
and owning 100% of the outstanding capital stock of its sole
subsidiary, Ashland Federal Savings Bank (the Bank).
The Bank is a federally chartered stock savings bank and a member
of the Federal Home Loan Bank System. As a member of this system,
the Bank is required to maintain an investment in capital stock
of the Federal Home Loan Bank of Cincinnati in an amount equal to
at least the greater of 1.0% of its outstanding loans and
mortgage-backed securities or 0.03% of total assets as of
December 31 of each year.
Savings deposits of the Bank are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000. The Bank pays a
premium to the FDIC for the insurance of such savings deposits.
The Bank currently serves the financial needs of communities in
its market area through its office located at 344 Seventeenth
Street, Ashland, Kentucky. The Bank's business involves
attracting deposits from the general public and using such
deposits, together with other funds, to originate primarily
one-to four-family residential mortgage loans and, to a lesser
extent, commercial and multi-family real estate, consumer and
construction loans primarily in its market area which includes
the Kentucky counties of Boyd and Greenup.
The Bank's revenues are derived principally from interest earned
on loans and to a lesser extent, from interest earned on
investments and service fees on loans and deposit accounts. The
operations of the Bank are influenced significantly by general
economic conditions and by policies of financial institutions
regulatory agencies. The Bank's cost of funds is influenced by
interest rates on competing investments and general market rates.
Lending activities are affected by the demand for financing real
estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans
and investments and the average rate paid on deposits, as well as
the relative amounts of such assets and liabilities. The Bank,
like most financial institutions, is subject to interest rate
risk to the degree that its interest-bearing liabilities mature
or reprice at different times, or on a different basis, than its
interest earning assets.
The more significant accounting policies followed by the Company
and the Bank are as follows:
B. Basis of Presentation
The consolidated financial statements include the accounts of the
Company, the Bank, and the Bank's wholly owned inactive
subsidiary, AFS Service Corporation. AFS Service Corporation was
organized in 1978 solely for the purpose of acquiring common
stock in Intrieve, Inc., formerly Savings and Loan Data
Corporation, Inc. and has not conducted any other business
transactions since the initial SLDC stock acquisition.
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. On an
ongoing basis, management reviews its estimates, including those
related to litigation and environmental liabilities, based on
currently available information. Changes in facts and
circumstances may result in revised estimates.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
C. Investment Securities and Mortgage-Backed and Related Securities
Effective April 1, 1994, management adopted the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Under SFAS No. 115, investments in securities
and mortgage-backed and related securities are classified in
three categories and accounted for as follows:
Held to Maturity. Debt securities for which the Bank has
the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums
and accretion of discounts which are recognized in
interest income over the period to maturity, using the
level yield method.
Trading securities. Debt securities that are bought and
held principally for the purpose of selling them in the
near term are classified as trading securities. The Bank
does not hold any securities which would be classified as
trading securities pursuant to SFAS No. 115.
Available for Sale. Securities available for sale consist
of debt securities not classified as securities to be held
to maturity or trading securities. Unrealized holding
gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component
of equity until realized. Gains and losses on the sale of
debt securities available for sale are determined using
the specific identification method.
The initial effect upon the adoption at April 1, 1994 of this
change in accounting for investment securities and
mortgage-backed and related securities was $1,536, net of
applicable deferred income taxes of $792, and is reported
separately as a component of equity. Prior to April 1, 1994,
investment securities and mortgage-backed and related securities
were considered held for investment and were carried at cost,
adjusted for amortization of premium and accretion of discounts
over the life of the security using the level yield method.
During the fourth quarter of 1995, the Financial Accounting
Standards Board allowed financial statement preparers a one-time
opportunity to reassess the classifications of securities
accounted for under SFAS No. 115. As a result of this
reassessment, the Bank reclassified $9.7 million of
held-to-maturity securities and mortgage-backed and related
securities to available for sale securities. In connection with
this reclassification, gross unrealized gains of $411,655 and
gross unrealized losses of $41,371 were recorded in
available-for-sale securities and in stockholders' equity (on a
net of tax basis).
Mortgage-backed and related securities are subject to prepayment,
which affects the yield and effective maturity of the investment.
The Bank does not purchase mortgage-backed and related securities
with significant premiums in order to minimize the effects of
prepayments.
In November, 1994, the OTS adopted a regulation which affects the
computation of regulatory capital. Unrealized gains or losses on
debt securities classified as "available for sale" under SFAS No.
115, and unrealized gains on equity securities, are not included
in the Bank's regulatory capital.
Federal Home Loan Bank stock is carried at cost which represents
redemption value.
Regulations require the Bank to maintain an amount of cash and
U.S. government and other approved securities equal to 5% of
deposit accounts (net of loans on deposits) plus short-term
borrowings. At March 31, 1996 and 1995, the Bank met these
requirements.
D. Loans Receivable, Net
Loans receivable, net are stated at unpaid principal balances,
less the allowance for loan losses, plus or minus net deferred
loan origination costs or fees, and the undisbursed portion of
loans in process.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
D. Loans Receivable, Net (Continued)
The Bank has established an allowance for loan losses for the
purpose of absorbing losses associated with the Bank's loan
portfolio. All actual loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the
allowance for loan losses are provided by charges to operations
based on various factors, including the market value of the
underlying collateral, growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to
outstanding loans, historical loss experience, delinquency trends
and prevailing and projected economic conditions. Management
evaluates the carrying value of loans periodically in order to
evaluate the adequacy of the allowance. While management uses the
best information available to make these evaluations, future
adjustments to the allowance may be necessary if the assumptions
used in making the evaluations require material revision.
E. Depreciation
Depreciation of office property and equipment is calculated by
the straight-line method over the estimated useful lives of such
property. The gain or loss on the sale of office property and
equipment is recorded in the year of disposition. The estimated
useful lives are 10 to 50 years for buildings and improvements
and 3 to 10 years for equipment.
F. Interest Income
Interest on loans receivable is recorded in the period earned.
Interest on delinquent loans, including impaired loans, is
accrued to the extent considered collectible. Interest on
non-accrual loans is recognized to the extent cash is received.
G. Loan Fees
Loan fees are accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 91. SFAS No. 91
requires loan origination fees and certain related direct loan
origination costs be offset and the resulting net amount be
deferred and amortized over the contractual life of the related
loans as an adjustment to the yield on such loans, using the
level yield method.
H. Accounting for Impairment of a Loan
Effective April 1, 1995, the Bank adopted the provisions of SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan" and
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." Under SFAS No. 114, loans
individually and specifically evaluated for impairment,
uncollateralized as well as collateralized, except loans that are
measured at fair value or at the lower of cost or fair value, are
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, at the
loan's observable market price or fair value of the collateral.
The Bank considers a loan to be impaired when, based on current
information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual
terms of the loan agreement on a timely basis. Groups of similar
small balance loans, such as residential and consumer loans, are
excluded from the provisions of SFAS Nos. 114 and 118. The
adoption of SFAS No. 114 and 118 did not have a material effect
on the Bank's financial position or results of operations.
I. Income Taxes
Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws, and rates
applicable to the periods in which the differences are expected
to affect taxable income.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
J. Cash and Cash Equivalents
For purposes of reporting consolidated cash flows, the Bank
considers cash, balances with banks, federal funds sold,
securities purchased under agreement to resell and
interest-bearing cash deposits in other depository institutions
with initial maturities of three months or less to be cash
equivalents.
K. Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at the lower of cost or fair
value less estimated selling costs at the date of foreclosure.
Costs relating to improvement of property are capitalized,
whereas costs relating to holding property are expensed.
After foreclosure valuations are periodically performed by
management, and an allowance for loss is established by a charge
to operations if the carrying value of a property exceeds the
lower of cost or fair value, less estimated selling costs.
L. Fair Values of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", requires that the Company disclose estimated fair
values for its financial instruments. In accordance with SFAS No.
107, fair values are based on estimates using present value and
other valuation techniques in instances where quoted prices are
not available. These techniques are significantly affected by the
assumptions used, including discount rates and estimates of
future cash flows. As such, the derived fair value estimates
cannot be substantiated by comparison to independent markets and,
further, may not be realizable in an immediate settlement of the
instruments. SFAS No. 107 also excludes certain items from its
disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent, and should not be construed
to represent, the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
Cash and cash equivalents - The carrying amounts of cash and
short-term instruments approximate their fair value.
Certificates of deposit with other financial institutions - For
certificates of deposit with a remaining term of 90 days or less,
the fair values are based on carrying amounts. The fair values
for other certificates of deposit are estimated using discounted
cash flow analysis, based on interest rates currently being
offered by financial institutions with similar credit quality.
Securities available for sale - Fair values for investment
securities, excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity
securities (Federal Home Loan Bank stock) represents redemption
value and approximates fair value.
Mortgage-backed and related securities available for sale - Fair
values for mortgage-backed and related securities are based on
quoted market prices or dealer quotes.
Loans - The fair values for loans are estimated using discounted
cash flow analysis, based on interest rates currently being
offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments
regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral
values, where applicable.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
L. Fair Values of Financial Instruments (Continued)
Accrued interest receivable and payable - The carrying amounts of
accrued interest approximate their fair values.
Deposit liabilities - The fair values disclosed for demand
deposits are, by definition, equal to the amount payable on
demand at the reporting date (that is, their carrying amounts).
The carrying amount of variable-rate, fixed-term money market
accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Off-balance-sheet instruments - Fair values for off-balance sheet
lending commitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements and the counterparties' credit standing. The
fair value of such off-balance-sheet instruments are immaterial
and, therefore, not disclosed.
M. Effect of Implementing New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 121 (SFAS
No. 121), "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of," and is effective for fiscal
years beginning after December 15, 1995. The statement requires
that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows is less
than the carrying amount of the asset. Management does not expect
the implementation of SFAS No. 121 to have a material impact on
the Company's consolidated financial position or results of
operations.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights." This statement amends Statement of Financial
Accounting Standards No. 65 (SFAS No. 65), Accounting for Certain
Mortgage Banking Activities," to require that a mortgage banking
enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are
acquired. Institutions that sell loans and retain the servicing
rights will be required to allocate the total cost of the loans
to servicing rights and loans based on their relative fair value
if that value can be estimated. SFAS No. 122 requires that a
mortgage banking enterprise assess its capitalized mortgage
servicing rights for impairment based on the fair value of those
rights. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Management does not believe the adoption
of SFAS No. 122 will have a material effect on the Bank's
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). This statement establishes
financial accounting and reporting standards for stock-based
employee compensation plans. The statement defines a fair value
based method of accounting for an employee stock option and
allows companies to continue to measure compensation cost for
such plans using the intrinsic value based method of accounting
prescribed in APB Opinion No. 25 "Accounting for Stock Issued to
Employees". Beginning in 1996, Companies electing to remain with
accounting under APB No. 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based
method of accounting had been applied. Management does not
believe the adoption of SFAS No. 123 will have a material effect
on the Company's consolidated financial position or results of
operations.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
N. Earnings Per Share
Earnings per share will be computed based upon the average common
and common equivalent shares outstanding during the period
subsequent to the Bank's conversion to a stock savings bank on
December 28, 1995. Earnings per share for the year ended March
31, 1996 is not meaningful.
O. Advertising Costs
Advertising costs are expensed when incurred.
P. Reclassifications
Certain presentations of accounts previously reported have been
reclassified in these consolidated financial statements. Such
reclassifications had no effect on net income or retained income
as previously reported.
NOTE 2: CONVERSION
The Bank converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank on December
28, 1995, and issued all of its common stock to the Company.
Concurrently with the conversion, the Company issued 1,322,500 shares
of Company common stock par value $.01, at $10.00 per share. Net
proceeds of the Company's stock issuance, after costs, were
approximately $12,700,000.
NOTE 3: RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
The Bank has retroactively restated its March 31, 1994 financial
statements to provide for deferred income taxes relating to temporary
reporting differences of Federal Home Loan Bank stock dividends. The
effects of the restatement adjustment on the March 31, 1994 financial
statements were to increase deferred income tax expense by $8,160 and
decrease net income by $8,160 and to increase deferred income tax
liabilities by $103,054, and to decrease retained earnings by
$103,054. The effect of the restatement adjustment on years prior to
March 31, 1994 was $94,894.
F-15
<PAGE>
NOTE 4: INVESTMENT SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
Investment securities available-for-sale and held-to-maturity are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale
March 31, 1996:
U.S. Treasury
securities $ 1,245,043 $ 20,897 $ -- $ 1,265,940
U.S. Government
Agency securities 4,499,079 5,200 ( 88,546) 4,415,733
Obligations of state
and political
subdivisions 4,527,650 229,761 ( 639) 4,756,772
---------- ------- ------ ----------
$10,271,772 $255,858 ($89,185) $10,438,445
========== ======= ====== ==========
Held-to-maturity
March 31, 1995:
U.S. Treasury
securities $ 1,245,065 $ -- ($ 8,756) $ 1,236,309
U.S. Government
Agency securities 6,445,935 15,280 ( 134,987) 6,326,228
Obligations of state
and political
subdivisions 4,628,930 124,496 ( 43,208) 4,710,218
---------- ------- ------- ----------
$12,319,930 $139,776 ($186,951) $12,272,755
========== ======= ======= ==========
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 4: INVESTMENT SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY
(Continued)
The amortized cost and estimated fair value of investment securities
at March 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less $ 251,014 $ 251,912
Due after one year through five years 994,029 1,014,028
Due after five years through ten years 1,631,726 1,640,955
Due after ten years 7,395,003 7,531,550
----------- -----------
$10,271,772 $10,438,445
=========== ===========
</TABLE>
Investments securities with a carrying value of approximately
$385,000 at March 31, 1996, were pledged to secure deposits of public
funds and for other purposes required or permitted by law.
During the year ended March 31, 1996, the Bank sold
available-for-sale securities for aggregate proceeds of $1,880,500
resulting in gross realized gains of $4,707 and gross realized losses
of $21,500. During the year ended March 31, 1994, the Bank sold
investment securities held for investment for aggregate proceeds of
$596,197 resulting in gross realized gains of $2,725.
Accrued interest receivable includes $171,037 and $204,112 for the
years ended March 31, 1996 and 1995, respectively, relating to
investment securities.
NOTE 5: SECURITIES PURCHASED UNDER AGREEMENT TO RESELL
The Bank entered into purchases of securities under agreements to
resell substantially identical securities. Securities purchased under
agreements to resell at March 31, 1996, consists of U.S. Treasury
securities. The amounts advanced under these agreements represent
short-term loans and are reflected as a receivable in the statement
of financial condition. The securities underlying the agreements are
book-entry securities. The securities are appropriately segregated
under a written agreement that explicitly recognizes the Bank's
interest in the securities. At March 31, 1996, these agreements
matured within 90 days and no material amount of agreements to resell
securities purchased was outstanding with any individual dealer.
Securities purchased under agreements to resell averaged
approximately $80,000 during the fiscal year ended March 31, 1996,
and the maximum amounts outstanding at any month-end during the
period was $340,000.
F-17
<PAGE>
NOTE 6: MORTGAGE-BACKED AND RELATED SECURITIES AVAILABLE-FOR-SALE AND
HELD-TO-MATURITY
Mortgage-backed and related securities available-for-sale and
held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
Available-for-sale COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
March 31, 1996:
FHLMC $ 371,222 $ -- ($ 6,166) $ 365,056
Other 484,338 -- ( 4,575) 479,763
REMICS:
FHLMC and FNMA 2,020,717 -- ( 25,197) 1,995,520
---------- ------- ------- ----------
$2,876,277 $ -- ($35,938) $2,840,339
========== ======= ======= ==========
March 31, 1995:
FHLMC, REMIC $ 412,449 $ -- ($70,744) $ 341,705
FNMA, interest
only strip 18,842 26,720 45,562
---------- ------- ------- ----------
$ 431,291 $26,720 ($70,744) $ 387,267
========== ======= ======= ==========
Held-to-maturity
March 31, 1995:
FHLMC $ 742,896 $11,499 $ -- $ 754,395
FNMA 169,650 2,505 -- 172,155
REMIC's and CMO's
FHLMC and FNMA 6,833,437 -- ( 124,192) 6,709,245
---------- ------- -------- ----------
$7,745,983 $14,004 ($124,192) $7,635,795
========== ======= ======== ==========
</TABLE>
Accrued interest receivable includes $18,537 and $44,332 at March 31,
1996 and 1995, respectively, related to mortgage-backed securities.
The amortized cost of mortgage-backed securities includes unamortized
premiums of $32,233 and $6,152 and unearned discounts of $0 and
$342,487 at March 31, 1996 and 1995, respectively.
Mortgage-backed securities with adjustable rates totalled $470,000
and $5.6 million at March 31, 1996 and 1995, respectively.
F-18
<PAGE>
NOTE 7: LOANS RECEIVABLE, NET
The Bank's loan portfolio consists principally of long-term
conventional loans collateralized by first mortgages on single-family
residences. Loans receivable, net at March 31, 1996 and 1995, consist
of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Real estate loans:
One-to-four family $38,944 $35,005
Commercial 2,509 630
Multi-family 215 118
Construction 1,132 --
------ ------
Total real estate loans 42,800 35,753
------ ------
Consumer loans:
Secured by deposits 389 383
Other 229 --
------ ------
Total consumer loans 618 383
------ ------
Commercial loans 1,063 --
------ ------
Total loans 44,481 36,136
Less:
Undisbursed loans in process 504 97
Net deferred loan origination
costs ( 31) ( 4)
Allowance for loan losses 286 312
------ ------
Total loans, net $43,722 $35,731
====== ======
</TABLE>
Loans with adjustable rates totalled $26.9 million and $23.5
million at March 31, 1996 and 1995, respectively.
Accrued interest receivable includes $109,204 and $26,636 at
March 31, 1996 and 1995, respectively, related to loans
receivable.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 7: LOANS RECEIVABLE, NET (Continued)
The following is a reconciliation of the allowance for loan losses:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $311,785 $318,398 $348,621
Provision charged to operations 168,000 132,939 83,500
Loans charged off ( 214,291) ( 148,730) ( 183,655)
Recoveries 20,890 9,178 69,932
------- ------- -------
Balance at end of year $286,384 $311,785 $318,398
======= ======= =======
</TABLE>
The following is a summary of non-performing loans at March 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Accruing loans past due 90 days
or more $ -- $ 60 $ --
Nonaccrual loans 595 748 1,051
---- ---- ------
Total non-performing loan
balances at year end $595 $808 $1,051
==== ==== ======
Non-performing loans as
a percentage of loans 1.36% 2.26% 3.17%
==== ==== ====
</TABLE>
If interest on nonaccrual loans had been accrued, such income would
have approximated $47,335, $65,504 and $31,493 for the years ended
March 31, 1996, 1995 and 1994, respectively. Interest income on
nonaccrual loans which is reflected in the accompanying statements of
operations was $34,660, $51,101 and $4,352 for the years ended March
31, 1996, 1995 and 1994, respectively.
In the normal course of business and subject to normal credit
policies, the Bank makes loans to officers, directors, their
immediate family and business interests of such persons. At March 31,
1996 and 1995, the balances of loans to such parties were as follows:
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 7: LOANS RECEIVABLE, NET (Continued)
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Aggregate amount of indebtedness
at beginning of year $210,358 $127,529
New loans 804,572
Repayments ( 103,508) 145,466
Loans of retiring officers ( 144,599) ( 62,637)
-------- ---------
Aggregate amount of indebtedness
at end of year $766,823 $210,358
======== ========
</TABLE>
The terms and conditions of these loans are consistent with similar
loans to unrelated parties and in management's opinion do not involve
more than a normal risk of collectibility.
NOTE 8: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment at March 31, 1996 and 1995 by major
classifications are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 99,550 $ 99,550
Buildings and improvements 476,627 321,542
Furniture and equipment 667,716 371,618
Automobile 25,364 25,364
---------- --------
TOTAL 1,269,257 818,074
-----
Less: Accumulated depreciation 545,327 487,527
---------- --------
$ 723,930 $330,547
========== ========
</TABLE>
Depreciation expense charged to operations for the years ended March
31, 1996, 1995 and 1994 totaled $57,801, $52,912 and $40,271,
respectively.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 9: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments are primarily commitments
to extend credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the
statement of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of these instruments.
The Bank uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
<TABLE>
<CAPTION>
CONTRACT AMOUNT
MARCH 31
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Financial instruments the contract amounts of which represents
credit risk:
Loan Commitments:
Adjustable rate $ 9,069 $ --
Fixed rate $297,666 $ --
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since, in some
instances, the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained
by the Bank upon extension of credit is based on established credit
policies and primarily includes a first mortgage on residential real
estate. The Bank, in most instances, limits the amount they will loan
on real estate to 90% of the appraised value. They further require
that borrowers have, at a minimum, 10% personal equity in any real
estate financed.
NOTE 10: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's lending activity is with customers located within
Boyd and Greenup Counties of Kentucky. These loans are primarily
secured by a first mortgage on residential real estate on which the
Bank generally limits the amount of its loan to 90% of appraised
value. Upon default by a borrower the mortgaged property is subject
to foreclosure action by the Bank.
In addition to the regional concentration of credit risk, the Bank
had cash on deposit with financial institutions which exceeded the
federally insured limits at March 31, 1996 and 1995, by $3,916,600
and $1,060,084, respectively. The Bank does not have a policy for
requiring collateral on such deposits.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 11: DEPOSITS
An analysis of deposits at March 31, 1996 and 1995 is as follows:
[Dollar amounts in thousands]
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------------------
1996 1995
----------------- -------------------
AMOUNT % AMOUNT %
------- ----- ------- -----
<S> <C> <C> <C> <C>
Interest bearing checking 3.25% $ 15 -- $ -- --
------- ----- ------- -----
Passbook savings 3.00% 2,683 5.8 3,045 6.3
------- ----- ------- -----
Money market accounts 3.10% 5,494 11.9 6,674 13.8
------- ----- ------- -----
Certificate Accounts:
3.01% to 3.25% -- -- -- --
3.26% to 4.25% 4,317 9.3 3,806 7.8
4.26% to 5.25% 8,486 18.4 13,818 28.5
5.26% to 6.25% 12,268 26.6 9,174 18.9
6.26% to 7.25% 11,635 25.2 10,093 20.8
7.26% to 8.25% 1,141 2.5 1,236 2.5
8.26% to 9.25% 161 .3 638 1.3
9.26% to 9.50% -- -- 26 .1
------- ------ ------- -----
Total Certificates
of Deposit 38,008 82.3 38,791 79.9
------- ----- ------- -----
Total Deposits $46,200 100.0% $48,510 100.0%
======= ===== ======= =====
</TABLE>
The weighted average interest rates on deposits at March 31, 1996 and
1995 were as follows:
MARCH 31,
----------------------
1996 1995
---- ----
Interest bearing checking 3.25 --
Passbook accounts 3.00 3.25
Money market accounts 3.10 3.40
Certificates of deposit 5.75 5.63
Total deposits 5.27 5.18
The aggregate amount of short-term jumbo certificates of deposit with
a minimum denomination of $100,000 was approximately $6,907,000 and
$4,729,000 at March 31, 1996 and 1995, respectively. Maturities of
jumbo certificates of deposit at March 31, 1996 were: 3 months or
less $3,461,000; over 3 through 6 months $515,000; over 6 through 12
months $1,500,000; over 12 months $1,431,000.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 11: DEPOSITS (Continued)
At March 31, 1996 and 1995, scheduled maturities of certificates of
deposit were as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Certificates maturing in:
1 year or less $26,907 $19,350
1 to 2 years 7,865 12,908
2 to 3 years 1,929 4,826
3 to 4 years 895 1,200
4 to 5 years 197 507
Over 5 years 215 0
------- -------
$38,008 $38,791
======= =======
</TABLE>
Interest expense on deposits for the years ended March 31, 1996,
1995, and 1994, is summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Certificates of deposit $2,310 $1,815 $1,784
Money market accounts 203 301 388
Passbook savings 90 115 140
------ ------ ------
$2,603 $2,231 $2,312
====== ====== ======
</TABLE>
NOTE 12: ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Cincinnati at March 31,
1995 consisted of an adjustable rate loan with the principal balance
due at maturity. The loan is summarized as follows:
<TABLE>
<CAPTION>
DATE OF MATURITY INTEREST INTEREST
------------------------------------- RATE BALANCE
ADVANCE DATE RATE INDEX MARCH 31, 1995
------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
7/29/94 7/29/99 6.175% LIBOR $4,800,000
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank,
advances are secured by the Bank's Federal Home Loan Bank stock and a
blanket pledge of first mortgage loans equal to 150 percent of the
current outstanding advances.
NOTE 13: RETAINED EARNINGS
In connection with the insurance of savings accounts, $1,868,351 of
the Bank's retained income at March 31, 1996 is restricted and may be
used only for the absorption of losses. The restriction does not
represent a valuation allowance and was not created by charges
against earnings.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 13: RETAINED EARNINGS (Continued)
The Office of Thrift Supervision ("OTS") imposes regulations which
provide that savings institutions must maintain certain levels of
capital. The regulations include a leverage limit, a tangible capital
requirement and a risk-based capital requirement. Specifically, the
regulations provide that savings institutions must maintain tangible
capital equal to 1.5% of adjusted total assets, core capital equal to
3% of adjusted total assets and a combination of core and
supplementary capital equal to 8% of risk weighted assets.
In November, 1994, the OTS adopted a regulation which affects the
computation of regulatory capital. Unrealized gains or losses on debt
securities classified as "available for sale" under SFAS No. 115, and
unrealized gains on equity securities, are not included in the Bank's
regulatory capital.
The following is a reconciliation of the Bank's generally accepted
accounting principles ("GAAP") capital to regulatory capital at March
31, 1996:
<TABLE>
<CAPTION>
REGULATORY
-----------------------------------------------
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- ------- -----------
(Amounts in thousands)
<S> <C> <C> <C>
GAAP capital $13,109 $13,109 $13,109
Regulatory adjustments:
Net unrealized gain on
available for sale securities ( 86) ( 86) ( 86)
Assets required to be deducted -- -- ( 84)
General loan valuation
allowance -- -- 286
------- ------- -------
Regulatory Capital 13,023 13,023 13,225
Required amounts 908 1,816 2,227
------- ------- -------
Regulatory capital excess $12,115 $11,207 $10,998
======= ======= =======
Regulatory capital as
a percentage of
assets, as defined 21.5% 21.5% 47.5%
Required percentage of
total assets, as defined 1.5% 3.0% 8.0%
------- ------- ------
Regulatory capital as a
percentage in excess of
requirement 20.0% 18.5% 39.5%
======= ======= =======
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 13: RETAINED EARNINGS (Continued)
The Company is not subject to any regulatory restrictions on the
payment of dividends to its stockholders. The Office of Thrift
Supervision ("OTS") regulations provide that a savings institution
which meets fully phased-in capital requirements and is subject only
to "normal supervision" may pay out, as a dividend, 100 percent of
net income to date over the calendar year and 50 percent of surplus
capital existing at the beginning of the calendar year without
supervisory approval, but with 30 days prior notice to the OTS. Any
additional amount of capital distributions would require prior
regulatory approval. A savings institution failing to meet current
capital standards may only pay dividends with supervisory approval.
At the time of conversion, a liquidation account was established in
an amount equal to the Bank's net worth as reflected in the latest
statement of condition used in its final conversion offering
circular. The liquidation account is maintained for the benefit of
eligible deposit account holders who maintain their deposit account
in the Bank after conversion. In the event of a complete liquidation
(and only in such event), each eligible deposit account holder will
be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted
subaccount balance for deposit accounts then held, before any
liquidation distribution may be made to stockholders. Except for the
repurchase of stock and payment of dividends, the existence of the
liquidation account will not restrict the use or application of net
worth. The initial balance of the liquidation account was $7,398,000.
NOTE 14: INCOME TAXES
The provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Currently payable - Federal $38,194 $68,681 $119,011
- State 2,129 -- --
Deferred - Federal ( 8,148) ( 15,808) 16,198
- State -- -- --
------- ------- --------
$32,175 $52,873 $135,209
======= ======= ========
</TABLE>
Deferred income taxes result from temporary differences in the
recognition of income and expenses for tax and financial statement
purposes. The source of these temporary differences and the tax
effect of each are as follows:
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 14: INCOME TAXES (Continued)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal Home Loan Bank
stock dividends $13,906 $11,696 $ 8,160
Deferred loan fees/costs 10,583 -- --
Loan loss allowance 11,307 ( 15,622) 10,276
Loss allowance, mortgage-
backed securities -- 23,788 30,647
Depreciation 6,860 2,979 --
AMT credit carryforward ( 36,324) ( 38,649) ( 32,885)
Deferred compensation ( 7,946) -- --
Accretion 2,270 -- --
Other deferred expenses ( 8,804) -- --
------- ------- -------
($ 8,148) ($15,808) $16,198
======= ======= =======
</TABLE>
The following tabulation reconciles the federal statutory tax rate to
the effective rate of taxes provided for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Tax exempt income ( 30.6) ( 21.6) ( 17.5)
Non-deductible expenses 5.8 ( 1.3) 6.9
State income taxes .7 -- --
----- ----- -----
9.9% 11.1% 23.4%
===== ===== =====
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 14: INCOME TAXES (Continued)
The tax effect of temporary differences giving rise to the Bank's
consolidated deferred income tax asset (liability) at March 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for losses $ 97,370 $108,677
AMT credit carryforward 107,858 71,534
Net unrealized loss on
available for sale
securities -- 14,968
Deferred compensation 7,946 --
Other deferred expenses 8,804 --
-------- --------
221,978 195,179
Valuation allowance 0 0
-------- --------
221,978 195,179
-------- --------
Deferred tax liabilities:
Federal Home Loan Bank
stock dividends 128,656 114,750
Depreciation 9,839 2,979
Accretion on securities 2,270 --
Deferred loan costs 10,583 --
Net unrealized gain on
available-for-sale
securities 44,450 --
-------- --------
195,798 117,729
-------- --------
Net deferred tax asset $ 26,180 $ 77,450
======== ========
</TABLE>
The Bank had available at March 31, 1996, alternative minimum tax
credit carryforwards for tax purposes of approximately $107,858,
which may be carried forward indefinitely and used to reduce federal
income taxes.
In computing federal income taxes, savings institutions are allowed a
statutory bad debt deduction of otherwise taxable income of 8%,
subject to limitations based on aggregate loans and savings balances.
Due to the limitation based on the level of deposits outstanding and
retained earnings, the Bank's bad debt deduction for the years 1996,
1995 and 1994 was limited to net charge-offs under the experience
method. As of March 31, 1996, appropriations of retained earnings
representing bad debt deductions were approximately $1,868,351. If
these tax bad debt deductions are used for other than loan losses,
the amount used will be subject to Federal income taxes at the
prevailing corporate rates.
The provisions of SFAS No. 109 require the Bank to establish a
deferred tax liability for the tax effect of the tax bad debt
reserves over the base year amounts. The Bank's base year tax bad
debt reserves and March 31, 1996 are approximately $1,868,351. The
estimated deferred tax liability on such amount is approximately
$635,239 which has not been recorded in the accompanying consolidated
financial statements.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 15: OTHER NONINTEREST EXPENSE
Other noninterest expense amounts for the years ended March 31, 1996,
1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Advertisings $ 52,774 $ 75,665 $ 76,038
State tax on deposits 55,131 57,498 54,203
Data processing 57,676 46,133 38,538
Audit and examinations 68,711 41,304 31,474
All other 335,974 175,723 128,050
-------- -------- --------
$570,266 $396,323 $328,303
======== ======== ========
</TABLE>
NOTE 16: BENEFIT PLANS
The Bank participates in the Pentegra multi-employer pension plan.
This non-contributory defined benefit plan covers all eligible
employees meeting certain service and age requirements. The plan
operates on a fiscal year ending on June 30, and it is the policy of
the Bank to fund the normal cost of the plan. Contributions to the
Plan for the years ended March 31, 1996, 1995 and 1994 were $12,219,
$31,742 and $26,807, respectively. The data available from the plan
administrators is not sufficient to determine the Bank's share of the
pension plan's accumulated benefit obligation, or the net assets
attributable to the Bank.
Directors are eligible to participate in a retirement plan which
provides benefits equal to approximately one-half of the monthly
compensation paid to active directors for a period not to exceed the
earlier of the number of months a participant served as director, or
the participant's death. Directors must have a minimum of ten years
of continuous service and serve until age 65 to participate in the
directors retirement plan.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 16: BENEFIT PLANS (Continued)
The following table sets forth the directors' retirement
plan's funded status and amounts recognized in the financial
statements at March 31, 1996:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested accumulated benefits ($45,148)
Non-vested accumulated benefits ( 14,522)
--------
Total accumulated benefits ( 59,670)
Unrecognized prior service cost being
recognized over 10 years 39,787
Unrecognized net obligation being
recognized over 10 years 12,798
Adjustment to recognize minimum liability ( 52,585)
--------
Accrued pension cost ($59,670)
========
Net pension cost for the year ended March 31, 1996 includes
the following components:
Service costs - benefits earned during the year $ 3,752
Interest cost on benefit obligation 4,090
Amortization of prior service cost and net
obligation 5,843
Underaccrual ( 1,650)
-------
Net pension cost $12,035
=======
</TABLE>
A discount rate of 7% was used in determining net pension cost.
Directors' retirement plan expense for the year ended March 31, 1995
and 1994 amounted to $5,700 and $5,400, respectively.
The disclosures required under SFAS No. 87 for the directors'
retirement plan are not available at March 31, 1995 and 1994.
Effective September 30, 1995, the Bank entered into a non-qualified
supplemental executive retirement agreement (agreement) with the
Bank's chief executive officer which provides for the payment of a
monthly supplemental retirement benefit equal to up to 24% of his
average monthly compensation during the three highest 12-month
periods in the ten years prior to retirement. Such benefit shall be
payable upon normal retirement at age 65 or under certain
circumstances, after age 55 if his termination is without cause. Upon
the officer's death, 50% of the amount payable under the agreement
shall be payable to his spouse until her death.
Supplemental executive retirement plan expense for the year ended
March 31, 1996 amounted to $17,935.
The disclosures required under SFAS No. 87 for the supplemental
executive retirement plan are not available at March 31, 1996. The
unfunded liability for the plan is not expected to have a material
effect on the financial position or results of operations of the
Bank.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 16: BENEFIT PLANS (Continued)
In conjunction with the Bank's conversion on December 28, 1995, the
Company established an Employee Stock Ownership Plan (ESOP) which
covers substantially all employees. The ESOP borrowed $1,058,000 from
the Company and purchased 105,800 common shares, equal to 8% of the
total number of shares issued in the conversion. The Bank makes
scheduled discretionary contributions to the ESOP sufficient to
service the debt. Shares are allocated to participants' accounts
under the shares allocated method. The cost of shares not committed
to be released and unallocated shares is reported as a reduction of
stockholders' equity. Compensation expense is recorded based on the
average fair market value of the ESOP shares when committed to be
released. The expense under the ESOP for the year ended March 31,
1996 was $59,671. The fair value of ESOP shares at March 31, 1996 was
$1,168,125.
Subsequent to the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Retention Plan (RRP). The Plans are
subject to stockholders approval. Under the stock option plan, stock
option and stock appreciation rights covering shares representing an
aggregate of up to 10% of the common stock sold in the conversion may
be granted to directors, officers and employees of the company or its
subsidiaries. Restricted stock awards covering up to 4% of the common
stock sold in the conversion may be awarded to the Bank's directors,
officers, and key employees under the RRP.
NOTE 17: FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
CARRYING FAIR
AMOUNT VALUE
------ -----
(In Thousands)
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 1,532 $ 1,532
Federal funds sold and securities
purchased under agreement to resell 975 975
Certificates of deposit with other
financial institutions 4,600 4,596
Securities available-for-sale 10,438 10,438
Mortgage-backed securities
available-for-sale 2,840 2,840
Federal Home Loan Bank stock 621 621
Loans receivable, net 43,722 42,633
Accrued interest receivable 332 332
Financial Liabilities:
Certificates of deposit 38,008 38,311
Other deposit accounts 8,192 8,192
Accrued interest payable 140 140
Accounts payable and accrued expenses 242 242
</TABLE>
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 18: SUBSEQUENT EVENTS
On April 22, 1996, the Company entered into an agreement (subject to
stockholders and regulators approval) to acquire 100% of the
outstanding stock of First Paintsville Bancshares, Inc., a one-bank
holding company for the First National Bank of Paintsville for $9.3
million in cash. In connection with the acquisition of First
Paintsville Bancshares, Inc., the Company will assume $722,000 of
long-term debt of First Paintsville Bancshares, Inc. The cost of the
transaction will be funded with a $4.5 million short-term loan and
the use of cash and temporary investments of $5.5 million.
NOTE 19: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
The following condensed statement of financial condition as of March
31, 1996 and the related condensed statements of operations and cash
flows for the period from December 28, 1995 through March 31, 1996
for Classic Bancshares, Inc. should be read in conjunction with the
consolidated financial statements and notes thereto:
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 19: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
<TABLE>
<CAPTION>
Statement of Financial Condition March 31, 1996
-------------------------------- --------------
<S> <C>
Assets
Cash and temporary investments $ 5,365,459
Accrued interest receivable 13,891
Note receivable - ESOP 991,875
Equity in net assets of Bank 5,541,975
Deferred income taxes 9,494
Other assets 105,388
-----------
Total Assets $12,028,082
===========
Liabilities
Accounts payable and accrued expenses $ 70,102
Accrued income taxes 24,960
-----------
Total Liabilities 95,062
-----------
Stockholders' Equity
Common stock 13,225
Additional paid-in capital 12,704,127
Retained earnings 220,768
Unearned ESOP shares ( 1,005,100)
-----------
Total Stockholders' Equity 11,933,020
-----------
Total Liabilities and Stockholders' Equity $12,028,082
===========
</TABLE>
<TABLE>
<CAPTION>
Period From
December 28, 1995
STATEMENT OF OPERATIONS Through March 31, 1996
----------------------- ----------------------
<S> <C>
Income
Equity in earnings of bank $ 188,399
Interest income 79,014
-----------
Total Income 267,413
-----------
Expenses
Legal and accounting fees 15,336
Corporate management fees 7,605
Travel and entertainment 2,788
Other expenses 5,700
-----------
Total Expenses 31,429
-----------
Income Before Income Taxes 235,984
Federal and state income taxes 15,216
-----------
Net Income $ 220,768
===========
</TABLE>
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------------
NOTE 19: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (Continued)
<TABLE>
<CAPTION>
Period From
December 28, 1995
Through March 31, 1996
----------------------
<S> <C>
STATEMENT OF CASH FLOWS
Operating Activities
Net income $ 220,768
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of bank ( 188,399)
Deferred income tax benefit ( 9,494)
Increase in accrued interest receivable ( 13,891)
Increase in other assets ( 105,388)
Increase in accounts payable and accrued expenses 70,102
Increase in accrued income taxes 24,960
-----------
Net Cash Used By Operating Activities ( 1,342)
-----------
Investing Activities
ESOP loan origination ( 1,058,000)
ESOP loan repayments 66,125
Purchased capital stock in Bank ( 5,300,676)
-----------
Net Cash Used By Investing Activities ( 6,292,551)
-----------
Financing Activities
Net proceeds from sale of common stock 11,659,352
-----------
Net Cash Provided By Financing Activities 11,659,352
-----------
Net Increase in Cash and Cash Equivalents 5,365,459
Cash and cash equivalents at beginning of year --
-----------
Cash and Cash Equivalents at End of Year $ 5,365,459
===========
</TABLE>
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Paintsville Bancshares, Inc.
Paintsville, Kentucky
We have audited the consolidated balance sheets of First Paintsville
Bancshares, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years then ended. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of First Paintsville Bancshares, Inc. and Subsidiary as of December 31,
1995 and 1994, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Eskew & Gresham
February 15, 1996
F-35
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 10):
Cash and due from banks $ 3,357,493 $ 2,820,453
Federal funds sold 0 1,240,000
----------- -----------
Total cash and cash equivalents $ 3,357,493 $ 4,060,453
Investment securities (Notes 2 and 10):
Available for sale 26,477,892 0
Held to maturity 0 38,083,189
Loans, net (Notes 3, 10 and 11) 26,565,390 23,466,986
Bank premises and equipment, net (Note 4) 648,910 686,472
Accrued interest receivable 488,131 608,010
Real estate acquired through foreclosure 320,604 352,603
Federal Home Loan Bank stock (Note 10) 215,500 52,600
Other assets (Note 8) 574,724 361,840
----------- -----------
TOTAL ASSETS $58,648,644 $67,672,153
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 10):
Demand $ 7,169,172 $ 9,113,074
NOW and money market 10,898,716 18,936,010
Savings 9,984,443 11,531,350
Time, $100,000 and over 4,554,060 3,523,716
Other time 18,958,192 17,822,274
----------- -----------
Total deposits $51,564,583 $60,926,424
Treasury tax and loan note (Note 10) 156,791 245,927
Accrued interest payable 152,377 129,194
Income taxes payable 165,512 133,288
Deferred income taxes (Note 5) 45,373 86,016
Note payable (Notes 6 and 10) 735,403 782,000
Debentures (Note 7) 0 67,000
Other liabilities 148,132 76,726
----------- -----------
Total liabilities $52,968,171 $62,446,575
MINORITY INTEREST IN SUBSIDIARY $ 171,109 $ 193,624
STOCKHOLDERS' EQUITY (Note 13):
Common stock, 180,000 shares authorized;
72,388 and 72,305 shares issued and
outstanding, respectively $ 1,447,068 $ 1,420,910
Retained earnings 4,057,231 3,611,044
Net unrealized gain on securities available
for sale, net of tax (Note 2) 5,065 0
----------- -----------
Total stockholders' equity $ 5,509,364 $ 5,031,954
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $58,648,644 $67,672,153
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,506,845 $ 2,195,969
Interest on investment securities -
U. S. Treasury securities 39,021 105,532
Obligations of U. S. government agencies 1,890,863 1,550,116
Obligations of states and political subdivisions 23,378 23,256
Other securities 25,394 19,351
Interest on federal funds sold 59,901 136,400
------------ ------------
$ 4,545,402 $ 4,030,624
INTEREST EXPENSE:
Interest on deposits $ 1,853,811 $ 1,761,024
Interest on borrowed funds 107,609 69,642
------------ ------------
$ 1,961,420 $ 1,830,666
Net interest income $ 2,583,982 $ 2,199,958
Provision for loan losses (Note 3) 169,000 0
------------ ------------
Net interest income after provision
for loan losses $ 2,414,982 $ 2,199,958
OTHER INCOME:
Service charges, commissions and fees $ 318,575 $ 336,602
Investment securities gains (losses) (Note 2) 30,968 (22,255)
Other 19,258 30,521
------------ ------------
$ 368,801 $ 344,868
OTHER EXPENSE:
Salaries and employee benefits $ 930,292 $ 940,091
Occupancy expenses 257,449 279,968
Advertising expenses 44,351 27,057
Other operating expenses 495,076 519,006
------------ ------------
$ 1,727,168 $ 1,766,122
Income before provision for income taxes
and minority interest $ 1,056,615 $ 778,704
Provision for income taxes (Note 5) 352,533 261,749
------------ ------------
Income before minority interest $ 704,082 $ 516,955
Minority interest in net income of subsidiary 21,155 20,385
------------ ------------
NET INCOME $ 682,927 $ 496,570
NET INCOME PER SHARE $ 9.44 $ 6.56
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Gain on
Securities Total
Common Retained Available Stockholders'
Stock Earnings for Sale Equity
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $1,536,914 $3,399,625 $ 0 $4,936,539
Net income 0 496,570 0 496,570
Purchase of 5,903 shares of
common stock (116,004) (285,151) 0 (401,155)
---------- ---------- ------------- ----------
Balance, December 31, 1994 $1,420,910 $3,611,044 $ 0 $5,031,954
Net income 0 682,927 0 682,927
Dividends paid ($3.00 per share) 0 (217,104) 0 (217,104)
Net change in unrealized gain on
securities available for sale (Note 2) 0 0 5,065 5,065
Issuance of 483 shares of
common stock 34,018 0 0 34,018
Purchase of 400 shares of
common stock (7,860) (19,636) 0 (27,496)
---------- ---------- ------------- ----------
BALANCE, DECEMBER 31, 1995 $1,447,068 $4,057,231 $ 5,065 $5,509,364
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 682,927 $ 496,570
Adjustments to reconcile net income to
net cash provided by operating activities -
Provision for loan losses 169,000 0
Depreciation 53,402 69,822
Amortization and accretion, net (24,729) (28,577)
Provision for deferred income taxes (43,325) 8,780
(Gain) loss on investment securities (30,968) 22,255
Gain on sale of real estate acquired through foreclosure (2,000) 0
Loss on sale of assets 0 7,936
Minority interest in net income 21,155 20,385
Changes in:
Accrued interest receivable 119,879 (141,568)
Income taxes refundable 0 56,761
Other assets (375,784) (30,289)
Accrued interest payable 23,183 (41)
Income taxes payable 32,224 133,288
Other liabilities 71,408 6,316
------------- -------------
Net cash provided by operating activities $ 696,372 $ 621,638
INVESTING ACTIVITIES:
Purchases of securities held to maturity $ 0 $(21,644,992)
Proceeds from sales of securities available for sale 1,993,125 0
Proceeds from calls, maturities and principal
payments on investment securities held to maturity 9,675,757 16,220,549
Net change in loans (3,267,404) 1,691,901
Purchase of real estate acquired through foreclosure 0 (368,879)
Proceeds from sales of real estate acquired
through foreclosure 25,000 91,915
Proceeds from sale of repossessed assets 9,000 0
Proceeds from disposal of equipment 11,876 7,500
Purchases of bank premises and equipment (27,718) (97,087)
------------- -------------
Net cash provided by (used in) investing activities $ 8,419,636 $ (4,099,093)
FINANCING ACTIVITIES:
Net change in deposits $ (9,361,841) $ (659,144)
Proceeds from issuance of note payable 0 782,000
Payments on note payable (46,597) 0
Net change in treasury tax and loan note (89,136) (285,691)
Payment on debentures (67,000) (388,280)
Purchase of minority interest (32,320) (42,605)
Cash dividends paid to minority interest (11,492) (4,490)
Dividends paid (217,104) 0
Proceeds from issuance of common stock 34,018 0
Purchase of common stock (27,496) (401,155)
------------- -------------
Net cash used in financing activities $ (9,818,968) $ (999,365)
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994
<S> <C> <C>
Decrease in cash and cash equivalents $ (702,960) $ (4,476,820)
Cash and cash equivalents at beginning of year 4,060,453 8,537,273
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,357,493 $ 4,060,453
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for -
Interest expense $ 1,938,237 $ 1,830,707
Income taxes $ 361,152 $ 62,919
Non-cash investing activity -
Transfer of investment securities held to maturity
to available for sale (Note 2) $ 26,468,864 $ 0
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements
include the accounts of First Paintsville Bancshares, Inc. (the Company) and
its majority-owned subsidiary, First National Bank of Paintsville (the Bank).
Significant intercompany balances and transactions have been eliminated.
B. Nature of Operations - The Bank operates under a national bank
charter, and provides full banking services, including trust services. As a
national bank, the Bank is subject to regulation by the Office of the
Comptroller of the Currency and the Federal Deposit Insurance Corporation. The
Company is also subject to regulation by the Federal Reserve Bank.
C. Estimates in the Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
D. Cash and Cash Equivalents - For purposes of reporting cash
flows, cash and cash equivalents include cash on hand, amounts due from banks
and federal funds sold. Generally, federal funds are sold for one-day periods.
E. Investment Securities - The Bank classifies its investment
security 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 Bank has no investments classified as trading.
Investment securities available for sale are carried at fair
value. Adjustments from amortized cost to fair value are recorded in
stockholders' equity, net of related income tax, under net unrealized gain
(loss) on investment securities. The adjustment is computed on the difference
between fair value and cost, adjusted for amortization of premiums and accretion
of discounts which are recorded as adjustments to interest income on a constant
yield method.
Gains or losses on dispositions are based on the net proceeds and
the adjusted carrying amount of the securities sold, using the specific
identification method.
F-41
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Loans - Loans are stated at the amount of unpaid principal,
reduced by unearned interest and an allowance for loan losses. Unearned interest
on installment loans is recognized as income over the terms of the loans by a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amount outstanding. Accrual of interest on impaired loans is
discontinued when management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of interest is doubtful. When interest accrual is
discontinued, interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against the allowance for
loan losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrowers'
ability to pay. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
For Impairment of a Loan", which requires that allowances for loan losses on
impaired loans be 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 Statement is effective for fiscal years
beginning after December 15, 1994. The Bank adopted the statement, as required
on January 1, 1995. The effect of adopting the new guidance was not material to
the Bank's financial statements.
G. Bank Premises and Equipment - Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over the
estimated useful lives of the assets using straight-line and accelerated
methods.
F-42
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. 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.
I. Income Taxes - The Company and the Bank file a consolidated
federal income tax return. The Bank is charged or credited an amount equal to
the tax that would have been applicable on a separate return basis.
The Company uses the liability method for computing deferred
income taxes. Under the liability method, deferred income taxes are based on the
change during the year in the deferred tax liability or asset established for
the expected future tax consequences of differences in the financial reporting
and tax bases of assets and liabilities. The differences relate principally to
premises and equipment, investment securities, pension assets, real estate
acquired through foreclosure and the allowance for loan losses.
J. Per Share Information - Net income per share is calculated
based on the weighted average number of shares outstanding during the year.
K. Advertising Expense - The Company charges all advertising
expenses to operations when incurred. No amounts have been established for any
future benefits relative to these expenditures.
L. Reclassifications - Certain reclassifications have been made in
the 1994 financial statements to conform to the 1995 presentation.
NOTE 2 - INVESTMENT SECURITIES
On January 1, 1994, the Company changed its accounting for certain
debt and equity securities to conform with the adoption of SFAS No. 115. This
change had no effect on stockholders' equity.
During December 1995, the Bank made a one time transfer of
investment securities from held to maturity to available for sale of
$26,468,864, as allowed under the Financial Accounting Series Special Report, "A
Guide to Implementation of Statement 115", issued in November 1995. The
investments were transferred at fair value at the date of transfer. The
unrealized gain on transfer is included in the net change in unrealized gain on
securities available for sale in the statements of stockholders' equity.
F-43
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
Amortized cost and fair value of investment securities available
for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of U. S. government
agencies $22,035,177 $ 50,856 $ (164,076) $21,921,957
Obligations of states and political
subdivisions 392,907 30,369 0 423,276
Asset-backed securities 4,041,920 98,195 (7,456) 4,132,659
------------ ------------ ----------- -----------
$26,470,004 $ 179,420 $ (171,532) $26,477,892
</TABLE>
Amortized cost and fair value of investment securities held to
maturity at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 1,996,675 $ 0 $ (37,675) $ 1,959,000
Obligations of U. S. government
agencies 30,926,185 11,219 (610,404) 30,327,000
Obligations of states and
political subdivisions 407,490 5,496 (22,986) 390,000
Asset-backed securities 4,502,879 44,214 (127,093) 4,420,000
Other securities 249,960 1,040 0 251,000
----------- ----------- ----------- -----------
$38,083,189 $ 61,969 $ (798,158) $37,347,000
</TABLE>
The amortized cost and fair value of investment securities
available for sale at December 31, 1995, by 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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $10,509,329 $10,524,112
Due after one year through five years 10,553,544 10,449,890
Due after five years through ten years 1,200,000 1,180,111
Due after ten years 165,211 191,120
------------ ------------
$22,428,084 $22,345,233
Asset-backed securities 4,041,920 4,132,659
------------ ------------
$26,470,004 $26,477,892
</TABLE>
F-44
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
Proceeds from calls and sales of investment securities were
$9,524,093 and $1,005,000 for 1995 and 1994, respectively. Gross gains of
$36,895 and $162 and gross losses of $5,927 and $22,413 were realized on the
calls and sales for 1995 and 1994, respectively.
Investment securities with carrying values of approximately
$7,299,000 and $9,096,000 at December 31, 1995 and 1994, respectively, were
pledged to secure public deposits and for other purposes as required or
permitted by law.
NOTE 3 - LOANS
Major classifications of loans are as follows:
December 31
1995 1994
Commercial and real estate $22,706,699 $20,346,088
Installment 4,733,965 3,634,498
Overdrafts 27,270 42,880
----------- -----------
$27,467,934 $24,023,466
Unearned income (455,179) (255,609)
Allowance for loan losses (447,365) (300,871)
---------- -----------
$26,565,390 $23,466,986
Changes in the allowance for loan losses were as follows:
1995 1994
Balance, beginning of year $ 300,871 $ 273,973
Loans charged off (78,432) (75,274)
Recoveries 55,926 102,172
Provision charged to expense 169,000 0
------------ ------------
Balance, end of year $ 447,365 $ 300,871
Impairment of loans having carrying values of approximately
$231,000 at December 31, 1995 has been recognized in conformity with FASB
Statement No. 114, "Accounting by Creditors for Impairment of a Loan". The
average recorded investment in impaired loans during 1995 was approximately
$222,000. The total allowance for credit losses related to those loans was
approximately $23,100 at December 31, 1995. No cash payments were received on
impaired loans in 1995.
F-45
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 3 - LOANS (CONTINUED)
Changes in the allowance for credit losses on impaired loans were
as follows:
Balance, at adoption $ 17,200
Charge-off of impaired loans 0
Additions to allowance 5,900
-----------
Balance, end of year $ 23,100
Nonaccrual loans were approximately $173,000 at December 31,
1994. The reduction in interest income associated with nonaccrual loans was
approximately $31,000 for 1994.
Loans made in the ordinary course of business to various officers
and directors, as well as entities in which these individuals have a financial
interest, and other related parties aggregated approximately $723,000 and
$1,001,000 at December 31, 1995 and 1994, respectively. The terms and conditions
of such loans are consistent with similar loans to unrelated parties and in
management's opinion do not involve more than a normal credit risk of
collectibility or present other unfavorable terms.
NOTE 4 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
1995 1994
<S> <C> <C>
Land $ 112,000 $ 112,000
Buildings 803,559 793,273
Furniture, fixtures and equipment 871,342 879,218
------------ ------------
$ 1,786,901 $ 1,784,491
Accumulated depreciation (1,137,991) (1,098,019)
----------- -----------
$ 648,910 $ 686,472
</TABLE>
Depreciation expense was $53,402 in 1995 and $69,822 in 1994.
F-46
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 5 - INCOME TAXES
The provision for income taxes is summarized as follows:
1995 1994
Current $ 395,858 $ 252,969
Deferred (43,325) 8,780
------------ --------------
$ 352,533 $ 261,749
The provisions for income taxes recorded for the years ended
December 31, 1995 and 1994, are less than would have been provided using the
statutory federal income tax rate due to tax-exempt interest income of
approximately $23,000 in both 1995 and 1994.
The Company's deferred tax assets and liabilities at December 31
are as follows:
1995 1994
Deferred tax assets $ 54,700 $ 1,700
Deferred tax liabilities 100,073 87,716
----------- ------------
Net deferred tax liability $ 45,373 $ 86,016
NOTE 6 - NOTE PAYABLE
Note payable at December 31, 1995 and 1994 consists of the
following:
1995 1994
Promissory note, due in 40 quarterly
installments of $29,492, interest at
prime (8.5% at December 31, 1995)
maturing December 31, 2004, secured by
80,018 shares of common stock of First
National Bank of Paintsville. $735,403 $ 782,000
Required payments of principal at December 31, 1995, by year, is
as follows:
1996 $ 57,511
1997 62,557
1998 68,046
1999 74,017
2000 80,512
Thereafter 392,760
----------
$ 735,403
F-47
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 7 - DEBENTURES
In connection with the acquisition of 93.4% of the Bank's common
stock, the Company incurred certain long-term debt consisting of subordinated
debentures. The balances outstanding at December 31, 1995 and 1994 were as
follows:
1995 1994
12% debentures payable to certain stock-
holders, one-third repayable in each of
the years 1995, 1996 and 1997. Interest
is payable annually and the debentures
are callable in full by the Company
annually, beginning December 20, 1994. $ 0 $ 67,000
The debentures were called in full by the Company on December 20,
1994. The balance outstanding at December 31, 1994 represented non-interest
bearing amounts that had not been presented for payment as of that date.
NOTE 8 - PENSION PLAN
The Bank has a non-contributory, defined benefit pension plan
covering substantially all of its employees. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. No contribution to the plan was made in 1995 or 1994 because of
the plan's fully funded position. Benefits are based on a percentage of employee
average monthly earnings multiplied by years of credited service.
The following table sets forth the plan's funded status and
amounts recognized in the accompanying financial statements at December 31:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including
vested benefits of ($644,050) and ($623,218),
respectively $ (626,604) $ (629,707)
----------- -----------
Projected benefit obligation for services
rendered to date $ (756,570) $ (816,835)
Plan assets at fair value, primarily fixed
income securities and common stock 1,109,627 982,352
----------- ------------
Plan assets in excess of projected benefit
obligations $ 353,057 $ 165,517
</TABLE>
F-48
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 8 - PENSION PLAN (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Unrecognized net loss 75,763 296,621
Unrecognized net asset at January 1, 1989,
being recognized over 17 years (286,351) (314,986)
----------- -----------
Prepaid pension cost included in other assets $ 142,469 $ 147,152
1995 1994
Net periodic pension cost for 1995 and 1994 included the
following components:
Service cost $ (36,700) $ (36,466)
Interest cost (48,590) (47,110)
Actual return on plan assets 75,044 212,960
Amortization of transition asset 28,635 28,635
Amortization of plan loss (14,914) 0
Difference between actual and expected return
on plan assets 0 (163,404)
----------- -----------
Net periodic gain (cost) $ 3,475 $ (5,385)
</TABLE>
A discount rate of 7% was used to compute the actuarial present
value of the accumulated and projected benefit obligations. The assumed rate of
return on plan assets was 7%. The assumed rate of salary increases is 4%.
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include standby letters of credit and
commitments to extend credit in the form of unused lines of credit. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
F-49
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
(CONTINUED)
At December 31, 1995 and 1994, the Bank had the following
financial instruments whose contract amounts represent credit risk:
1995 1994
Standby letters of credit $ 190,000 $ 343,000
Commitments to extend credit $ 1,367,000 $ 1,546,000
Standby letters of credit represent conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing these letters of credit is essentially the
same as the risk involved in extending loans to customers. The Bank holds
primarily certificates of deposit and real estate as collateral to support these
commitments in whole or in part. Standby letters of credit with related parties
totaled approximately $81,000 and $76,000 at December 31, 1995 and 1994,
respectively.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Collateral held varies, but
primarily includes real estate.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents - For those short-term 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.
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.
F-50
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 10 - 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.
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.
Note Payable - Rates currently available to the Bank for debt
with similar terms and remaining maturities are used to estimate
fair value of existing debt. Since the outstanding debt is at
prime, the carrying value is a reasonable estimate of fair value.
Other Borrowings - For treasury tax and loan note, the
carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit -
Commitments to extend credit and standby letters of credit
represent agreements to lend to a customer at the market rate
when the loan is extended, thus the commitments and letters of
credit are not considered to have a fair value.
The fair values of the Company's financial instruments at December
31, 1995 are as follows:
Carrying Fair
Amount Value
Financial assets:
Cash and cash equivalents $ 3,357,493 $ 3,357,000
Investment securities 26,477,892 26,478,000
Loans 27,012,755 26,814,000
Less: allowance for loan losses (447,365) (447,000)
Federal Home Loan Bank stock 215,500 216,000
----------- -------------
$56,616,275 $56,418,000
Financial liabilities:
Deposits $51,564,583 $51,727,000
Note payable 735,403 735,000
Other borrowings 156,791 157,000
----------- ------------
$52,456,777 $52,619,000
F-51
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
(CONTINUED)
NOTE 11 - CONCENTRATION OF CREDIT RISK
The Bank grants residential, commercial and installment loans to
customers primarily located in Johnson and adjoining counties in Kentucky.
Although the Bank has a diverse loan portfolio, a substantial portion of its
debtors' ability to perform on their contracts is dependent upon the coal
industry which has a significant impact on the local economy.
NOTE 12 - CONTINGENCIES
The Bank is a party to certain legal actions arising from
foreclosure proceedings and normal business activities. Management believes that
the ultimate liability, if any, resulting from these actions will not materially
affect the Bank's financial position or results of operations.
NOTE 13 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds for dividend payments and
debt retirement is dividends received from the Bank. Banking regulations limit
the amount of dividends that may be paid without prior approval of the Bank's
regulatory agencies. Under these regulations, dividends in 1996 will be limited
to approximately $802,000 plus any 1996 net profits retained to the date of the
dividend declaration.
F-52
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
MARCH 31,
(IN THOUSANDS)
1996 1995
---- ----
ASSETS
Cash and due from banks $ 2,984 $ 2,119
Federal funds sold 4,725 1,375
------ ------
Total cash and cash equivalents 7,709 3,494
Investment securities available for sale 21,602
Investment securities to be held to maturity 36,521
Loans receivable, net 27,455 23,447
Bank premises and equipment 784 668
Accrued interest receivable 444 564
Federal Home Loan Bank stock 219 203
Real estate acquired through foreclosure 321 343
Other assets 526 381
------ ------
TOTAL ASSETS $59,060 $65,621
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $51,841 $58,758
Treasury tax and loan note 456 223
Accrued interest payable 155 140
Debt payable 722 788
Other liabilities 198 294
------ ------
Total liabilities 53,372 60,203
------ ------
Minority interest in subsidiary 171 169
------ ------
Stockholders' equity
Common stock 1,446 1,493
Retained earnings 4,162 3,756
Net unrealized gain on securities
available for sale ( 91) --
------ ------
Total stockholders' equity 5,517 5,249
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $59,060 $65,621
====== ======
See notes to unaudited consolidated financial statements.
F-53
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC.
UNAUDITED CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
1996 1995
---- ----
INTEREST INCOME
Loans $ 674 $ 567
Investment securities 331 553
Other interest and dividend income 36 7
----- -----
Total interest income 1,041 1,127
----- -----
Interest expense
Interest on deposits 447 439
Other interest expense 18 27
----- -----
Total interest expense 465 466
----- -----
Net interest income 576 661
Provision for loan losses -- --
----- -----
Net interest income after
provision for loan losses 576 661
Non-interest income 80 87
Non-interest expense 381 417
----- -----
Income before income tax and minority
interest 275 331
Income tax expense 93 109
----- -----
Income before minority interest 182 222
Minority interest in net income
of subsidiary 5 9
----- -----
NET INCOME $ 177 $ 213
===== =====
See notes to unaudited consolidated financial statements.
F-54
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(IN THOUSANDS)
1996 1995
---- ----
OPERATING ACTIVITIES
Net income $ 177 $ 213
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 18 13
Change in other assets 89 ( 115)
Change in other liabilities ( 158) 9
Other ( 22) ( 9)
----- -----
Net cash provided by operating activities 104 111
----- -----
INVESTING ACTIVITIES
Purchases of securities available for sale (1,998)
Sales and maturities of securities available
for sale 6,727
Sales and maturities of securities held to
maturity 1,562
Net change in loans ( 890) 20
Purchases of bank premises and equipment ( 153) ( 7)
----- -----
Net cash provided by investing activities 3,686 1,575
----- -----
FINANCING ACTIVITIES
Net change in deposits 276 (2,168)
Net change in treasury tax and loan note 299 ( 23)
Payments on debt ( 13) ( 61)
----- -----
Net cash provided (used) by financing
activities 562 (2,252)
----- -----
NET CHANGE IN CASH AND EQUIVALENTS 4,352 ( 566)
CASH AND EQUIVALENTS BEGINNING OF PERIOD 3,357 4,060
----- -----
CASH AND EQUIVALENTS END OF PERIOD $7,709 $3,494
===== =====
See notes to unaudited consolidated financial statements.
F-55
<PAGE>
FIRST PAINTSVILLE BANCSHARES, INC. & SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Three months ended March
31, 1996 and 1995 (unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial
statements of First Paintsville Bancshares, Inc. and its subsidiary,
included herein reflect all adjustments (consisting only of normal
recurring adjustments), necessary to present fairly the financial
condition of First Paintsville Bancshares, Inc. as of March 31, 1996
and 1995, and the results of operations for all interim periods
presented.
The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results which may be expected for the
entire fiscal year ending December 31, 1996.
F-56
<PAGE>
APPENDIX I
---------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
FIRST PAINTSVILLE BANCSHARES, INC.
THE FIRST NATIONAL BANK OF PAINTSVILLE
CLASSIC BANCSHARES, INC.
and
CLASSIC SUB CORP.
---------------------------------------------
--------------
APRIL 22, 1996
--------------
I-1
<PAGE>
TABLE OF CONTENTS
Page
RECITALS ........................................................... 2
ARTICLE I. THE MERGER AND RELATED MATTERS............................. 2
1.1 Structure of the Merger.................................... 2
1.2 Closing Date............................................... 2
1.3 Company Merger............................................. 3
1.4 Conversion of Merger Sub Common Stock...................... 4
1.5 Escrowed Funds............................................. 4
1.6 Reservation of Right to Revise Transaction................. 5
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE BANK.................................. 5
2.1 Organization and Authority................................. 5
2.2 Subsidiaries............................................... 5
2.3 Capitalization............................................. 6
2.4 Authorization.............................................. 6
2.5 Company Financial Statements............................... 7
2.6 Company Reports............................................ 7
2.7 Properties and Leases...................................... 8
2.8 Taxes...................................................... 8
2.9 Material Adverse Change.................................... 8
2.10 Commitments and Contracts.................................. 9
2.11 Litigation and Other Proceedings........................... 9
2.12 Insurance..................................................10
2.13 Compliance with Laws.......................................10
2.14 Labor......................................................11
2.15 Material Interests of Certain Persons......................11
2.16 Allowance for Loan Losses; Nonperforming Assets............12
2.17 Employee Benefit Plans.....................................12
2.18 Conduct to Date............................................13
2.19 Proxy Statement, etc.......................................14
2.20 Registration Obligations...................................14
2.21 Takeover Provisions Not Applicable.........................14
2.22 Regulatory Matters.........................................15
2.23 Brokers and Finders........................................15
2.24 Accuracy of Information....................................15
2.25 Community Reinvestment Act Compliance......................15
2.26 Adequate Representation....................................15
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF
ACQUIROR..................................................15
3.1 Organization and Authority.................................15
3.2 Authorization..............................................16
3.3 Acquiror Financial Statements..............................16
3.4 Acquiror Reports...........................................17
3.5 Material Adverse Change....................................17
3.6 Proxy Statement, etc.......................................17
3.7 Brokers and Finders........................................17
3.8 Accuracy of Information....................................17
<PAGE>
3.9 Available Funds.............................................17
ARTICLE IV. CONDUCT OF BUSINESSES PRIOR TO THE CLOSING DATE.............18
4.1 Conduct of Businesses Prior to the Closing Date.............18
4.2 Forbearances................................................18
4.3 Government Filings..........................................20
ARTICLE V. ADDITIONAL AGREEMENTS.......................................20
5.1 Access and Information......................................20
5.2 Regulatory Filings..........................................20
5.3 Stockholder Approvals.......................................20
5.4 Current Information.........................................21
5.5 Expenses....................................................21
5.6 Buy/Sell Agreement and Voting Agreements....................21
5.7 Miscellaneous Agreements and Consents.......................21
5.8 Employee Agreements and Benefits............................21
5.9 Press Releases..............................................21
5.10 Takeover Provisions.........................................21
5.11 D&O Indemnification and Insurance...........................21
5.12 Third Parties...............................................22
5.13 Dissenting Shareholders' Appraisal Rights...................22
5.14 Establishment of Accruals...................................22
ARTICLE VI. CONDITIONS..................................................22
6.1 Conditions to Each Party's Obligation to Effect the Merger..22
6.2 Conditions to Obligations of the Company and
the Bank to Effect the Merger...............................22
6.3 Conditions to Obligations of Acquiror and
Merger Sub to Effect the Merger.............................23
ARTICLE VII. TERMINATION, AMENDMENT AND WAIVER................................24
7.1 Termination.................................................24
7.2 Effect of Termination.......................................25
7.3 Amendment...................................................25
7.4 Severability................................................25
7.5 Waiver......................................................25
ARTICLE VIII. GENERAL PROVISIONS..............................................25
8.1 Non-Survival of Representations, Warranties and Agreements..25
8.2 Notices.....................................................26
8.3 Miscellaneous...............................................26
Exhibit A - Buy/Sell Agreement
Exhibit B - Voting Agreement
Exhibit C - Escrow Agreement
<PAGE>
AGREEMENT AND PLAN OF MERGER
RECITALS
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated April 22,
1996, is by and among First Paintsville Bancshares, Inc., a Kentucky corporation
(the "Company"), The First National Bank of Paintsville (the "Bank"), Classic
Bancshares, Inc., a Delaware corporation ("Acquiror"), and Classic Sub Corp., a
Kentucky corporation and a wholly-owned subsidiary of Acquiror ("Merger Sub").
A. Acquiror and the Company, on the terms and conditions hereinafter
set forth, desire to effect an acquisition transaction pursuant to which
Acquiror will acquire for cash all of the shares of the Company Common Stock (as
hereinafter defined) outstanding on the Closing Date (as hereinafter defined) at
a purchase price per share equal to the amount set forth in Section 1.3(a)
hereof.
B. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and the
merger contemplated thereby and to prescribe certain conditions to the merger.
C. Within seven days after the execution and delivery of this
Agreement, and as an inducement to Acquiror's willingness to enter into this
Agreement, Acquiror and each of James C. Witten and James C. Witten Revocable
Trust, Robert W. Witten, Robert L. Bayes, James D. Turner, Diane Turner Belko
and John W. Turner, M.D. (collectively the "Sellers") shall enter into a
buy/sell agreement in the form attached hereto as Exhibit A (the "Buy/Sell
Agreements") and Acquiror and certain of the directors of the Company shall
enter into voting agreements in the Form attached hereto as Exhibit B (the
"Voting Agreements").
NOW THEREFORE, in consideration of the representations, warranties,
promises, covenants, agreements and conditions herein and hereunder, the parties
hereto agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Structure of the Merger. On the Closing Date, Merger Sub will merge
(the "Merger") with and into the Company, with the Company being the surviving
corporation (the "Surviving Corporation"), pursuant to the provisions of, and
with the effect provided in, the Kentucky Business Corporation Act (the "KBCA").
On the Closing Date, the articles of incorporation and bylaws of the Surviving
Corporation shall be the articles of incorporation and bylaws of the Company in
effect immediately prior to the Closing Date. On the Closing Date, the directors
and officers of the Surviving Corporation shall be the directors and officers of
Merger Sub immediately prior to the Closing Date. The name of the Surviving
Corporation shall continue to be First Paintsville Bancshares, Inc. Upon
consummation of the Merger, the separate corporate existence of Merger Sub shall
terminate.
1.2 Closing Date. As soon as practicable after each of the conditions
set forth in Article 6 hereof have been satisfied or waived, the closing of the
transactions contemplated by this Agreement shall take place, at such date, time
and location as shall be designated by Acquiror to the Company (the "Closing").
The date on which the Closing actually occurs is herein referred to as the
"Closing Date."
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On the Closing Date, or such other date as may be designated by Acquiror to the
Company, the parties will file, or cause to be filed with the Secretary of State
of the Commonwealth of Kentucky such articles of merger and other documents as
they may deem necessary or appropriate for the Merger in accordance with Section
271B.11-050 of the KBCA. The Merger shall thereupon become effective in
accordance with the KBCA. Notwithstanding any other provision in this Agreement
to the contrary, this Agreement shall terminate if the Closing Date has not
occurred by March 31, 1997.
1.3 Company Merger.
(a) Conversion of the Company Stock. On the Closing Date:
(i) Each share of common stock of the Company, no par value per
share (the "Company Common Stock"), issued and outstanding
immediately prior thereto (except for Dissenting Shares, if
applicable, as defined in Section 1.3(b) hereof) shall, by virtue
of the Merger and without any action on the part of the holder
thereof, be converted into the right to receive $125.00 in cash
(the "Merger Consideration"), without any interest thereon from the
Closing Date until the time of payment; provided, however, that in
the event that the Closing Date occurs after September 30, 1996,
such amount shall increase by $.83 for each month or portion
thereof occurring after such date and by an additional $.17 per
month (in addition to the $.83 referred to above) for each month or
portion thereof occurring after December 31, 1996.
Notwithstanding any other provision of this Agreement, any
shares of the Company Common Stock issued and outstanding
immediately prior to the Closing Date which are then owned
beneficially or of record by Acquiror, Merger Sub, the Company, the
Bank or by any direct or indirect subsidiary of any of them or are
held in the treasury of the Company shall, by virtue of the Merger,
be canceled without payment of any consideration therefor and
without any conversion thereof.
(ii) The holders of certificates representing shares of the
Company Common Stock shall cease to have any rights as stockholders
of the Company, except such rights, if any, as they may have
pursuant to the KBCA. Except as provided above, until certificates
representing shares of the Company Common Stock are surrendered for
exchange, each such certificate shall, after the Closing Date,
represent for all purposes only the right to receive the amount of
cash into which their shares of the Company Common Stock shall have
been converted by the Merger as provided above (the "Merger
Consideration").
(b) Dissenting Shares. Any shares of the Company Common Stock
held by a holder who dissents from the Merger in accordance with the
KBCA and becomes entitled to obtain payment for the fair value of such
shares of the Company Common Stock pursuant to the applicable
provisions of the KBCA shall be herein called "Dissenting Shares."
Notwithstanding any other provision of this Agreement, any Dissenting
Shares shall not, after the Closing Date, be entitled to vote for any
purpose or receive any dividends or other distributions and shall be
entitled only to such rights as are afforded in respect of Dissenting
Shares pursuant to the KBCA.
(c) Exchange of the Company Common Stock
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(i) As soon as practicable after the Closing Date, holders of
record of certificates formerly representing shares of the Company
Common Stock (the "Certificates") shall be instructed to tender
such Certificates to Acquiror pursuant to a letter of transmittal
that Acquiror shall deliver or cause to be delivered to such
holders. Such letters of transmittal shall specify that risk of
loss and title to Certificates shall pass only upon delivery of
such Certificates to Acquiror.
(ii) After the Closing Date, each holder of a Certificate that
surrenders such Certificate to Acquiror or, at the election of
Acquiror, a paying agent designated by Acquiror (the "Paying
Agent") will, upon acceptance thereof by Acquiror or the Paying
Agent, be paid the Merger Consideration in respect of the shares
represented thereby.
(iii) Acquiror or, at the election of Acquiror, the Paying
Agent, shall accept Certificates upon compliance with such
reasonable terms and conditions as Acquiror or the Paying Agent,
may impose to effect an orderly exchange thereof in accordance with
customary exchange practices. Certificates shall be appropriately
endorsed or accompanied by such instruments of transfer as Acquiror
or the Paying Agent may reasonably require.
(iv) Each outstanding Certificate, other than those
representing Dissenting Shares, shall until duly surrendered to
Acquiror or the Paying Agent be deemed to evidence the right to
receive the Merger Consideration.
(v) After the Closing Date, holders of Certificates shall cease
to have rights with respect to the Company Common Stock previously
represented by such Certificates, and their sole rights (other than
the holders of Certificates representing Dissenting Shares) shall
be to exchange such Certificates for the Merger Consideration.
After the Closing Date, there shall be no further transfer on the
records of the Company of Certificates, and if such Certificates
are presented to the Company for transfer, they shall be canceled
against delivery of the Merger Consideration. Acquiror shall not be
obligated to deliver the Merger Consideration to any holder of the
Company Common Stock until such holder surrenders the Certificates
as provided herein. Neither the Paying Agent nor any party to this
Agreement nor any affiliate thereof shall be liable to any holder
of the Company Common Stock represented by any Certificate for any
consideration paid to a public official pursuant to applicable
abandoned property, escheat or similar laws. Acquiror and the
Paying Agent shall be entitled to rely upon the stock transfer
books of the Company to establish the identity of those persons
entitled to receive consideration specified in this Agreement,
which books shall be conclusive with respect thereto. In the event
of a dispute with respect to ownership of stock represented by any
Certificate, Acquiror and the Paying Agent shall be entitled to
deposit any consideration in respect thereof in escrow with an
independent third party and thereafter be relieved with respect to
any claims thereto.
1.4 Conversion of Merger Sub Common Stock. Each of the shares of the
common stock of Merger Sub issued and outstanding immediately prior to the
Closing Date shall, by virtue of the Merger, automatically and without any
action on the part of any party hereto, be converted into one share of Company
Common Stock.
1.5 Escrowed Funds. Within 14 business days after the execution of this
Agreement by the parties hereto, Acquiror shall deliver to a financial
institution acceptable to Acquiror and the Company
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(the "Escrow Agent"), the sum of $300,000 (the "Escrowed Funds"), which, under
certain circumstances described in the form of Escrow Agreement attached hereto
as Exhibit C, the Escrowed Funds may be retained by the Company. In all other
circumstances, the Escrowed Funds shall be returned to Acquiror upon the Closing
Date or on the termination date of this Agreement. Interest on the Escrowed
Funds shall be paid to Acquiror in accordance with the terms of the Escrow
Agreement.
1.6 Reservation of Right to Revise Transaction. Acquiror may change the
method of effecting the Merger (including, without limitation, the provisions of
this Article I), and/or may provide for the merger of the Bank, to the extent
permitted by applicable law and to the extent it deems such change to be
desirable, provided, however, that no such change shall (a) alter or change the
amount or kind of the Merger Consideration or the timetable and schedule
contemplated by this Agreement or (b) materially impede or delay receipt of any
approval referred to in Section 6.1(a) hereof or the consummation of the Merger.
Acquiror may exercise this right of revision by giving written notice thereof in
the manner provided in Section 8.2 hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE BANK
The Company and the Bank represent and warrant to and covenant with
Acquiror as follows:
2.1 Organization and Authority. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Kentucky, is duly qualified to do business and is in good
standing in all jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and has the corporate
power and authority to own its properties and assets and to carry on its
business as it is now being conducted. The Company is registered as a bank
holding company with the Board of Governors of the Federal Reserve System (the
"FRB") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). True
and complete copies of the Articles of Incorporation and Bylaws of the Company
and of the Articles of Association and Bylaws of the Bank, each as in effect on
the date of this Agreement, are set forth in Schedule 2.1 hereto.
2.2 Subsidiaries. Set forth in Schedule 2.2 is a complete and correct
list of all Subsidiaries of the Company (each a "Company Subsidiary" and
collectively the "Company Subsidiaries"). The term "Subsidiary" when used with
respect to any party means any entity (including without limitation any
corporation, partnership, joint venture or other organization, whether
incorporated or unincorporated) which is consolidated with such party for
financial reporting purposes. Other than the Company Subsidiaries, there are no
entities in which the Company has a five percent or greater direct or indirect
equity or ownership interest. All outstanding Equity Securities (as defined in
Section 2.3) of each Company Subsidiary, except as set forth on Schedule 2.2,
are owned directly or indirectly by the Company. Except as set forth on Schedule
2.2, all of the outstanding shares of capital stock of the Company Subsidiaries
are validly issued, fully paid and nonassessable and are owned directly or
indirectly by the Company free and clear of any lien, claim, charge, option,
encumbrance, agreement, mortgage, pledge, security interest or restriction (each
a "Lien") with respect thereto. Each of the Company Subsidiaries is a
corporation or bank duly incorporated or organized, validly existing, and in
good standing under the laws of its jurisdiction of incorporation or
organization, and has the corporate power and authority to own or lease its
properties and assets and to carry on its business as it is now being conducted.
Each of the Company Subsidiaries is duly qualified to do business in each
jurisdiction where
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its ownership or leasing of property or the conduct of its business requires it
so to be qualified, except where the failure to so qualify would not have a
material adverse effect on the financial condition, assets, deposit liabilities,
results of operations or business (collectively, the "Condition") of the Company
and the Company Subsidiaries, taken as a whole. Except as set forth on Schedule
2.2, neither the Company nor any Company Subsidiary owns beneficially, directly
or indirectly, any shares of any class of Equity Securities or similar interests
of any corporation, bank, business trust, association or similar organization.
The Bank is a national banking association. The deposits of the Bank are insured
by the Federal Deposit Insurance Corporation (the "FDIC"). Except as set forth
on Schedule 2.2, neither the Company nor any Company Subsidiary holds any
interest in a partnership or joint venture of any kind.
2.3 Capitalization. The authorized capital stock of the Company
consists of (i) 180,000 shares of the Company Common Stock, of which, as of the
date hereof, 72,375 shares are issued and outstanding and (ii) 180,000 shares of
preferred stock, no par value per share (the "Company Preferred Stock"), of
which, as of the date hereof, none are issued or outstanding. The authorized
capital stock of the Bank consists of 90,000 shares of common stock, $2.50 par
value per share, of which, as of the date hereof, all are issued and
outstanding. Set forth in Schedule 2.3 is a list of the stockholders of the
Company and the Bank, setting forth as to each stockholder their name, number of
shares held, date of purchase and stock certificate number. Since December 31,
1995, no Equity Securities of the Company have been issued. Except as set forth
above, there are no other Equity Securities of the Company outstanding. "Equity
Securities" of an issuer means capital stock or other equity securities of such
issuer, options, warrants, scrip, rights to subscribe to, calls or commitments
of any character whatsoever relating to, or securities or rights convertible
into, shares of any capital stock or other equity securities of such issuer, or
contracts, commitments, understandings or arrangements by which such issuer is
or may become bound to issue additional shares of its capital stock or other
equity securities of such issuer, or options, warrants, scrip or rights to
purchase, acquire, subscribe to, calls on or commitments for any shares of its
capital stock or other equity securities. All of the issued and outstanding
shares of the Company Common Stock and the Bank common stock are validly issued,
fully paid, and nonassessable, and have not been issued in violation of any
preemptive right of any stockholder of the Company. As of March 31, 1996, the
consolidated stockholders' equity of the Company was $5,616,113.
2.4 Authorization.
(a) The Company and the Bank have the corporate power and authority
to enter into this Agreement and, subject to the approval of this
Agreement by the stockholders of the Company, to carry out their
obligations hereunder. The only stockholder vote required for the
Company to approve this Agreement is the affirmative vote of the
holders of at least a majority of the outstanding shares of Company
Common Stock entitled to vote thereon. The execution, delivery and
performance of this Agreement by the Company and the Bank and the
consummation by the Company and the Bank of the transactions
contemplated hereby have been duly authorized by the Boards of
Directors of the Company and the Bank. Subject to the approval of the
Company's stockholders and subject to the receipt of such approvals of
Regulatory Authorities (as defined in Section 2.6) as may be required
by statute or regulation, this Agreement is a valid and binding
obligation of the Company and the Bank enforceable against the Company
and the Bank in accordance with its terms.
(b) Neither the execution, delivery or performance by the Company
and the Bank of this Agreement, nor the consummation by the Company and
the Bank of the transactions contemplated hereby, nor compliance by the
Company and the Bank with any of the provisions hereof, will (i)
violate or conflict with any term, condition or provision of its
articles of incorporation, charter or bylaws, or (ii) except as
disclosed in Schedule 2.4B, violate, conflict
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with, or result in a breach of any provisions of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or
accelerate the performance required by, or result in a right of
termination or acceleration of, or result in the creation of any Lien
upon any of the properties or assets of Company or any Company
Subsidiary, under any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which the Company or any
Company Subsidiary is a party or by which it may be bound, or to which
the Company or any Company Subsidiary or any of their properties or
assets may be subject.
(c) Other than in connection or in compliance with the provisions
of the KBCA, the Securities Exchange Act of 1934 and the rules and
regulations thereunder (the "Exchange Act"), or filings, consents,
reviews, authorizations, approvals or exemptions required under the
BHCA and the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any public body or authority is
necessary for the consummation by the Company and the Bank of the
transactions contemplated by this Agreement.
2.5 Company Financial Statements. The consolidated balance sheets of
the Company and the Company Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the three-year period ended
December 31, 1995, together with the notes thereto, audited by Eskew & Gresham,
PSC, and the unaudited consolidated condensed balance sheets of the Company and
the Company Subsidiaries as of March 31, 1996 and September 30, 1995, and the
related unaudited consolidated condensed statements of income and cash flows for
the periods then ended (collectively, the "Company Financial Statements"), have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis ("GAAP"), present fairly the consolidated
financial position of the Company and the Company Subsidiaries at such dates,
and the consolidated results of operations, cash flows and changes in
stockholders' equity of the Company and the Company Subsidiaries for the periods
stated therein and are derived from the books and records of the Company and the
Company Subsidiaries, which are complete and accurate in all material respects
and have been maintained in accordance with good business practices. Neither the
Company nor any of the Company Subsidiaries has any material contingent
liabilities that are not described in the Company Financial Statements.
2.6 Company Reports. Since December 31, 1994, each of the Company and
the Company Subsidiaries has filed all material reports and statements, together
with any required material amendments thereto, that it was required to file with
the FDIC, the FRB, the Office of the Comptroller of the Currency (the "OCC") and
any other federal, state, municipal, local or foreign government, securities,
banking, insurance and other governmental or regulatory authority and the
agencies and staffs thereof (such entities being referred to herein collectively
as the "Regulatory Authorities" and individually as a "Regulatory Authority").
All such reports and statements filed with any such Regulatory Authority are
collectively referred to herein as the "Company Reports." As of its respective
date, each Company Report complied in all material respects with all of the
rules and regulations promulgated by the applicable Regulatory Authority and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company has made available to the Acquiror true and complete
copies of the Bank's most recent annual and quarterly Consolidated Reports of
Condition and Income ("Call Reports") filed with the OCC.
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2.7 Properties and Leases. Except (i) as may be reflected in the
Company Financial Statements, and (ii) any Lien for current taxes not yet
delinquent, the Company and the Company Subsidiaries have good title free and
clear of any material Lien to all the real and personal property reflected in
the Company's consolidated balance sheet as of March 31, 1996 and, in each case,
all real and personal property acquired since such date, except such real and
personal property as has been disposed of since March 31, 1996 in the ordinary
course of business for fair value. All leases material to the Company or any
Company Subsidiary, pursuant to which the Company or the Company Subsidiary is a
lessee or lessor of real or personal property, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any material existing default by the Company or any Company Subsidiary
or any event which, with notice or lapse of time or both, would constitute a
material default by the Company or any Company Subsidiary. All of the Company's
and the Company Subsidiaries' buildings, structures and equipment in regular use
have been well maintained and are in good and serviceable condition, normal wear
and tear excepted. To the Best Knowledge of the Company, none of the buildings,
structures and equipment of the Company or any Company Subsidiary violates or
fails to comply in any material respect with any applicable health, fire,
environmental, safety, zoning or building laws or ordinances or any restrictive
covenant pertaining thereto.
2.8 Taxes. Except as set forth on Schedule 2.8, the Company and each of
the Company Subsidiaries have timely filed and will timely (including
extensions) file all tax returns and reports required to be filed at or prior to
the Closing Date ("the Company Returns"). Each of the Company and the Company
Subsidiaries has paid, or set up adequate reserves on the Company Financial
Statements for the payment of, all taxes required to be paid in respect of the
periods covered by such returns and reports and has set up adequate reserves on
the most recent financial statements. The Company has filed for the payment of
all taxes anticipated to be payable in respect of all periods up to and
including the latest period covered by such financial statements. Neither the
Company nor any Company Subsidiary will have any liability material to the
Condition of the Company and the Company Subsidiaries, taken as a whole, for any
such taxes in excess of the amounts so paid or reserves so established and no
deficiencies for any tax, assessment or governmental charge have been proposed,
asserted or assessed (tentatively or definitely) against the Company or any
Company Subsidiary which would not be covered by existing reserves. Except as
set forth on Schedule 2.8, neither the Company nor any Company Subsidiary is
delinquent in the payment of any tax, assessment or governmental charge, nor has
it requested any extension of time within which to file any tax return in
respect of any fiscal year which has not since been filed and no requests for
waivers of the time to assess any tax are pending. The federal and state income
tax returns of the Company and the Company Subsidiaries have been audited by the
Internal Revenue Service (the "IRS") or appropriate state tax authorities with
respect to those periods and jurisdictions set forth on Schedule 2.8. There is
no deficiency or refund litigation or matter in controversy with respect to the
Company Returns. Except as set forth on Schedule 2.8, neither the Company nor
any Company Subsidiary (i) has extended or waived any statute of limitations on
the assessment of any tax due; (ii) is a party to any agreement providing for
the allocation or sharing of taxes (other than the allocation of federal income
taxes as provided by regulation 1.1552-1(a)(1) under the Internal Revenue Code
of 1986, as amended (the "Code")); (iii) is required to include in income any
adjustment pursuant to Section 481(a) of the Code, by reason of a voluntary
change in accounting method (nor to the Best Knowledge of the Company has the
IRS has proposed any such adjustment or change of accounting method) or (iv) has
filed a consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply.
2.9 Material Adverse Change. Except as set forth on Schedule 2.9, since
December 31, 1995, there has been no material adverse change in the Condition of
the Company and the Company Subsidiaries, taken as a whole, except as may have
resulted or may result from changes to laws and regulations or changes in
economic conditions applicable to depositary institutions generally.
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2.10 Commitments and Contracts.
(a) Except as set forth on Schedule 2.10 (and with a true and
correct copy of the document or other item in question attached to such
Schedule), neither the Company nor any Company Subsidiary is a party or
subject to any of the following (whether written or oral, express or
implied):
(i) any agreement, arrangement or commitment (A) not
made in the ordinary course of business or (B) pursuant to
which the Company or any Company Subsidiary is or may become
obligated to invest in or contribute capital to any Company
Subsidiary or any other entity;
(ii) any agreement, indenture or other instrument not
disclosed in the Company Financial Statements relating to the
borrowing of money by the Company or any Company Subsidiary or
the guarantee by the Company or any Company Subsidiary of any
such obligation (other than trade payables or instruments
related to transactions entered into in the ordinary course of
business by any Company Subsidiary, such as deposits, Fed
Funds borrowings, and repurchase agreements);
(iii) any contract, agreement or understanding with
any labor union or collective bargaining organization;
(iv) any contract containing covenants which limit
the ability of the Company or any Company Subsidiary to
compete in any line of business or with any person or
containing any restriction of the geographical area in which,
or method by which, the Company or any Company Subsidiary may
carry on its business (other than as may be required by law or
any applicable Regulatory Authority);
(v) any other contract or agreement which is a
"material contract" within the meaning of Item 601(b)(10) of
Regulation S-K promulgated by the SEC; or
(vi) any lease with annual rental payments
aggregating $25,000 or more.
(b) Neither the Company nor any Company Subsidiary is in
violation of its charter or organizational documents or bylaws; or in
default under any agreement, commitment, arrangement, lease, insurance
policy, or other instrument, whether entered into in the ordinary
course of business or otherwise and whether written or oral, and there
has not occurred any event that, with the lapse of time or giving of
notice or both, would constitute such a default, except where such
default would not have a material adverse effect on the Condition of
the Company and the Company Subsidiaries, taken as a whole.
2.11 Litigation and Other Proceedings. Other than as set forth on
Schedule 2.11, neither the Company nor any Company Subsidiary is a party to any
pending or, to the Best Knowledge of the Company, threatened claim, action,
suit, investigation or proceeding, or is subject to any order, judgment or
decree that involves a claim for damages for more than $10,000, a request for
non-monetary relief, or a request to enjoin or restrain the transactions
contemplated by this Agreement or the Buy/Sell Agreements. Without limiting the
generality of the foregoing, except as set forth on Schedule 2.11 there are no
actions, suits, or proceedings pending or, to the Best Knowledge of the Company,
threatened against the Company or any Company Subsidiary or any of their
respective officers or directors by any stockholder of the Company or any
Company Subsidiary (or any former stockholder of the Company or
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any Company Subsidiary) or involving claims under the Securities Act of 1933
(the "Securities Act"), the Exchange Act, the Community Reinvestment Act of 1977
(the "CRA") or the fair lending laws.
2.12 Insurance. Each of the Company and the Company Subsidiaries has
taken all requisite action (including without limitation the making of claims
and the giving of notices) pursuant to its directors' and officers' liability
insurance policy or policies in order to preserve all rights thereunder with
respect to all matters (other than matters arising in connection with this
Agreement and the transactions contemplated hereby) occurring prior to the
Closing Date that are known to the Company. Set forth on Schedule 2.12 is a list
of all insurance policies (excluding policies maintained on one- to four-family
residential properties acquired through foreclosure) maintained by or for the
benefit of the Company or any Company Subsidiary or their respective directors,
officers, employees or agents. During the past five years, neither the Company
nor any Company Subsidiary has had an insurance policy canceled or been denied
insurance coverage for which any of such companies has applied.
2.13 Compliance with Laws.
(a) The Company and each of the Company Subsidiaries have all
permits, licenses, authorizations, orders and approvals of, and have
made all filings, applications and registrations with, all Regulatory
Authorities that are required in order to permit them to own or lease
their properties and assets and to carry on their business as presently
conducted and that are material to the business of the Company and the
Company Subsidiaries; all such permits, licenses, authorizations,
orders and approvals are in full force and effect and, to the Best
Knowledge of the Company, no suspension or cancellation of any of them
is threatened; and all such filings, applications and registrations are
current.
(b) (i) The Company and each of the Company Subsidiaries have
complied in all material respects with all laws, regulations and orders
(including without limitation zoning ordinances, building codes, the
Employee Retirement Income Security Act of 1974 ("ERISA"), and
securities, tax, environmental, civil rights, and occupational health
and safety laws and regulations, and including without limitation, in
the case of any Company Subsidiary that is a banking organization,
banking corporation or trust company, all statutes, rules, regulations
and policy statements pertaining to the conduct of a banking,
deposit-taking, lending or related business (or to the exercise of
trust powers) and governing instruments applicable to them and to the
conduct of their business, and (ii) neither the Company nor any Company
Subsidiary is in default under, and no event has occurred which, with
the lapse of time or notice or both, could result in a default under,
the terms of any judgment, order, writ, decree, permit, or license of
any Regulatory Authority or court, whether federal, state, municipal,
or local and whether at law or in equity. Neither the Company nor any
Company Subsidiary is subject to or reasonably likely to incur a
liability as a result of its past or present ownership, operation, or
use of any Property (as defined below) of the Company or any Company
Subsidiary (whether directly or, to the Best Knowledge of the Company,
as a consequence of such Property being part of the investment
portfolio of the Company or any Company Subsidiary) (A) that is
contaminated by or contains any hazardous waste, toxic substance, or
related materials, including without limitation asbestos, PCBs,
pesticides, herbicides, and any other substance or waste that is
hazardous to human health or the environment (collectively, a "Toxic
Substance"), or (B) on which any Toxic Substance has been stored,
disposed of, placed, or used in the construction thereof. "Property" of
a person shall include all property (real or personal, tangible or
intangible) owned, leased or controlled by such person, including
without limitation property under foreclosure, property held by such
person or any Subsidiary of such person in its capacity as a trustee
and property in which any venture capital or similar unit of such
person or any Subsidiary of such person has an interest. No claim,
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action, suit, or proceeding is pending against the Company or any
Company Subsidiary relating to Property of the Company or any Company
Subsidiary before any court or other Regulatory Authority or
arbitration tribunal relating to Toxic Substances, pollution, or the
environment, and there is no outstanding judgment, order, writ,
injunction, decree, or award against or affecting the Company or any
Company Subsidiary with respect to the same. Except for statutory or
regulatory restrictions of general application, no Regulatory Authority
has placed any restriction on the business of the Company or any
Company Subsidiary.
(c) Since December 31, 1995, neither the Company nor any
Company Subsidiary has received any notification or communication as to
any matter which has not been resolved from any Regulatory Authority
(i) asserting that the Company or any Company Subsidiary is not in
substantial compliance with any of the statutes, regulations or
ordinances that such Regulatory Authority enforces, except with respect
to matters which are set forth on Schedule 2.13C (ii) threatening to
revoke any license, franchise, permit or governmental authorization
that is material to the Condition of the Company and the Company
Subsidiaries, taken as a whole, including without limitation the Bank's
status as an insured depositary institution under the Federal Deposit
Insurance Act (the "FDIA"), (iii) requiring or threatening to require
the Company or any Company Subsidiary, or indicating that the Company
or any Company Subsidiary may be required, to enter into a cease and
desist order, agreement or memorandum of understanding or any other
agreement restricting or limiting or purporting to direct, restrict or
limit in any manner the operations of the Company or any Company
Subsidiary, including without limitation any restriction on the payment
of dividends. No such cease and desist order, agreement or memorandum
of understanding or other agreement is currently in effect.
(d) Neither the Company nor any Company Subsidiary is required
by Section 32 of the FDIA to give prior notice to any federal banking
agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive
officer.
2.14 Labor. No work stoppage involving the Company or any Company
Subsidiary is pending or, to the Best Knowledge of the Company, threatened.
Neither the Company nor any Company Subsidiary is involved in, or, to the Best
Knowledge of the Company, threatened with or affected by, any labor dispute,
arbitration, lawsuit or administrative proceeding which reasonably could be
expected to have a material adverse effect on the Condition of the Company and
the Company Subsidiaries, taken as a whole. No employees of the Company or any
Company Subsidiary are represented by any labor union or any collective
bargaining organization.
2.15 Material Interests of Certain Persons.
(a) To the Best Knowledge of the Company, no officer or
director of the Company or any Subsidiary of the Company, or any
"associate" (as such term is defined in Rule 14a-1 under the Exchange
Act) of any such officer or director, has any material interest in any
material contract or property (real or personal, tangible or
intangible), used in or pertaining to the business of the Company or
any Company Subsidiary.
(b) Other than as set forth on Schedule 2.15(b), there are no
loans from the Company or any Company Subsidiary to any present
officer, director, employee or any associate or related interest of any
such person ("Insider Loans"). All outstanding Insider Loans from the
Company or any Company Subsidiary were approved by or reported to the
appropriate board of directors in accordance with applicable law and
regulations.
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2.16 Allowance for Loan Losses; Nonperforming Assets.
(a) The allowances for loan losses contained in the Company
Financial Statements were established in accordance with the past
practices and experiences of the Company and the Company Subsidiaries,
and the allowance for loan losses shown on the consolidated condensed
balance sheet of the Company and the Company Subsidiaries at March 31,
1996 is adequate in all material respects under the requirements of
GAAP and the rules, regulations and policies of the OCC to provide for
possible losses on loans (including without limitation accrued interest
receivable) and credit commitments (including without limitation
stand-by letters of credit) outstanding as of the date of such balance
sheet.
(b) The sum of the aggregate amount of all Nonperforming
Assets (as defined below) and all troubled debt restructurings (as
defined under GAAP) on the books of the Company and the Company
Subsidiaries is $933,918. The Company will use due diligence to assure
that this amount improves before Closing. "Nonperforming Assets" shall
mean (A) loans and leases classified as nonperforming, (B) assets
classified as other real estate owned and other assets acquired through
foreclosure, including in-substance foreclosed real estate, (C) loans
and leases that are on non-accrual status and (D) all loans that are 90
days or more past due, in each case under the definitions applied by
GAAP, as appropriate.
2.17 Employee Benefit Plans.
(a) Schedule 2.17A lists all pension, retirement, supplemental
retirement, stock option, stock purchase, stock ownership, savings,
stock appreciation right, profit sharing, employment, deferred
compensation, consulting, bonus, medical, disability, workers'
compensation, vacation, group insurance, severance and other material
employee benefit, incentive and welfare policies, contracts, plans and
arrangements, and all trust or loan agreements or arrangements related
thereto, maintained, sponsored or contributed to by the Company or any
Company Subsidiary in respect of any of the present or former
directors, officers, or other employees of and/or consultants to the
Company or any Company Subsidiary (collectively, "the Company Employee
Plans"). The following documents with respect to each the Company
Employee Plan are included in Schedule 2.17A: (i) a true and complete
copy of all written documents comprising such Company Employee Plan
(including amendments and individual agreements relating thereto) or,
if there is no such written document, an accurate and complete
description of the Company Employee Plan; (ii) the most recent Form
5500 or Form 5500-C (including all schedules thereto), if applicable;
(iii) the most recent financial statements and actuarial reports, if
any; (iv) the summary plan description currently in effect and all
material modifications thereof, if any; and (v) the most recent IRS
determination letter, if any.
(b) All of the Company Employee Plans have been maintained and
operated materially in accordance with their terms and with the
material requirements of all applicable statutes, orders, rules and
final regulations, including without limitation ERISA and the Code. All
contributions required to be made to the Company Employee Plans have
been made.
(c) With respect to each of the Company Employee Plans which
is a pension plan (as defined in Section 3(2) of ERISA) (the "Pension
Plans"): (i) each Pension Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code is so qualified and,
to the extent a determination letter has been received from the IRS
with respect to any such Pension Plan, such determination letter may
still be relied upon, and each related trust is exempt from taxation
under Section 501(a) of the Code; (ii) the present value of all
benefits vested and all
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benefits accrued under each Pension Plan which is subject to Title IV
of ERISA, valued using the assumptions in the most recent actuarial
report, did not, in each case, as of the last applicable annual
valuation date (as indicated on Schedule 2.17A), exceed the value of
the assets of the Pension Plan allocable to benefits on a plan
termination basis; (iii) there has been no "prohibited transaction," as
such term is defined in Section 4975 of the Code or Section 406 of
ERISA, which could subject any Pension Plan or associated trust, or, to
the Best Knowledge of the Company or any fiduciary or ERISA affiliate,
to any material tax or penalty; (iv) no Pension Plan or any trust
created thereunder has been terminated, nor have there been any
"reportable events" with respect to any Pension Plan, as that term is
defined in Section 4043 of ERISA since January 1, 1986; and (v) no
Pension Plan or any trust created thereunder has incurred any
"accumulated funding deficiency", as such term is defined in Section
302 of ERISA (whether or not waived). No Pension Plan is a
"multiemployer plan" as that term is defined in Section 3(37) of ERISA.
With respect to each Pension Plan that is described in Section 4063(a)
of ERISA (a "Multiple Employer Pension Plan"): (i) neither the Company
nor any Company Subsidiary would have any liability or obligation to
post a bond under Section 4063 of ERISA if the Company and all Company
Subsidiaries were to withdraw from such Multiple Employer Pension Plan;
and (ii) neither the Company nor any Company Subsidiary would have any
liability under Section 4064 of ERISA if such Multiple Employer Pension
Plan were to terminate.
(d) Neither the Company nor any Company Subsidiary has any
liability for any post-retirement health, medical or similar benefit of
any kind whatsoever, except as required by statute or regulation.
(e) Neither the Company nor any Company Subsidiary has any
material liability under ERISA or the Code as a result of its being a
member of a group described in Sections 414(b), (c), (m) or (o) of the
Code.
(f) Neither the Company nor any Company Subsidiary has any
material liability under the continuation of health care provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985 or any
comparable state law.
(g) Except as set forth on Schedule 2.17G, neither the
execution nor delivery of this Agreement, nor the consummation of any
of the transactions contemplated hereby, will (i) result in any payment
(including without limitation severance, unemployment compensation or
golden parachute payment) becoming due to any director or employee of
the Company or any Company Subsidiary from any of such entities, (ii)
materially increase any benefit otherwise payable under any of the
Company Employee Plans or (iii) result in the acceleration of the time
of payment of any such benefit. The Company shall insure that no
amounts paid or payable by the Company, the Company Subsidiaries or
Acquiror to or with respect to any employee or former employee of the
Company or any Company Subsidiary will fail to be deductible for
federal income tax purposes by reason of Section 280G or Section 162(m)
of the Code or otherwise.
2.18 Conduct to Date. From and after March 31, 1996 through the date of
this Agreement, except as set forth on Schedule 2.18 or in the Company Financial
Statements: (i) the Company and the Company Subsidiaries have conducted their
respective businesses in the ordinary and usual course consistent with past
practices; (ii) neither the Company nor any Company Subsidiary has issued, sold,
granted, conferred or awarded any of its Equity Securities, or any corporate
debt securities which would be classified under GAAP as long-term debt on the
consolidated balance sheets of the Company; (iii) the Company has not effected
any stock split or adjusted, combined, reclassified or otherwise changed its
capitalization; (iv) the Company has not declared, set aside or paid any
dividend or other distribution in
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respect of its capital stock, or purchased, redeemed, retired, repurchased, or
exchanged, or otherwise acquired or disposed of, directly or indirectly, any of
its Equity Securities, whether pursuant to the terms of such Equity Securities
or otherwise; (v) neither the Company nor any Company Subsidiary has incurred
any material obligation or liability (absolute or contingent), except normal
trade or business obligations or liabilities incurred in the ordinary course of
business, or subjected to Lien any of its assets or properties other than in the
ordinary course of business consistent with past practice; (vi) neither the
Company nor any Company Subsidiary has discharged or satisfied any material Lien
or paid any material obligation or liability (absolute or contingent), other
than in the ordinary course of business; (vii) neither the Company nor any
Company Subsidiary has sold, assigned, transferred, leased, exchanged, or
otherwise disposed of any of its properties or assets other than for a fair
consideration in the ordinary course of business; (viii) except as required by
contract or law, neither the Company nor any Company Subsidiary has (A)
increased the rate of compensation of, or paid any bonus to, any of its
directors, officers, or other employees, except merit or promotion increases in
accordance with existing policy, (B) entered into any new, or amended or
supplemented any existing, employment, management, consulting, deferred
compensation, severance, or other similar contract, (C) entered into,
terminated, or substantially modified any of the Company Employee Plans or (D)
agreed to do any of the foregoing; (ix) neither the Company nor any Company
Subsidiary has suffered any material damage, destruction, or loss, whether as
the result of fire, explosion, earthquake, accident, casualty, labor trouble,
requisition, or taking of property by any Regulatory Authority, flood,
windstorm, embargo, riot, act of God or the enemy, or other casualty or event,
and whether or not covered by insurance; (x) neither the Company nor any Company
Subsidiary has canceled or compromised any debt, except for debts charged off or
compromised in accordance with the past practice of the Company and the Company
Subsidiaries; (xi) neither the Company nor any Company Subsidiary has entered
into any material transaction, contract or commitment outside the ordinary
course of its business and (xii) neither the Company nor any Company Subsidiary
has made or guaranteed any loan to any of the Company Employee Plans.
2.19 Proxy Statement, etc. None of the information regarding the
Company or any Company Subsidiary supplied or to be supplied by the Company for
inclusion or included in (i) the proxy statement to be mailed to stockholders in
accordance with Section 5.3 (the "Proxy Statement") or (ii) any other documents
to be filed with any Regulatory Authority in connection with the transactions
contemplated hereby will, at the respective times such documents are filed with
any Regulatory Authority and, with respect to the Proxy Statement, when mailed,
be false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading
or, in the case of the Proxy Statement or any amendment thereof or supplement
thereto, at the time of the meeting of the Company's stockholders referred to in
Section 5.3, be false or misleading with respect to any material fact, or omit
to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for such meeting.
All documents which the Company or any Company Subsidiary is responsible for
filing with any Regulatory Authority in connection with the Merger will comply
as to form in all material respects with the provisions of applicable law.
2.20 Registration Obligations. Neither the Company nor any Company
Subsidiary is under any obligation, contingent or otherwise, which will survive
the Closing Date by reason of any agreement to register any of its securities
under the Securities Act, or other Federal or State securities laws or
regulations.
2.21 Takeover Provisions Not Applicable. At the request of Acquiror,
the Company will take any necessary or appropriate steps to exempt the
transactions contemplated hereby from any applicable anti-takeover law and will
take any necessary or appropriate steps so that any takeover provisions in the
charter documents or bylaws of the Company or the Bank, including without
limitation any provisions of
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the Company's Articles of Incorporation restricting the ownership or acquisition
of the Company's securities or imposing any "fair price" or supermajority
director or stockholder vote requirements (and any corresponding or similar
provisions of the Bank's Charter), will not apply to the Buy/Sell Agreements,
the Voting Agreements, this Agreement or any of the transactions contemplated
hereby or thereby.
2.22 Regulatory Matters. Neither the Company nor any Company Subsidiary
has taken or agreed to take any action or has any knowledge of any fact or
circumstance that would materially impede or delay receipt of any approval
referred to in Section 6.1(b) hereof or the consummation of the transactions
contemplated by this Agreement.
2.23 Brokers and Finders. Neither the Company nor any Company
Subsidiary nor any of their respective officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for the Company or any Company
Subsidiary, in connection with this Agreement or the transactions contemplated
hereby.
2.24 Accuracy of Information. The statements of the Company and the
Bank contained in this Agreement, the Schedules hereto and any other written
document executed and delivered by or on behalf of the Company or the Bank
pursuant to the terms of this Agreement are true and correct in all material
respects, and such statements and documents do not omit any material fact
necessary to make the statements contained therein not misleading.
2.25 Community Reinvestment Act Compliance. The Bank currently has a
CRA rating that is below satisfactory. To the best knowledge of the Company,
there is no fact or circumstance or set of facts or circumstances which would
cause the CRA rating of the Bank to fall below its current level. From the date
hereof to the Closing Date, the Bank shall use its best efforts to improve its
CRA rating to satisfactory or better, although there is no guarantee that the
Bank's rating will be improved.
2.26 Adequate Representation. The Company and the Bank represent and
acknowledge that they have received adequate legal advice and representation in
connection with this Agreement and the transactions contemplated hereby and that
they have not relied upon counsel for Acquiror and Merger Sub for legal advice
or representation in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR
Acquiror represents and warrants to and covenants with the Company and
the Bank as follows:
3.1 Organization and Authority. Acquiror is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and has the corporate power and
authority to own its properties and assets and to carry on its business as it is
now being conducted, except where the failure to be so qualified would not have
a material adverse effect on the Condition of Acquiror. Acquiror is registered
as a savings and loan holding company with the Office of Thrift Supervision
under the Home Owners' Loan Act of 1933,
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<PAGE>
as amended (the "HOLA"). Merger Sub is a corporation, duly organized, validly
existing and in good standing under the laws of the Commonwealth of Kentucky.
3.2 Authorization.
(a) Acquiror and Merger Sub have the corporate power and
authority to enter into this Agreement and to carry out their
obligations hereunder. The execution, delivery and performance of this
Agreement by Acquiror and Merger Sub and the consummation by Acquiror
and Merger Sub of the transactions contemplated hereby have been duly
authorized by all requisite corporate action of Acquiror and Merger Sub
and subject to the receipt of such approvals of the Regulatory
Authorities as may be required by statute or regulation, will be a
valid and binding obligation of Acquiror and Merger Sub enforceable
against Acquiror and Merger Sub in accordance with its terms.
(b) Neither the execution, delivery or performance by Acquiror
and Merger Sub of this Agreement, nor the consummation by Acquiror and
Merger Sub of the transactions contemplated hereby, nor compliance by
Acquiror and Merger Sub with any of the provisions hereof, will (i)
violate or conflict with any term, condition or provision of its
articles or certificate of incorporation, charter or bylaws, (ii)
violate, conflict with or result in a breach of any provisions of, or
constitute a default (or an event which, with notice or lapse of time
or both, would constitute a default) or result in the termination of,
or accelerate the performance required by, or result in a right of
termination or acceleration of, or result in the creation of, any Lien
upon any of the material properties or assets of Acquiror under any
note, bond, mortgage, indenture, deed of trust, license, lease,
agreement or other instrument or obligation to which Acquiror or Merger
Sub is a party or by which it may be bound, or to which Acquiror or
Merger Sub or any of its material properties or assets may be subject,
or (ii) subject to compliance with the statutes and regulations
referred to in subsection (c) of this Section 3.2, to the best
knowledge of Acquiror (the "Best Knowledge of Acquiror"), violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to Acquiror or any of its respective material
properties or assets.
(c) Other than in connection with or in compliance with the
provisions of the KBCA, the Exchange Act or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHCA, and
the HSR Act, no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any public body or authority is
necessary for the consummation by Acquiror and Merger Sub of the
transactions contemplated by this Agreement.
3.3 Acquiror Financial Statements. The consolidated balance sheets of
Acquiror and the Acquiror Subsidiaries as of March 31, 1995 and 1994 and related
consolidated statements of income, cash flows and changes in stockholders'
equity for each of the three years in the three-year period ended March 31,
1995, together with the notes thereto, audited by Smith, Goolsby, Artis & Reams,
P.S.C. (with respect to statements as of March 31, 1995) and Griffith, Delaney,
Hillman & Company (with respect to statements as of March 31, 1994 and March 31,
1993) (collectively the "Acquiror Financial Statements"), and the unaudited
consolidated condensed balance sheets of the Acquiror and the Acquiror
Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
unaudited consolidated condensed statements of income and cash flows for the
periods then ended, have been prepared in accordance with GAAP, present fairly
the consolidated financial position of Acquiror and the Acquiror Subsidiaries at
such dates, and the consolidated results of operations, cash flows and changes
in stockholders' equity of Acquiror and the Acquiror Subsidiaries for the
periods stated therein and are derived from the books and records of Acquiror
and the Acquiror Subsidiaries, which are complete and accurate in all material
respects
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and have been maintained in accordance with good business practices. Neither
Acquiror nor any Acquiror Subsidiary has any material contingent liabilities
that are not described in the Acquiror Financial Statements described above.
3.4 Acquiror Reports. Since March 31, 1995, Acquiror has filed all
material reports, registrations and statements, together with any required
material amendments thereto, that it was required to file with any Regulatory
Authority. All such reports and statements filed with any such Regulatory
Authority are collectively referred to herein as the "Acquiror Reports." As of
its respective date, each Acquiror Report complied in all material respects with
all the rules and regulations promulgated by the applicable Regulatory Authority
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
3.5 Material Adverse Change. Since March 31, 1995, there has been no
material adverse change in the Condition of Acquiror that would materially
affect its ability to carry out its obligations under this Agreement, except as
may have resulted or may result from changes to laws and regulations or changes
in economic conditions applicable to depositary institutions generally.
3.6 Proxy Statement, etc. None of the information regarding Acquiror
and any Acquiror Subsidiary supplied or to be supplied by Acquiror for inclusion
or included in the Proxy Statement or any other documents to be filed with any
Regulatory Authority in connection with the transactions contemplated hereby
will, at the respective times such documents are filed with any Regulatory
Authority and, with respect to the Proxy Statement, when mailed, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements therein not misleading or, in the case
of the Proxy Statement or any amendment thereof or supplement thereto, at the
time of the meeting of stockholders referred to in Section 5.3, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for such meeting. All documents which Acquiror is
responsible for filing with any Regulatory Authority in connection with the
Merger will comply as to form in all material respects with the provisions of
applicable law.
3.7 Brokers and Finders. Except with respect to the agreement with
Capital Resources Group, Inc., neither Acquiror nor any of its respective
officers, directors or employees has employed any broker or finder or incurred
any liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for
Acquiror in connection with this Agreement or the transactions contemplated
hereby.
3.8 Accuracy of Information. The statements of Acquiror contained in
this Agreement, the Schedules hereto and in any other written document executed
and delivered by or on behalf of Acquiror pursuant to the terms of this
Agreement are true and correct in all material respects, and such statements and
documents do not omit any material fact necessary to make the statements
contained herein or therein not misleading.
3.9 Available Funds. As of the Closing Date, Acquiror will have
available to it sufficient readily available funds to pay the Merger
Consideration.
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ARTICLE IV
CONDUCT OF BUSINESSES PRIOR TO THE CLOSING DATE
4.1 Conduct of Businesses Prior to the Closing Date. During the period
from the date of this Agreement to the Closing Date, the Company shall, and
shall cause each of the Company Subsidiaries to, conduct its business in the
ordinary and usual course consistent with sound business practices and, in the
case of the Bank, sound banking practices, and shall, and shall cause each such
Subsidiary to, use its best efforts to maintain and preserve its business
organization, employees and advantageous business relationships and retain the
services of its officers and key employees.
4.2 Forbearances. During the period from the date of this Agreement to
the Closing Date, the Company shall not and shall not permit any Company
Subsidiary to, without the prior written consent of Acquiror:
(a) declare, set aside or pay any dividends or other
distributions, directly or indirectly, in respect of its capital stock
(other than ordinary, normal dividends from a wholly owned Subsidiary
of the Company to the Company or another wholly owned Subsidiary of the
Company);
(b) enter into or amend any employment, severance or similar
agreement or arrangement with any director or officer or employee, or
modify any of the Company Employee Plans or any loans relating thereto
(or prepay in whole or in part any such loans) or grant any salary or
wage increase or increase any employee benefit (including incentive or
bonus payments), except (i) normal individual increases in compensation
to employees consistent with past practice, or as required by law or
contract, and (ii) such increases of which the Company notifies
Acquiror in writing and which Acquiror does not disapprove within ten
days of the receipt of such notice;
(c) authorize, recommend, propose or announce an intention to
authorize, so recommend or propose, or enter into an agreement in
principle with respect to, any merger, consolidation or business
combination (other than the Merger), any acquisition of a material
amount of assets or securities, any disposition of a material amount of
assets or securities or any release or relinquishment of any material
contract rights;
(d) propose or adopt any amendments to its articles or
certificate of incorporation or other charter document or bylaws except
any amendment which provides that the Company or any Company subsidiary
shall not be subject to any anti-takeover law, including, without
limitation, Section 271B.12-210 of the KBCA;
(e) issue, sell, grant, confer or award any of its Equity
Securities or effect any stock split or adjust, combine, reclassify or
otherwise change its capitalization as it exists on the date of this
Agreement;
(f) purchase, redeem, retire, repurchase, or exchange, or
otherwise acquire or dispose of, directly or indirectly, any of its
Equity Securities, whether pursuant to the terms of such Equity
Securities or otherwise;
(g) (i) without first obtaining the consent of Acquiror, which
consent shall not be unreasonably withheld or delayed, enter into or
increase any loan or credit commitment (including
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stand-by letters of credit) to, or invest or agree to invest in, any
person or entity or modify any of the material provisions or renew or
otherwise extend the maturity date of any existing loan or credit
commitment (collectively, "Lend to") in an amount in excess of $75,000,
provided no such consent shall be required in respect of single-family
residential loans or credits not exceeding $150,000 that are saleable
in recognized secondary markets pursuant to the Bank's lending policies
as in effect on the date hereof; (ii) enter into, or increase in an
amount in excess of $150,000, any commercial or multi-family real
estate loan or credit commitment (including stand-by letters of credit)
to, or invest or agree to invest in, any commercial or multi-family
real estate project or entity, or Lend to any person other than in
accordance with lending policies as in effect on the date hereof,
provided that the Company or any Company Subsidiary may make any such
loan in the event (A) the Company or any Company Subsidiary has
delivered to Acquiror or its designated representative a notice of its
intention to make such loan and such information as Acquiror or its
designated representative may reasonably require in respect thereof and
(B) Acquiror or its designated representative shall not have objected
to such loan by giving written or facsimile notice of such objection
within two business days following the delivery to Acquiror of the
notice of intention and information as aforesaid; (iii) Lend to any
person or entity, with respect to any of the loans or other extensions
of credit to which or investments in which are on a "watch list" or
similar internal report of the Company or any Company Subsidiary
(except those denoted "pass" or similar notation thereon); (iv) enter
into any agreement or engage in any transaction which reasonably could
be construed as materially affecting the asset/liability management or
interest rate risk management position of the Bank (in this regard, the
Company shall promptly telecopy to Acquiror copies of all the Company
or the Bank loan and deposit pricing reports as well as summaries of
any proposed asset sales and secondary market transactions as soon as
they are identified); or (v) change lending, credit, investment,
liability management and other material banking policies in any respect
which is material to the Bank; provided, however, that nothing in this
paragraph shall prohibit the Company or any Company Subsidiary from
honoring any contractual obligation in existence on the date of this
Agreement;
(h) directly or indirectly (including through its officers,
directors, employees or other representatives) initiate, solicit or
encourage any discussions, inquiries or proposals with any third party
relating to the disposition of any significant portion of the business
or assets of the Company or any Company Subsidiary or the acquisition
of Equity Securities of the Company or any Company Subsidiary or the
merger of the Company or any Company Subsidiary with any person (other
than Acquiror) or any similar transaction (each such transaction being
referred to herein as an "Acquisition Transaction"), or provide any
such person with information or assistance or negotiate with any such
person with respect to an Acquisition Transaction;
(i) take any action that would materially impede or delay the
consummation of the transactions contemplated by this Agreement or the
ability of Acquiror, the Company or the Bank to obtain any approval of
any Regulatory Authority required for the transactions contemplated by
this Agreement or to perform its covenants and agreements under this
Agreement;
(j) other than in the ordinary course of business consistent
with sound business or banking practices, incur any indebtedness for
borrowed money, assume, guarantee, endorse or otherwise as an
accommodation become responsible or liable for the obligations of any
other individual, corporation or other entity; or
(k) agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction or take
or omit to take any other act which would make any of the
representations and warranties in Article II of this Agreement untrue
or incorrect in any
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material respect if made anew after engaging in such activity, entering
into such transaction, or taking or omitting such other act.
4.3 Government Filings. The Company and the Bank shall file all Call
Reports with the appropriate Regulatory Authorities and all other reports,
applications and other documents required to be filed with the FRB and the other
Regulatory Authorities between the date hereof and the Closing Date and shall
make available to Acquiror copies of all such reports promptly after the same
are filed. Except where prohibited by applicable statutes and regulations, the
Company shall promptly provide Acquiror (or its counsel) with copies of all
other filings made by the Company with any Regulatory Authority in connection
with this Agreement, the Buy/Sell Agreements or the transactions contemplated
hereby or thereby.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Access and Information. The Company and the Company Subsidiaries
shall afford to Acquiror and to its accountants, counsel and other
representatives, full access during normal business hours, during the period
prior to the Closing Date, to all their respective properties, books, contracts,
commitments and records and, during such period, shall furnish promptly to
Acquiror (i) a copy of each report, schedule and other document filed or
received by it during such period pursuant to the requirements of federal and
state securities laws and (ii) all other information concerning its business,
properties and personnel as Acquiror may reasonably request. Except as may be
required by law, Acquiror shall, and shall cause its advisors and
representatives to, (A) hold confidential all information obtained in connection
herewith which is not otherwise public knowledge, (B) return all documents
(including copies thereof) obtained hereunder and (C) use its best efforts to
cause all information obtained pursuant to this Agreement or in connection with
the negotiation of this Agreement to be treated as confidential and not use, or
knowingly permit others to use, any such information unless such information
becomes generally available to the public.
5.2 Regulatory Filings. The Company and Acquiror shall cooperate and
use their respective best efforts to prepare all documentation, to effect all
filings and to obtain all permits, consents, approvals and authorizations of all
third parties and Regulatory Authorities necessary to consummate the
transactions contemplated by this Agreement.
5.3 Stockholder Approvals. The Company and Acquiror shall call meetings
of their stockholders to be held as soon as practicable for the purpose of
voting on this Agreement and the Merger. In connection with such meeting,
Acquiror and the Company shall cooperate in the preparation of the Proxy
Statement and, with the approval of each of Acquiror and the Company, the Proxy
Statement shall be filed with the SEC and mailed to the stockholders of the
Company and Acquiror. The Boards of Directors of the Company and Acquiror shall
submit for approval of the Company's and Acquiror's stockholders, as the case
may be, the matters to be voted upon at such meeting. The Boards of Directors of
the Company and Acquiror hereby do and will unanimously recommend this
Agreement, the Merger and the other transactions contemplated hereby and all
related amendments, if any, to the stockholders of the Company and Acquiror, as
the case may be, and will use their best efforts to obtain any vote of their
stockholders necessary for the approval and adoption of this Agreement, the
Merger and any related amendments.
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5.4 Current Information. During the period from the date of this
Agreement to the Closing Date, the Company and the Bank shall promptly furnish
Acquiror with copies of all monthly and other interim financial statements as
the same become available and shall cause one or more of its designated
representatives to confer on a regular and frequent basis with representatives
of Acquiror. The Company shall promptly notify Acquiror of any material change
in the business or operations of the Company or any Company Subsidiary and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the threat
of material litigation involving the Company or any Company Subsidiary.
5.5 Expenses. Each party hereto shall bear its own expenses incident to
preparing, entering into and carrying out this Agreement and to consummating the
Merger.
5.6 Buy/Sell Agreements and Voting Agreements. The Company shall use
its best efforts to cause Sellers to execute the Buy/Sell Agreements and certain
of the directors of the Company to execute Voting Agreements within seven days
of the execution of this Agreement by the parties hereto.
5.7 Miscellaneous Agreements and Consents. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
respective best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement as expeditiously as possible, including without
limitation using its respective best efforts to lift or rescind any injunction
or restraining order adversely affecting the ability of the parties to
consummate the transactions contemplated hereby. Each party shall, and shall
cause each of its respective Subsidiaries to, use its best efforts to obtain
consents of all third parties and Regulatory Authorities necessary or, in the
opinion of Acquiror, desirable for the consummation of the transactions
contemplated by this Agreement.
5.8 Employee Agreements and Benefits. Following the Closing Date, the
Company and Bank benefit plans in effect as of the date of this Agreement shall
remain in effect with respect to employees of the Company and the Bank covered
by such plans on the Closing Date until such time as Acquiror shall, subject to
applicable law, the terms of this Agreement and the terms of such plans, amend,
modify or terminate any such plans. Notwithstanding the foregoing, Acquiror
agrees to honor in accordance with their terms all benefits vested as of the
date hereof under the Company and Bank benefit plans or under other contracts,
arrangements or understandings described in the Company Schedules. Nothing
herein shall obligate Acquiror to provide or cause to be provided any benefits,
including any benefits duplicative of those provided under any Company or Bank
benefit plan continued pursuant to this Section 5.7.
5.9 Press Releases. Except as may be required by law, Acquiror shall
issue any and all press releases relating to this Agreement or any of the
transactions contemplated hereby, following consultation with the Company as to
the form and substance of such press releases.
5.10 Takeover Provisions. The Company has taken or, if requested by
Acquiror, will take all steps necessary to exempt the transactions contemplated
by this Agreement, the Voting Agreements, and the Buy/Sell Agreements from, and
if necessary challenge the validity of, any applicable state takeover or similar
law.
5.11 D&O Indemnification and Insurance. Acquiror agrees that the Merger
shall not affect or diminish any of the Company's or the Bank's duties and
obligations of indemnification existing as of the Closing Date in favor of its
employees, agents, directors or officers arising by virtue of its Articles of
Incorporation, charter or bylaws in the form in effect at the date of this
Agreement or arising by operation of law or arising by virtue of any contract,
resolution or other agreement or document existing at the date
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of this Agreement, and such duties and obligations shall continue in full force
and effect for so long as they would (but for the Merger) otherwise survive and
continue in full force and effect.
5.12 Third Parties. The Company shall immediately terminate all
negotiations or discussions concerning any Acquisition Transaction with parties
other than Acquiror and enforce the terms of all confidentiality agreements with
such other parties.
5.13 Dissenting Shareholders' Appraisal Rights. The Company will comply
with all applicable notification and other provisions of regulations or statutes
relating to Dissenting Shares.
5.14 Establishment of Accruals. If requested by Acquiror immediately
prior to the Closing Date, the Bank shall, consistent with GAAP, establish such
additional accruals (including an addition of $300,000 to its allowance for loan
losses and $100,000 to its reserve for losses stemming from other real estate
owned) and reserves as may be necessary to conform the Bank's accounting and
credit loss reserve practices and methods to those of Acquiror (as such
practices and methods are to be applied to the Bank from and after the Closing
Date) and reflect Acquiror's plans with respect to the conduct of the Bank's
business following the Merger and to provide for the costs and expenses relating
to the consummation by the Bank of the transactions contemplated by this
Agreement.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been
approved and adopted by the requisite vote of the stockholders of the
Company and Acquiror.
(b) Regulatory Approvals. All requisite approvals of this
Agreement and the transactions contemplated hereby shall have been
received from the FRB and all other Regulatory Authorities, if any,
having approval authority with respect to the Merger, without the
imposition of any condition which differs from conditions customarily
imposed by such Regulatory Authorities in orders approving acquisitions
of the type contemplated hereby and in the good faith opinion of
Acquiror compliance with which would materially adversely affect the
reasonably anticipated benefits of the Merger to Acquiror, and all
applicable waiting periods shall have expired.
(c) No Injunctions. Neither Acquiror, Merger Sub, the Company
nor the Bank shall be subject to any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger.
6.2 Conditions to Obligations of the Company and the Bank to Effect the
Merger. The obligations of the Company and the Bank to effect the Merger shall
be subject to the fulfillment or waiver on or prior to the Closing Date of the
following additional conditions:
(a) Representations and Warranties. The representations and
warranties of Acquiror set forth in Article III of this Agreement shall
be true and correct in all material respects as of the
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date of this Agreement and as of the Closing Date (except, with respect
to the Closing Date, (i) to the extent such representations and
warranties are by their express provisions made as of a specified date
and (ii) for the effect of transactions contemplated by this Agreement)
and the Company and the Bank shall have received a certificate of the
president and chief executive officer of Acquiror to that effect.
(b) Performance of Obligations. Acquiror shall have performed
in all material respects all obligations required to be performed by it
under this Agreement prior to the Closing Date, and the Company and the
Bank shall have received a certificate of the president and chief
executive officer of Acquiror to that effect.
(c) Opinion of Counsel. The Company and the Bank shall have
received an opinion from Silver, Freedman & Taff, L.L.P., counsel to
Acquiror (which counsel may rely on the opinion of Rose, Short & Pitt
as to matters of Kentucky law), dated the Closing Date, in form and
substance substantially as heretofore provided to the Company and the
Bank.
6.3 Conditions to Obligations of Acquiror and Merger Sub to Effect the
Merger. The obligations of Acquiror and Merger Sub to effect the Merger shall be
subject to the fulfillment or waiver on or prior to the Closing Date of the
following additional conditions:
(a) Representations and Warranties. The representations and
warranties of the Company and the Bank set forth in Article II of this
Agreement shall be true and correct in all material respects as of the
date of this Agreement and as of the Closing Date (except, with respect
to the Closing Date, (i) to the extent such representations and
warranties are by their express provisions made as of a specific date
and (ii) for the effect of transactions contemplated by this Agreement)
and Acquiror shall have received a certificate of the chairman and
chief executive officer of the Company and the Bank confirming the same
to the best of his knowledge.
(b) Performance of Obligations. The Company and the Bank shall
have performed in all material respects all obligations required to be
performed by them under this Agreement prior to the Closing Date, and
Acquiror shall have received a certificate of the chairman and chief
executive officer of the Company and the Bank confirming the same to
the best of his knowledge.
(c) Opinion of Counsel. Acquiror shall have received an
opinion from counsel to the Company and the Bank, dated the Closing
Date, in form and substance substantially as heretofore provided to
Acquiror.
(d) Buy/Sell Agreement. Within seven days of the execution and
delivery of this Agreement, James C. Witten and the James C. Witten
Revocable Trust shall have executed and delivered to Acquiror the
Buy/Sell Agreement.
(e) Voting Agreements. Within seven days of the execution and
delivery of this Agreement, certain of the directors of the Company
shall have executed and delivered to Acquiror Voting Agreements.
(f) No Material Adverse Change. Since March 31, 1996, there
shall have been no material adverse change in the Condition or
operations of the Company and the Company Subsidiaries, taken as a
whole. For the purposes of this Section, "material adverse change"
shall mean a change of 15 percent or more of shareholders' equity or
value of the Company and the Company Subsidiaries. In computing a
material adverse change, the determination shall be made
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in accordance with generally accepted accounting principles as in
effect on the date hereof and applied consistently with prior periods,
and there shall be added back the following expenses, charges and
similar amounts which are paid or accrued by the Company or the Bank:
(i) all Merger related expenses, legal fees and expenses, accounting
fees and expenses, expenses of the stockholder meeting, expenses for
the preparation, printing and mailing of the proxy statement, and
expenses for the preparation of regulatory applications; (ii) expenses
requested or required in writing by Acquiror; (iii) charges, fees and
expenses related to any change with respect to, or effect on, the
Company or the Bank resulting from any other matter affecting
depository institutions generally, including, without limitation,
changes in general economic conditions and changes in prevailing
interest and deposit rates; (iv) increases in the Bank's reserve for
loan losses of up to $300,000 and increases in the Bank's reserve for
losses on other real estate owned of up to $100,000; and (v) any other
items of expense which are mutually agreed to by the Company and
Acquiror.
(g) 1995 Audited Financial Statements. Prior to the Closing
Date, there shall be prepared and provided to Acquiror audited
financial statements of the Company and the Company Subsidiaries as of
December 31, 1995 together with an unqualified opinion of the Company's
independent auditors regarding same.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after any requisite stockholder approval:
(a) by mutual consent by the Boards of Directors of Acquiror
and the Company;
(b) by the Board of Directors of Acquiror or the Company if
(i) any Regulatory Authority, after Acquiror has used due diligence to
obtain the approval of such Regulatory Authority, has denied approval
of the Merger and such denial has become final and nonappealable; (ii)
the stockholders of the Company shall not have approved this Agreement
and the Merger at the meeting of the Company's stockholders referred to
in Section 5.3 following a favorable recommendation of such matters by
the Company's Board of Directors; or (iii) the stockholders of Acquiror
shall not have approved this Agreement and the Merger at the meeting of
Acquiror's stockholders referred to in Section 5.3 following a
favorable recommendation of such matters by Acquiror's Board of
Directors;
(c) by the Board of Directors of Acquiror in the event of a
material breach by the Company or the Bank of any representation,
warranty, covenant or other agreement contained in this Agreement which
breach is not cured within 30 days after written notice thereof to the
Company by Acquiror;
(d) by the Board of Directors of the Company in the event of a
material breach by Acquiror or Merger Sub of any representation,
warranty, covenant or other agreement contained in this Agreement,
which breach is not cured within 30 days after written notice thereof
is given to Acquiror by the Company;
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(e) by Acquiror in the event that within seven days after this
Agreement has been executed by the parties hereto, certain of the
directors of the Company shall have failed to execute Voting
Agreements; and
(f) by Acquiror in the event that within seven days following
the execution of this Agreement by the parties hereto, Sellers shall
not have executed the Buy/Sell Agreements.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Sections 7.1(a) and Sections 7.1(e) and 7.1(f), this
Agreement shall forthwith become void and there shall be no liability under this
Agreement on the part of Acquiror or the Company or their respective officers or
directors except as set forth in the second sentence of Section 5.1 and in
Section 5.5.
7.3 Amendment. This Agreement and the Schedules hereto may be amended
by the parties hereto, by action taken by or on behalf of their respective
Boards of Directors, at any time before or after approval of this Agreement by
the stockholders of the Company; provided, however, that (i) after any such
approval by the stockholders of the Company no such modification shall alter or
change the amount or kind of consideration to be received by holders of the
Company Common Stock or the applicable timetable or dates as provided in this
Agreement and (ii) Acquiror may make, and the Company's Board of Directors shall
approve and its duly authorized representative shall execute, such amendments as
are permitted by Section 1.6 hereof. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of Acquiror and the Company.
7.4 Severability. Any term, provision, covenant or restriction
contained in this Agreement held by a court or a Regulatory Authority of
competent jurisdiction to be invalid, void or unenforceable, shall be
ineffective to the extent of such invalidity, voidness or unenforceability, but
neither the remaining terms, provisions, covenants or restrictions contained in
this Agreement nor the validity or enforceability thereof in any other
jurisdictions shall be affected or impaired thereby. Any term, provision,
covenant or restriction contained in this Agreement that is so found to be so
broad as to be unenforceable shall be interpreted to be as broad as is
enforceable.
7.5 Waiver. Any term, condition or provision of this Agreement may be
waived in writing at any time by the Board of Directors of the party which is,
or whose stockholders are, entitled to the benefits thereof.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties and Agreements. No
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation. Except
as set forth below in this Section 8.1, all representations, warranties and
agreements in this Agreement of the parties or in any instrument delivered by a
party pursuant to or in connection with this Agreement shall not survive after
the Closing Date or the termination of this Agreement in accordance with its
terms. In the event of consummation of the Merger, this Agreements contained in
or referred to in Sections 5.7, 5.10 and 5.12 shall survive the after the
Closing Date. In the event of termination of this Agreement in accordance with
its terms, the agreements contained in or referred to in the second sentence of
Section 5.1, in Sections 5.5 and 7.2 and in the last sentence of this Section
8.1 shall survive such
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termination. Nothing herein shall relieve a breaching party from liability to a
non-breaching party in the event of a proper termination of this Agreement
pursuant to Section 7.1(c) or 7.1(d).
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to be duly received (i) on the date given if
delivered personally or (ii) upon confirmation of receipt, if by facsimile
transmission or (iii) on the date received if mailed by registered or certified
mail (return receipt requested), to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(i) if to Acquiror or Merger Sub, or both:
Classic Bancshares, Inc.
344 17th Street
Ashland, Kentucky 41101
Attention: David B. Barbour
President and Chief
Executive Officer
Telecopy: (606) 324-1307
Copies to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
Attention: Kip A. Weissman, P.C.
Telecopy: (202) 682-0354
(ii) if to the Company or the Bank, or both:
First Paintsville Bancshares, Inc.
240 Main Street
Paintsville, Kentucky 41240
Attention: Robert L. Bayes
President
8.3 Miscellaneous. This Agreement (including the Schedules referred to
herein) (i) constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof, (ii) is not intended to
confer upon any person not a party hereto any rights or remedies hereunder,
(iii) shall not be assigned by operation of law or otherwise and (iv) shall be
governed in all respects by the laws of the Commonwealth of Kentucky, except as
otherwise specifically provided herein or required by Kentucky law or by federal
law or regulation. This Agreement may be executed in counterparts which together
shall constitute a single agreement.
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Acquiror, Merger Sub, the Company and the Bank have caused this
Agreement to be duly executed by their authorized representatives on the date
first above written.
<TABLE>
<CAPTION>
FIRST PAINTSVILLE BANCSHARES, INC. CLASSIC BANCSHARES, INC.
<S> <C>
By: /s/ James C. Witten By: /s/ David B. Barbour
------------------------------------ -----------------------------------
Name: James C. Witten Name: David B. Barbour
------------------------------------ -----------------------------------
Title: Chairman and CEO Title: President/CEO
------------------------------------ -----------------------------------
Attested by: /s/ Hoy C. Witten Attested by: /s/ Lynette F. Speaks
------------------------------------ -----------------------------------
Name: Hoy C. Witten Name: Lynette F. Speaks
------------------------------------ -----------------------------------
Title: Assistant Vice President/Secretary Title: Secretary
------------------------------------ -----------------------------------
THE FIRST NATIONAL BANK OF PAINTSVILLE CLASSIC SUB CORP.
By: /s/ James C. Witten By: /s/ David B. Barbour
------------------------------------ -----------------------------------
Name: James C. Witten Name: David B. Barbour
------------------------------------ -----------------------------------
Title: Chairman and CEO Title: President/CEO
------------------------------------ -----------------------------------
Attested by: /s/ Hoy C. Witten Attested by: /s/ Robert S. Curtis
------------------------------------ -----------------------------------
Name: Hoy C. Witten Name: Robert S. Curtis
------------------------------------ -----------------------------------
Title: Assistant Vice President/Secretary Title: Incorporator
------------------------------------ -----------------------------------
</TABLE>
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<PAGE>
APPENDIX A
REPRESENTATIONS AND WARRANTIES
OF SELLERS
Sellers represent and warrant, to the best of their knowledge and
belief (except as to Section A.1, as to which there are no knowledge
qualifiers), to and covenant with Classic that, except as otherwise disclosed in
the Merger Agreement:
A.1 Share Ownership and Authorization. Sellers are the true and lawful
owners of the Shares, free and clear of any liens, claims, options, charges or
encumbrances whatsoever, except for a security interest as follows:
Lien Holder Amount
----------- ------
_______________________________________________________________________________
Sellers own beneficially no securities of the Company other than the
Shares. Sellers have the full power and authority and the unqualified right to
sell, assign, transfer and deliver the Shares to Classic, subject to the receipt
of such approvals of Regulatory Authorities (as defined in Section A.7) as may
be required by statute or regulation. This Agreement constitutes a valid and
legally binding obligation of Sellers and, subject to any bankruptcy, insolvency
or other laws affecting creditors' rights generally, is enforceable against
Sellers in accordance with its terms. Upon payment to Sellers of the Purchase
Price, Classic will acquire good, valid and unencumbered title to the Shares,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim.
A.2 Organization and Authority of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Kentucky, is duly qualified to do business and is in good
standing in all jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified and has the corporate
power and authority to own its properties and assets and to carry on its
business as it is now being conducted. The Company is registered as a bank
holding company with the FRB under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Sellers shall use their best efforts to cause the Company
and the Bank to deliver to Classic, prior to the Closing Date, true and complete
copies of the Articles of Incorporation and Bylaws of the Company and the
Articles of Association and Bylaws of the Bank, respectively, each as in effect
on the date of this Agreement.
A.3 Subsidiaries. Sellers shall use their best efforts to cause the
Company to deliver to Classic, prior to the Closing Date, a complete and correct
list of all Subsidiaries of the Company (each a "Company Subsidiary" and
collectively the "Company Subsidiaries"). The term "Subsidiary" when used with
respect to the Company or Classic means any entity (including without limitation
any corporation, partnership, joint venture or other organization, whether
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incorporated or unincorporated) which is consolidated with such party for
financial reporting purposes. Other than the Company Subsidiaries, there are no
entities in which the Company has a five percent or greater direct or indirect
equity or ownership interest. All outstanding Equity Securities (as defined in
Section A.4) of each Company Subsidiary, except as otherwise disclosed to
Classic, are owned directly or indirectly by the Company. Except as otherwise
disclosed to Classic, all of the outstanding shares of capital stock of the
Company Subsidiaries are validly issued, fully paid and nonassessable and,
except with respect to the shares owned by the minority stockholders of the
Bank, are owned directly or indirectly by the Company free and clear of any
lien, claim, charge, option, encumbrance, agreement, mortgage, pledge, security
interest or restriction (each a "Lien") with respect thereto. Each of the
Company Subsidiaries is a corporation or bank duly incorporated or organized,
validly existing, and in good standing under the laws of its jurisdiction of
incorporation or organization, and has the corporate power and authority to own
or lease its properties and assets and to carry on its business as it is now
being conducted. Each of the Company Subsidiaries is duly qualified to do
business in each jurisdiction where its ownership or leasing of property or the
conduct of its business requires it so to be qualified, except where the failure
to so qualify would not have a material adverse effect on the financial
condition, assets, deposit liabilities, results of operations or business
(collectively, the "Condition") of the Company and the Company Subsidiaries,
taken as a whole. Except with respect to the Company's ownership of shares of
the common stock of the Bank or as otherwise disclosed to Classic, neither the
Company nor any Company Subsidiary owns beneficially, directly or indirectly,
any shares of any class of Equity Securities or similar interests of any
corporation, bank, business trust, association or similar organization. The Bank
is a national banking association. The deposits of the Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC"). Except as otherwise
disclosed to Classic, neither the Company nor any Company Subsidiary holds any
interest in a partnership or joint venture of any kind.
A.4 Capitalization. The authorized capital stock of the Company
consists of (i) 180,000 shares of common stock (the "Company Common Stock"), of
which, as of the date hereof, 72,375 shares are issued and outstanding and (ii)
180,000 shares of preferred stock, no par value per share (the "Company
Preferred Stock"), of which, as of the date hereof, none are issued or
outstanding. The authorized capital stock of the Bank consists of 90,000 shares
of common stock, $2.50 par value per share, of which, as of the date hereof, all
are issued and outstanding. Sellers shall use their best efforts to cause the
Company and the Bank to provide to Classic, prior to the Closing Date, a list of
the respective stockholders of the Company and the Bank, setting forth as to
each stockholder his name, number of shares held, date of purchase and stock
certificate number. Since December 31, 1995, no Equity Securities of the Company
have been issued. Except as set forth above, there are no other Equity
Securities of the Company outstanding. "Equity Securities" of an issuer means
capital stock or other equity securities of such issuer, options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, shares of any capital
stock or other equity securities of such issuer, or contracts, commitments,
understandings or arrangements by which such issuer is or may become bound to
issue additional shares of its capital stock or other equity securities of such
issuer, or options, warrants, scrip or rights to purchase, acquire, subscribe
to, calls on or commitments for any shares of its capital stock or other equity
securities. All of the issued and outstanding shares of the Company Common Stock
and the Bank common stock are validly issued, fully paid, and nonassessable, and
have not been issued in violation of any preemptive right of any stockholder of
the Company.
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As of March 31, 1996, the consolidated stockholders' equity of the
Company was $5,616,113 million.
A.5 Authorization.
(a) Neither the execution, delivery or performance by Sellers
of this Agreement, nor the consummation of the Purchase, nor compliance
by Sellers with any of the provisions hereof, will (i) violate or
conflict with any term, condition or provision of the articles of
incorporation, charter or bylaws of the Company or any Company
Subsidiary, (ii) violate, conflict with, or result in a breach of any
provisions of, or constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, or result
in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration of, or result in the
creation of any Lien upon any of the properties or assets of the
Company or any Company Subsidiary, under any of the terms, conditions
or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which
the Company or any Company Subsidiary is a party or by which it may be
bound, or to which the Company or any Company Subsidiary or any of
their properties or assets may be subject, or (iii) subject to
compliance with the laws and regulations referred to in subsection (b)
of this Section A.5, to the collective best knowledge of Sellers (the
"Best Knowledge of Sellers"), violate any judgment, ruling, order,
writ, injunction, decree, statute, rule or regulation applicable to the
Company or any Company Subsidiary or any of their respective properties
or assets.
(b) Other than in connection or in compliance with Kentucky
law, the Securities Exchange Act of 1934 and the rules and regulations
thereunder (the "Exchange Act"), or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHCA and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"),
no notice to, filing with, exemption or review by, or authorization,
consent or approval of, any public body or authority is necessary for
the consummation by Sellers of the Purchase.
A.6 Company Financial Statements. The consolidated balance sheets of
the Company and the Company Subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the three-year period ended
December 31, 1995, together with the notes thereto, audited by Eskew & Gresham,
PSC, and the unaudited consolidated condensed balance sheets of the Company and
the Company Subsidiaries as of March 31, 1996 and September 30, 1995, and the
related unaudited consolidated condensed statements of income and cash flows for
the periods then ended (collectively, the "Company Financial Statements"), have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis ("GAAP"), present fairly the consolidated
financial position of the Company and the Company Subsidiaries at such dates,
and the consolidated results of operations, cash flows and changes in
stockholders' equity of the Company and the Company Subsidiaries for the periods
stated therein and are derived from the books and records of the Company and the
Company Subsidiaries, which are complete and accurate in all material respects
and have been maintained in accordance with good business
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practices. Neither the Company nor any of the Company Subsidiaries has any
material contingent liabilities that are not described in the Company Financial
Statements.
A.7 Company Reports. Since December 31, 1995, each of the Company and
the Company Subsidiaries has filed all material reports and statements, together
with any required material amendments thereto, that it was required to file with
the FDIC, the FRB, the Office of the Comptroller of the Currency (the "OCC") and
any other federal, state, municipal, local or foreign government, securities,
banking, insurance and other governmental or regulatory authority and the
agencies and staffs thereof (such entities being referred to herein collectively
as the "Regulatory Authorities" and individually as a "Regulatory Authority").
All such reports and statements filed with any such Regulatory Authority are
collectively referred to herein as the "Company Reports." As of its respective
date, each Company Report complied in all material respects with all of the
rules and regulations promulgated by the applicable Regulatory Authority and did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Sellers shall use their best efforts to cause the Bank to provide
Classic, prior to the Closing Date, with true and complete copies of the Bank's
most recent annual and quarterly Consolidated Reports of Condition and Income
("Call Reports") filed with the OCC.
A.8 Properties and Leases. Except (i) as may be reflected in the
Company Financial Statements, and (ii) any Lien for current taxes not yet
delinquent, the Company and the Company Subsidiaries have good title free and
clear of any material Lien to all the real and personal property reflected in
the Company's consolidated balance sheet as of March 31, 1996 and, in each case,
all real and personal property acquired since such date, except such real and
personal property as has been disposed of since March 31, 1996 in the ordinary
course of business for fair value. All leases material to the Company or any
Company Subsidiary, pursuant to which the Company or any Company Subsidiary is a
lessee or lessor of real or personal property, are valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any material existing default by the Company or any Company Subsidiary
or any event which, with notice or lapse of time or both, would constitute a
material default by the Company or any Company Subsidiary. All of the Company's
and the Company Subsidiaries' buildings, structures and equipment in regular use
have been well maintained and are in good and serviceable condition, normal wear
and tear excepted. To the Best Knowledge of Sellers, none of the buildings,
structures and equipment of the Company or any Company Subsidiary violates or
fails to comply in any material respect with any applicable health, fire,
environmental, safety, zoning or building laws or ordinances or any restrictive
covenant pertaining thereto.
A.9 Taxes. Except as otherwise disclosed to Classic, the Company and
each of the Company Subsidiaries have timely filed and Sellers shall use their
best efforts to ensure that each will timely (including extensions) file all tax
returns and reports required to be filed at or prior to the Closing Date ("the
Company Returns"). Each of the Company and the Company Subsidiaries has paid, or
set up adequate reserves on the Company Financial Statements for the payment of,
all taxes required to be paid in respect of the periods covered by such returns
and reports and has set up adequate reserves on the most recent financial
statements. The Company has filed for the payment of all taxes anticipated to be
payable in respect of all periods up to and including the latest period covered
by such financial statements. Neither the Company nor any
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Company Subsidiary will have any liability material to the Condition of the
Company and the Company Subsidiaries, taken as a whole, for any such taxes in
excess of the amounts so paid or reserves so established and no deficiencies for
any tax, assessment or governmental charge have been proposed, asserted or
assessed (tentatively or definitely) against the Company or any Company
Subsidiary which would not be covered by existing reserves. Except as otherwise
disclosed to Classic, neither the Company nor any Company Subsidiary is
delinquent in the payment of any tax, assessment or governmental charge, nor has
it requested any extension of time within which to file any tax return in
respect of any fiscal year which has not since been filed and no requests for
waivers of the time to assess any tax are pending. The federal and state income
tax returns of the Company and the Company Subsidiaries have been audited by the
Internal Revenue Service (the "IRS") or appropriate state tax authorities with
respect to those periods and jurisdictions as disclosed to Classic. There is no
deficiency or refund litigation or matter in controversy with respect to the
Company Returns. Except as otherwise disclosed to Classic, neither the Company
nor any Company Subsidiary (i) has extended or waived any statute of limitations
on the assessment of any tax due; (ii) is a party to any agreement providing for
the allocation or sharing of taxes (other than the allocation of federal income
taxes as provided by regulation 1.1552-1(a)(1) under the Internal Revenue Code
of 1986, as amended (the "Code")); (iii) is required to include in income any
adjustment pursuant to Section 481(a) of the Code, by reason of a voluntary
change in accounting method (nor to the Best Knowledge of Sellers has the IRS
has proposed any such adjustment or change of accounting method) or (iv) has
filed a consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply.
A.10 Material Adverse Change. Except as otherwise disclosed to Classic,
since December 31, 1995, there has been no material adverse change in the
Condition of the Company and the Company Subsidiaries, taken as a whole, except
as may have resulted or may result from changes to laws and regulations or
changes in economic conditions applicable to depositary institutions generally.
A.11 Commitments and Contracts.
(a) Except as otherwise disclosed to Classic in the schedules
to the Merger Agreement, neither the Company nor any Company Subsidiary
is a party or subject to any of the following (whether written or oral,
express or implied):
(i) any agreement, arrangement or commitment (A) not
made in the ordinary course of business or (B) pursuant to
which the Company or any Company Subsidiary is or may become
obligated to invest in or contribute capital to any Company
Subsidiary or any other entity;
(ii) any agreement, indenture or other instrument not
disclosed in the Company Financial Statements relating to the
borrowing of money by the Company or any Company Subsidiary or
the guarantee by the Company or any Company Subsidiary of any
such obligation (other than trade payables or instruments
related to transactions entered into in the ordinary course of
business by any Company Subsidiary, such as deposits, Fed
Funds borrowings, and repurchase agreements);
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(iii) any contract, agreement or understanding with
any labor union or collective bargaining organization;
(iv) any contract containing covenants which limit
the ability of the Company or any Company Subsidiary to
compete in any line of business or with any person or
containing any restriction of the geographical area in which,
or method by which, the Company or any Company Subsidiary may
carry on its business (other than as may be required by law or
any applicable Regulatory Authority);
(v) any other contract or agreement which is a
"material contract" within the meaning of Item 601(b)(10) of
Regulation S-K promulgated by the SEC; or
(vi) any lease with annual rental payments
aggregating $25,000 or more.
In the event that the Company or any Company
Subsidiary is a party to any agreement listed in this Section
A.11(a), Sellers shall use their best efforts to cause the
Company or any Company Subsidiary, as the case may be, to
provide Classic, prior to the Closing Date, with a true and
correct copy of such agreement.
(b) Neither the Company nor any Company Subsidiary is in
violation of its charter or organizational documents or bylaws, or in
default under any agreement, commitment, arrangement, lease, insurance
policy, or other instrument, whether entered into in the ordinary
course of business or otherwise and whether written or oral, and there
has not occurred any event that, with the lapse of time or giving of
notice or both, would constitute such a default, except where such
default would not have a material adverse effect on the Condition of
the Company and the Company Subsidiaries, taken as a whole.
A.12 Litigation and Other Proceedings. Other than as disclosed to
Classic, neither the Company nor any Company Subsidiary is a party to any
pending or, to the Best Knowledge of Sellers, threatened claim, action, suit,
investigation or proceeding, or is subject to any order, judgment or decree that
involves a claim for damages for more than $10,000, a request for non-monetary
relief, or a request to enjoin or restrain the transactions contemplated by this
Agreement. Without limiting the generality of the foregoing, except as otherwise
disclosed to Classic, there are no actions, suits, or proceedings pending or, to
the Best Knowledge of Sellers, threatened against the Company or any Company
Subsidiary or any of their respective officers or directors by any stockholder
of the Company or any Company Subsidiary (or any former stockholder of the
Company or any Company Subsidiary) or involving claims under the Securities Act
of 1933 (the "Securities Act"), the Exchange Act, the Community Reinvestment Act
of 1977 (the "CRA") or the fair lending laws.
A.13 Insurance. During the past five years, neither the Company nor any
Company Subsidiary has had an insurance policy canceled or been denied insurance
coverage for which any of such companies has applied. Sellers shall use their
best efforts to cause the Company and the Company Subsidiaries to provide
Classic, prior to the Closing Date, with a list of their respective insurance
policies (excluding policies maintained on one-to-four family residential
properties
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acquired through foreclosure) maintained by or for the benefit of the Company or
any Company Subsidiary or their respective directors, officers, employees or
agents.
A.14 Compliance with Laws.
(a) The Company and each of the Company Subsidiaries have all
permits, licenses, authorizations, orders and approvals of, and have
made all filings, applications and registrations with, all Regulatory
Authorities that are required in order to permit them to own or lease
their properties and assets and to carry on their business as presently
conducted and that are material to the business of the Company and the
Company Subsidiaries; all such permits, licenses, authorizations,
orders and approvals are in full force and effect and, to the Best
Knowledge of Sellers, no suspension or cancellation of any of them is
threatened; and all such filings, applications and registrations are
current.
(b) (i) The Company and each of the Company Subsidiaries have
complied in all material respects with all laws, regulations and orders
(including without limitation zoning ordinances, building codes, the
Employee Retirement Income Security Act of 1974 ("ERISA"), and
securities, tax, environmental, civil rights, and occupational health
and safety laws and regulations, and including without limitation, in
the case of any Company Subsidiary that is a banking organization,
banking corporation or trust company, all statutes, rules, regulations
and policy statements pertaining to the conduct of a banking,
deposit-taking, lending or related business (or to the exercise of
trust powers) and governing instruments applicable to them and to the
conduct of their business, and (ii) neither the Company nor any Company
Subsidiary is in default under, and no event has occurred which, with
the lapse of time or notice or both, could result in a default under,
the terms of any judgment, order, writ, decree, permit, or license of
any Regulatory Authority or court, whether federal, state, municipal,
or local and whether at law or in equity. Neither the Company nor any
Company Subsidiary is subject to or reasonably likely to incur a
liability as a result of its past or present ownership, operation, or
use of any Property (as defined below) of the Company or any Company
Subsidiary (whether directly or, to the Best Knowledge of Sellers, as a
consequence of such Property being part of the investment portfolio of
the Company or any Company Subsidiary) (A) that is contaminated by or
contains any hazardous waste, toxic substance, or related materials,
including without limitation asbestos, PCBs, pesticides, herbicides,
and any other substance or waste that is hazardous to human health or
the environment (collectively, a "Toxic Substance"), or (B) on which
any Toxic Substance has been stored, disposed of, placed, or used in
the construction thereof. "Property" of a person shall include all
property (real or personal, tangible or intangible) owned, leased or
controlled by such person, including without limitation property under
foreclosure, property held by such person or any Subsidiary of such
person in its capacity as a trustee and property in which any venture
capital or similar unit of such person or any Subsidiary of such person
has an interest. No claim, action, suit, or proceeding is pending
against the Company or any Company Subsidiary relating to Property of
the Company or any Company Subsidiary before any court or other
Regulatory Authority or arbitration tribunal relating to Toxic
Substances, pollution, or the environment, and there is no outstanding
judgment, order, writ, injunction, decree, or award against or
affecting the Company or any Company Subsidiary with respect to the
same. Except for statutory or regulatory restrictions of
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general application, no Regulatory Authority has placed any restriction
on the business of the Company or any Company Subsidiary.
(c) Since December 31, 1995, neither the Company nor any
Company Subsidiary has received any notification or communication as to
any matter which has not been resolved from any Regulatory Authority
(i) asserting that the Company or any Company Subsidiary is not in
substantial compliance with any of the statutes, regulations or
ordinances that such Regulatory Authority enforces, except with respect
to matters which are otherwise disclosed to Classic (ii) threatening to
revoke any license, franchise, permit or governmental authorization
that is material to the Condition of the Company and the Company
Subsidiaries, taken as a whole, including without limitation the Bank's
status as an insured depositary institution under the Federal Deposit
Insurance Act (the "FDIA"), (iii) requiring or threatening to require
the Company or any Company Subsidiary, or indicating that the Company
or any Company Subsidiary may be required, to enter into a cease and
desist order, agreement or memorandum of understanding or any other
agreement restricting or limiting or purporting to direct, restrict or
limit in any manner the operations of the Company or any Company
Subsidiary, including without limitation any restriction on the payment
of dividends. No such cease and desist order, agreement or memorandum
of understanding or other agreement is currently in effect.
(d) Neither the Company nor any Company Subsidiary is required
by Section 32 of the FDIA to give prior notice to any federal banking
agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive
officer.
A.15 Labor. No work stoppage involving the Company or any Company
Subsidiary is pending or, to the Best Knowledge of Sellers, threatened. Neither
the Company nor any Company Subsidiary is involved in, or, to the Best Knowledge
of Sellers, threatened with or affected by, any labor dispute, arbitration,
lawsuit or administrative proceeding which reasonably could be expected to have
a material adverse effect on the Condition of the Company and the Company
Subsidiaries, taken as a whole. No employees of the Company or any Company
Subsidiary are represented by any labor union or any collective bargaining
organization.
A.16 Material Interests of Certain Persons.
(a) To the Best Knowledge of Sellers, no officer or director
of the Company or any Subsidiary of the Company, or any "associate" (as
such term is defined in Rule 14a-1 under the Exchange Act) of any such
officer or director, has any material interest in any material contract
or property (real or personal, tangible or intangible), used in or
pertaining to the business of the Company or any Company Subsidiary.
(b) Except as otherwise disclosed to Classic, there are no
loans from the Company or any Company Subsidiary to any present
officer, director, employee or any associate or related interest of any
such person ("Insider Loans"). All outstanding Insider Loans from the
Company or any Company Subsidiary were approved by or reported to the
appropriate board of directors in accordance with applicable law and
regulations.
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A.17 Allowance for Loan Losses; Nonperforming Assets.
(a) The allowances for loan losses contained in the Company
Financial Statements were established in accordance with the past
practices and experiences of the Company and the Company Subsidiaries,
and the allowance for loan losses shown on the consolidated condensed
balance sheet of the Company and the Company Subsidiaries at March 31,
1996 is adequate in all material respects under the requirements of
GAAP and the rules, regulations and policies of the OCC to provide for
possible losses on loans (including without limitation accrued interest
receivable) and credit commitments (including without limitation
stand-by letters of credit) outstanding as of the date of such balance
sheet.
(b) The sum of the aggregate amount of all Nonperforming
Assets (as defined below) and all troubled debt restructurings (as
defined under GAAP) on the books of the Company and the Company
Subsidiaries is $933,918. Sellers shall use due diligence to assure
that this amount improves before Closing. "Nonperforming Assets" shall
mean (A) loans and leases classified as nonperforming, (B) assets
classified as other real estate owned and other assets acquired through
foreclosure, including in-substance foreclosed real estate, (C) loans
and leases that are on non-accrual status and (D) all loans that are 90
days or more past due, in each case under the definitions applied by
GAAP, as appropriate.
A.18 Employee Benefit Plans.
(a) Sellers shall use their best efforts to cause the Company
and the Company Subsidiaries to provide to Classic, prior to the
Closing Date, a list of all of their respective pension, retirement,
supplemental retirement, stock option, stock purchase, stock ownership,
savings, stock appreciation right, profit sharing, employment, deferred
compensation, consulting, bonus, medical, disability, workers'
compensation, vacation, group insurance, severance and other material
employee benefit, incentive and welfare policies, contracts, plans and
arrangements, and all trust or loan agreements or arrangements related
thereto, (the "Benefit Plan Lists") maintained, sponsored or
contributed to by the Company or any Company Subsidiary in respect of
any of the present or former directors, officers, or other employees of
and/or consultants to the Company or any Company Subsidiary
(collectively, "the Company Employee Plans"). Sellers shall use their
best efforts to ensure that the following documents with respect to
each Company Employee Plan are included in the Benefit Plan Lists: (i)
a true and complete copy of all written documents comprising such
Company Employee Plan (including amendments and individual agreements
relating thereto) or, if there is no such written document, an accurate
and complete description of the Company Employee Plan; (ii) the most
recent Form 5500 or Form 5500-C (including all schedules thereto), if
applicable; (iii) the most recent financial statements and actuarial
reports, if any; (iv) the summary plan description currently in effect
and all material modifications thereof, if any; and (v) the most recent
IRS determination letter, if any.
(b) All of the Company Employee Plans have been maintained and
operated materially in accordance with their terms and with the
material requirements of all
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applicable statutes, orders, rules and final regulations, including
without limitation ERISA and the Code. All contributions required to be
made to the Company Employee Plans have been made.
(c) With respect to each of the Company Employee Plans which
is a pension plan (as defined in Section 3(2) of ERISA) (the "Pension
Plans"): (i) each Pension Plan which is intended to be "qualified"
within the meaning of Section 401(a) of the Code is so qualified and,
to the extent a determination letter has been received from the IRS
with respect to any such Pension Plan, such determination letter may
still be relied upon, and each related trust is exempt from taxation
under Section 501(a) of the Code; (ii) the present value of all
benefits vested and all benefits accrued under each Pension Plan which
is subject to Title IV of ERISA, valued using the assumptions in the
most recent actuarial report, did not, in each case, as of the last
applicable annual valuation date (as indicated on the Benefit Plan
Lists), exceed the value of the assets of the Pension Plan allocable to
benefits on a plan termination basis; (iii) there has been no
"prohibited transaction," as such term is defined in Section 4975 of
the Code or Section 406 of ERISA, which could subject any Pension Plan
or associated trust, or, to the Best Knowledge of Sellers, to any
material tax or penalty; (iv) no Pension Plan or any trust created
thereunder has been terminated, nor have there been any "reportable
events" with respect to any Pension Plan, as that term is defined in
Section 4043 of ERISA since January 1, 1986; and (v) no Pension Plan or
any trust created thereunder has incurred any "accumulated funding
deficiency", as such term is defined in Section 302 of ERISA (whether
or not waived). No Pension Plan is a "multiemployer plan" as that term
is defined in Section 3(37) of ERISA. With respect to each Pension Plan
that is described in Section 4063(a) of ERISA (a "Multiple Employer
Pension Plan"): (i) neither the Company nor any Company Subsidiary
would have any liability or obligation to post a bond under Section
4063 of ERISA if the Company and all Company Subsidiaries were to
withdraw from such Multiple Employer Pension Plan; and (ii) neither the
Company nor any Company Subsidiary would have any liability under
Section 4064 of ERISA if such Multiple Employer Pension Plan were to
terminate.
(d) Neither the Company nor any Company Subsidiary has any
liability for any post-retirement health, medical or similar benefit of
any kind whatsoever, except as required by statute or regulation.
(e) Neither the Company nor any Company Subsidiary has any
material liability under ERISA or the Code as a result of its being a
member of a group described in Sections 414(b), (c), (m) or (o) of the
Code.
(f) Neither the Company nor any Company Subsidiary has any
material liability under the continuation of health care provisions of
the Consolidated Omnibus Budget Reconciliation Act of 1985 or any
comparable state law.
(g) Except as otherwise disclosed to Classic, neither the
execution nor delivery of this Agreement nor the consummation of the
Purchase will (i) result in any payment (including without limitation
severance, unemployment compensation or golden parachute payment)
becoming due to any director or employee of the Company or any Company
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Subsidiary from any of such entities, (ii) materially increase any
benefit otherwise payable under any of the Company Employee Plans or
(iii) result in the acceleration of the time of payment of any such
benefit. Sellers shall use their best efforts to cause the Company and
the Company Subsidiaries to take the necessary steps to ensure that no
amounts paid or payable by the Company, the Company Subsidiaries or
Classic to or with respect to any employee or former employee of the
Company or any Company Subsidiary will fail to be deductible for
federal income tax purposes by reason of Section 280G or Section 162(m)
of the Code or otherwise.
A.19 Conduct to Date. From and after March 31, 1996 through the date of
this Agreement, except as otherwise disclosed to Classic: (i) the Company and
the Company Subsidiaries have conducted their respective businesses in the
ordinary and usual course consistent with past practices; (ii) neither the
Company nor any Company Subsidiary has issued, sold, granted, conferred or
awarded any of its Equity Securities, or any corporate debt securities which
would be classified under GAAP as long-term debt on the consolidated balance
sheets of the Company; (iii) the Company has not effected any stock split or
adjusted, combined, reclassified or otherwise changed its capitalization; (iv)
the Company has not declared, set aside or paid any dividend or other
distribution in respect of its capital stock, or purchased, redeemed, retired,
repurchased, or exchanged, or otherwise acquired or disposed of, directly or
indirectly, any of its Equity Securities, whether pursuant to the terms of such
Equity Securities or otherwise; (v) neither the Company nor any Company
Subsidiary has incurred any material obligation or liability (absolute or
contingent), except normal trade or business obligations or liabilities incurred
in the ordinary course of business, or subjected to Lien any of its assets or
properties other than in the ordinary course of business consistent with past
practice; (vi) neither the Company nor any Company Subsidiary has discharged or
satisfied any material Lien or paid any material obligation or liability
(absolute or contingent), other than in the ordinary course of business; (vii)
neither the Company nor any Company Subsidiary has sold, assigned, transferred,
leased, exchanged, or otherwise disposed of any of its properties or assets
other than for a fair consideration in the ordinary course of business; (viii)
except as required by contract or law, neither the Company nor any Company
Subsidiary has (A) increased the rate of compensation of, or paid any bonus to,
any of its directors, officers, or other employees, except merit or promotion
increases in accordance with existing policy, (B) entered into any new, or
amended or supplemented any existing, employment, management, consulting,
deferred compensation, severance, or other similar contract, (C) entered into,
terminated, or substantially modified any of the Company Employee Plans or (D)
agreed to do any of the foregoing; (ix) neither the Company nor any Company
Subsidiary has suffered any material damage, destruction, or loss, whether as
the result of fire, explosion, earthquake, accident, casualty, labor trouble,
requisition, or taking of property by any Regulatory Authority, flood,
windstorm, embargo, riot, act of God or the enemy, or other casualty or event,
and whether or not covered by insurance; (x) neither the Company nor any Company
Subsidiary has canceled or compromised any debt, except for debts charged off or
compromised in accordance with the past practice of the Company and the Company
Subsidiaries; (xi) neither the Company nor any Company Subsidiary has entered
into any material transaction, contract or commitment outside the ordinary
course of its business and (xii) neither the Company nor any Company Subsidiary
has made or guaranteed any loan to any of the Company Employee Plans.
A.20 Proxy Statement, etc. None of the information regarding Sellers,
the Company or any Company Subsidiary supplied or to be supplied by Sellers, the
Company or any Company
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Subsidiary for inclusion or included in (i) the proxy statement to be mailed to
stockholders in accordance with Section D.3 of Appendix D to this Agreement (the
"Proxy Statement") or (ii) any other documents to be filed with any Regulatory
Authority in connection with the Purchase will, at the respective times such
documents are filed with any Regulatory Authority and, with respect to the Proxy
Statement, when mailed, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the meeting of Classic's
stockholders referred to in Section D.3 of Appendix D to this Agreement be false
or misleading with respect to any material fact, or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of any proxy for such meeting. All documents which
Sellers are responsible for filing with any Regulatory Authority in connection
with the Purchase will comply as to form in all material respects with the
provisions of applicable law.
A.21 Regulatory Matters. Neither Sellers, nor the Company nor any
Company Subsidiary have taken or agreed to take any action or have any knowledge
of any fact or circumstance that would materially impede or delay receipt of any
approval referred to in Section 6.1(b) of this Agreement or the consummation of
the Purchase.
A.22 Accuracy of Information. The statements of Sellers contained in
this Agreement, the information provided by Sellers and, to the Best Knowledge
of Sellers, the Company or any Company Subsidiary to Classic pursuant to this
Agreement and any other written document executed and delivered by Sellers
pursuant to the terms of this Agreement are true and correct in all material
respects, and such statements and documents do not omit any material fact
necessary to make the statements contained therein not misleading.
A.23 Community Reinvestment Act Compliance. The Bank currently has a
CRA rating that is below satisfactory. To the Best Knowledge of Sellers, there
is no fact or circumstance or set of facts or circumstances which would cause
the CRA rating of the Bank to fall below its current level. From the date hereof
to the Closing Date, Sellers shall use their best efforts to improve the Bank's
CRA rating to satisfactory or better, but without any guarantee thereof.
A.24 Adequate Representation. Sellers represent and acknowledge that
they have received adequate legal advice and representation in connection with
this transaction and have not relied on counsel for Classic for legal advice or
representation in connection with this transaction.
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APPENDIX B
REPRESENTATIONS AND WARRANTIES OF CLASSIC
Classic represents and warrants to and covenants with Sellers as
follows:
B.1 Organization and Authority. Classic is a corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing in all
jurisdictions where its ownership or leasing of property or the conduct of its
business requires it to be so qualified and has the corporate power and
authority to own its properties and assets and to carry on its business as it is
now being conducted, except where the failure to be so qualified would not have
a material adverse effect on the Condition of Classic. Classic is registered as
a savings and loan holding company with the Office of Thrift Supervision under
the Home Owners' Loan Act of 1933, as amended (the "HOLA").
B.2 Authorization.
(a) Classic has the corporate power and authority to enter
into this Agreement and to carry out its obligations hereunder. The
execution, delivery and performance of this Agreement by Classic and
the consummation by Classic of the Purchase have been duly authorized
by all requisite corporate actions of Classic and, subject to the
receipt of such approvals of the Regulatory Authorities as may be
required by statute or regulation, will be a valid and binding
obligation of Classic enforceable against Classic in accordance with
its terms.
(b) Neither the execution, delivery or performance by Classic
of this Agreement, nor the consummation by Classic of the transactions
contemplated hereby, nor compliance by Classic with any of the
provisions hereof, will (i) violate or conflict with any term,
condition or provision of its articles or certificate of incorporation,
charter or bylaws, (ii) violate, conflict with or result in a breach of
any provisions of, or constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) or result
in the termination of, or accelerate the performance required by, or
result in a right of termination or acceleration of, or result in the
creation of, any Lien upon any of the material properties or assets of
Classic under any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which
Classic is a party or by which it may be bound, or to which Classic or
any of its material properties or assets may be subject, or (ii)
subject to compliance with the statutes and regulations referred to in
subsection (c) of this Section B.2, to the best knowledge of Classic
(the "Best Knowledge of Classic"), violate any judgment, ruling, order,
writ, injunction, decree, statute, rule or regulation applicable to
Classic or any of its respective material properties or assets.
(c) Other than in connection with or in compliance with the
provisions of the Exchange Act or filings, consents, reviews,
authorizations, approvals or exemptions required under the BHCA, and
the HSR Act, no notice to, filing with, exemption or
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review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Classic of the Purchase.
B.3 Classic Financial Statements. The consolidated balance sheets of
Classic and the Classic Subsidiaries as of March 31, 1995 and 1994 and related
consolidated statements of income, cash flows and changes in stockholders'
equity for each of the three years in the three-year period ended March 31,
1995, together with the notes thereto, audited by Smith, Goolsby, Artis & Reams,
P.S.C. (with respect to statements as of March 31, 1995) and Griffith, Delaney,
Hillman & Company (with respect to statements as of March 31, 1994 and March 31,
1993) (collectively the "Classic Financial Statements"), and the unaudited
consolidated condensed balance sheets of the Classic and the Classic
Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
unaudited consolidated condensed statements of income and cash flows for the
periods then ended, have been prepared in accordance with GAAP, present fairly
the consolidated financial position of Classic and the Classic Subsidiaries at
such dates, and the consolidated results of operations, cash flows and changes
in stockholders' equity of Classic and the Classic Subsidiaries for the periods
stated therein and are derived from the books and records of Classic and the
Classic Subsidiaries, which are complete and accurate in all material respects
and have been maintained in accordance with good business practices. Neither
Classic nor any Classic Subsidiary has any material contingent liabilities that
are not described in the Classic Financial Statements described above.
B.4 Classic Reports. Since March 31, 1995, Classic has filed all
material reports, registrations and statements, together with any required
material amendments thereto, that it was required to file with any Regulatory
Authority. All such reports and statements filed with any such Regulatory
Authority are collectively referred to herein as the "Classic Reports." As of
its respective date, each Classic Report complied in all material respects with
all the rules and regulations promulgated by the applicable Regulatory Authority
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
B.5 Material Adverse Change. Since March 31, 1995, there has been no
material adverse change in the Condition of Classic that would materially affect
its ability to carry out its obligations under this Agreement, except as may
have resulted or may result from changes to laws and regulations or changes in
economic conditions applicable to depositary institutions generally.
B.6 Proxy Statement, etc. None of the information regarding Classic or
any Classic Subsidiary supplied or to be supplied by Classic for inclusion or
included in the Proxy Statement or any other documents to be filed with any
Regulatory Authority in connection with the Purchase will, at the respective
times such documents are filed with any Regulatory Authority and, with respect
to the Proxy Statement, when mailed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein not misleading or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the meeting of
stockholders referred to in Section D.3 of Appendix D to this Agreement, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the
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solicitation of any proxy for such meeting. All documents which Classic is
responsible for filing with any Regulatory Authority in connection with the
Purchase will comply as to form in all material respects with the provisions of
applicable law.
B.7 Accuracy of Information. The statements of Classic contained in
this Agreement, the Appendices hereto and in any other written document executed
and delivered by or on behalf of Classic pursuant to the terms of this Agreement
are true and correct in all material respects, and such statements and documents
do not omit any material fact necessary to make the statements contained herein
or therein not misleading.
B.8 Available Funds. As of the Closing Date, Classic will have
available to it sufficient readily available funds to pay the Purchase Price.
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APPENDIX C
CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME
C.1 Conduct of Businesses Prior to the Effective Time. During the
period from the date of this Agreement to the Closing Date, Sellers shall use
their best efforts to cause the Company and each of the Company Subsidiaries to,
conduct their respective businesses only in the ordinary and usual course
consistent with sound business practices and, in the case of the Bank, sound
banking practices, and shall use their best efforts to cause the Company and the
Company Subsidiaries to maintain and preserve their respective organizational
structures, employees and advantageous business relationships and retain the
services of their respective officers and key employees. Sellers shall take no
action, and shall use their best efforts to ensure that the Company and the
Company Subsidiaries take no action, that would have the effect of reducing the
value of the Shares.
C.2 Forbearances. During the period from the date of this Agreement to
the Closing Date, Sellers shall use their best efforts to prevent the Company or
any Company Subsidiary, without the prior written consent of Classic, from:
(a) declaring, setting aside or paying any dividends or other
distributions, directly or indirectly, in respect of its capital stock
(other than ordinary, normal dividends from a wholly owned Subsidiary
of the Company to the Company or another wholly owned Subsidiary of the
Company);
(b) entering into or amending any employment, severance or
similar agreement or arrangement with any director or officer or
employee, or modifying any of the Company Employee Plans or any loans
relating thereto (or prepaying in whole or in part any such loans) or
granting any salary or wage increase or increasing any employee benefit
(including incentive or bonus payments), except (i) normal individual
increases in compensation to employees consistent with past practices,
or as required by law or contract, and (ii) such increases of which the
Company notifies Classic in writing and which Classic does not
disapprove within ten days of the receipt of such notice;
(c) authorizing, recommending, proposing or announcing an
intention to authorize, so recommend or propose, or entering into an
agreement in principle with respect to, any merger, consolidation or
business combination (other than with Classic or any Subsidiary of
Classic), any acquisition of a material amount of assets or securities,
any disposition of a material amount of assets or securities or any
release or relinquishment of any material contract rights;
(d) proposing or adopting any amendments to its articles or
certificate of incorporation or other charter document or bylaws
(except for any amendment which provides that the Company or any
Company Subsidiary shall not be subject to any anti-takeover law,
including, without limitation, Section 271B.12-210 of the Kentucky
Business Corporation Act (the "KBCA");
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(e) issuing, selling, granting, conferring or awarding any of
its Equity Securities or effecting any stock split or adjusting,
combining, reclassifying or otherwise changing its capitalization as it
exists on the date of this Agreement except any change in its
capitalization designed to facilitate a transaction involving Classic
or any Classic Subsidiary;
(f) purchasing, redeeming, retiring, repurchasing, or
exchanging, or otherwise acquiring or disposing of, directly or
indirectly, any of its Equity Securities, whether pursuant to the terms
of such Equity Securities or otherwise;
(g) (i) entering into or increasing any loan or credit
commitment (including stand-by letters of credit) to, or investing or
agreeing to invest in, any person or entity or modifying any of the
material provisions or renewing or otherwise extending the maturity
date of any existing loan or credit commitment (collectively, "Lending
to") in an amount in excess of $75,000, provided no such consent shall
be required in respect of single-family residential loans or credits
not exceeding $150,000 that are saleable in recognized secondary
markets pursuant to the Bank's lending policies as in effect on the
date hereof; (ii) entering into, or increasing in an amount in excess
of $150,000, any commercial or multi-family real estate loan or credit
commitment (including stand-by letters of credit) to, or investing or
agreeing to invest in, any commercial or multi-family real estate
project or entity, or Lending to any person other than in accordance
with lending policies as in effect on the date hereof, unless (A) the
Company or any Company Subsidiary has delivered to Classic or its
designated representative a notice of its intention to make such loan
and such information as Classic or its designated representative may
reasonably require in respect thereof and (B) Classic or its designated
representative shall not have objected to such loan by giving written
or facsimile notice of such objection within two business days
following the delivery to Classic of the notice of intention and
information as aforesaid; (iii) Lending to any person or entity, with
respect to any of the loans or other extensions of credit to which or
investments in which are on a "watch list" or similar internal report
of the Company or any Company Subsidiary (except those denoted "pass"
or similar notation thereon); (iv) entering into any agreement or
engaging in any transaction which reasonably could be construed as
materially affecting the asset/liability management or interest rate
risk management position of the Bank (in this regard, Sellers shall use
their best efforts to cause the Company or the Bank to promptly provide
to Classic copies of all of the Company's or the Bank's loan and
deposit pricing reports as well as summaries of any proposed asset
sales and secondary market transactions as soon as they are
identified); or (v) changing credit, lending, investment, liability
management and other material banking policies in any respect which is
material to the Bank; provided, however, that Sellers shall not be
obligated to attempt to prohibit the Company or any Company Subsidiary
from honoring any contractual obligation in existence on the date of
this Agreement;
(h) directly or indirectly (including through its officers,
directors, employees or other representatives) initiating, soliciting
or encouraging any discussions, inquiries or proposals with any third
party relating to the disposition of any significant portion of the
business or assets of the Company or any Company Subsidiary or the
acquisition of Equity Securities of the Company or any Company
Subsidiary or the merger of the
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Company or any Company Subsidiary with any person (other than Classic
or any Classic Subsidiary) or any similar transaction (each such
transaction being referred to herein as an "Acquisition Transaction"),
or providing any such person with information or assistance or
negotiating with any such person with respect to an Acquisition
Transaction;
(i) taking any action that would materially impede or delay
the consummation of the Purchase or the ability of Classic or Sellers
to obtain any approval of any Regulatory Authority required for the
transactions contemplated by this Agreement or to perform their
covenants and agreements under this Agreement;
(j) other than in the ordinary course of business consistent
with sound business or banking practices, incurring any indebtedness
for borrowed money, assuming, guaranteeing, endorsing or otherwise as
an accommodation becoming responsible or liable for the obligations of
any other individual, corporation or other entity; or
(k) agreeing in writing or otherwise to take any of the
foregoing actions or engaging in any activity, entering into any
transaction or taking or omitting to take any other act which would
make any of the representations and warranties with respect to the
Company and the Company Subsidiaries contained in Appendix A of this
Agreement untrue or incorrect in any material respect if made anew
after engaging in such activity, entering into such transaction, or
taking or omitting such other act.
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APPENDIX D
ADDITIONAL AGREEMENTS
D.1 Access and Information. Sellers shall use their best efforts to
cause the Company and the Company Subsidiaries to afford to Classic and to its
accountants, counsel and other representatives, full access during normal
business hours, during the period prior to the Closing Date, to all their
respective properties, books, contracts, commitments and records and, during
such period, to cause the Company and the Company Subsidiaries to furnish
promptly to Classic (i) a copy of each report, schedule and other document filed
or received by it during such period pursuant to the requirements of federal and
state securities laws and (ii) all other information concerning its business,
properties and personnel as Classic may reasonably request. Except as may be
required by law, Classic shall, and shall cause its advisors and representatives
to, (A) hold confidential all information obtained in connection herewith which
is not otherwise public knowledge, (B) return all documents (including copies
thereof) obtained hereunder and (C) use its best efforts to cause all
information obtained pursuant to this Agreement or in connection with the
negotiation of this Agreement to be treated as confidential and not use, or
knowingly permit others to use, any such information unless such information
becomes generally available to the public.
D.2 Regulatory Filings. Sellers and Classic shall cooperate and use
their best efforts to prepare all documentation, to effect all filings, to
obtain all permits, consents, approvals and authorizations of all Regulatory
Authorities and to take any other actions necessary to consummate the
transactions contemplated by this Agreement.
D.3 Stockholder Approval. Classic shall call a meeting of its
stockholders to be held as soon as practicable for the purpose of voting on this
Agreement and the Purchase. In connection with such meeting, Classic and Sellers
shall cooperate in the preparation of the Proxy Statement and, with the approval
of Classic, the Proxy Statement shall be filed with the SEC and mailed to the
stockholders of Classic. The Boards of Directors of Classic shall submit for
approval of Classic's stockholders, the matters to be voted upon at such
meeting. The Board of Directors of Classic hereby does and will unanimously
recommend this Agreement and the Purchase and all related amendments, if any, to
the stockholders of Classic and will use its best efforts to obtain any vote of
its stockholders necessary for the approval and adoption of this Agreement, the
Purchase, and any related amendments to this Agreement.
D.4 Current Information. During the period from the date of this
Agreement to the Closing Date, Sellers shall use their best efforts to cause the
Company and the Company Subsidiaries to promptly furnish Classic with copies of
all of their respective monthly and other interim financial statements as the
same become available. Sellers shall promptly notify Classic of any material
change in the business or operations of the Company or any Company Subsidiary
and of any governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated), or the threat of
material litigation involving the Company or any Company Subsidiary.
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D.5 Expenses. Each party hereto shall bear its own expenses incident to
preparing, entering into and carrying out this Agreement and to consummating the
Purchase.
D.6 Miscellaneous Agreements and Consents. Subject to the terms and
conditions herein provided, each of the parties hereto agrees to use its
respective best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the Purchase as
expeditiously as possible, including without limitation using its respective
best efforts to lift or rescind any injunction or restraining order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby. Each party shall, and Classic shall cause each of its Subsidiaries to,
use its best efforts to obtain consents of all Regulatory Authorities necessary
or, in the opinion of Classic, desirable for the consummation of the
transactions contemplated by this Agreement.
D.7 Press Releases. Except as may be required by law, Classic shall
issue any and all press releases relating to this Agreement or any of the
transactions contemplated hereby, following consultation with Sellers as to the
form and substance of such press releases.
D.8 Takeover Provisions. If requested by Classic, Sellers shall use
their best efforts to exempt the Purchase from, and if necessary challenge the
validity of any applicable state takeover or similar law. Sellers shall use
their best efforts to cause the Company and the Bank to take all steps necessary
so that any takeover provisions in the charter documents or bylaws of the
Company or any Company Subsidiary, including without limitation any provisions
of the Company's Articles of Incorporation restricting the ownership or
acquisition of the Company's securities or imposing any "fair price" or
supermajority director or stockholder vote requirements (and any corresponding
or similar provisions of the Bank's Charter), will not apply to this Agreement
or the Purchase. If requested by Classic, Sellers shall use their best efforts
to cause the Articles of Incorporation of the Company to be amended (the
"Amendment") prior to the Closing Date, to expressly provide that the Company
shall not be governed by Section 271B.12-210 of the KBCA. If so requested by
Classic, Sellers shall use their best efforts to cause the Board of Directors of
the Company to propose and recommend the Amendment to the shareholders of the
Company and to call a special meeting of the shareholders for the purpose of
voting on the Amendment. In the event that such special meeting is called,
Sellers hereby agree that they will vote all of their shares in favor of the
Amendment, and shall use their best efforts to cause the remaining shareholders
of the Company to vote in favor of the Amendment.
D.9 Third Parties. Sellers shall immediately terminate all negotiations
or discussions concerning any sale of their Shares or any other Acquisition
Transaction with parties other than Classic or any Classic Subsidiary, and shall
not provide any such third party with information or other form of assistance
with respect to an Acquisition Transaction or proposed sale of their Shares and
shall use their best efforts to cause the Company and the Company Subsidiaries
to enforce the terms of all confidentiality agreements each has entered into
with any third parties.
D.10 Merger Agreement. Sellers shall use their best efforts to cause
the Merger Agreement to be approved by the Company's shareholders and the
transactions contemplated thereunder to be consummated in accordance with the
terms thereof.
D.11 Removal of Security Interest on Shares. Sellers shall use their
best efforts to cause the security interest on the Shares to be removed not
later than the Closing.
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EXHIBIT A
BUY/SELL AGREEMENT
THIS BUY/SELL AGREEMENT (this "Agreement"), dated April ___, 1996, is
between Classic Bancshares, Inc., a Delaware corporation ("Classic"), and ____
("Seller").
WHEREAS, Seller is the owner of ____ shares (the "Shares") of the
issued and outstanding common stock, no par value, of First Paintsville
Bancshares, Inc., a Kentucky corporation (the "Company");
WHEREAS, the Board of Directors of Classic and the Board of Directors
of the Company have approved an Agreement and Plan of Merger dated as of April
22, 1996 (the "Merger Agreement") providing for the merger of an interim
subsidiary of Classic with and into the Company;
WHEREAS, in order to provide protection from the consequences of any
termination of the Merger Agreement, in the event of the termination of the
Merger Agreement, subject to certain conditions, Classic desires to purchase
from Seller and Seller desires to sell to Classic the Shares, for an amount of
cash as set forth in Section 1.1 of this Agreement; and
WHEREAS, the parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement and the
transactions contemplated hereby.
NOW THEREFORE, in consideration of the foregoing and the
representations, warranties, promises, covenants, agreements and conditions
herein and hereunder, the parties hereto agree as follows:
ARTICLE I
THE PURCHASE AND RELATED MATTERS
1.1 The Purchase. At the Closing (as defined herein), Seller will sell
to Classic and Classic will purchase from Seller, upon the terms and the
conditions set forth herein, the Shares (the "Purchase") for an aggregate
purchase price of $ ____ (the "Purchase Price"), such amount reflecting a price
of $125.00 per share plus an additional $.83 per share for each month or portion
thereof if the Closing takes place after September 30, 1996 and an additional
$.17 (in addition to the $.83 referred to above) per share for each month or
portion thereof if the Closing takes place after December 31, 1996; provided,
however, that the purchase and sale obligations under this Agreement shall
terminate if the Purchase has not taken place by March 31, 1997.
1.2 The Closing. The closing (the "Closing") of the Purchase shall take
place at a location to be determined at a later date promptly following the
fulfillment or waiver of the conditions set forth in Article VI hereof (the
"Closing Date"). At the Closing, Seller will deliver to Classic certificates
representing the Shares, duly endorsed or accompanied by stock powers
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duly executed in blank, with signatures guaranteed, and otherwise in form
acceptable for transfer on the books of the Company, and Classic will deliver to
Seller a certified check in the amount of the Purchase Price made payable to
Seller.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby makes the representations and warranties to Classic as
set forth in Appendix A to this Agreement to the best of his knowledge and
belief (except as to Section A.1, which is not limited to knowledge and belief).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CLASSIC
Classic hereby makes the representations and warranties to Seller as
set forth in Appendix B to this Agreement.
ARTICLE IV
CONDUCT OF BUSINESS
Seller shall use his best efforts to cause the Company and the Company
Subsidiaries (as such term is defined in Section A.3 of Appendix A to this
Agreement), including the First National Bank of Paintsville (the "Bank") to
conduct their respective businesses in accordance with the terms set forth in
Appendix C to this Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
This Agreement shall be subject to the additional agreements set forth
in Appendix D to this Agreement.
ARTICLE VI
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Purchase. The
respective obligations of each party to effect the Purchase shall be subject to
the fulfillment or waiver at or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement shall have been
approved and adopted by the requisite vote of the stockholders of
Classic.
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(b) Regulatory Approvals. All requisite approvals of this
Agreement and the transactions contemplated hereby shall have been
received from the Board of Governors of the Federal Reserve System (the
"FRB") and all other Regulatory Authorities (as defined in Section A.7
of Appendix A hereto), if any, having approval authority with respect
to the Purchase, without the imposition of any condition which differs
from conditions customarily imposed by such Regulatory Authorities in
orders approving stock purchases of the type contemplated hereby and,
in the good faith opinion of Classic, compliance with which would
materially adversely affect the reasonably anticipated benefits of the
Purchase to Classic, and all applicable waiting periods shall have
expired.
(c) No Injunctions. Neither Classic nor Seller shall be
subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of
the Purchase.
(d) Merger Agreement. The Merger Agreement shall have been
terminated.
6.2 Conditions to Obligations of Seller to Effect the Purchase. The
obligations of Seller to effect the Purchase shall be subject to the fulfillment
or waiver at or prior to the Closing Date of the following additional
conditions:
(a) Representations and Warranties. The representations and
warranties of Classic set forth in Appendix B to this Agreement shall
be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date (as though made on and as of the
Closing Date except (i) to the extent such representations and
warranties are by their express provisions made as of a specified date
and (ii) for the effect of transactions contemplated by this
Agreement), and Seller shall have received a certificate of the
president and chief executive officer of Classic to that effect.
(b) Performance of Obligations. Classic shall have performed
in all material respects all obligations required to be performed by it
under this Agreement prior to the Closing Date, and Seller shall have
received a certificate of the president and chief executive officer of
Classic to that effect.
6.3 Conditions to Obligations of Classic to Effect the Purchase. The
obligations of Classic to effect the Purchase shall be subject to the
fulfillment or waiver at or prior to the Closing Date of the following
additional conditions:
(a) Representations and Warranties. The representations and
warranties of Seller set forth in Appendix A to this Agreement shall be
true and correct in all material respects, without regard to any
knowledge qualifier, as of the date of this Agreement and as of the
Closing Date (as though made on and as of the Closing Date except (i)
to the extent such representations and warranties are by their express
provisions made as of a specific date and (ii) for the effect of
transactions contemplated by this Agreement) and Classic shall have
received a certificate of Seller confirming the same to the best of his
knowledge and belief.
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(b) Performance of Obligations. Seller shall have performed in
all material respects all obligations required to be performed by him
under this Agreement prior to the Closing Date, and Classic shall have
received a certificate of Seller confirming the same to the best of his
knowledge and belief.
(c) No Material Adverse Change. Since the date of this
Agreement, there shall have been no material adverse change in the
condition or operations of the Company and the Company Subsidiaries,
taken as a whole. For the purpose of this section, a "material adverse
change" shall mean a change of 15 percent or more of the shareholders'
equity or value of the Company and its subsidiaries. In calculating a
material adverse change, the determination shall be made in accordance
with generally accepted accounting principles as in effect on the date
hereof and applied consistently with prior periods, and there shall be
added back the following expenses, charges and similar amounts which
are paid or accrued by the Company or the Bank: (i) expenses incurred
in connection with the proposed acquisition of the Company and the Bank
by Classic; (ii) expenses requested or required in writing by Classic;
(iii) charges, fees and expenses related to any change with respect to,
or effect on, the Company or the Bank resulting from any other matter
affecting depository institutions generally, including, without
limitation, changes in general economic conditions and changes in
prevailing interest and deposit rates; (iv) increases in the Bank's
reserve for loan losses of up to $300,000 and increases in the Bank's
reserve for losses on other real estate owned of up to $100,000; and
(v) any other items of expense which are mutually agreed to by Seller
and Classic.
(d) Classic Termination of Merger Agreement. Classic shall not
have terminated the Merger Agreement in accordance with 7.1(c) thereof.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval of the stockholders of
Classic:
(a) by mutual consent of Seller and the Board of Directors of
Classic;
(b) by Seller or the Board of Directors of Classic if (i) any
Regulatory Authority has denied approval of the Purchase after Classic
used due diligence to obtain such approval and such denial has become
final and nonappealable or (ii) the stockholders of Classic shall not
have approved this Agreement and the Purchase at the meeting referred
to in Section D.5 of Appendix D to this Agreement following a favorable
recommendation of such matters by Classic's Board of Directors;
(c) by the Board of Directors of Classic in the event of (i) a
material breach by Seller of any representation (without regard to any
knowledge qualifier), warranty (without regard to any knowledge
qualifier), covenant or other agreement contained in this Agreement,
which breach is not cured within 30 days after written notice thereof
to Seller by Classic, provided that the terminating party is not then
in violation of any
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representation, warranty, covenant or any other agreement contained
herein or (ii) termination of the Merger Agreement by Classic pursuant
to Section 7.1(c) or 7.1(e) thereof; or
(d) by Seller in the event of a material breach by Classic of
any representation, warranty, covenant or other agreement contained in
this Agreement, which breach is not cured within 30 days after written
notice thereof is given to Classic by Seller, provided that the
terminating party is not then in violation of any representation,
warranty, covenant or any other agreement contained herein.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Sections 7.1(a) through 7.1(d) or termination of the
Merger Agreement pursuant to Section 7.1(f) thereof, this Agreement shall
forthwith become void and there shall be no liability under this Agreement on
the part of Seller or Classic or the officers or directors of Classic except as
set forth in the second sentence of Section D.1 and in Section D.5 of Appendix D
to this Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken by Seller or by or on behalf of the Board of Directors of Classic,
at any time before or after approval of this Agreement by the stockholders of
Classic; provided, however, that after such approval by the stockholders of
Classic no such modification shall alter or change the Purchase Price or the
date of Closing. This Agreement may not be amended except by an instrument in
writing signed by Seller and on behalf of Classic.
7.4 Severability. Any term, provision, covenant or restriction
contained in this Agreement held by a court or a Regulatory Authority of
competent jurisdiction to be invalid, void or unenforceable, shall be
ineffective to the extent of such invalidity, voidness or unenforceability, but
neither the remaining terms, provisions, covenants or restrictions contained in
this Agreement nor the validity or enforceability thereof in any other
jurisdictions shall be affected or impaired thereby. Any term, provision,
covenant or restriction contained in this Agreement that is so found to be so
broad as to be unenforceable shall be interpreted to be as broad as is
enforceable.
7.5 Waiver. Any term, condition or provision of this Agreement may be
waived in writing at any time by either Seller or the Board of Directors of
Classic where Seller or Classic is, or where the stockholders of Classic are,
entitled to the benefits thereof.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations, Warranties and Agreements. No
investigation by the parties hereto made heretofore or hereafter shall affect
the representations and warranties of the parties which are contained herein and
each such representation and warranty shall survive such investigation. Except
as set forth below in this Section 8.1, all representations, warranties and
agreements contained in this Agreement of the parties or in any instrument
delivered by or to a party pursuant to or in connection with this Agreement
shall not survive after the Closing
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Date or the termination of this Agreement in accordance with its terms. In the
event of the termination of this Agreement in accordance with its terms, the
agreements contained in or referred to in the second sentence of Section D.1 and
Section D.5 of Appendix D to this Agreement, Section 7.2 and in the last
sentence of this Section 8.1 shall survive such termination. Nothing herein
shall relieve a breaching party from liability to a non-breaching party in the
event of a proper termination of this Agreement pursuant to Section 7.1(c) or
7.1(d).
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to be duly received (i) on the date given if
delivered personally or (ii) upon confirmation of receipt, if by facsimile
transmission or (iii) on the date received if mailed by registered or certified
mail (return receipt requested), to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(i) if to Classic:
Classic Bancshares, Inc.
344 17th Street
Ashland, Kentucky 41101
Attention: David B. Barbour
President and Chief
Executive Officer
Telecopy: (606) 324-1307
Copies to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
Attention: Kip A. Weissman, P.C.
Telecopy: (202) 682-0354
(ii) if to Seller:
8.3 Remedies. Seller acknowledges that the Shares are unique and that
Classic will not have an adequate remedy at law if Seller fails to perform any
of his obligations hereunder, and each party agrees that the other party shall
have the right, in addition to any other rights it may have, to specific
performance of this Agreement or equitable relief by way of injunction if such
party fails to perform any of his obligations hereunder, in any action or
proceeding instituted in any court having competent jurisdiction.
8.4 Disclosures to Classic. With respect to all disclosure requirements
contained herein that require the disclosure of information that is not publicly
available, Seller shall use his best efforts to cause the Company and the
Company Subsidiaries to make such disclosures to Classic.
8.5 Miscellaneous. This Agreement (including the Appendices hereto) (i)
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written
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and oral, among the parties, or any of them, with respect to the subject matter
hereof, (ii) is not intended to confer upon any person not a party hereto any
rights or remedies hereunder, (iii) shall not be assigned by operation of law or
otherwise and (iv) shall be governed in all respects by the laws of the
Commonwealth of Kentucky, except as otherwise specifically provided herein or
required by Kentucky law or by federal law or regulation. This Agreement may be
executed in counterparts which together shall constitute a single agreement.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
as of the date first above written.
CLASSIC BANCSHARES, INC.
By: ______________________________________
David B. Barbour
President and Chief Executive Officer
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<PAGE>
EXHIBIT B
VOTING AGREEMENT
This Voting Agreement, dated as of April __, 1996, is entered into
between Classic Bancshares, Inc. ("Acquiror"), and the undersigned director and
stockholder ("Stockholder") of First Paintsville Bancshares, Inc. (the
"Company").
W I T N E S S E T H:
WHEREAS, the Company and Acquiror have proposed to enter into an
Agreement and Plan of Merger (the "Agreement"), dated as of April 22, 1996,
which contemplates the acquisition by Acquiror of 100% of the common stock of
the Company (the "Company Stock") by means of a merger between the Company and
an interim subsidiary of Acquiror (the "Merger"); and
WHEREAS, Acquiror is willing to expend the substantial time, effort and
expense necessary to implement the Merger only if Stockholder enters into this
Voting Agreement; and
WHEREAS, Stockholder believes that the Merger is in his best interest
and the best interest of the Company;
NOW, THEREFORE, in consideration of the premises, Stockholder hereby
agrees as follows:
1. Voting Agreement - Stockholder shall vote, or cause to be voted, all
of the shares of Company Stock he now or hereafter owns and over which he now
has, or prior to the record date for voting at the Meeting (as hereinafter
defined) acquires, voting control in favor of the Merger at the meeting of
stockholders of the Company to be called for the purpose of approving the Merger
(the "Meeting").
2. No Competing Transaction - Stockholder shall not vote any of his
shares of Company Stock in favor of any other merger or sale of all or
substantially all the assets of the Company to any person other than Acquiror or
its affiliates until closing of the Merger, termination of the Agreement or
abandonment of the Merger by the mutual agreement of the Company and Acquiror,
whichever comes first.
3. Transfers Subject to Agreement - Stockholder shall not transfer his
shares of Company Stock unless the transferee, prior to such transfer, executes
a voting agreement with respect to the transferred shares substantially to the
effect of this Voting Agreement and reasonably satisfactory to Acquiror.
4. No Ownership Interest - Nothing contained in this Voting Agreement
shall be deemed to vest in Acquiror any direct or indirect ownership or
incidents of ownership of or with respect to any shares of Company Stock owned
or controlled by Stockholder. All rights,
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ownership and economic benefits of and relating to the shares of Company Stock
shall remain and belong to Stockholder and Acquiror shall have no authority to
manage, direct, superintend, restrict, regulate, govern or administer any of the
policies or operations of the Company or exercise any power or authority to
direct Stockholder in the voting of any of his shares of Company Stock, except
as otherwise expressly provided herein.
5. Documents Delivered - Stockholder acknowledges having reviewed the
Agreement and its attachments and that reports, proxy statements and other
information with respect to Acquiror filed with the Securities and Exchange
Commission (the "Commission") were, prior to his execution of this Voting
Agreement, available for inspection and copying at the Offices of the Commission
and that Acquiror delivered the following such documents to the Company:
(a) Acquiror's Prospectus dated November 13, 1995; and
(b) Acquiror's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995.
6. Amendment and Modification - This Voting Agreement may be amended,
modified or supplemented at any time by the written approval of such amendment,
modification or supplement by Stockholder and Acquiror.
7. Entire Agreement - This Voting Agreement evidences the entire
agreement among the parties hereto with respect to the matters provided for
herein and there are no agreements, representations or warranties with respect
to the matters provided for herein, other than those set forth herein and in the
Agreement. This Voting Agreement supersedes any agreements among the Company and
Stockholder concerning the Merger, disposition or control of the stock of the
Company.
8. Severability - The parties agree that if any provision of this
Voting Agreement shall under any circumstances be deemed invalid or inoperative,
this Voting Agreement shall be construed with the invalid or inoperative
provisions deleted and the rights and obligations of the parties shall be
construed and enforced accordingly.
9. Counterparts - This Voting Agreement may be executed in two
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same investment.
10. Governing Law - The validity, construction enforcement and effect
of this Voting Agreement shall be governed by the internal laws of the
Commonwealth of Kentucky.
11. Headings - The headings for the paragraphs of this Voting Agreement
are inserted for convenience only and shall not constitute a part hereof or
affect the meaning or interpretation of this Voting Agreement.
12. Termination - This Voting Agreement shall terminate upon the
consummation of the Merger, termination of the Agreement or abandonment of the
Merger by the mutual agreement of the Company and Acquiror, whichever comes
first.
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13. Successors - This Voting Agreement shall be binding upon and inure
to the benefit of Acquiror and its successors, and Stockholder, such
Stockholder's respective executors, personal representatives, administrators,
heirs, legatees, guardians and other legal representatives. This Voting
Agreement shall survive the death or incapacity of Stockholder. This Voting
Agreement may be assigned by Acquiror only to an affiliate of Acquiror.
This Agreement has been executed by the parties as of the date first above
written.
CLASSIC BANCSHARES, INC.
By:_________________________________
Authorized Officer
STOCKHOLDER
____________________________________
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<PAGE>
EXHIBIT C
__________________, 1996
ESCROW AGREEMENT
First Bankers Trust Company, N.A.
1201 Broadway
Quincy, Illinois 62301
Dear Sirs:
In accordance with the provisions of the Agreement and Plan of Merger
dated April 22, 1996 (the "Merger Agreement") by and among First Paintsville
Bancshares, Inc. (the "Company"), The First National Bank of Paintsville (the
"Bank"), Classic Bancshares, Inc. ("Classic") and Classic Sub Corp., a copy of
which is attached hereto as Appendix A, and if you countersign this letter
agreement, you agree to be appointed as Escrow Agent, with the duties and upon
the terms and conditions hereinafter set forth:
1. Deposit in Escrow.
On the date hereof, Classic will deposit with you, and you
hereby agree to accept in your capacity as Escrow Agent, the sum of Three
Hundred Thousand Dollars ($300,000) in immediately available funds (the
"Funds"). The Escrow Agent shall hold the Funds and such interest as shall
accrue thereon in accordance with these instructions until an Event (as
hereinafter defined) in the highest-yielding deposit account, or such other
interest bearing investment, as shall be from time to time instructed by
Classic. The Escrow Agent shall from time to time pay to Classic the interest
that shall accrue on the Funds.
2. Term of Escrow.
The term of the escrow governed hereby (the "Escrow") shall
commence on the date hereof and end upon the first occurrence of an Event (as
hereinafter defined).
3. Events.
For the purposes of this Escrow Agreement, the relevant events
(an "Event" or the "Events") shall be the earliest to occur of (a) the date on
which (1) the Escrow Agent in good faith determines, (2) a court of competent
jurisdiction determines or (3) Classic delivers to the Escrow Agent an Officer's
Certificate indicating that (i) the Company has terminated the Merger Agreement
pursuant to Section 7.1(d) thereof and (ii) neither the Company nor the Bank at
the time of such termination was in violation of any representation, warranty,
covenant or any other
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agreement contained in the Merger Agreement ("Event A"), (b) the date on which
(1) the Escrow Agent in good faith determines, (2) a court of competent
jurisdiction determines or (3) Classic delivers to the Escrow Agent an Officer's
Certificate certifying that the transactions contemplated by the Merger
Agreement have been consummated or that the Merger Agreement has been terminated
under Section 7 thereof other than by the Company pursuant to Section 7.1(d)
thereof ("Event B"); (c) the date on which (1) the Escrow Agent in good faith
determines, (2) a court of competent jurisdiction determines or (3) Classic
delivers to the Escrow Agent an Officer's Certificate indicating that (i) the
Merger Agreement has terminated because the transactions contemplated thereby
did not occur by March 31, 1997 and (ii) neither the Company nor the Bank at the
time of such termination was in violation of any representation, warranty,
covenant or any other agreement contained in the Merger Agreement ("Event C");
and (d) none of Events A, B or C has occurred by March 31, 1997 ("Event D").
4. Effects of Events.
(a) Upon the occurrence of Event A, the Escrow Agent shall (i)
release the Funds to the Company and (ii) release all interest accrued but
unpaid on the Funds to Classic.
(b) Upon the occurrence of Event B, the Escrow Agent shall
release the Funds and all accrued but unpaid interest thereon to Classic.
(c) Upon the occurrence of Event C, the Escrow Agent shall (i)
release the Funds to the Company and (ii) release all interest accrued but
unpaid on the Funds to Classic.
(d) Upon the occurrence of Event D, the Escrow Agent shall
release the funds and all accrued but unpaid interest thereon to Classic.
5. Nature of Duties.
The duties of the Escrow Agent hereunder are only such as are
specifically set forth in this Escrow Agreement, and the Escrow Agent shall not
be required to take any action as such which it has reason to believe would
subject it to expense or liability unless it shall have been assured or
indemnified to its satisfaction by the person requesting such action. If at any
time the Escrow Agent shall receive conflicting notices, claims, demands or
instructions with respect to the Funds or documents deposited with it in this
Escrow, or if for any reason it shall in good faith be unable to determine the
person or persons entitled to receive such Funds or documents, or any portion
thereof, the Escrow Agent may refuse to make any delivery thereof and retain
such Funds or documents safely in its possession until it shall have received
instructions in writing concurred in by both Classic and the Company, or until
the disposition of such Funds or documents shall be directed by a final order or
judgment of a court of competent jurisdiction, whereupon it shall make such
disposition in accordance with such instructions or such order or judgment.
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6. Resignation of Escrow Agent.
The Escrow Agent may resign and be discharged from its duties
hereunder at any time by giving notice of such resignation to Classic specifying
a date (not less than 30 days after the giving of such notice) when such
resignation shall take effect. Promptly after such notice, a financial
institution acceptable to Classic and the Company shall be appointed by Classic
as a successor escrow agent upon the resignation date specified in such notice.
If no successor escrow agent shall have been so appointed, and shall have
accepted such appointment, within 30 days after the retiring Escrow Agent's
giving of notice of resignation by the resigning escrow agent, then the retiring
Escrow Agent may, on behalf Classic and the Company, appoint a financial
institution acceptable to Classic and the Company as successor escrow agent. If
a successor escrow agent shall not have been appointed and accepted such
appointment within 30 days of the giving of notice of resignation, the resigning
Escrow Agent may, at the expense of Classic (who in turn may enter into an
agreement with the Company to share such expense), petition any court of
competent jurisdiction for the appointment of a successor escrow agent.
7. Understandings.
It is understood and agreed that the Escrow Agent:
(a) is not a party to, and is not bound by, any agreement
referred to herein or by any other agreement to which Classic or any successor
or assign thereof is a party other than as herein set forth;
(b) is acting hereunder as an escrow agent only and is not
responsible or liable in any manner whatsoever for the sufficiency, correctness,
genuineness or validity of any instrument deposited with it, or for the form of
execution of any such instrument, or for the identity, authority or rights of
any person executing or depositing it;
(c) shall be protected in acting upon any written notice,
request, waiver, consent, receipt or other paper or document believed by it in
good faith to be genuine and to have been made, signed, sent or presented by the
proper person or persons;
(d) shall not be liable for any error of judgment, or for any
act done or omitted by it in good faith, or for any mistake of fact or law, or
for anything which it may do or refrain from doing in connection herewith,
except its own gross negligence or willful misconduct; and
(e) may consult with independent legal counsel in the event of
any dispute or question as to the construction of any of the provisions hereof
or its duties hereunder, and shall incur no liability and shall be fully
protected in acting in accordance with the opinion and instructions of such
counsel.
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8. Fees and Expenses.
All fees and expenses reasonably incurred by the Escrow Agent
in connection with the performance of its duties as such hereunder shall be
borne by Classic (who, in turn, may enter into an agreement with the Company to
share such fees and expenses). Such fees and expenses shall be reimbursed upon
written request therefor by the Escrow Agent.
9. Notices.
All notices, request, demands and other communications called
for or contemplated hereunder shall be in writing and shall be deemed to have
been duly given when delivered to the party to whom addressed or when sent by
telecopy, telegram, telex or wire (if promptly confirmed by registered or
certified mail, return receipt requested, prepaid and addressed) to the parties,
their successors in interest, or their assignees at the following addresses, or
at such other addresses as the parties may designate by written notice in the
manner aforesaid:
(a) If to Classic:
Classic Bancshares, Inc.
344 17th Street
Ashland, Kentucky 41101
Attention: David B. Barbour
President and Chief
Executive Officer
Telecopy: (606) 324-1307
with copies to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
Attention: Kip A. Weissman, P.C.
Telecopy: (202) 682-0354
First Paintsville Bancshares, Inc.
240 Main Street
Paintsville, Kentucky 41240
Attention: Robert L. Bayes
President
(b) If to the Escrow Agent, to it at its above address, to the
attention of Carmen Walsh.
10. Survival.
This Escrow Agreement shall be binding upon the parties hereto
and upon their respective successors in interest and assigns.
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11. Governing Law.
This Escrow Agreement shall be construed in accordance with
and governed by the laws of the Commonwealth of Kentucky.
12. Headings.
Headings in this Escrow Agreement are for reference purposes
only and shall not be deemed to have any substantive effect.
13. Counterparts.
This Escrow Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute but one agreement.
CLASSIC BANCSHARES, INC.
By:______________________________________
David B. Barbour
President and Chief Executive Officer
ACKNOWLEDGED AND AGREED:
FIRST BANKERS TRUST COMPANY, N.A.
By: ____________________________________________
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<PAGE>
REVOCABLE PROXY
FIRST PAINTSVILLE BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS
September 17, 1996
The undersigned hereby appoints the Board of Directors of First Paintsville
Bancshares, Inc. ("First Paintsville" or the "Company"), with full powers of
substitution, to act as attorney and proxy for the undersigned to vote all
shares of Common Stock of First Paintsville which the undersigned is entitled to
vote at the Special Meeting of Shareholders, to be held on September 17, 1996,
at 9:00 A.M., and at any and all adjournments thereof, as follows:
I. A proposal to approve and adopt the Agreement and Plan of Merger dated April
22, 1996 including Amendment No. One thereto ("Merger Agreement") pursuant to
which (i) First Paintsville will be merged with and into Classic Bancshares,
Inc. and (ii) each outstanding share of First Paintsville common stock will
be converted into the right to receive $125.00 in cash, subject to increase
if the Merger is not consummated by September 30, 1996, all on and subject to
the terms and conditions contained in the Merger Agreement.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, upon such other matters as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" the listed proposition.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
(Please sign and date on reverse side)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at any
adjournment thereof, and after notification to the Secretary of the Company at
the Meeting of the stockholder's decision to terminate this Proxy, then the
power of such attorney and proxy shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt from the Company, prior to the execution
of this Proxy, of Notice of the Meeting and a Joint Proxy Statement.
Dated: ________________, 1996
-----------------------------
SIGNATURE OF STOCKHOLDER
-----------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your
name appears above on this
card. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your
full title. If shares are held
jointly, each holder should
sign.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE.
<PAGE>
REVOCABLE PROXY
CLASSIC BANCSHARES, INC
SPECIAL MEETING OF SHAREHOLDERS
September 16, 1996
The undersigned hereby appoints the Board of Directors of Classic Bancshares,
Inc. ("Classic" or the "Company"), with full powers of substitution, to act as
attorney and proxy for the undersigned to vote all shares of Common Stock of
Classic which the undersigned is entitled to vote at the Special Meeting of
Shareholders, to be held on September 16, 1996, at 4:00 P.M., and at any and all
adjournments thereof, as follows:
I. A proposal to approve and adopt the Agreement and Plan of Merger dated April
22, 1996 including Amendment No. One thereto ("Merger Agreement") pursuant to
which (i) First Paintsville Bancshares, Inc. ("First Paintsville") will be
merged with and into Classic and (ii) each outstanding share of First
Paintsville common stock will be converted into the right to receive $125.00
in cash, subject to increase if the Merger is not consummated by September
30, 1996, all on and subject to the terms and conditions contained in the
Merger Agreement and approval of the related Buy/Sell Agreements with certain
First Paintsville stockholders.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
In their discretion, upon such other matters as may properly come before the
Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" the listed proposition.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE PROPOSITION STATED. IF ANY OTHER BUSINESS IS
PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY
IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
(Please sign and date on reverse side)
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at any
adjournment thereof, and after notification to the Secretary of the Company at
the Meeting of the stockholder's decision to terminate this Proxy, then the
power of such attorney and proxy shall be deemed terminated and of no further
force and effect.
The undersigned acknowledges receipt from the Company, prior to the execution
of this Proxy, of Notice of the Meeting and a Joint Proxy Statement.
Dated: ________________, 1996
-----------------------------
SIGNATURE OF STOCKHOLDER
-----------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your
name appears above on this
card. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your
full title. If shares are held
jointly, each holder should
sign.
PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
