<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1997
REGISTRATION NO. 333-
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PEOPLES BANCORP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 6711 31-0987416
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
------------------------
138 PUTNAM STREET
P.O. BOX 738
MARIETTA, OHIO 45750
(614) 373-3155
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------------
ROBERT E. EVANS, PRESIDENT
PEOPLES BANCORP INC.
138 PUTNAM STREET
P.O. BOX 738
MARIETTA, OHIO 45750
(614) 373-3155
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------------
WITH A COPY TO:
<TABLE>
<S> <C> <C>
CHARLES R. HUNSAKER, ESQ. REBECCA R. JACKSON NORMAN B. ANTIN, ESQ.
Peoples Bancorp Inc. President and Chief KENNETH B. TABACH, ESQ.
138 Putnam Street Executive Officer Elias, Matz, Tiernan &
P.O. Box 738 Gateway Bancorp, Inc. Herrick L.L.P.
Marietta, Ohio 45750 2717 Louisa Street 734 15th Street, N.W.
(614) 373-3155 Cattlettsburg, Kentucky Washington, D.C. 20005
41129 (202) 347-0300
(606) 739-4126
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED(1) SHARE OR UNIT(2) PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
Common Shares, no par value
per share........................................ 504,428 shares $26.35 $13,292,176 $4,027.93
</TABLE>
(1) This Registration Statement covers the maximum number of common shares of
the Registrant issuable upon consummation of the acquisition of Gateway
Bancorp, Inc. ("Gateway") by the Registrant.
(2) Estimated solely for the purpose of calculation of the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933, the
registration fee is based on the average of the high and low prices of the
Gateway Common Stock as reported on The Nasdaq Stock Market's Small-Cap
Market on September 25, 1997 ($17.75), and computed based on the maximum
number of shares (748,855) that may be exchanged for the securities being
registered.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
GATEWAY BANCORP, INC.
2717 LOUISA STREET
CATLETTSBURG, KENTUCKY 41129
(606) 739-4126
, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
Gateway Bancorp, Inc. ("Gateway") on , , 1997 at :00 .m.,
Eastern Time, at the FIVCO Community Room located at 3000 Louisa Street,
Catlettsburg, Kentucky.
At the Special Meeting, stockholders will be asked to approve the Agreement
and Plan of Merger dated as of June 17, 1997, as amended as of September 2, 1997
and a related Plan of Merger (together, the "Merger Agreement"), whereby Gateway
will be merged (the "Merger") into Peoples Acquisition Corp. ("PAC"), a
newly-formed, wholly-owned subsidiary of Peoples Bancorp Inc. ("Peoples"), with
PAC as the surviving corporation operating under the name "Gateway Bancorp,
Inc." If the Merger is consummated, each share of common stock of Gateway, par
value $.01 per share ("Gateway Common Stock"), outstanding immediately prior to
consummation of the Merger (other than shares as to which dissenters' rights
have been asserted and duly perfected in accordance with applicable law and
shares held by Peoples, Gateway or any of their respective subsidiaries, other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) shall be converted into and represent the right to receive: (i)
$18.75 in cash; (ii) a number of Peoples common shares, no par value (the
"Peoples Common Shares"), as determined by applying a formula (the "Exchange
Ratio") set forth in the Merger Agreement and based on the average market price
of Peoples Common Shares over the 20 trading day period ending five days before
the closing date of the Merger (the "Peoples Market Value"), subject to the
terms, conditions, limitations and procedures set forth in the Merger Agreement;
or (iii) a combination of cash and Peoples Common Shares (the "Merger
Consideration"). The Merger Agreement provides that 68% of the aggregate
consideration will consist of Peoples Common Shares and 32% will consist of
cash. Thus, the actual consideration ultimately received by a stockholder for
shares of Gateway Common Stock will depend upon such stockholder's election, the
election of other stockholders, as well as the allocation and proration
procedure as described in the accompanying materials.
As a result of the Merger, Gateway will become a wholly-owned subsidiary of
Peoples. Approval by Gateway's stockholders of the Merger Agreement is a
condition to consummation of the Merger. The terms of the proposed Merger are
explained in detail in the accompanying Proxy Statement/Prospectus, which we
urge you to read carefully.
Each stockholder entitled to vote at the Special Meeting will have the right
to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Kentucky law. For a
summary of the rights of stockholders of Gateway to dissent, see "The Merger--
Dissenters' Rights" in the attached Proxy Statement/Prospectus and Appendix C
thereto.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF THE
PROPOSAL TO APPROVE THE MERGER, WHICH THE BOARD BELIEVES IS IN THE BEST
INTERESTS OF GATEWAY'S STOCKHOLDERS.
Enclosed is a Notice of Special Meeting of Stockholders, the Proxy
Statement/Prospectus and a proxy card. Your vote is important, regardless of the
number of shares you own. Please complete, sign and date the enclosed proxy card
and return it as soon as possible in the envelope provided. If you decide to
attend the meeting, you may vote your shares in person whether or not you have
previously submitted a proxy. On behalf of the Board, I thank you for your
attention to this important matter.
Very truly yours,
Rebecca R. Jackson
President and Chief Executive Officer
<PAGE>
GATEWAY BANCORP, INC.
2717 Louisa Street
Catlettsburg, Kentucky 41129
(606) 739-4126
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Gateway
Bancorp, Inc. ("Gateway") will be held at the FIVCO Community Room located at
3000 Louisa Street, Catlettsburg, Kentucky, on , , 1997 at
:00 a.m., Eastern Time, for the following purposes, all of which are more
completely set forth in the accompanying Proxy Statement/Prospectus:
1. To consider and vote upon the Agreement and Plan of Merger dated as of June
17, 1997, as amended as of September 2, 1997, between Peoples Bancorp, Inc.
("Peoples") and Gateway, and a related Plan of Merger (together, the "Merger
Agreement"), pursuant to which (i) Gateway will be merged into Peoples
Acquisition Corp. ("PAC"), a newly-formed, wholly-owned subsidiary of
Peoples (the "Merger"), with PAC as the surviving corporation of the Merger
operating under the name "Gateway Bancorp, Inc." and (ii) each share of
common stock of Gateway, par value $.01 per share ("Gateway Common Stock"),
outstanding immediately prior to consummation of the Merger (other than
shares as to which dissenters' rights have been asserted and duly perfected
in accordance with applicable law and shares held by Peoples, Gateway or any
of their respective subsidiaries, other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted) shall be
converted into and represent the right to receive either: (i) $18.75 in
cash; (ii) a number of Peoples common shares, no par value (the "Peoples
Common Shares"), as determined by applying a formula (the "Exchange Ratio")
set forth in the Merger Agreement and based on the average market price of
Peoples Common Shares over the 20 trading day period ending five days prior
to the closing date of the Merger (the "Peoples Market Value"), subject to
the terms, conditions, limitations and procedures set forth in the Merger
Agreement; or (iii) a combination of cash and Peoples Common Shares (the
"Merger Consideration"), as described in the Proxy Statement/Prospectus and
the Merger Agreement which is attached as Appendix A thereto. The Merger
Agreement provides that 68% of the aggregate Merger Consideration will
consist of Peoples Common Shares and 32% will consist of cash. Thus, the
actual consideration ultimately received by a stockholder for shares of
Gateway Common Stock will depend upon such stockholder's election, the
election of other stockholders, as well as the allocation and proration
procedure as described therein;
2. If necessary, to consider and vote upon a proposal to adjourn the Special
Meeting to solicit additional proxies; and
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only holders of record of the Gateway Common Stock at the close of business
on , 1997 are entitled to notice of and to vote at the Special
Meeting and any adjournments thereof.
Any stockholder entitled to vote at the Special Meeting will have the right
to dissent from the Merger and to obtain payment for the fair value of his
shares upon compliance with the applicable provisions of Kentucky law. For a
summary of the rights of stockholders of Gateway to dissent, see "The Merger--
Dissenters' Rights" in the attached Proxy Statement/Prospectus and Appendix C
thereto.
BY ORDER OF THE BOARD OF DIRECTORS
Hunter E. Clark
SECRETARY
Catlettsburg, Kentucky
, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU OWN. EVEN IF YOU
PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU
MAY VOTE EITHER IN PERSON OR BY YOUR PROXY. ANY PROXY GIVEN MAY BE REVOKED BY
YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE THEREOF.
<PAGE>
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS OF GATEWAY BANCORP, INC.
TO BE HELD ON , 1997
------------------------
PEOPLES BANCORP INC.
PROSPECTUS
FOR
UP TO 504,428 COMMON SHARES OF
PEOPLES BANCORP INC. TO BE ISSUED IN CONNECTION WITH THE
ACQUISITION OF GATEWAY BANCORP, INC. BY PEOPLES BANCORP INC.
------------------------
This Proxy Statement/Prospectus is being furnished in connection with the
solicitation of proxies by the Board of Directors of Gateway Bancorp, Inc.
("Gateway") to be used at a special meeting of its stockholders to be held on
, , 1997 (the "Special Meeting"). The purpose of the Special
Meeting is to consider and vote upon an Agreement and Plan of Merger, dated as
of June 17, 1997, as amended as of September 2, 1997, between Peoples Bancorp
Inc. ("Peoples") and Gateway, and a related Plan of Merger between Peoples,
Peoples Acquisition Corp. ("PAC"), a newly-formed wholly-subsidiary of Peoples,
and Gateway (together, the "Merger Agreement"). A copy of the Merger Agreement
is attached as Appendix A to this Proxy Statement/Prospectus. At the Special
Meeting, stockholders may also be asked to consider a proposal to adjourn the
meeting to solicit additional proxies, if necessary.
In accordance with the terms of the Merger Agreement, upon approval of the
Merger Agreement by the stockholders of Gateway and receipt of all requisite
regulatory approvals and the satisfaction or waiver of all conditions, Gateway
shall be merged into PAC (the "Merger"), with PAC as the surviving corporation
of the Merger operating under the name "Gateway Bancorp, Inc." In connection
with the Merger, each share of common stock of Gateway, par value $.01 per share
(the "Gateway Common Stock"), outstanding immediately prior to consummation of
the Merger (other than shares as to which dissenters' rights have been asserted
and duly perfected in accordance with Kentucky law and shares held by Peoples,
Gateway or any of their respective subsidiaries, other than shares held in a
fiduciary capacity or in satisfaction of a debt previously contracted) shall be
converted into and represent the right to receive, at the election of the holder
thereof, either: (i) $18.75 in cash, (ii) a number of Peoples common shares, no
par value (the "Peoples Common Shares"), as determined by applying a formula
(the "Exchange Ratio") set forth in the Merger Agreement and based on the
average market price of Peoples Common Shares over the 20 trading day period
ending five days prior to the closing date of the Merger (the "Peoples Market
Value"), subject to the terms, conditions, limitations and procedures set forth
in the Merger Agreement or (iii) a combination of cash and Peoples Common Shares
(the "Merger Consideration"). The Merger Agreement provides that 68% of the
aggregate Merger Consideration will consist of Peoples Common Shares and 32%
will consist of cash. Thus, the actual consideration ultimately received by a
stockholder for shares of Gateway Common Stock will depend upon such
stockholder's election, the election of other stockholders, as well as the
allocation and proration procedure described herein. As a result of the Merger,
Gateway will become a wholly-owned subsidiary of Peoples.
The outstanding Peoples Common Shares are, and the Peoples Common Shares
offered hereby will be, included for quotation on The Nasdaq National Market.
The closing price of Peoples Common Shares on , 1997 was $
per share.
Peoples has filed a Registration Statement on Form S-4 pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering up to
504,428 Peoples Common Shares. In addition to being the Proxy Statement for the
Special Meeting, this document constitutes a prospectus of Peoples with respect
to the Peoples Common Shares to be issued in connection with the Merger.
<PAGE>
GATEWAY STOCK CERTIFICATES SHOULD NOT BE RETURNED TO GATEWAY WITH THE
ENCLOSED PROXY AND SHOULD NOT BE FORWARDED UNTIL AFTER RECEIPT OF A LETTER OF
TRANSMITTAL, WHICH WILL BE PROVIDED TO GATEWAY STOCKHOLDERS PROMPTLY FOLLOWING
CONSUMMATION OF THE MERGER.
This Proxy Statement/Prospectus does not cover resales of Peoples Common
Shares following consummation of the Merger, and no person may make use of this
Proxy Statement/Prospectus in connection with any such resale.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to stockholders of Gateway on or about , 1997.
All information contained in this Proxy Statement/Prospectus relating to
Peoples and its subsidiaries has been supplied by Peoples, and all information
contained in this Proxy Statement/Prospectus relating to Gateway and its
subsidiaries has been supplied by Gateway.
------------------------
THE PEOPLES COMMON SHARES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PEOPLES COMMON SHARES OFFERED HEREBY ARE NOT DEPOSITS, SAVINGS ACCOUNTS
OR OTHER OBLIGATIONS OF ANY DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
------------------------
The date of this Proxy Statement/Prospectus is , 1997.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
AVAILABLE INFORMATION...................................................................................... 6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 6
SUMMARY.................................................................................................... 8
The Parties to the Merger................................................................................. 8
The Stockholder Meeting................................................................................... 10
Merger Consideration and Election, Allocation and Proration Procedures.................................... 11
Opinion of Financial Advisor.............................................................................. 14
Recommendation of the Board of Directors of Gateway....................................................... 14
Stockholders Agreement.................................................................................... 14
Effective Time of the Merger; Termination of the Merger Agreement......................................... 15
Conditions to the Merger.................................................................................. 15
Dissenters' Rights........................................................................................ 15
Certain Federal Income Tax Consequences................................................................... 15
Accounting Treatment of the Merger........................................................................ 16
Interest of Certain Persons in the Merger................................................................. 16
Unaudited Pro Forma Condensed Combined Summary Financial Information...................................... 16
COMPARATIVE PER SHARE DATA................................................................................. 18
COMPARATIVE MARKET PRICES.................................................................................. 19
PEOPLES SELECTED CONSOLIDATED FINANCIAL INFORMATION........................................................ 20
GATEWAY SELECTED CONSOLIDATED FINANCIAL INFORMATION........................................................ 22
STOCKHOLDER MEETING........................................................................................ 24
Special Meeting of Gateway Stockholders................................................................... 24
Costs..................................................................................................... 25
THE MERGER................................................................................................. 25
General................................................................................................... 25
Background of and Reasons for the Merger.................................................................. 25
Opinion of Financial Advisor.............................................................................. 27
Merger Consideration and Election, Allocation and Proration............................................... 30
Conditions to the Merger.................................................................................. 34
Procedures for Exchange of Gateway Stock Certificates..................................................... 36
Regulatory Approvals...................................................................................... 37
Business Pending the Merger............................................................................... 37
Acquisition Proposals..................................................................................... 38
Representations and Warranties............................................................................ 38
Effective Time of the Merger; Termination and Amendment................................................... 39
Interests of Certain Persons in the Merger................................................................ 40
Resale Considerations With Respect to the Peoples Common Shares........................................... 42
Certain Federal Income Tax Consequences................................................................... 42
Accounting Treatment of the Merger........................................................................ 43
Dissenters' Rights........................................................................................ 44
Expenses of the Merger.................................................................................... 45
Stockholders Agreement.................................................................................... 46
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).......................................... 47
ADJOURNMENT OF SPECIAL MEETING............................................................................. 53
OWNERSHIP OF GATEWAY COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GATEWAY................... 54
GATEWAY MANAGEMENT INFORMATION............................................................................. 55
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
GATEWAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 58
General................................................................................................... 58
Changes in Financial Condition............................................................................ 58
Comparison of Operating Results for the Six Months Ended June 30, 1997 and June 30, 1996.................. 63
Comparison of Operating Results for the Years Ended December 31, 1996 and December 31, 1995............... 64
Comparison of Operating Results for the Years Ended December 31, 1995 and December 31, 1994............... 65
Asset and Liability Management............................................................................ 66
Liquidity and Capital Resources........................................................................... 67
Recapitalization of SAIF.................................................................................. 68
Recent Accounting Pronouncements.......................................................................... 69
Impact of Inflation and Changing Prices................................................................... 69
BUSINESS OF GATEWAY........................................................................................ 70
Lending Activities........................................................................................ 70
Asset Quality............................................................................................. 74
Mortgage-Backed Securities and Investment Securities...................................................... 77
Sources of Funds.......................................................................................... 80
Subsidiaries.............................................................................................. 82
Competition............................................................................................... 83
Offices................................................................................................... 83
REGULATION AND SUPERVISION OF GATEWAY...................................................................... 84
DESCRIPTION OF PEOPLES COMMON SHARES....................................................................... 93
General................................................................................................... 93
Voting Rights............................................................................................. 93
Nomination Procedures; Number of Directors; Classified Board of Directors; Removal of Directors........... 93
Pre-Emptive Rights........................................................................................ 94
Repurchases............................................................................................... 94
Dividend Rights........................................................................................... 94
Liquidation Rights........................................................................................ 95
COMPARISON OF RIGHTS OF HOLDERS OF PEOPLES COMMON SHARES AND HOLDERS OF GATEWAY COMMON STOCK............... 95
General................................................................................................... 95
Authorized Capital Stock.................................................................................. 95
Issuance of Capital Stock................................................................................. 96
Board of Directors........................................................................................ 96
Voting Rights............................................................................................. 98
Payment of Dividends...................................................................................... 98
Special Meetings of Shareholders.......................................................................... 99
Shareholder Action Without a Meeting...................................................................... 99
Pre-Emptive Rights........................................................................................ 99
Mergers and Consolidations................................................................................ 99
Other Corporate Transactions.............................................................................. 100
Amendment of Articles..................................................................................... 101
Antitakeover Statutes..................................................................................... 101
Director and Officer Liability and Indemnification........................................................ 103
STOCKHOLDER PROPOSALS...................................................................................... 106
LEGAL OPINIONS............................................................................................. 106
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
EXPERTS.................................................................................................... 106
INDEX TO GATEWAY CONSOLIDATED FINANCIAL STATEMENTS......................................................... 107
</TABLE>
<TABLE>
<CAPTION>
APPENDIX A: Agreement and Plan of Merger, dated as of June 17, 1997, as amended
as of September 2, 1997, between Peoples Bancorp Inc. and Gateway
Bancorp, Inc., including a related Plan of Merger attached as
Exhibit B thereto.................................................. A-1
<S> <C> <C>
APPENDIX B: Opinion of Friedman, Billings, Ramsey & Co., Inc................... B-1
APPENDIX C: Kentucky Business Corporation Act provisions regarding dissenters'
rights of appraisal................................................ C-1
</TABLE>
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION
WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY, AND,
IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY PEOPLES OR GATEWAY OR ANY OTHER PERSON. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY
STATEMENT/PROSPECTUS, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF PEOPLES OR GATEWAY OR ANY OF THEIR RESPECTIVE SUBSIDIARIES SINCE THE DATE OF
THIS PROXY STATEMENT/PROSPECTUS.
------------------------
5
<PAGE>
AVAILABLE INFORMATION
Peoples and Gateway are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. The reports, proxy statements and other information filed by
Peoples and Gateway with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 or from the Web Site maintained by the Commission at
"http://www.sec.gov." Copies of such material also can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of prescribed rates. Copies of such
reports, proxy statements and other information may also be inspected at the
National Association of Securities Dealers, Inc. (the "NASD"), located at 1735 K
Street, N.W., Washington, D.C. 20006.
Peoples has filed with the Commission a Registration Statement on Form S-4
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the Peoples Common Shares
to be issued pursuant to the Merger. As permitted by the rules and regulations
of the Commission, this Proxy Statement/Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto.
Such additional information may be obtained from the Commission's principal
office in Washington, D.C. by either of the means described above for obtaining
reports, proxy statements and other information filed pursuant to the Exchange
Act. Statements contained in this Proxy Statement/Prospectus or in any document
incorporated in this Proxy Statement/ Prospectus by reference or supplied
herewith as to the contents of any contract or other document referred to herein
or therein are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document, each such statement being
qualified in all respects by such reference.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Peoples (File No.
0-16772) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
1. Peoples' Annual Report on Form 10-K for the fiscal year ended December
31, 1996;
2. Peoples' Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, and June 30, 1997; and
3. The description of the Peoples Common Shares contained in the
Registration Statement on Form 8-B filed by Peoples on July 20, 1993.
All documents subsequently filed by Peoples pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
made hereby shall be deemed to be incorporated by reference into this Proxy
Statement/Prospectus and to be a part hereof.
The Merger Agreement is included herewith as Appendix A and is incorporated
by reference herein. Discussion of the terms and conditions of the Merger
Agreement is summary in nature, and reference is made to the Merger Agreement
for a more complete discussion of the terms and conditions of the Merger, the
Merger Agreement and related transactions.
Any statement contained herein, in any supplement hereto or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein, in any supplement hereto or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be
6
<PAGE>
deemed, except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus or any supplement hereto.
Also incorporated herein by reference are the documents attached hereto as
Appendices B and C to this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS FILED BY
PEOPLES WITH THE COMMISSION WHICH ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. ALL OF SUCH DOCUMENTS WITH RESPECT TO PEOPLES ARE AVAILABLE, UPON
WRITTEN OR ORAL REQUEST, FROM RUTH I. OTTO, SECRETARY, PEOPLES BANCORP INC., 138
PUTNAM STREET, P.O. BOX 738, MARIETTA, OHIO 45750; TELEPHONE NUMBER (614)
373-3155. COPIES WILL BE FURNISHED (WITHOUT EXHIBITS UNLESS THE EXHIBITS HAVE
BEEN SPECIFICALLY INCORPORATED BY REFERENCE) FREE OF CHARGE. IN ORDER TO ENSURE
TIMELY DELIVERY OF SUCH DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ,
1997.
7
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS AND IS NOT INTENDED TO BE A COMPLETE STATEMENT
OF THE MATTERS DESCRIBED HEREIN. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED, OR
INCORPORATED BY REFERENCE, IN THIS PROXY STATEMENT/PROSPECTUS AND IN THE
APPENDICES ATTACHED HERETO. STOCKHOLDERS ARE URGED TO READ THIS PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY.
THE PARTIES TO THE MERGER
PEOPLES. Peoples Bancorp Inc. ("Peoples Delaware") was incorporated under
the laws of the State of Delaware on April 1, 1980. Peoples Delaware was merged,
following shareholder approval, into Peoples Bancorp Inc. ("Peoples"), an Ohio
corporation, effective April 6, 1993, pursuant to a reincorporation of Peoples
from Delaware to Ohio. Peoples' principal business is to act as a multi-bank
holding company.
Peoples' wholly-owned subsidiaries are The Peoples Banking and Trust Company
("Peoples Bank"), The First National Bank of Southeastern Ohio ("First National
Bank"), Russell Federal Savings Bank ("Russell Federal") and Northwest Territory
Life Insurance Company, an Arizona corporation ("Northwest Territory"). At June
30, 1997, Peoples (the parent company only) had 28 full-time equivalent
employees.
Peoples is a bank holding company under the Bank Holding Company Act of
1956, as amended, which restricts the activities of Peoples and the acquisition
by Peoples of voting stock or assets of any bank, savings association or other
company. Peoples is subject to the reporting requirements of, and examination
and regulation by, the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). Peoples is also a savings and loan holding company due to
its ownership of Russell Federal. However, since Peoples is a bank holding
company regulated by the Federal Reserve Board, it is not subject to separate
regulation as a savings and loan holding company.
Peoples Bank was chartered as an Ohio banking corporation under its present
name in Marietta, Ohio, in 1902. At June 30, 1997, Peoples Bank had assets of
$547.7 million, deposits of $463.6 million, and loans net of unearned interest
of $389.7 million. Peoples Bank is a full-service commercial bank. At June 30,
1997, the Trust Department of Peoples Bank held approximately $450 million of
assets (market value) in trust and custodial accounts apart from the assets of
the bank. Through its 21 offices located in Ohio, Peoples Bank serves
principally Washington, Athens, Meigs, and Gallia Counties, together with
portions of Fairfield, Hocking, Lawrence, Perry, and Vinton Counties in Ohio and
adjacent parts of Northern West Virginia. A loan production office in
Newark-Granville, Ohio, serves that immediate area in Licking County. At June
30, 1997, Peoples Bank had 234 full-time equivalent employees. As an Ohio
state-chartered bank, Peoples Bank is supervised and regulated by the Ohio
Division of Financial Institutions and the Federal Deposit Insurance Corporation
("FDIC").
First National Bank is a national banking association chartered in 1900. It
provides banking services and products that are substantially the same as those
of Peoples Bank. First National Bank operates an office in each of Caldwell,
Chesterhill and McConnelsville, Ohio. These cities and the surrounding areas of
Noble and Morgan Counties, Ohio comprise its market. At June 30, 1997, it had
assets of $81.1 million, deposits of $61.1 million, and loans net of unearned
interest of $56.1 million. At June 30, 1997, First National Bank had 34
full-time equivalent employees. As a national bank, First National Bank is
supervised and regulated by the Comptroller of the Currency.
The deposits of Peoples Bank and First National Bank are insured by the FDIC
and those entities are subject to the applicable provisions of the Federal
Deposit Insurance Act.
First National Bank also operates two insurance agency subsidiaries,
Northwest Territory Life Insurance Agency, Inc. and Northwest Territory Property
& Casualty Insurance Agency, Inc. (the "Agencies"). On December 22, 1995, each
Agency received a Certificate of Qualification (license) to operate the
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Agency from the Ohio Department of Insurance, thereby allowing the Agencies to
engage in the insurance agency business, subject to the regulations of the Ohio
Department of Insurance and the Comptroller of the Currency. These were the
first insurance agencies in Ohio associated with a financial institution to
receive licenses to conduct a broad-based insurance business. At June 30, 1997,
the Agencies had an aggregate of 5 full-time equivalent employees. The Agencies
are incorporated under the laws of the State of Ohio and licensed by the Ohio
Department of Insurance, which regulates, supervises and has authority to
examine the Agencies.
Russell Federal was originally chartered as a mutual association in 1914. On
October 6, 1994, Russell Federal converted from a mutual association to a stock
corporation. Russell Federal serves the financial needs of customers in Greenup
and Boyd Counties, its primary market area. Its principal products include
savings accounts, time certificates of deposit and commercial and residential
real estate loans. Russell Federal has one full-service office located on Ferry
Street in the city of Russell. At June 30, 1997, Russell Federal had 7 full-time
equivalent employees. At June 30, 1997, Russell Federal had total assets of
$27.7 million, deposits of $21.0 million, and loans net of unearned interest of
$21.7 million. As a federally chartered savings bank, Russell Federal is subject
to broad federal regulation and oversight extending to all its operations. As
member of the FHLB of Cincinnati, it is subject to certain limited regulation by
the Federal Reserve. Russell Federal's deposits are insured by the FDIC, which
exercises regulatory and examination authority. Russell Federal is also subject
to regulation, supervision, and examination by the Office of Thrift Supervision
("OTS").
Northwest Territory was organized under Arizona law in 1983 and was issued a
Certificate of Authority to act as a reinsurance company by the State of Arizona
on February 8, 1984. Northwest Territory reinsures credit life and disability
insurance issued to customers of banking subsidiaries of Peoples by the issuing
insurance company. At May 31, 1997, Northwest Territory had total assets of $1.4
million and had gross premium income of $201,000 in 1996, $244,000 in 1995 and
$238,000 in 1994. Northwest Territory reinsures risks (currently not exceeding
$15,000 per insured on a present value basis) within limits established by
governmental regulations and management policy. Northwest Territory has no
employees.
Northwest Territory is chartered by the State of Arizona and is subject to
regulation, supervision and examination by the Arizona Department of Insurance.
The powers of regulation and supervision of the Arizona Department of Insurance
relate generally to such matters as minimum capitalization, the grant and
revocation of certificates of authority to transact business, the nature of and
limitations on investments, the maintenance of reserves, the form and content of
required financial statements, reporting requirements and other matters
pertaining to life and disability insurance companies.
Each of Peoples' financial institution subsidiaries originates various types
of loans, including commercial and commercial real estate loans, residential
real estate loans, home equity lines of credit, real estate construction loans,
and consumer loans (including loans to individuals, credit card loans, and
indirect loans). In general, Peoples retains most of its originated loans and,
therefore, secondary market activity has been minimal. The loans of each of
Peoples' subsidiaries are spread over a broad range of industrial
classifications. The lending market area served by Peoples' subsidiaries is
primarily concentrated in southeastern Ohio and neighboring areas of Kentucky
and West Virginia. In addition, a loan production office in central Ohio
provides opportunities to serve customers in that geographic region.
The financial institution subsidiaries of Peoples experience significant
competition in attracting depositors and borrowers. Competition in lending
activities comes principally form other commercial banks in the lending areas of
the financial institutions and, to a lesser extent, from savings associations,
insurance companies, governmental agencies, credit unions, brokerage firms and
pension funds. The primary factors in competing for loans are interest rate and
overall lending services. Competition for deposits comes from other commercial
banks, savings associations, money market funds and credit unions as well as
from insurance companies and brokerage firms. The primary factors in competing
for deposits
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are interest rates paid on deposits, account liquidity, convenience of office
location and overall financial condition.
Peoples' executive offices are located at 138 Putnam Street, Marietta, Ohio,
45750, and its telephone number is (614) 374-6136. At June 30, 1997, Peoples had
total consolidated assets of $661.5 million, total liabilities of $602.6
million, including deposits of $545.3 million, and stockholders' equity of $58.9
million.
For additional information concerning Peoples, its business, financial
condition and results of operations, see "Available Information," "Incorporation
Of Certain Documents By Reference," and "Peoples Selected Consolidated Financial
Information."
GATEWAY. Gateway is a Kentucky corporation and sole stockholder of
Catlettsburg Federal Savings Bank ("Catlettsburg Federal") which converted to
the stock form of organization in January 1995. The business of Gateway consists
primarily of the business of Catlettsburg Federal. As a savings and loan holding
company, Gateway is subject to regulation and supervision by the OTS.
Catlettsburg Federal conducts business from its main office located in
Catlettsburg, Kentucky and one full-service branch office located in Grayson,
Kentucky. Catlettsburg Federal is primarily engaged in attracting deposits from
the general public and using those funds to invest in mortgage-backed securities
and United States Government and federal agency securities and to originate
loans secured by single-family residences located in Boyd County and surrounding
counties in Northeastern Kentucky. To a lesser extent, Catlettsburg Federal also
makes loans secured by savings accounts.
Catlettsburg Federal is subject to examination and comprehensive regulation
by the OTS, which is Catlettsburg Federal's chartering authority and primary
regulator. Catlettsburg Federal's deposits are insured by the Savings
Association Insurance Fund (the "SAIF") of the FDIC to the maximum extent
permitted by law. Catlettsburg Federal is also regulated by the FDIC, the
administrator of the SAIF. Catlettsburg Federal is also subject to certain
reserve requirements established by the Federal Reserve and is a member of the
FHLB of Cincinnati, which is one of the 12 regional banks comprising the FHLB
System.
Gateway's executive offices are located at 2717 Louisa Street, Catlettsburg,
Kentucky 41129, and its telephone number is (606) 739-4126. At June 30, 1997,
Gateway had total consolidated assets of $63.8 million, total liabilities of
$46.5 million, including deposits of $46.3 million, and stockholders' equity of
$17.3 million.
For additional information concerning Gateway, see "Available Information,"
"Gateway Selected Consolidated Financial Information," "Gateway Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business of Gateway," "Regulation and Supervision of Gateway" and the Gateway
Consolidated Financial Statements contained elsewhere herein.
THE STOCKHOLDER MEETING
The Special Meeting will be held at the FIVCO Community Room located at 3000
Louisa Street, Catlettsburg, Kentucky, on , 1997 at 0:00 .m.,
Eastern Time. Only the holders of record of the outstanding shares of Gateway
Common Stock at the close of business on , 1997 (the "Record Date")
are entitled to notice of and to vote at the Special Meeting. At the Record
Date, shares of Gateway Common Stock were outstanding and entitled to vote.
A majority of the outstanding shares of Gateway Common Stock must be represented
in person or by proxy at the Special Meeting in order for a quorum to be
present. Each share of Gateway Common Stock entitles the holder thereof to one
vote on each matter to be submitted to Gateway's stockholders at the Special
Meeting.
At the Special Meeting, Gateway's stockholders will be asked to consider and
vote upon (a) a proposal to approve the Merger Agreement, (b) a proposal to
adjourn the Special Meeting to solicit additional proxies, if necessary, and (c)
the transaction of such other business as may properly come before the Special
Meeting and any adjournment or adjournments thereof. The proposals to approve
the Merger
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Agreement and adjourn the Special Meeting, if necessary, will require the
affirmative vote of a majority of the votes cast by all stockholders of Gateway
entitled to vote thereon at the Special Meeting. Shares as to which the
"ABSTAIN" box have been marked on the proxy and broker non-votes will be counted
as present for determining if a quorum is present; however, such abstentions and
broker non-votes are not considered votes cast and thus will not affect the
number of votes required for approval. See "Stockholder Meeting--Special Meeting
of Gateway Stockholders."
The directors of Gateway have agreed and intend to vote or cause to be voted
all shares of Gateway Common Stock in which they have the right to vote for
approval and adoption of the Merger Agreement. At the Record Date, directors of
Gateway and their affiliates in the aggregate beneficially owned [80,755]
shares, or [7.5]%, of the outstanding Gateway Common Stock, excluding shares
subject to options.
REVOCABILITY OF PROXIES. Holders of Gateway Common Stock may revoke a proxy
at any time prior to its exercise by filing with the Secretary of Gateway
(Hunter E. Clark, Secretary, Gateway Bancorp, Inc., 2717 Louisa Street,
Catlettsburg, Kentucky 41129) a written notice of revocation or a proxy bearing
a later date, or by voting in person at the Special Meeting. Attendance at the
Special Meeting will not of itself constitute revocation of a proxy. If your
shares are not registered in your own name, you will need additional
documentation from your recordholder in order to vote personally at the Special
Meeting.
HOLDERS OF GATEWAY COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID
ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE SPECIAL MEETING. ALL PROPERLY
EXECUTED PROXIES RECEIVED PRIOR TO OR AT THE SPECIAL MEETING WILL BE VOTED WITH
RESPECT TO THE MATTERS IDENTIFIED ON THE PROXY CARDS IN ACCORDANCE WITH ANY
INSTRUCTIONS THEREON AND, IF NO INSTRUCTIONS ARE GIVEN, WILL BE VOTED FOR
ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND, IF APPLICABLE, FOR
ADJOURNMENT OF THE SPECIAL MEETING.
MERGER CONSIDERATION AND ELECTION, ALLOCATION AND PRORATION PROCEDURES
GENERAL. In accordance with the terms of the Merger Agreement, Gateway will
be merged with and into PAC, a newly-formed, wholly-owned subsidiary of Peoples,
with PAC as the surviving corporation of the Merger operating under the name
"Gateway Bancorp, Inc." The Merger Agreement contemplates that, upon
consummation of the Merger, Gateway will be operated as a direct, wholly-owned
subsidiary of Peoples.
MERGER CONSIDERATION. The Merger Agreement provides that at the effective
time of the Merger, each share of Gateway Common Stock outstanding immediately
prior to consummation of the Merger (other than shares as to which dissenters'
rights have been asserted and duly perfected in accordance with Kentucky law and
shares held by Peoples, Gateway or any of their respective subsidiaries, other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) will be converted into and represent the right to receive either (i)
$18.75 in cash ("Per Share Cash Consideration"); (ii) a number of Peoples Common
Shares ("Per Share Stock Consideration") as determined by the Exchange Ratio and
based on the Average Share Price (defined as the average of the mean between the
closing high bid and low asked price per share as reported by The Nasdaq
National Market) of Peoples Common Shares over the 20 trading day period ending
five days prior to the Closing Date of the Merger (the "Peoples Market Value");
or (iii) a combination of cash and Peoples Common Shares. The Merger Agreement
provides that the number of Peoples Common Shares comprising the Per Share Stock
Consideration will be equal to (A) if the Peoples Market Value is equal to or
less than $37.66 but equal to or greater than $27.84, the quotient determined by
dividing (x) $18.75 by (y) the Peoples Market Value, (B) if the Peoples Market
Value is less than $27.84, 0.6736 shares or (C) if the Peoples Market Value is
greater than $37.66, 0.4978 shares (the "Exchange Ratio"). The Merger Agreement
provides that 68% of the shares of Gateway Common Stock will be converted into
the right to receive the Stock Consideration and 32% will be
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converted into the right to receive the Cash Consideration; provided however,
that to the extent the Peoples Market Value exceeds $37.66, the ratio of the
aggregate dollar amount of Stock Consideration to the aggregate dollar amount of
Merger Consideration may exceed 68%. See "The Merger--The Merger Consideration."
ELECTIONS. Within three business days after the consummation of the Merger,
each record holder of Gateway Common Stock will be sent materials asking such
stockholder to make an election (an "Election") as to the consideration to be
received for his or her shares of Gateway Common Stock. Such holders of Gateway
Common Stock may elect:
(i) the number of Peoples Common Shares, based on the Exchange Ratio,
for each share of Gateway Common Stock (a "Stock Election");
(ii) $18.75 in cash, without interest, for each share of Gateway Common
Stock (a "Cash Election");
(iii) A Stock Election with respect to some of such stockholder's shares
of Gateway Common Stock and a Cash Election with respect to the remaining
shares of Gateway Common Stock held by such holder; or
(iv) whatever is left after the election of the other holders of Gateway
Common Stock and the application to the extent necessary of certain random
selection procedures (a "No-Election").
Notwithstanding the foregoing, in order to make a Stock Election, the number
of shares of Gateway Common Stock a holder must elect to convert to Peoples
Common Shares must equal or exceed 100 shares. Therefore, any holder of Gateway
Common Stock who owns less than 100 shares must elect the Cash Election or be
treated as having made a No-Election. A failure to properly make an election as
described herein will be treated as a No-Election. Any shares for which
dissenters' rights have been perfected will be deemed to have a Cash Election.
NO OVERSUBSCRIPTION. In the event that the number of shares as to which a
Cash Election has been made does not exceed 32% of the shares of Gateway Common
Stock outstanding at the Effective Time and the number of shares as to which a
Stock Election has been made does not exceed 68% of the shares of Gateway Common
Stock outstanding at the Effective Time, then:
(i) all shares to which a Cash Election has been made shall be converted
into the right to receive $18.75 in cash, without interest, per share of
Gateway Common Stock;
(ii) all shares as to which a Stock Election has been made shall be
converted into the right to receive Peoples Common Shares, as determined by
the Exchange Ratio, per share of Gateway Common Stock; and
(iii) shares as to which a No-Election has been made shall be converted
into either the right to receive Peoples Common Shares, as determined by the
Exchange Ratio, per share of Gateway Common Stock or $18.75 in cash, without
interest, per share of Gateway Common Stock as determined by random
selection so that 32% of the shares of Gateway Common Stock are converted
into the right to receive cash and 68% of the shares of Gateway Common Stock
are converted into the right to receive Peoples Common Shares.
The random selection process to be used by the Trust Division of Peoples
Bank (the "Exchange Agent") will consist of drawing by lot or such other process
as the Exchange Agent deems equitable and necessary to effect the allocations
described above.
OVERSUBSCRIPTION FOR CASH. If the aggregate number of shares as to which a
Cash Election has been made exceeds 32% of the shares of Gateway Common Stock
outstanding at the effective time of the Merger (the "Effective Time"), then:
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(i) each share as to which a Stock Election has been made and each share
as to which No-Election has been made shall be converted into the right to
receive Peoples Common Shares, as determined by the Exchange Ratio; and
(ii) each share as to which a Cash Election has been made shall be
converted into the right to receive a combination of cash and Peoples Common
Shares. The amount in cash will be equal to the product, rounded to the
nearest $0.01, of (x) $18.75 and (y) a fraction (the "Cash Fraction"), the
numerator of which shall be a number equal to 32% of the shares of Gateway
Common Stock outstanding at the Effective Time and the denominator of which
shall be the total number of shares as to which a Cash Election has been
made. The number of Peoples Common Shares will be equal the product, rounded
to four decimal places, of (x) the Per Share Stock Consideration and (y) a
number equal to one minus the Cash Fraction.
OVERSUBSCRIPTION FOR PEOPLES COMMON SHARES. If the aggregate number of
shares as to which a Stock Election has been made exceeds 68% of the shares of
Gateway Common Stock outstanding at the Effective Time, then:
(i) each share as to which a Cash Election has been made and each share
as to which a No-Election has been made shall be converted into the right to
receive $18.75 in cash, without interest; and
(ii) each share as to which a Stock Election has been made shall be
converted into the right to receive a combination of cash and Peoples Common
Shares. The number of Peoples Common Shares will be equal to the product,
rounded to four decimal places, of (x) the Per Share Stock Consideration and
(y) a fraction (the "Stock Fraction"), the numerator of which shall be a
number equal to 68% of the shares of Gateway Common Stock outstanding at the
Effective Time and the denominator of which shall be the total number of
shares as to which a Stock Election has been made. The amount of cash will
be equal to the product, rounded to the nearest $0.01, of (x) $18.75 and (y)
a number equal to one minus the Stock Fraction.
NO GUARANTEE OF CHOSEN CONSIDERATION OR EQUIVALENT VALUE. Because the
Merger Agreement provides that 68% of the aggregate consideration payable to
holders of Gateway Common Stock in the Merger will be comprised of Peoples
Common Shares, no guarantee can be given that the election of any given
stockholder of Gateway will be fully honored. Rather, the election by each
stockholder will be subject to the election, allocation and proration procedures
described herein. Thus, stockholders may not receive their requested form of
consideration or combination thereof.
EXAMPLES OF MERGER CONSIDERATION TO BE RECEIVED. The following table sets
forth examples of how 100 shares of Gateway Common Stock will be converted and
the Merger Consideration to be received by a Gateway stockholder based upon
various Election results, assuming that the Peoples Market Value is $37.75 and
the Exchange Ratio is .04978. The Per Share Cash Consideration is fixed at
$18.75. The decimals are presented for demonstration purposes only since cash
will be issued in lieu of fractional shares.
<TABLE>
<CAPTION>
ACTUAL ELECTION
RESULTS OF ALL IF GATEWAY STOCKHOLDER IF GATEWAY STOCKHOLDER
GATEWAY STOCKHOLDERS ELECTS 100% STOCK ELECTS 100% CASH
- - -------------------------------- --------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
PEOPLES
PEOPLES COMMON
CASH TO COMMON CASH TO SHARES TO
PERCENT PERCENT BE SHARES TO BE BE
ELECT STOCK ELECT CASH RECEIVED BE RECEIVED RECEIVED RECEIVED
- - --------------- --------------- --------- ---------------- ---------- -----------
90% 10% $ 458.33 37.6116 $ 1,875.00 None
75.......... 25 175.00 45.1339 1,875.00 None
68.......... 32 None 49.7800 1,875.00 None
50.......... 50 None 49.7800 1,200.00 17.9208
32.......... 68 None 49.7800 882.35 26.3541
25.......... 75 None 49.7800 625.00 33.1867
</TABLE>
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ELECTION PROCEDURES. All Elections will be required to be made on a Letter
of Transmittal and Election Form. To make an effective Election with respect to
shares of Gateway Common Stock, the holder thereof must, in accordance with the
Letter of Transmittal and Election Form, (i) complete properly and return the
Letter of Transmittal and Election Form to the Exchange Agent, (ii) deliver
therewith his or her certificates representing shares of Gateway Common Stock
(the "Gateway Stock Certificates") with respect to such shares (or an
appropriate guarantee of delivery thereof), and (iii) deliver therewith any
other required documents, prior to 5:00 p.m. on the 10th business day following
the mailing of the Letter of Transmittal and Election Form (the "Election
Deadline.").
GATEWAY STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY
AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL A GATEWAY STOCKHOLDER
HAS RECEIVED THE LETTER OF TRANSMITTAL AND ELECTION FORM.
A holder of shares of Gateway Common Stock having a preference as to the
form of consideration to be received for his or her shares of Gateway Common
Stock should make an Election because shares as to which an Election has been
made will be given priority in allocating such consideration over shares as to
which an Election is not received. NEITHER GATEWAY NOR THE GATEWAY BOARD OF
DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER STOCKHOLDERS SHOULD ELECT TO
RECEIVE THE PER SHARE CASH CONSIDERATION OR THE PER SHARE STOCK CONSIDERATION IN
THE MERGER. EACH HOLDER OF GATEWAY COMMON STOCK MUST MAKE HIS OR HER OWN
DECISION WITH RESPECT TO SUCH ELECTION.
No fractional Peoples Common Shares will be issued in the Merger to holders
of Gateway Common Stock. Each holder of Gateway Common Stock who otherwise would
have been entitled to a fraction of a Peoples Common Share will receive in lieu
thereof, at the time of surrender of the certificate or certificates
representing such holder's shares of Gateway Common Stock, an amount of cash
(without interest) determined by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Peoples Market Value.
OPINION OF FINANCIAL ADVISOR
The Board of Directors of Gateway has received a written opinion from
Friedman, Billings, Ramsey & Co., Inc. ("FBR"), dated as of the date of this
Proxy Statement/Prospectus, to the effect that, based on the factors stated
therein, the consideration to be received by Gateway's stockholders pursuant to
the Merger Agreement is fair to the stockholders of Gateway from a financial
point of view. A copy of the fairness opinion of FBR is attached hereto as
Appendix B and should be read in its entirety.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GATEWAY
The Board of Directors of Gateway has determined that the Merger is in the
best interests of the stockholders and, accordingly, has unanimously approved
the Merger. THE BOARD OF DIRECTORS OF GATEWAY UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT. SEE "THE
MERGER--BACKGROUND OF AND REASONS FOR THE MERGER."
STOCKHOLDERS AGREEMENT
In conjunction with the Merger Agreement, Peoples has entered into a
Stockholders Agreement, dated as of June 17, 1997, with each of the directors of
Gateway ("Stockholders Agreement"). Pursuant to such Stockholders Agreement,
each such director of Gateway has agreed, among other things, not to sell,
pledge, transfer or otherwise dispose of his or her shares of Gateway Common
Stock and to vote such shares of Gateway Common Stock in favor of the Merger
Agreement. See "The Merger--Stockholders Agreement."
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EFFECTIVE TIME OF THE MERGER; TERMINATION OF THE MERGER AGREEMENT
The Merger shall become effective upon the occurrence of the filing of a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Ohio pursuant to the Ohio General Corporation Law ("OGCL") and
articles of merger ("Articles of Merger") with the Secretary of State of the
Commonwealth of Kentucky pursuant to the Kentucky 1988 Business Corporation Act
("KBCA"), unless a later date and time is specified as the effective time in
such Certificate of Merger and Articles of Merger (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 Gateway's
stockholders, the expiration of all applicable regulatory waiting periods and
the satisfaction or waiver of all other conditions to the Merger. See "The
Merger--Effective Time of the Merger; Termination and Amendment."
The Merger Agreement may be terminated by mutual consent of Peoples and
Gateway and by Peoples or Gateway if either (i) the Merger has not been
consummated on or prior to June 17, 1998; (ii) the stockholders of Gateway do
not approve the Merger Agreement; (iii) any required regulatory applications are
denied or are approved contingent upon the satisfaction of any condition or
requirement which materially impairs the value of Gateway to Peoples; or (iv)
there is a material breach of any representation, warranty, covenant or
undertaking by the other party which is not cured within the specified time
period. See "The Merger--Effective Time of the Merger; Termination and
Amendment."
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions, including,
without limitation, obtaining the requisite approval of the Merger Agreement by
the stockholders of Gateway; receipt of all necessary regulatory approvals
pertaining to the Merger; and certain other closing conditions. A holding
company application has been filed by Peoples and approved by the Federal
Reserve with respect to the Merger. See "The Merger--Conditions to the Merger"
and "The Merger--Regulatory Approvals." Substantially all of the conditions to
consummation of the Merger (except for required stockholder and regulatory
approvals) may be waived at any time by the party for whose benefit they were
created, and the Merger Agreement may be amended at any time by written
agreement of the parties, except that no waiver or amendment occurring after
approval of the Merger Agreement by Gateway's stockholders shall modify either
the amount or the form of the Merger Consideration.
DISSENTERS' RIGHTS
Holders of shares of Gateway Common Stock who object to the Merger and
comply with the prescribed statutory procedures are entitled to have the fair
value of their shares determined in accordance with the KBCA and paid to them in
cash in lieu of the Peoples Common Shares and/or cash they would otherwise be
entitled to receive in the Merger. A copy of the pertinent statutory provisions
of the KBCA is attached to this Proxy Statement/Prospectus as Appendix C.
FAILURE TO FOLLOW SUCH PROVISIONS PRECISELY MAY RESULT IN A LOSS OF DISSENTERS'
RIGHTS. See "The Merger--Dissenters' Rights."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon an opinion of counsel
delivered to both Peoples and Gateway to the effect that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that no taxable gain will be
recognized by Peoples or Gateway in connection with the Merger. The opinion of
counsel is summarized under "The Merger--Certain Federal Income Tax
Consequences" and is filed as an exhibit to the Registration Statement of which
this Proxy Statement/Prospectus is a part. No gain or loss will be recognized by
the stockholders of Gateway upon the exchange of their shares of Gateway Common
Stock for Peoples Common Shares, except for cash received in lieu of fractional
shares. A Gateway stockholder who exchanges shares of Gateway Common Stock for
cash, either as part of the Merger Consideration or
15
<PAGE>
through the exercise of dissenters' rights, will recognize gain or loss, but not
in excess of the amount of cash received. See "The Merger--Certain Federal
Income Tax Consequences."
ACCOUNTING TREATMENT OF THE MERGER
It is anticipated that the Merger will be accounted for as a purchase for
accounting purposes. See "The Merger--Accounting Treatment of the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Merger Agreement provides that upon consummation of the Merger, Rebecca
R. Jackson and John H. Fugeman, who are presently directors of Gateway (in the
event of the death, disability or other inability to serve, Gateway and Peoples
shall mutually agree upon another individual presently or at such time serving
as a director of Gateway to replace such person in this capacity) in addition to
Robert E. Evans, RobRoy Walters and Carol A. Schneeberger of Peoples, will be
elected to the Board of Directors of Gateway and, David B. Baker, Robert E.
Evans, Norman R. Menshouse, Carol A. Schneeberger, RobRoy Walters and Joseph H.
Wesel of Peoples will be elected to the Board of Directors of Catlettsburg
Federal. The existing directors of Catlettsburg Federal may continue to serve as
directors of Catlettsburg Federal. Peoples currently intends to maintain Gateway
as a separate holding company subsidiary of Peoples for a period of not less
than two years from the Effective Time. In addition, Peoples will maintain
Catlettsburg Federal as a separate subsidiary of Gateway (or a successor or
alternative subsidiary of Peoples) for a period of not less than two years from
the Effective Time. In addition, Rebecca R. Jackson, the current President and
Chief Executive Officer of Catlettsburg Federal, will continue to be retained by
Catlettsburg Federal in accordance with the terms of her employment agreement.
However, Peoples does not intend to have Ms. Jackson serve as Chief Executive
Officer of Gateway after the Merger nor does it intend to renew her employment
agreement at the annual anniversary date of such agreement. See "The
Merger--Interests of Certain Person in the Merger."
UNAUDITED PRO FORMA CONDENSED COMBINED SUMMARY FINANCIAL INFORMATION
The unaudited pro forma condensed combined summary financial information set
forth below gives effect to the Merger under the purchase accounting method. The
pro forma condensed combined summary statements of income treat the Merger as if
it had been consummated at the beginning of the respective periods, and the pro
forma condensed combined summary balance sheet treats the Merger as if it had
been consummated on June 30, 1997. The pro forma combined per share data gives
effect to the assumed issuance of 354,168 Peoples Common Shares based on an
Exchange Ratio of 0.4978 assuming the Peoples Market Value is $37.75. For a
description of the basis for the pro forma adjustments, including the basis for
the number of Peoples Common Shares which are assumed to be issued in the
Merger, see "Pro Forma Condensed Consolidated Financial Statements (Unaudited)."
This pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the Merger had been consummated at the
dates assumed herein, nor is it necessarily indicative of future operating
results or financial position. See "Pro Forma Condensed Consolidated Financial
Statements (Unaudited)."
16
<PAGE>
SUMMARY OF UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
-------------------------- PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS(1) COMBINED
------------ ------------ -------------- ------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income........................................ $ 25,884 $ 2,235 $ (205) $ 27,914
Interest expense....................................... 12,024 1,170 13 13,207
Net interest income.................................... 13,860 1,065 (218) 14,707
Income before income taxes............................. 6,054 541 (263) 6,332
Net income............................................. 4,127 348 (197) 4,278
Net income per share:
Primary................................................ $ 1.17 $ 0.33 -- $ 1.10
Fully diluted.......................................... $ 1.16 $ 0.33 -- $ 1.09
Weighted average shares and share equivalents
outstanding:
Primary................................................ 3,540,317 1,041,240 -- 3,894,485
Fully diluted.......................................... 3,567,657 1,072,821 -- 3,921,825
</TABLE>
SUMMARY OF UNAUDITED PRO FORMA INCOME INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
-------------------------- PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS(1) COMBINED
------------ ------------ -------------- ------------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income........................................ $ 47,397 $ 4,710 $ (410) $ 51,697
Interest expense....................................... 21,966 2,654 25 24,645
Net interest income.................................... 25,431 2,056 (435) 27,052
Income before income taxes............................. 11,122 773 (565) 11,330
Net income............................................. 7,651 530 (420) 7,761
Net income per share:
Primary................................................ $ 2.20 $ 0.48 -- $ 2.02
Fully diluted.......................................... $ 2.18 $ 0.48 -- $ 2.01
Weighted average shares and share equivalents
outstanding:
Primary................................................ 3,480,999 1,094,395 -- 3,835,167
Fully diluted.......................................... 3,506,996 1,095,201 -- 3,861,164
</TABLE>
SUMMARY OF UNAUDITED PRO FORMA INCOME INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEET DATA AS OF JUNE 30, 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
-------------------------- PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS(1) COMBINED
------------ ------------ -------------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities held to maturity................. $ -- $ 39,558 $ (39,558) $ --
Investment securities available for sale............... 147,856 -- 34,800 182,656
Loans receivable, net.................................. 460,147 21,005 153 481,305
Total assets........................................... 661,517 63,828 (3,799) 721,546
Deposits............................................... 545,330 46,318 (64) 591,584
Borrowed funds......................................... 50,376 -- -- 50,376
Total liabilities...................................... 602,602 46,566 93 649,261
Retained earnings...................................... 23,355 10,147 (10,147) 23,355
Total stockholders' equity............................. 58,915 17,262 (3,892) 72,285
</TABLE>
- - ------------------------
(1) For a description of the basis for the pro forma adjustments, including the
basis for the number of Peoples Common Shares which are assumed to be issued
in the Merger, see "Pro Forma Condensed Consolidated Financial Statements
(Unaudited)."
17
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share, pro forma
combined per share and pro forma equivalent per share information with respect
to the Peoples Common Shares and the Gateway Common Stock at the dates and for
the periods presented, giving effect to the Merger using the purchase method of
accounting, based on the Exchange Ratio (assuming that 354,168 Peoples Common
Shares are issued in the Merger based upon the assumptions described in the
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
included elsewhere herein). See "The Merger--Accounting Treatment of the Merger"
and "Pro Forma Condensed Consolidated Financial Statements (Unaudited)."
The selected per share data set forth below should be read in conjunction
with, and is qualified in its entirety by, the historical consolidated financial
statements of Peoples, including the related notes, incorporated herein by
reference and the historical consolidated financial statements of Gateway and
the pro forma condensed consolidated financial statements (unaudited) appearing
elsewhere herein. See "Available Information," "Incorporation of Certain
Documents by Reference," the historical consolidated financial statements of
Gateway included elsewhere herein and "Pro Forma Condensed Consolidated
Financial Statements (Unaudited)." The pro forma information gives effect to the
Merger as if the transaction had been consumated at the beginning of each period
presented using the purchase method of accounting. The data set forth below is
not necessarily indicative of the results of the future operations of Peoples
upon consummation of the Merger or the actual results that would have been
achieved had the Merger been consummated prior to the periods presented.
<TABLE>
<CAPTION>
GATEWAY COMMON STOCK
PEOPLES COMMON SHARES
-------------------------- ------------------------
<S> <C> <C> <C> <C>
PRO FORMA PRO FORMA
HISTORICAL COMBINED(1) HISTORICAL EQUIVALENT
----------- ------------- ----------- -----------
Primary net income per share(2):
Six months ended June 30, 1997................................. $ 1.17 $ 1.10 $ 0.33 $ 0.38
Year ended December 31, 1996................................... 2.20 2.02 0.48 0.70
Dividends declared per share:
Six months ended June 30, 1997................................. 0.36 0.36 0.20 0.12(3)
Year ended December 31, 1996................................... 0.65 0.65 0.40 0.22(3)
Book value per share at:
June 30, 1997.................................................. 17.10 19.02 16.05 12.56(4)
December 31, 1996.............................................. 16.32 18.26 15.83 12.30(4)
</TABLE>
- - ------------------------
(1) Reflects (i) estimated purchase accounting adjustments to be recorded in
connection with the Merger, consisting of mark-to-market valuation
adjustments for assets acquired and liabilities assumed and establishment of
intangible assets for the purchase price in excess of the fair value of the
net assets acquired, and the resultant amortization/accretion of all such
adjustments over appropriate future periods, and (ii) the assumed issuance
of 354,168 Peoples Common Shares in the Merger based upon an Exchange Ratio
of 0.4978 assuming the Peoples Market Value per share is $37.75.
(2) Represents the Peoples pro forma combined amounts multiplied by 0.345, which
is the assumed number of Peoples Common Shares to be issued for each share
of Gateway Common Stock outstanding based upon an Exchange Ratio of 0.4978
assuming the Peoples Market Value per share is $37.75.
(3) Peoples historical dividends multiplied by 0.345, which is the assumed
number of Peoples Common Shares to be issued for each share of Gateway
Common Stock outstanding based upon an Exchange Ratio of 0.4978 assuming the
Peoples Market Value per share is $37.75.
(4) Includes the cash to be paid by Peoples of $6.00 per share ($18.75 per share
times 32%).
18
<PAGE>
COMPARATIVE MARKET PRICES
The Peoples Common Shares is included for quotation on The Nasdaq National
Market under the symbol "PEBO." The Gateway Common Stock is included for
quotation on the Nasdaq Small-Cap Market under the symbol "GWBC." The table
below sets forth, for the calendar quarters indicated, the reported high and low
bid prices of Peoples Common Shares and Gateway Common Stock based on published
financial sources and cash dividends declared per share by Peoples and Gateway.
<TABLE>
<CAPTION>
PEOPLES COMMON SHARES GATEWAY COMMON STOCK
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
CASH CASH
DIVIDENDS DIVIDENDS
PAID PER PAID PER
HIGH LOW SHARE HIGH LOW SHARE
--------- --------- ----------- --------- --------- -----------
1995
First Quarter................................................ $ 20.66 $ 18.59 $ 0.14 $ 13.50 $ 10.75 $ 0.10
Second Quarter............................................... 20.05 18.18 0.14 14.50 12.50 0.10
Third Quarter................................................ 20.66 18.18 0.14 15.50 13.50 0.10
Fourth Quarter............................................... 21.48 20.23 0.15 16.25 14.00 1.20
1996
First Quarter................................................ 21.59 20.91 0.15 15.25 14.00 0.10
Second Quarter............................................... 21.36 20.91 0.15 15.00 14.00 0.10
Third Quarter................................................ 24.00 21.02 0.17 14.25 13.00 0.10
Fourth Quarter............................................... 28.00 23.75 0.17 14.75 13.75 0.10
1997
First Quarter................................................ 30.25 26.25 0.18 15.25 14.25 0.10
Second Quarter............................................... 36.75 29.25 0.18 18.00 14.50 0.10
Third Quarter................................................ 39.50 35.25 0.19 18.25 17.50 0.10
</TABLE>
(through September 24, 1997)
Since the market price of the Peoples Common Shares is subject to
fluctuation, the market value of the Peoples Common Shares that holders of
shares of Gateway Common Stock may receive in the Merger may increase or
decrease prior to and after the Merger.
On June 16, 1997, the last full trading day prior to the execution and
delivery of the Merger Agreement and the public announcement thereof, the
closing sales prices per share of Peoples Common Shares and Gateway Common Stock
as reported in the WALL STREET JOURNAL were $33.50 and $16.875, respectively. On
, 1997, the most recent practicable date prior to the printing of
this Proxy Statement/Prospectus, the closing sales prices per share of Peoples
Common Shares and Gateway Common Stock were $ and $ ,
respectively.
Set forth below is information regarding the reported closing sales price
per share of Peoples Common Shares and Gateway Common Stock on June 16, 1997,
the last trading day preceding public announcement of the Agreement.
<TABLE>
<CAPTION>
HISTORICAL MARKET
VALUE PER SHARE
--------------------
<S> <C> <C> <C>
EQUIVALENT MARKET VALUE
PER SHARE OF GATEWAY
DATE PEOPLES GATEWAY (1)
- - -------------------------------------------------------------------- --------- --------- -----------------------
June 16, 1997....................................................... $ 33.50 $ 16.875 $ 18.75
</TABLE>
- - ------------------------
(1) Equivalent market value per share of Gateway Common Stock based on an
Exchange Ratio of 0.5597.
SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE PEOPLES
COMMON SHARES AND GATEWAY COMMON STOCK, TO THE EXTENT POSSIBLE, PRIOR TO THE
SPECIAL MEETING.
19
<PAGE>
PEOPLES SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth certain consolidated financial and other data
of Peoples at the dates and for the periods indicated. For additional financial
information about Peoples, reference is made to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of Peoples and related notes included in Peoples' 1996
Annual Report to Stockholders.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $ 661,517 $ 616,635 $ 543,430 $ 498,006 $ 465,373 $ 468,562
Investment securities................... 147,856 147,783 131,762 99,419 103,349 112,556
Net loans............................... 460,147 415,540 372,800 354,570 315,305 285,448
Total deposits.......................... 545,330 504,692 429,077 403,819 385,639 401,623
Long-term borrowings.................... 30,601 29,200 23,142 23,787 20,331 15,506
Stockholders' equity.................... 58,915 56,193 51,474 45,635 42,778 38,497
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total interest income................ $ 25,884 $ 23,041 $ 47,397 $ 43,068 $ 35,801 $ 35,086 $ 37,505
Total interest expense............... 12,024 10,783 21,966 20,777 15,424 15,263 17,887
Net interest income.................. 13,860 12,258 25,431 22,291 20,377 20,048 19,820
Provision for loan losses............ 1,229 795 1,965 1,315 765 1,592 2,387
Other income......................... 2,849 2,433 5,178 4,481 4,141 4,177 3,716
Other expenses....................... 9,426 8,312 17,522 16,818 15,672 15,124 14,945
Net income........................... 4,127 3,852 7,651 6,050 5,748 5,071 4,550
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ --------------------------------------
1997 1996 1996 1995 1994 1993(1)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SIGNIFICANT RATIOS:
Net income to:
Average total assets................................................ 1.27% 1.34% 1.29% 1.15% 1.20% 1.09%
Average stockholders' equity........................................ 14.5 14.8 14.4 12.3 12.9 11.9
Average stockholders' equity to average total assets.................. 8.8 9.0 8.9 9.3 9.3 8.8
Average loans to average deposits..................................... 83.3 83.5 84.0 85.2 85.5 78.4
Primary capital to period end total assets............................ 8.8 8.7 9.2 10.4 10.1 10.1
Dividend payout ratio................................................. 30.1 27.5 29.3 32.2 29.3 29.8
PER SHARE DATA(2):
Net income:
Primary............................................................. $ 1.17 $ 1.11 $ 2.20 $ 1.73 $ 1.63 $ 1.50
Fully diluted(3).................................................... 1.16 1.11 2.18 1.72 1.63 1.48
Cash dividends paid................................................... 0.36 0.31 0.65 0.56 0.48 0.43
Book value at end of period........................................... 17.10 15.07 16.32 15.04 13.01 12.15
<CAPTION>
1992
---------
<S> <C>
SIGNIFICANT RATIOS:
Net income to:
Average total assets................................................ 1.01%
Average stockholders' equity........................................ 11.8
Average stockholders' equity to average total assets.................. 7.5
Average loans to average deposits..................................... 70.2
Primary capital to period end total assets............................ 8.9
Dividend payout ratio................................................. 28.0
PER SHARE DATA(2):
Net income:
Primary............................................................. $ 1.41
Fully diluted(3).................................................... 1.32
Cash dividends paid................................................... 0.40
Book value at end of period........................................... 11.42
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
20
<PAGE>
- - ------------------------
(1) 1993 net income and per share information based upon net income after
adjustment for cumulative effect of accounting changes of $314,000 or $0.09
per share.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(2) Primary shares outstanding.... 3,540,317 3,465,881 3,480,999 3,498,955 3,520,337 3,384,796 3,223,079
Fully diluted shares
outstanding..................... 3,567,657 3,468,997 3,506,996 3,519,124 3,523,812 3,438,808 3,557,184
</TABLE>
(3) Fully diluted net income per share for 1993 and 1992 is calculated as if the
Subordinated Convertible Debenture were converted as of the issue date, with
a corresponding increase from the after-tax reduction in interest expense.
21
<PAGE>
GATEWAY SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial and other data of Gateway does not purport
to be complete and is qualified in its entirety by reference to the more
detailed financial information contained elsewhere herein. See "Index to Gateway
Consolidated Financial Statements." In March 1995, Gateway changed its fiscal
year end to December 31 from June 30 commencing with the fiscal year ended
December 31, 1994.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
JUNE 30, ------------------------------- --------------------
1997 1996 1995 1994 1994 1993
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
SELECTED FINANCIAL CONDITION AND
OTHER DATA:
Total assets................................. $ 63,828 $ 66,439 $ 73,409 $ 70,357 $ 67,355 $ 64,614
Cash and cash equivalents.................... 2,362 1,348 6,542 7,394 2,970 9,252
Investment securities........................ 14,355 17,524 21,443 20,852 22,139 15,204
Mortgage-backed securities................... 25,203 27,663 27,618 29,513 31,279 28,836
Loans receivable, net........................ 21,005 19,076 16,920 11,451 10,110 10,645
Real estate owned............................ 44 -- -- -- -- 49
Deposits..................................... 46,318 49,195 53,288 60,486 57,929 55,895
FHLB advances................................ -- -- -- -- -- --
Stockholders' equity, net.................... 17,262 17,029 18,478 9,593 9,274 8,562
Full service offices......................... 2 2 2 2 2 2
</TABLE>
<TABLE>
<CAPTION>
AT AND
AT AND FOR THE AT AND FOR FOR THE
SIX MONTHS ENDED THE SIX YEAR
AT AND FOR THE YEAR ENDED MONTHS ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
-------------------- --------------------------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- ----------- ------------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Total interest income.................. $ 2,235 $ 2,365 $ 4,710 $ 4,827 $ 4,161 $ 2,096 $ 4,146
Total interest expense................. 1,170 1,382 2,653 2,673 2,385 1,187 2,455
--------- --------- --------- --------- ----------- ------ ---------
Net interest income.................. 1,065 983 2,057 2,154 1,776 909 1,691
Provision for loan losses.............. -- -- -- 20 -- -- --
--------- --------- --------- --------- ----------- ------ ---------
Net interest income after provision
for loan losses.................... 1,065 983 2,057 2,134 1,776 909 1,691
Non-interest income.................... 7 21 29 10 25 14 55
Non-interest expense................... 531 513 1,313 893 770 449 669
--------- --------- --------- --------- ----------- ------ ---------
Income before provision for income
taxes................................ 541 491 773 1,251 1,031 474 1,077
Provision for income taxes............. 193 152 243 430 337 155 365
--------- --------- --------- --------- ----------- ------ ---------
Net income............................. $ 348 $ 339 $ 530 $ 821 $ 694 $ 319 $ 712
--------- --------- --------- --------- ----------- ------ ---------
--------- --------- --------- --------- ----------- ------ ---------
Net income per share................... $ .33 $ .30 $ .48 $ .69 N/A N/A N/A
Book value per share................... $ 16.05 $ 15.68 $ 15.83 $ 15.44 N/A N/A N/A
<CAPTION>
<S> <C>
1993
---------
<S> <C>
SELECTED OPERATING DATA:
Total interest income.................. $ 4,388
Total interest expense................. 2,743
---------
Net interest income.................. 1,645
Provision for loan losses.............. 47
---------
Net interest income after provision
for loan losses.................... 1,598
Non-interest income.................... 32
Non-interest expense................... 582
---------
Income before provision for income
taxes................................ 1,048
Provision for income taxes............. 345
---------
Net income............................. $ 703
---------
---------
Net income per share................... N/A
Book value per share................... N/A
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT AND
AT AND FOR THE AT AND FOR FOR THE
SIX MONTHS ENDED THE SIX YEAR
AT AND FOR THE YEAR ENDED MONTHS ENDED ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30,
-------------------- --------------------------------- ------------- ---------
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- ----------- ------------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS (1):
Return on average assets............... 1.06% 0.94% 0.75% 1.11% 1.04% 0.97% 1.07%
Return on average equity............... 4.05 3.75 2.99 3.99 7.48 6.90 7.99
Average equity to average assets....... 26.32 24.99 25.12 27.88 13.92 14.03 13.42
Equity to assets at end of year........ 25.08 24.89 25.63 25.17 13.63 13.64 13.77
Interest rate spread (2)............... 2.05 1.49 1.70 1.55 2.13 2.18 2.00
Interest rate margin (2) 3.31 2.75 2.96 2.96 2.69 2.77 2.57
Non-performing loans to total loans at
end of period (3).................... 2.52 -- 1.09 2.45 2.81 2.81 1.86
Non-performing assets to total assets
at end of period (3)................. 0.90 -- 0.31 0.56 0.46 0.46 0.28
Allowance for loan losses to total
loans outstanding at end of
period............................... 0.39 0.47 0.42 0.48 0.53 0.53 0.60
Allowance for loan losses to total
non-performing loans at end of period
(3).................................. 15.31 -- 38.76 19.57 18.94 18.94 32.29
Average interest-earning assets to
average interest-bearing
liabilities.......................... 134.75 131.54 132.90 138.25 115.57 116.42 115.10
Net interest income after provision for
loan losses to total expense......... 200.56 191.62 156.66 238.97 230.65 202.45 252.77
Non-interest expense to average total
assets............................... 1.62 1.42 1.86 1.21 1.15 1.36 1.01
<CAPTION>
1993
---------
<S> <C>
SELECTED OPERATING RATIOS (1):
Return on average assets............... 1.14%
Return on average equity............... 8.57
Average equity to average assets....... 13.38
Equity to assets at end of year........ 13.26
Interest rate spread (2)............... 2.01
Interest rate margin (2) 2.71
Non-performing loans to total loans at
end of period (3).................... 4.56
Non-performing assets to total assets
at end of period (3)................. 0.84
Allowance for loan losses to total
loans outstanding at end of
period............................... 1.45
Allowance for loan losses to total
non-performing loans at end of period
(3).................................. 31.80
Average interest-earning assets to
average interest-bearing
liabilities.......................... 115.41
Net interest income after provision for
loan losses to total expense......... 281.80
Non-interest expense to average total
assets............................... 0.95
</TABLE>
- - ------------------------
(1) With the exception of end of year ratios, all ratios are based on average
monthly balances during the periods.
(2) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
(3) Non-performing loans consist of non-accrual loans and loans that are
contractually past due 90 days or more but still accruing interest, and
non-performing assets consist of non-performing loans and real estate
acquired by foreclosure or deed-in lieu thereof.
23
<PAGE>
STOCKHOLDER MEETING
This Proxy Statement/Prospectus is being furnished to Gateway stockholders
in connection with the solicitation of proxies by the Board of Directors of
Gateway for use at the Special Meeting to be held on , 1997, and at
any adjournment or adjournments thereof. This Proxy Statement/Prospectus also
serves as a prospectus of Peoples in connection with the issuance of Peoples
Common Shares to holders of Gateway Common Stock upon consummation of the
Merger.
GATEWAY STOCKHOLDERS SHOULD NOT FORWARD ANY GATEWAY STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
This Proxy Statement/Prospectus, the Notice of Special Meeting of
Stockholders of Gateway and the accompanying proxy solicited by the Board of
Directors of Gateway, are first being mailed to the stockholders of Gateway on
or about , 1997.
The principal executive offices of Gateway are located at 2717 Louisa
Street, Catlettsburg, Kentucky 41129, and its telephone number is (606)
739-4126.
SPECIAL MEETING OF GATEWAY STOCKHOLDERS
The Special Meeting will be held on , 1997, commencing at
:00 .m., Eastern Time, at the FIVCO Community Room located at 3000 Louisa
Street, Catlettsburg Kentucky.
PURPOSE OF MEETING. The purposes of the Special Meeting are to consider and
vote upon a proposal to approve the Merger Agreement, to consider and vote upon
a proposal to adjourn the Special Meeting to solicit additional proxies, if
necessary, and to transact such other business as may properly come before the
Special Meeting and any adjournment or adjournments thereof. It is not
anticipated that any matter other than the proposal to adopt and approve the
Merger Agreement and, if necessary, the adjournment proposal as aforesaid will
be brought before the Special Meeting. If any other matter is properly presented
at the Special Meeting for consideration, the persons named in the enclosed form
of proxy card and acting thereunder will have discretion to vote on such matter
in accordance with their best judgment.
SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE. The close of business
on , 1997 has been fixed by the Board of Directors of Gateway as the
Record Date for the determination of holders of Gateway Common Stock entitled to
notice of and to vote at the Special Meeting and any adjournment or adjournments
thereof. At the close of business on the Record Date, there were shares
outstanding and entitled to vote, held by approximately holders of record.
Each share of Gateway Common Stock entitles the holder thereof to one vote on
each matter to be submitted to Gateway stockholders at the Special Meeting.
VOTE REQUIRED. A majority of the outstanding shares of Gateway Common Stock
must be represented in person or by proxy at the Special Meeting in order for a
quorum to be present. The affirmative vote of a majority of the votes cast by
all stockholders of Gateway entitled to vote thereon is required to approve the
Merger Agreement and the proposal to adjourn the Special Meeting to solicit
additional proxies, if necessary. The votes may be made in person or by proxy.
Shares as to which the "ABSTAIN" box has been marked on the proxy and broker
non-votes will be counted as present for determining if a quorum is present;
however, an abstention or a broker non-vote is not a vote cast and thus will not
affect the number of votes required for approval.
As of the Record Date, the directors and executive officers of Gateway and
their affiliates in the aggregate beneficially owned and are entitled to vote
[80,755] shares or [7.5]% of the outstanding Gateway Common Stock (exclusive of
shares of Gateway Common Stock which may be acquired upon the exercise of
outstanding stock options). The directors of Gateway have signed a Stockholders
Agreement which provides, among other things, that they will vote any shares of
Gateway Common Stock over which they have voting power in favor of the Merger
Agreement. The directors of Gateway who signed the
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<PAGE>
Stockholders Agreement beneficially owned [80,755] shares or [7.5]% of the
Gateway Common Stock outstanding on the Record Date (exclusive of shares of
Gateway Common Stock which may be acquired upon the exercise of outstanding
stock options).
VOTING; SOLICITATION AND REVOCATION OF PROXIES. A proxy for use at the
Special Meeting is being furnished to each Gateway stockholder together with
this Proxy Statement/Prospectus and is solicited by the Board of Directors of
Gateway. Any Gateway stockholder executing a proxy may revoke it at any time
before it is voted by filing with the Secretary of Gateway, at the address of
Gateway set forth on the Notice of Special Meeting of Stockholders, written
notice of such revocation; by executing a later-dated proxy; or by attending the
Special Meeting and giving notice of such revocation in person. Attendance at
the Special Meeting will not, in and of itself, constitute revocation of a
proxy. Each proxy returned to Gateway (and not revoked) will be voted in
accordance with the instructions thereon. IF NO INSTRUCTIONS ARE INDICATED, THE
PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT.
COSTS
Peoples and Gateway will share the costs of printing this Proxy
Statement/Prospectus and the accompanying proxy. Each party will otherwise bear
its own costs in the transaction. Proxies will be solicited by mail and may be
further solicited, for no additional compensation by officers, directors or
employees of Gateway, by further mailing, by telephone or by personal contact.
Gateway will also pay the standard charges and expenses of brokerage houses,
voting trustees, banks, associations and other custodians, nominees and
fiduciaries, who are record holders of Gateway Common Stock, not beneficially
owned by them, for forwarding such materials to and obtaining proxies from the
beneficial owners of Gateway Common Stock entitled to vote at the Special
Meeting.
THE MERGER
The following description of the material terms of the Merger does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, a copy of which is attached to this Proxy Statement/Prospectus
as Appendix A. All stockholders of Gateway are urged to read such document
carefully.
GENERAL
The Boards of Directors of Peoples and Gateway have determined that the
acquisition of Gateway by Peoples is desirable and in the best interests of
Peoples' and Gateway's respective stockholders and have unanimously approved the
Merger. The Merger will be accomplished through the Merger of Gateway with and
into PAC, pursuant to the Merger Agreement, with PAC being the surviving
corporation operating under the name "Gateway Bancorp, Inc." THE BOARD OF
DIRECTORS OF GATEWAY UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. Upon consummation of
the Merger, each share of Gateway Common Stock outstanding at the Effective Time
will be converted into and represent the right to receive Peoples Common Shares,
cash or a combination of both, as described under "The Merger--The Merger
Consideration."
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. In early February 1997, a representative of
Peoples approached executive management of Gateway, indicating that Peoples was
interested in meeting to discuss a possible transaction between the two
companies. Robert E. Evans, President and Chief Executive Officer, and RobRoy
Walters, Controller, of Peoples and John H. Fugeman, Chairman of the Board, and
Rebecca R. Jackson, President and Chief Executive Officer, of Gateway met on
February 5, 1997 in order to discuss the
25
<PAGE>
respective companies, the competitive challenges faced by each, consolidation
within the banking industry generally and the possible strategic benefits of a
business combination between Peoples and Gateway.
Additional telephone conversations between the parties continued over the
next week, during which the parties continued to discuss the possible strategic
benefits of a business combination, as well as certain considerations related to
the proposed management and staffing of the combined company. On February 11,
1997, following Board authorization, Peoples and Gateway entered into a mutual
confidentiality agreement. On February 18, 1997, Messrs. Evans and Walters met
with the full Board of Directors of Gateway in order to familiarize them with
Peoples, its business strategies and long range goals and to discuss the
confidentiality agreement. On March 31, 1997, Gateway engaged FBR as its
financial advisor. Between March 27, 1997 and May 8, 1997, Peoples and Gateway
conducted reciprocal due diligence analysis.
Gateway pursued other merger opportunities with larger in-state and
out-of-state bank holding companies. None of such discussions ever advanced
beyond preliminary discussions.
On April 25, 1997, at a meeting of the Board of Directors of Gateway, after
a thorough discussion and consideration of a Letter of Intent whereby Peoples
would acquire Gateway and thereby Catlettsburg, the Board of Directors of
Gateway authorized Ms. Jackson to execute the Letter of Intent.
On June 16, 1997, at a meeting of the Board of Directors of Gateway, the
Gateway Board discussed the reasons for, and the potential benefits of, the
Merger; and Gateway's financial advisor made a presentation regarding the
financial terms of the Merger Agreement and delivered its opinion that the
Merger Consideration was fair, from a financial point of view, to holders of
Gateway Common Stock. After a thorough discussion and consideration of the
factors discussed below under "The Merger-- Background of and Reasons for the
Merger--Reasons for the Merger," the Board of Directors of Gateway unanimously
approved the Merger Agreement and the transactions contemplated thereby and
authorized the execution of the Merger Agreement and the Stockholders Agreement.
On May 8, 1997, at a meeting of the Board of Directors of Peoples, Mr. Evans
reviewed with the Peoples' Board the reasons for, and the potential benefits of
the Merger. After a thorough discussion and consideration, the Board of
Directors of Peoples unanimously approved the Merger Agreement and the
transactions contemplated thereby and authorized the execution of the Merger
Agreement and the Stockholders Agreement. The Merger Agreement and the
Stockholders Agreement were entered into on June 17, 1997.
REASONS FOR THE MERGER. The terms of the Merger Agreement, including the
Merger Consideration to be paid to Gateway's stockholders, were the result of
arm's-length negotiations between the representatives of Peoples and Gateway.
Among the factors considered by the Boards of Directors of Peoples or Gateway,
as appropriate, in deciding to approve and recommend the terms of the Merger
were (i) the Merger Consideration to be paid to Gateway's stockholders in
relation to the market value, book value, earnings per share and dividend rates
of the Peoples Common Shares and the Gateway Common Stock; (ii) the ability to
expand Peoples' presence in Boyd County, Kentucky and to enhance the services
available to Gateway's customers; (iii) information concerning the financial
condition, results of operations, capital levels, asset quality and prospects of
Peoples and Gateway; (iv) the short-term and long-term impact the Merger will
have on Peoples' consolidated results of operations, including anticipated cost
savings resulting from consolidations in certain areas and expanded consumer
lending and retail banking products and services; (v) the general structure of
the transaction and the compatibility of management and business philosophy;
(vi) the improvement of the franchise value of Peoples to its stockholders as a
result of the enhanced network and products and services; (vii) the likelihood
of receiving the requisite regulatory approvals in a timely manner; (viii) the
tax-free nature of the stock portion of the Merger Consideration to the
stockholders of Gateway; (ix) the ability of the combined enterprise to compete
in relevant banking and non-banking markets; (x) industry and economic
conditions; (xi) the impact of the Merger on the depositors, employees,
customers and communities served by Peoples and Gateway through expanded
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<PAGE>
consumer lending and retail banking products and services; and (xii) the opinion
of Gateway's financial advisor as to the fairness of the Merger Consideration
from a financial point of view to the holders of the Gateway Common Stock. In
making their determination, the Boards of Directors of Peoples and Gateway did
not ascribe relative weights to the factors which they considered.
The directors of Gateway believe that the Merger is in the best interest of
their organization and their stockholders. THE GATEWAY DIRECTORS UNANIMOUSLY
RECOMMEND THAT GATEWAY STOCKHOLDERS VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT.
OPINION OF FINANCIAL ADVISOR
FBR was retained by Gateway on March 31, 1997 to act as its financial
advisor in connection with an analysis of, and advice regarding, a proposed
merger between Gateway and Peoples. At the meeting of the Gateway Board held on
June 16, 1997, FBR delivered its opinion to the Gateway Board to the effect that
as of the date of such opinion, the proposed cash and stock consideration to be
received by the holders of shares of Gateway Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders. FBR has
reconfirmed its June 16, 1997 opinion by delivery of its written opinion to the
Gateway Board, dated the date of this Proxy Statement (the "FBR Opinion"),
stating that, as of the date hereof and based on the matters set forth in such
opinion, the proposed consideration to be received by the holders of shares of
Gateway Common Stock pursuant to the Merger Agreement is fair to such holders
from a financial point of view.
THE FULL TEXT OF THE FBR OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS
ATTACHED AS APPENDIX B TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED
HEREIN BY REFERENCE. THE DESCRIPTION OF THE FBR OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX B. GATEWAY'S STOCKHOLDERS ARE
URGED TO READ THE FBR OPINION IN ITS ENTIRETY. FBR'S OPINION IS DIRECTED ONLY TO
THE CONSIDERATION TO BE RECEIVED IN THE MERGER BY THE HOLDERS OF GATEWAY COMMON
STOCK AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
FBR is a nationally recognized investment banking firm and was selected by
Gateway based on the firm's reputation and experience in investment banking in
general, its recognized expertise in the valuation of banking businesses and
because of its familiarity with Gateway. FBR, as part of its investment banking
business, is frequently engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with rendering the opinions dated June 16, 1997 and the date
hereof, FBR, among other things: (i) reviewed the Merger Agreement; (ii)
reviewed Peoples' Annual Reports to Stockholders for the fiscal years ended
December 31, 1995 and 1996 and Peoples' Annual Reports on Form 10-K filed with
the Commission for the fiscal years ended December 31, 1994 through 1996; (iii)
reviewed Gateway's Annual Report on Form 10-KSB filed with the Commission for
the fiscal year ended December 31, 1996; (iv) reviewed Peoples' Quarterly
Reports on Form 10-Q for the fiscal quarters ended September 30, 1996, March 31,
1997 and June 30, 1997 filed with the Commission; (v) reviewed Gateway's
Quarterly Reports on Form 10-QSB for the fiscal quarters ended June 30, 1996,
September 30, 1996, March 31, 1997 and June 30, 1997 filed with the Commission;
(vi) reviewed the reported market prices and trading activity for Peoples Common
Shares for the period January 1994 through , 1997; (vii) discussed
the financial condition, results of operations, business and prospects of
Gateway and Peoples with the management of Gateway and Peoples; (viii) compared
the results of operations and financial condition of
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<PAGE>
Gateway and Peoples with those of certain publicly-traded financial institutions
(or their holding companies) that FBR deemed to be reasonably comparable to
Gateway or Peoples, as the case may be; (ix) reviewed the financial terms, to
the extent publicly available, of certain acquisition transactions that FBR
deemed to be reasonably comparable to the Merger; (x) reviewed the financial
terms, to the extent publicly available, of certain acquisition transactions
entered into by Peoples; and (xi) performed such other analyses and reviewed and
analyzed such other information as FBR deemed appropriate.
In connection with rendering the FBR Opinion, as set forth therein, FBR
relied without independent verification upon the accuracy and completeness of
all the financial and other information reviewed by it for purposes of rendering
its opinion. FBR did not review individual credit files nor did it make an
independent evaluation or appraisal of the assets or liabilities of Gateway or
any of its subsidiaries and was not furnished with any such evaluation or
appraisal.
The following is a summary of material analyses presented by FBR to the
Gateway Board in connection with providing its opinion dated June 16, 1997 to
the Gateway Board, and does not purport to be a complete description of the
analyses by FBR. FBR believes that its analyses must be considered as a whole
and that selecting portions of its analyses without considering all factors and
analyses would create an incomplete view of the analyses and processes
underlying its opinion. In its analyses, FBR relied upon numerous assumptions
with respect to industry performance, general business and economic conditions,
and other matters, many of which are beyond the control of Gateway or Peoples.
Analyses based upon forecasts of future results are not necessarily indicative
of actual values, which may be significantly more or less favorable than
suggested by such analyses. No company or transaction used as a comparison in
the analyses is identical to Gateway or to the Merger. Additionally, estimates
of the value of businesses do not purport to be appraisals and are not
necessarily reflective of the prices at which businesses actually may be sold.
Because such estimates are inherently subject to uncertainty, neither the
Gateway Board nor FBR, or any other person, assumes responsibility for the
accuracy of such estimates. FBR's analyses were prepared solely for purposes of
its opinions rendered June 16, 1997 and the date of this Proxy Statement, were
provided to the Gateway Board regarding the fairness from a financial point of
view of the proposed consideration to be received for shares of Gateway Common
Stock pursuant to the Merger by holders of such shares, and do not purport to be
appraisals or necessarily reflect the prices at which Gateway or its securities
actually may be sold. The preparation of a fairness opinion is a complex process
and is not necessarily susceptible to partial analysis or a summary description.
SUMMARY OF TERMS OF PROPOSED TRANSACTION. FBR reviewed the terms of the
proposed Merger, including the aggregate amount of consideration, the form of
consideration, and the percentage of premium to the then current Gateway Common
Stock market price. The amount of consideration is $18.75 per share of Gateway
Common Stock, subject to upward adjustment under certain circumstances, of
which, 32% is to be paid in cash (the "Cash Consideration") and 68% is to be
paid in Peoples Common Shares (the "Stock Consideration" and together with the
Cash Consideration, the "Total Consideration"). On June 16, 1997, the Total
Consideration represented a premium over the closing price of the Gateway Common
Stock on June 16, 1997, April 25, 1997 (date of announcement of execution of the
Letter of Intent) and April 25, 1996 of 11.1 percent, 11.9 percent and 25.0
percent, respectively.
FBR stated that the Total Consideration represented a multiple of (i) 38.1
times Gateway's earnings per share for the last twelve months ended March 31,
1997; (ii) 28.5 times the estimate of Gateway's 1997 earnings per share; (iii)
1.2 times Gateway's book value per share as of March 31, 1997 and (iv) 1.6 times
normalized March 31, 1997 tangible book value per share, assuming tangible
equity was reduced to 8 percent of total assets and the consideration for excess
equity over 8 percent of total assets was paid on a dollar for dollar basis. The
Total Consideration also represented a tangible book premium to core deposits of
7.96 percent based on tangible book value per share at March 31, 1997 and a
normalized tangible book premium to core deposits of 7.10 percent, assuming
tangible equity was reduced dollar for dollar to 8 percent of total assets at
March 31, 1997 and the consideration for excess equity over 8 percent of total
assets was paid on a dollar for dollar basis.
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<PAGE>
The actual earnings results for Gateway for the twelve months ended March
31, 1997 included a nonrecurring expense of $336,000 for the recapitalization of
the SAIF taken in the third quarter of 1996. The forecasts and projections
furnished to FBR for Gateway were prepared by the management of Gateway. As a
matter of policy, Gateway does not publicly disclose internal management
forecasts, projections or estimates of the type furnished to FBR in connection
with its analysis of the Merger, and such forecasts, projections and estimates
were not prepared with a view towards public disclosure. These forecasts,
projections and estimates were based on numerous variables and assumptions which
are inherently uncertain and which may not be within the control of management
including, without limitation, general economic, regulatory and competitive
conditions. Accordingly, actual results could vary materially from those set
forth in such forecasts, projections and estimates.
COMPARABLE TRANSACTION ANALYSIS. FBR reviewed certain information relating
to transactions involving acquisitions of thrifts that were announced between
January 1, 1997 and June 13, 1997. In conjunction with its analysis, FBR
reviewed valuation multiples based on price to book value, price to tangible
book value, price to latest twelve months earnings per share and the premium
over tangible book value as a percentage of core deposits. FBR compared Peoples'
pending acquisition of Gateway to transactions involving thrifts nationwide,
thrifts with assets between $50 and $100 million, thrifts in the states of
Indiana, Kentucky, Ohio, Tennessee and West Virginia, thrift transactions where
the consideration was paid in a mixture of cash and stock and thrift
transactions where the seller had a tangible equity to tangible assets ratio
greater than 20% (the "Comparable Groups"). The following table presents the
median and average multiples and ratios for the Comparable Groups.
SUMMARY OF ANNOUNCED THRIFT MERGER AND ACQUISITIONS
JANUARY 1, 1997--JUNE 13, 1997
<TABLE>
<CAPTION>
ANNOUNCED
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEAL DEAL DEAL PR/ TG DEAL PR/ TGBK PREM/
VALUE PR/BK BK 4-QTR COREDEPS
($M) (%) (%) EPS(X) (%)
--------- ----------- ----------- ----------- -----------
NATIONWIDE Median 40.8 162.10 169.51 24.50 10.40
47 Transactions Average 334.7 170.45 174.35 26.84 11.10
NATIONWIDE, ASSETS $50M--$100M Median 13.0 150.93 150.93 27.70 7.96
12 Transactions Average 12.9 149.70 149.84 28.23 8.23
REGIONAL* Median 26.8 149.81 149.90 34.18 10.91
7 Transactions Average 29.6 153.62 153.67 33.64 11.73
CASH/STOCK MIXTURE CONSIDERATION Median 145.7 161.15 161.15 29.31 10.00
11 Transactions Average 836.7 174.45 178.74 31.15 10.82
TANG. EQUITY/TANG. ASSETS > 20% Median 15.9 130.54 130.54 39.06 14.63
5 Transactions Average 32.2 130.49 130.49 36.26 13.00
PEOPLES BANCORP/GATEWAY BANCORP 20.2 117.50 117.50 39.06 7.96
NORMALIZED GATEWAY ACQUISITION* 20.2 163.22 163.22 28.46 7.10
<CAPTION>
<S> <C>
TANG EQ./
TANG ASSETS
(%)
-------------
NATIONWIDE 8.30
47 Transactions 10.90
NATIONWIDE, ASSETS $50M--$100M 10.37
12 Transactions 11.66
REGIONAL* 11.46
7 Transactions 14.10
CASH/STOCK MIXTURE CONSIDERATION 8.23
11 Transactions 10.92
TANG. EQUITY/TANG. ASSETS > 20% 24.91
5 Transactions 24.32
PEOPLES BANCORP/GATEWAY BANCORP 25.63
NORMALIZED GATEWAY ACQUISITION* 8.00
</TABLE>
- - ------------------------
* Assuming tangible equity was reduced to 8 percent of total assets and the
consideration for excess equity over 8 percent of total assets was paid on a
dollar for dollar basis.
The normalized price to book value multiple for the Merger at announcement
was greater than the average for all of the Comparable Groups, although
transactions where the seller had a tangible equity to tangible assets ratio
greater than 20% were not reviewed on a normalized basis. The price to last
twelve
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months earnings per share multiple exceeds or equals the average and median for
all the Comparable Groups.
PRESENT VALUE ANALYSIS. Using a present value analysis, FBR estimated the
present value of the future earnings streams and terminal values of Gateway
through the year 2000 based on Gateway management's estimates of Gateway's
earning per share and analysts' estimates of Gateway's earnings per share for
1997, and assuming long-term earnings growth rates of 5 percent in 1998 and 2.5
percent thereafter. FBR used discount rates of 10 percent and terminal multiples
of 20 to 25 times estimated earnings for the year 2000. The present value of
estimated earnings per share of Gateway Common Stock using the analysts' 1997
estimates ranged from a low of $7.77 per share (based on a multiple of 20 times,
a discount rate of 10 percent and a long-term earnings growth rate of 5 percent
in 1998 and 2.5 percent thereafter) to a high of $9.71 per share (based on a
multiple of 25 times, a discount rate of 10 percent, and a long-term earnings
growth rate of 5 percent in 1998 and 2.5 percent thereafter). When the same
earnings growth rate and a 10 percent discount rate were applied to median
merger multiples based on the price to tangible book value multiples of 100 to
150 percent, the analysis indicated a reference range between $8.32 and $12.48
per share of Gateway Common Stock. When the same earnings growth rates and
discount rate were applied to merger market multiples based on tangible book
premium to core deposits of 7 to 12 percent, the analysis indicated a reference
range between $9.80 and $10.86 per share of Gateway Common Stock.
PRO FORMA MERGER ANALYSIS. FBR performed pro forma merger analyses that
combined Gateway's and Peoples's current and projected income statement and
balance sheets based on 1997 earnings forecasts of Gateway and Peoples,
respectively. Assumptions and analyses of the accounting treatment, acquisition
adjustments, operating efficiencies and other adjustments were made to arrive at
a base case pro forma analysis to determine the effect of the transaction on
both Gateway and Peoples. FBR noted that, based on the Total Consideration paid
for Gateway's Common Stock, the impact of the Merger on Peoples's earnings per
share and tangible book value per share did not appear to be material. The
actual results achieved by the combined company will vary from the projected
results and such variations may be material.
For its services as financial advisor to Gateway in connection with the
Merger, FBR will receive a transaction fee equal to $75,000 (the "Transaction
Fee"). Upon engagement of FBR by Gateway, FBR was paid a $10,000 retainer fee
which will be credited as part of the total Transaction Fee upon the closing of
the Merger. Twenty-five percent of the anticipated Transaction Fee is payable
upon the mailing of the Gateway's proxy materials which solicits stockholder
support for the Merger, which amount shall be returned to Gateway if the Merger
is not consummated for any reason other than the breach of the Merger Agreement
by Gateway; and the remainder of the Transaction Fee will be due at the closing
of the Merger. Gateway has also agreed to pay FBR its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its counsel, and to
indemnify FBR against certain liabilities, including certain liabilities arising
under the federal securities laws.
FBR has advised Gateway that, in the ordinary course of its business as a
full-service securities firm, FBR may, subject to certain restrictions, actively
trade the equity securities of Gateway and/or Peoples for its own account or for
the accounts of its customers, and, accordingly, may at any time hold a long or
short position in such securities.
MERGER CONSIDERATION AND ELECTION, ALLOCATION AND PRORATION
MERGER CONSIDERATION. The Merger Agreement provides that at the Effective
Time of the Merger, each share of Gateway Common Stock outstanding immediately
prior to consummation of the Merger (other than shares as to which dissenters'
rights have been asserted and duly perfected in accordance with Kentucky law and
shares held by Peoples, Gateway or any of their respective subsidiaries, other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted) will be converted into and represent the right to receive: (i)
$18.75 in cash ("Per Share Cash Consideration"); (ii) a number of
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Peoples Common Shares ("Per Share Stock Consideration") as determined by the
Exchange Ratio and based on the Average Share Price of Peoples Common Shares
over the 20 trading day period ending five days prior to the Closing Date of the
Merger (the "Peoples Market Value"); or (iii) a combination of cash and Peoples
Common Shares. The Merger Agreement provides that the number of Peoples Common
Shares comprising the Per Share Stock Consideration will be equal to (A) if the
Peoples Market Value is equal to or less than $37.66 but equal to or greater
than $27.84, the quotient determined by dividing (x) $18.75 by (y) the Peoples
Market Value; (B) if the Peoples Market Value is less than $27.84, 0.6736
shares; or (C) if the Peoples Market Value is greater than $37.66, 0.4978 shares
(the "Exchange Ratio"). The Merger Agreement provides that 68% of the shares of
Gateway Common Stock will be converted into the right to receive the Stock
Consideration; provided however, that to the extent the Peoples Market Value
exceeds $37.66, the ratio of the aggregate dollar amount of Stock Consideration
to the aggregate dollar amount of Merger Consideration may exceed 68%.
ACCORDINGLY, THE ACTUAL CONSIDERATION ULTIMATELY RECEIVED BY A STOCKHOLDER FOR
SHARES OF GATEWAY COMMON STOCK WILL DEPEND UPON SUCH STOCKHOLDER'S ELECTION, THE
ELECTION OF OTHER STOCKHOLDERS, AS WELL AS THE ALLOCATION AND PRORATION
PROCEDURE DESCRIBED HEREIN.
If, between the date of this Proxy Statement/Prospectus and the Effective
Time, the Peoples Common Shares are changed into a different number or class of
shares by reason of any reclassification, recapitalization, split-up,
combination, exchange of shares or readjustment, or a stock dividend thereon is
declared with a record date within said period, the Merger Consideration as
specified above shall be adjusted accordingly.
ELECTIONS. Within three business days after the consummation of the Merger,
each record holder of Gateway Common Stock will be sent materials asking such
stockholder to make an election (an "Election") as to the form of consideration
to be received for his or her shares of Gateway Common Stock. Such holder of
Gateway Common Stock may elect:
(i) the number of Peoples Common Shares, based on the Exchange Ratio,
for each share of Gateway Common Stock (a "Stock Election");
(ii) $18.75 in cash, without interest, for each share of Gateway Common
Stock (a "Cash Election");
(iii) A Stock Election with respect to some of such stockholder's shares
of Gateway Common Stock and a Cash Election with respect to the remaining
shares of Gateway Common Stock held by such holder; or
(iv) whatever is left after the election of the other holders of Gateway
Common Stock and the application to the extent necessary of certain random
selection procedures (a "No-Election").
Notwithstanding the foregoing, in order to make a Stock Election, the number
of shares of Gateway Common Stock a holder must elect to convert to Peoples
Common Shares must equal or exceed 100 shares. Therefore, any holder of Gateway
Common Stock who owns less than 100 shares must elect the Cash Election or be
treated as having made a No-Election. A failure to properly make an election as
described below will be treated as a No-Election. Any shares for which
disserters' rights have been perfected will be deemed to have made a Cash
Election.
No gain or loss will be recognized by the holders of Gateway Common Stock
who receive Peoples Common Shares as a result of the Merger, except to the
extent of any cash received in lieu of a fractional share interest in Gateway
Common Stock. Holders of Gateway Common Stock who receive the Per Share Cash
Consideration will recognize gain in an amount per share equal to the difference
between $18.75 and the basis for their shares of Gateway Common Stock. See "THE
MERGER--Certain Federal Income Tax Consequences."
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NO OVERSUBSCRIPTION. In the event that the number of shares as to which a
Cash Election has been made does not exceed 32% of the shares of Gateway Common
Stock outstanding at the Effective Time and the number of shares as to which a
Stock Election has been made does not exceed 68% of the shares of Gateway Common
Stock outstanding at the Effective Time, then:
(i) all shares to which a Cash Election has been made will be converted
into the right to receive $18.75 in cash, without interest, per share of
Gateway Common Stock;
(ii) all shares as to which a Stock Election has been made will be
converted into the right to receive Peoples Common Shares, as determined by
the Exchange Ratio, per share of Gateway Common Stock; and
(iii) shares as to which a No-Election has been made will be converted
into either the right to receive shares of Peoples Common Shares, as
determined by the Exchange Ratio, per share of Gateway Common Stock or
$18.75 per share of Gateway Common Stock as determined by random selection
so that 32% of the shares of Gateway Common Stock are converted into the
right to receive cash and 68% of the shares of Gateway Common Stock are
converted into the right to receive Peoples Common Shares; provided,
however, that to the extent that it is not possible to provide for such
allocation and still achieve 68% of the Merger Consideration being in
Peoples Common Shares, the Exchange Agent will allocate based on random
selection so that such result will be attained.
The random selection process to be used by the Exchange Agent will consist
of drawing by lot or such other process as the Exchange Agent deems equitable
and necessary to effect the allocations described above.
OVERSUBSCRIPTION FOR CASH. If the aggregate number of shares as to which a
Cash Election has been made exceeds 32% of the shares of Gateway Common Stock
outstanding at the Effective Time, then:
(i) each share as to which a Stock Election has been made and each share
as to which a No-Election has been made will be converted into the right to
receive Peoples Common Shares, as determined by the Exchange Ratio; and
(ii) each share as to which a Cash Election has been made will be
converted into the right to receive a combination of cash and Peoples Common
Shares. The amount in cash, without interest, will be equal to the product,
rounded to the nearest $0.01, of (x) $18.75 and (y) a fraction (the "Cash
Fraction"), the numerator of which will be a number equal to 32% of the
shares of Gateway Common Stock outstanding at the Effective Time and the
denominator of which will be the total number of shares as to which a Cash
Election has been made. The number of Peoples Common Shares will be equal
the product, rounded to four decimal places, of (x) the Per Share Stock
Consideration and (y) a number equal to one minus the Cash Fraction.
OVERSUBSCRIPTION FOR PEOPLES COMMON SHARES. If the aggregate number of
shares as to which a Stock Election has been made exceeds 68% of the shares of
Gateway Common Stock outstanding at the Effective Time, then:
(i) each share as to which a Cash Election has been made and each share
as to which a No-Election has been made will be converted into the right to
receive $18.75 in cash, without interest; and
(ii) each share as to which a Stock Election has been made will be
converted into the right to receive a combination of cash and Peoples Common
Shares. The number of Peoples Common Shares will be equal to the product,
rounded to four decimal places, of (x) the Per Share Stock Consideration and
(y) a fraction (the "Stock Fraction"), the numerator of which will be a
number equal to 68% of the shares of Gateway Common Stock outstanding at the
Effective Time and the denominator of which will be the total number of
shares as to which a Stock Election has been made. The amount of cash,
without interest, will be equal to the product, rounded to the nearest
$0.01, of (x) $18.75 and (y) a number equal to one minus the Stock Fraction.
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NO GUARANTEE OF CHOSEN CONSIDERATION OR EQUIVALENT VALUE. Because the
Merger Agreement provides that 68% of the aggregate Merger Consideration payable
to holders of Gateway Common Stock in the Merger will be comprised of Peoples
Common Shares, no guarantee can be given that the election of any given
stockholder of Gateway will be fully honored. Rather, the election by each
stockholder will be subject to the election, allocation and proration procedures
described herein. Thus stockholders may not receive their requested form of
consideration or combination thereof.
ELECTION PROCEDURES. All Elections will be required to be made on a Letter
of Transmittal and Election Form. To make an effective Election with respect to
shares of Gateway Common Stock, the holder thereof must, in accordance with the
Letter of Transmittal and Election Form, (i) complete properly and return the
Letter of Transmittal and Election Form to the Exchange Agent, (ii) deliver
therewith his or her Gateway Stock Certificates with respect to such shares (or
an appropriate guarantee of delivery thereof), and (iii) deliver therewith any
other required documents, prior to 5:00 p.m. on the 10th business day following
the mailing the of Letter of Transmittal and Election Form (the "Election
Deadline.").
GATEWAY STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY
AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT UNTIL A GATEWAY STOCKHOLDER
HAS RECEIVED THE LETTER OF TRANSMITTAL AND ELECTION FORM.
A holder of shares of Gateway Common Stock having a preference as to the
form of consideration to be received for his or her shares of Gateway Common
Stock should make an Election because shares as to which an Election has been
made will be given priority in allocating such consideration over shares as to
which an Election is not received. NEITHER GATEWAY NOR THE GATEWAY BOARD OF
DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER STOCKHOLDERS SHOULD ELECT TO
RECEIVE THE PER SHARE CASH CONSIDERATION OR THE PER SHARE STOCK CONSIDERATION IN
THE MERGER. EACH HOLDER OF GATEWAY COMMON STOCK MUST MAKE HIS OR HER OWN
DECISION WITH RESPECT TO SUCH ELECTION.
EXAMPLES OF MERGER CONSIDERATION TO BE RECEIVED. The following table sets
forth examples of how 100 shares of Gateway Common Stock will be converted and
the Merger Consideration to be received by a Gateway stockholder based upon
various Election results, assuming that the Peoples Market Value is $37.75 and
the Exchange Ratio is .04978. The Per Share Cash Consideration is fixed at
$18.75. The decimals are presented for demonstration purposes only since cash
will be issued in lieu of fractional shares.
<TABLE>
<CAPTION>
ACTUAL ELECTION
RESULTS OF ALL IF GATEWAY STOCKHOLDER IF GATEWAY STOCKHOLDER
GATEWAY STOCKHOLDERS ELECTS 100% STOCK ELECTS 100% CASH
- - -------------------------------- --------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
CASH TO PEOPLES COMMON CASH TO PEOPLES COMMON SHARES
PERCENT PERCENT BE SHARES TO BE TO BE
ELECT STOCK ELECT CASH RECEIVED BE RECEIVED RECEIVED RECEIVED
- - --------------- --------------- --------- ---------------- ---------- ----------------------
90% 10% $ 458.33 37.6116 $ 1,875.00 None
75 25 175.00 45.1339 1,875.00 None
68 32 None 49.7800 1,875.00 None
50 50 None 49.7800 1,200.00 17.9208
32 68 None 49.7800 882.35 26.3541
25 75 None 49.7800 625.00 33.1867
</TABLE>
NO FRACTIONAL PEOPLES COMMON SHARES TO BE ISSUED. No fractional Peoples
Common Shares will be issued in the Merger to holders of shares of Gateway
Common Stock. Each holder of shares of Gateway Common Stock who otherwise would
have been entitled to a fraction of a Peoples Common Share will receive in lieu
thereof, at the time of surrender of the certificate or certificates
representing such holder's shares of Gateway Common Stock, an amount of cash
(without interest) determined by multiplying the fractional share interest to
which such holder would otherwise be entitled by the Peoples Market Value.
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TREATMENT OF OUTSTANDING STOCK OPTIONS FOR GATEWAY COMMON STOCK. The Merger
Agreement provides that each option with respect to Gateway Common Stock (a
"Gateway Stock Option") that was issued pursuant to Gateway's Stock Option Plan
on June 29, 1995 and is outstanding and exercisable at the Effective Time will
be cancelled and converted into the right to receive from Gateway or Peoples,
subject to required withholding taxes, if any, (x) cash and Peoples Common
Shares in an aggregate amount equal to the difference between the exercise price
of such Gateway Stock Option and the Merger Consideration for each share of
Gateway Common Stock subject to such Gateway Stock Option (the "Option Payment
Amount"), with 32% of such Option Payment Amount to be paid in cash and 68% of
such Option Payment Amount to be paid in Peoples Common Shares (with any
fractional shares converted to cash), determined as follows: (A) if the Peoples
Market Value is equal to or less than $37.66 but equal to or greater than
$27.84, the quotient determined by dividing (x) $3.57 by (y) the Peoples Market
Value, (B) if the Peoples Market Value is less than $27.84, 0.1282 shares or (C)
if the Peoples Market Value is greater than $37.66, 0.0948 shares. The aggregate
consideration to be paid to Gateway Stock Option holders pursuant to this
formula is based on appreciation of $5.25 for each option.
For options granted on June 29, 1996, the aforementioned formula will apply
except that the aggregate consideration to be paid to Gateway option holders
will be based on appreciation of $4.625 and determined as follows: (A) if the
Peoples Market Value is equal to or less than $37.66 but equal to or greater
than $27.84, the quotient determined by dividing (x) $3.145 by (y) the Peoples
Market Value, (B) if the Peoples Market Value is less than $27.84, 0.1130 shares
or (C) if the Peoples Market Value is greater than $37.66, 0.0835 shares.
For options granted on June 29, 1997, the above formula will apply except
that the aggregate consideration to be paid to Gateway option holders shall be
based on appreciation of $1.1875 and determined as follows: (A) if the Peoples
Market Value is equal to or less than $37.66 but equal to or greater than
$27.84, the quotient determined by dividing (x) 0.8075 by (y) the Peoples Market
Value, (B) if the Peoples Market Value is less than $27.84, 0.0290 shares or (C)
if the Peoples Market Value is greater than $37.66, 0.0214 shares.
CONDITIONS TO THE MERGER
The Merger Agreement provides that consummation of the proposed transaction
is subject to the satisfaction of certain conditions, or the waiver of such
conditions by the party entitled to do so, at or before the Effective Time. Each
of the parties' obligations under the Merger Agreement is subject to the
following conditions, among others: (a) all corporate action necessary to
authorize the execution and delivery of the Merger Agreement and consummation of
the transactions contemplated thereby has been duly and validly taken by
Peoples, PAC and Gateway, including approval by the requisite vote of the
respective stockholders of PAC and Gateway of the Merger Agreement; (b) all
approvals and consents for the transactions contemplated by the Merger Agreement
from the Federal Reserve and any other governmental entity, the approval or
consent of which is required for the consummation of the Merger, and the other
transactions contemplated thereby have been received and all statutory waiting
periods in respect thereof shall have expired; (c) none of Peoples, Gateway or
their respective subsidiaries is subject to any statute, rule, regulation,
injunction or other order or decree which shall have been enacted, entered,
promulgated or enforced by any governmental or judicial authority which
prohibits, restricts or makes illegal consummation of the Merger or any of the
other transactions contemplated thereby; (d) the Registration Statement has
become effective under the Securities Act, and Peoples shall have received all
state securities laws or "blue sky" permits and other authorizations or there
shall be exemptions from registration requirements necessary to issue the
Peoples Common Shares in connection with the Merger, and neither the
Registration Statement nor any such permit, authorization or exemption shall be
subject to a stop order or threatened stop order by the Commission or any state
securities authority; (e) the Peoples Common Shares to be issued in connection
with the Merger have been approved for listing on The Nasdaq National Market;
and (f) Peoples and Gateway have received an opinion issued by Elias, Matz,
Tiernan &
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<PAGE>
Herrick L.L.P., to the effect that, among other things, the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and that (i) no gain or loss will be recognized
by Peoples, PAC or Gateway as a result of the Merger; (ii) no gain or loss will
be recognized by the stockholders of Gateway who exchange their Gateway Common
Stock solely for Peoples Common Shares pursuant to the Merger (except with
respect to cash received in lieu of a fractional share interest in Peoples
Common Shares); (iii) the tax basis of the Peoples Common Shares received by
stockholders who exchange all of their Gateway Common Stock solely for Peoples
Common Shares in the Merger will be the same as the tax basis of the Gateway
Common Stock surrendered in exchange therefor (reduced by any amount allocable
to a fractional share interest for which cash is received); and (iv) any
stockholders of Gateway who receive cash in exchange for their shares of Gateway
Common Stock will recognize gain, if any, equal to the lesser of (i) the excess
of the amount of cash plus the fair market value of any Peoples Common Shares
received in the Merger over the shareholder's adjusted tax basis in their
Gateway Common Stock, or (ii) the amount of cash received. See "The
Merger--Certain Federal Income Tax Consequences."
In addition to the foregoing conditions, Peoples' and PAC's obligations
under the Merger Agreement are conditioned upon, among others: (a) the
representations and warranties of Gateway set forth in the Merger Agreement are
true and correct as of June 17, 1997 and as of the Effective Time (or on the
date when made in the case of any representation and warranty which specifically
relates to an earlier date), provided, however, that notwithstanding anything in
the Merger Agreement to the contrary, this condition will be deemed to be
satisfied even if such representations or warranties are not true and correct
unless the failure of any of the representations or warranties to be so true and
correct would have, individually or in the aggregate, a material adverse effect
on the financial condition, results of operations or business of Gateway on a
consolidated basis or on the ability of Peoples, PAC and Gateway, as applicable,
to consummate the Merger; (b) Gateway has performed in all material respects all
obligations and covenants required to be performed by it pursuant to the Merger
Agreement on or prior to the Effective Time; (c) Peoples has received the
written opinion of Elias, Matz, Tiernan & Herrick L.L.P., and Adkins & Adkins
Attorneys, P.S.C., or another general corporate law firm licensed to practice in
Kentucky, dated the date of the Closing, with respect to certain legal matters;
(d) the dissenters' shares constitute not more than 10% of the outstanding
shares of Gateway Common Stock immediately prior to the Effective Time; (e) each
of the directors of Gateway has executed and delivered the Stockholders
Agreement; and (f) Gateway has furnished Peoples with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions as Peoples may reasonably request.
In addition to the conditions set forth above as applicable to both parties,
Gateway's obligations under the Merger Agreement are conditioned upon, among
others: (a) the representations and warranties of Peoples as set forth in the
Merger Agreement are true and correct as of June 17, 1997 and as of the
Effective Time (or on the date when made in the case of any representation and
warranty which specifically relates to an earlier date), provided, however, that
notwithstanding anything in the Merger Agreement to the contrary, this condition
will deemed to be satisfied even if such representations or warranties are not
true and correct unless the failure of any of the representations or warranties
to be so true and correct would have, individually or in the aggregate, a
material adverse effect on the financial condition, results of operations or
business of Peoples on a consolidated basis or on the ability of Peoples and
Gateway, as applicable, to consummate the Merger; (b) Peoples and PAC have
performed in all material respects all obligations and complied with all
covenants required to be performed and complied with by them pursuant to the
Merger Agreement on or prior to the Effective Time; (c) Gateway has received the
written opinion of Charles R. Hunsaker, General Counsel to Peoples, or another
general corporate law firm licensed to practice in Ohio, dated the date of the
Closing, that address certain legal matters; (d) Gateway has received an opinion
from FBR dated as of the date the Proxy Statement/ Prospectus is mailed to the
Gateway stockholders to the effect that, in its opinion, the consideration to be
paid to stockholders of Gateway is fair to such stockholders from a financial
point of view; and (f) Peoples
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<PAGE>
and/or PAC have furnished Gateway with such certificates of their respective
officers or others and such other documents to evidence fulfillment of the
conditions as Gateway may reasonably request.
PROCEDURES FOR EXCHANGE OF GATEWAY STOCK CERTIFICATES
Within three business days of the Effective Time, Peoples will deposit, or
will cause to be deposited, with the Exchange Agent, for the benefit of the
holders of shares of Gateway Common Stock, an estimated amount of cash
sufficient to pay the aggregate Cash Consideration and the aggregate amount of
cash to be paid in lieu of fractional shares, and Peoples shall reserve for
issuance with its transfer agent and registrar the aggregate Stock Consideration
to be issued.
The Letter of Transmittal and Election Form to be mailed within three
business days after the Effective Time will specify that delivery will be
effected, and risk of loss and title to Gateway Stock Certificates representing
Peoples Common Shares shall pass, only upon proper delivery of the Gateway Stock
Certificates to the Exchange Agent and shall include instructions for use in
effecting the surrender of the Gateway Stock Certificates in exchange for
certificates evidencing Peoples Common Shares or cash, as appropriate.
Upon the proper surrender to the Exchange Agent of a Gateway Stock
Certificate for cancellation, together with such Letter of Transmittal and
Election Form, duly executed and completed in accordance with the instructions
thereto, and such other documents as may be reasonably required pursuant to such
instructions, the holder of such Gateway Stock Certificate will be entitled to
receive in exchange therefor the appropriate Merger Consideration. As soon as
practicable after completion of the allocations of the Merger Consideration and
in no event later than ten business days after the Election Deadline, the
Exchange Agent will distribute Peoples Common Shares and cash as provided in the
Merger Agreement.
No dividends or other distributions declared or made after the Effective
Time with respect to Peoples Common Shares with a record date after the
Effective Time will be paid to the holder of any unsurrendered Gateway Stock
Certificate with respect to the Peoples Common Shares represented thereby, and
no cash payment in lieu of any fractional shares will be paid to any such
holder, until the holder of such Gateway Stock Certificate surrenders such
certificate. Subject to the effect of escheat, tax or other applicable laws,
following surrender of any such Certificate, the holder of whole Peoples Common
Shares issued in exchange therefor, will be paid, without interest, (i) the
amount of any cash payable with respect to such whole Peoples Common Shares, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole Peoples Common Shares.
At the Effective Time, the stock transfer books of Gateway will be closed
and there will be no further registration of transfers of shares of Gateway
Common Stock thereafter on the records of Gateway. From and after the Effective
Time, the holders of certificates representing shares of Gateway Common Stock
outstanding immediately prior to the Effective Time will cease to have any
rights with respect to such shares of Gateway Common Stock, except as otherwise
provided in the Merger Agreement or by law.
Any portion of the aggregate Per Share Cash Consideration or the proceeds of
any investments thereof that remains unclaimed by the stockholders of Gateway
for six (6) months after the Effective Time will be repaid by the Exchange Agent
to Peoples upon the written request of Peoples. After such request is made, any
stockholder of Gateway will look only to Peoples for payment and issuance of the
Merger Consideration deliverable in respect of each share of Gateway Common
Stock such stockholder holds as determined pursuant to the Merger Agreement
without any interest thereon. If outstanding Gateway Stock Certificates are not
surrendered or the payment for such shares is not claimed prior to the date on
which such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items will, to the extent permitted
by abandoned property and any other applicable law, become the property of
Peoples (and to the extent not in its possession shall be paid over to it), free
and clear of all claims or interest of any person previously entitled to such
claims. Notwithstanding the foregoing, neither
36
<PAGE>
Peoples, the Exchange Agent nor any other person will be liable to any former
holder of Gateway Common Stock for any amount delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
Peoples and the Exchange Agent will be entitled to rely upon Gateway's stock
transfer books to establish the identity of those persons entitled to receive
the Merger Consideration, which books will be conclusive with respect thereto.
In the event of a dispute with respect to ownership of stock represented by any
Gateway Stock Certificate, Peoples and the Exchange Agent will be entitled to
deposit any consideration represented thereby in escrow with an independent
third party and thereafter be relieved with respect to any claims thereto.
In the event any Gateway Stock Certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Gateway Stock Certificate to be lost, stolen or destroyed and, if required
by the Exchange Agent, the posting by such person of a bond in such amount as
the Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Gateway Stock Certificate, the Merger
Consideration deliverable in respect thereof pursuant to the Merger Agreement
will be paid to the stockholder.
REGULATORY APPROVALS
Consummation of the Merger is subject to, among other things, prior receipt
of all requisite approvals from the Federal Reserve and any other regulatory
agency of competent jurisdiction necessary to consummate the Merger and
expiration of all regulatory waiting periods applicable to the Merger. Peoples
has applied to and received approval from the Federal Reserve pursuant to the
Bank Holding Company Act of 1956, as amended, to acquire Gateway and
Catlettsburg Federal. No other regulatory approval is necessary in connection
with the transactions contemplated by the Merger Agreement.
BUSINESS PENDING THE MERGER
Under the terms of the Merger Agreement, Gateway has agreed not to take
certain actions, nor permit its subsidiaries to take certain actions, prior to
consummation of the Merger without the prior written consent of Peoples,
including, among other things, the following: (i) change any provision of the
Articles of Incorporation or other governing instrument or Bylaws of Gateway or
its subsidiaries; (ii) except for the issuance of Gateway Common Stock pursuant
to the terms of outstanding stock options, change the number of shares of its
authorized or issued capital stock or issue or grant any option, warrant, call,
commitment, subscription, award, right to purchase or agreement of any character
relating to the authorized or issued capital stock of Gateway or its
subsidiaries, or any securities convertible into shares of such capital stock,
or split, combine or reclassify any shares of its capital stock, or redeem or
otherwise acquire any shares of such capital stock; (iii) declare, set aside or
pay any dividend or other distribution (whether in cash, stock or property or
any combination thereof) in respect of the capital stock of Gateway or its
subsidiaries, except for regular quarterly cash dividends not in excess of $0.10
per share of Gateway Common Stock; (iv) grant any severance or termination pay
(other than pursuant to binding contracts of Gateway currently in effect and
disclosed pursuant to the Merger Agreement), to, or enter into or amend any
employment, consulting or compensation agreement with, any of its directors,
officers or employees; or award any increase in compensation or benefits to its
directors, officers or employees, except, in the case of employees, such as are
granted each January in the ordinary course of business in an amount and
consistent with past practices and policies; (v) subject to certain exceptions,
enter into or modify any employee benefit plan or arrangement, or any trust
agreement related thereto, in respect of any of its directors, officers or
employees; or make any contributions to Gateway's Employee Stock Ownership Plan
or any other defined contribution plan or any defined benefit pension or
retirement plan other than in the ordinary course of business consistent with
past practice; (vi) sell or dispose of any significant assets or incur any
significant liabilities, or acquire in any manner whatsoever (other than to
realize upon collateral for a defaulted loan) any business or entity; (vii) make
any capital expenditures in excess of $10,000 in the
37
<PAGE>
aggregate, other than expenditures necessary to maintain existing assets in good
repair and other than as disclosed pursuant to the Merger Agreement; (viii) file
any applications or make any contract with respect to branching or site location
or relocation; (ix) make any material change in its accounting methods or
practices, other than changes required by generally accepted accounting
principles, or change any of its methods of reporting income and deductions for
federal income tax purposes, except as required by changes in laws or
regulations; (x) change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as may be
required by applicable law; (xi) engage in any transaction with an "affiliated
person" or "affiliate," in each case as defined in the Merger Agreement; (xii)
enter into any futures contract, option or other agreement or take any other
action for purposes of hedging the exposure of its interest-earning assets and
interest-bearing liabilities to changes in market rates of interest; (xiii) take
any action that would result in any of its representations and warranties
contained in the Merger Agreement not being true and correct in any material
respect at the Effective Time; or (xiv) agree to do any of the foregoing.
Furthermore, each party has agreed to provide the other party and its
representatives with such financial data and other information with respect to
its business and properties as such party from time to time reasonably requests.
Each party will cause all non-public financial and business information obtained
by it from the other to be treated confidentially. If the Merger is not
consummated, each party will either return to the other all non-public financial
statements, documents and other materials previously furnished by such party or
destroy such information.
ACQUISITION PROPOSALS
Until the Effective Time of the Merger or the earlier termination of the
Merger Agreement, neither Gateway nor its subsidiaries will, nor will Gateway or
its subsidiaries authorize or permit any of its directors, officers or employees
or any investment banker, financial advisor, attorney, accountant or other
representative of Gateway or its subsidiaries to, directly or indirectly,
encourage or solicit or hold discussions or negotiations with, or provide any
information to, any person, entity or group (other than Peoples) concerning any
merger, sale of substantial assets or liabilities not in the ordinary course of
business, sale of shares of capital stock or similar transactions involving
Gateway or its subsidiaries (an "Acquisition Transaction"); provided, however,
that Gateway may provide information in connection with an unsolicited possible
Acquisition Transaction if the Board of Directors of Gateway, after consulting
with counsel, determines in the exercise of its fiduciary responsibilities that
such information should be furnished. Under the Merger Agreement, Gateway is
required to promptly communicate to Peoples the terms of any proposal which it
may receive in respect of any such Acquisition Transaction and to provide
Peoples with copies of (i) any written legal advice provided to the Board of
Directors of Gateway, (ii) all such written inquiries or proposals and (iii) an
accurate and complete written synopsis of all such oral inquiries or proposals.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains representations and warranties of Peoples and
Gateway which are customary in transactions of this type, including, but not
limited to, representations and warranties concerning: (a) the organization and
capitalization of Peoples and its subsidiaries and Gateway and its subsidiaries;
(b) the due authorization, execution, delivery and enforceability of the Merger
Agreement; (c) consents or approvals required, and the lack of conflicts or
violations under applicable articles of incorporation, bylaws, instruments and
laws, with respect to the transactions contemplated by the Merger Agreement; (d)
the documents to be filed by Peoples and Gateway with the Commission and other
regulatory agencies; (e) the conduct of business in the ordinary course and
absence of certain changes; (f) financial statements; (g) compliance with laws;
and (h) the allowance for loan losses and real estate owned.
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<PAGE>
EFFECTIVE TIME OF THE MERGER; TERMINATION AND AMENDMENT
The Effective Time of the Merger will occur upon the filing of a Certificate
of Merger with the Secretary of State of the State of Ohio pursuant to the OGCL
and Articles of Merger with the Secretary of State of the Commonwealth of
Kentucky pursuant to the KBCA, unless a later date and time is specified as the
effective time in such Certificate of Merger and Articles of Merger. Such
filings will occur only after the receipt of all requisite regulatory approvals,
approval of the Merger Agreement by the requisite vote of Gateway's
stockholders, the expiration of all applicable regulatory waiting periods and
the satisfaction or waiver of all other conditions to the Merger.
A closing (the "Closing") will take place immediately prior to the Effective
Time at 10:00 a.m. on or before the tenth day following the receipt of all
necessary regulatory or governmental approvals and consents and the expiration
of all statutory waiting periods in respect thereof and the satisfaction or
waiver (to the extent permitted) of all the conditions to consummation of the
Merger, or on such other date as the parties may mutually agree upon.
The Merger Agreement may be terminated, either before or after approval by
the stockholders of Peoples and Gateway, as follows: (a) by mutual written
consent of the parties; (b) by Peoples or Gateway (i) if the Effective Time has
occurred on or prior to June 17, 1998 or (ii) if a vote of the stockholders of
Gateway is taken and such stockholders fail to approve the Merger Agreement at
the meeting of stockholders (or any adjournment thereof); unless the failure of
such occurrence is due to the failure of the party seeking to terminate the
Merger Agreement to perform or observe its agreements set forth therein to be
performed or observed by such party at or before the Effective Time; (c) by
Peoples or Gateway upon written notice to the other 30 or more days after the
date upon which any application for a regulatory or governmental approval
necessary to consummate the Merger and the other transactions contemplated by
the Merger Agreement has been denied or withdrawn at the request or
recommendation of the applicable regulatory agency or governmental authority,
unless within such 30-day period a petition for rehearing or an amended
application is filed or noticed, or 30 or more days after any petition for
rehearing or amended application is denied; (d) by Peoples in writing if Gateway
has, or by Gateway in writing if Peoples has, breached (i) any covenant or
undertaking contained in the Merger Agreement, or (ii) any representation or
warranty contained in the Merger Agreement, which breach would have a material
adverse effect on the business, operations, assets or financial condition of
Gateway and its subsidiaries or Peoples and its subsidiaries, as applicable,
taken as a whole, or upon the consummation of the transactions contemplated by
the Merger Agreement, in any case if such breach has not been cured by the
earlier of 30 days after the date on which written notice of such breach is
given to the party committing such breach or the Effective Time; provided that
either party may terminate the Merger Agreement on the basis of any such
material breach of any representation or warranty, notwithstanding any
qualification therein relating to the knowledge of the other party; (e) by
Peoples or Gateway if any of the applications for prior approval referred to in
the Merger Agreement are denied or are approved contingent upon the satisfaction
of any condition or requirement which, in the reasonable opinion of the Board of
Directors of Peoples, would materially impair the value of Gateway and its
subsidiaries to Peoples, and the time period for appeals and requests for
reconsideration has run; (f) by Gateway or Peoples, by action of a majority of
its respective Board of Directors, in the event the Peoples Market Value is less
than $27.84; or (g) by Gateway, without any liability for expenses or damages by
or to Peoples whatsoever if Peoples: (i) changes any provision of the Articles
of Incorporation or other governing instrument or Regulations of Peoples or PAC
in a manner which would adversely affect in any manner the terms of the Peoples
Common Shares or the ability of Peoples and PAC to consummate the transactions
contemplated by the Merger Agreement; (ii) effects any recapitalization,
reclassification, stock split or like change in capitalization; or (iii)
participates in any merger, consolidation or other transaction in which Peoples
is not the surviving corporation or sells, transfers or otherwise disposes of
all or substantially all of the consolidated assets or deposit liabilities
(other than loans and investments in the ordinary course) or the capital stock
of The Peoples Banking and
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Trust Company, The First National Bank of Southeastern Ohio or Russell Federal
Savings Bank directly or indirectly held by it.
To the extent permitted under applicable law, at any time prior to the
consummation of the Merger, whether before or after approval thereof by the
stockholders of Gateway, the parties may by written agreement (a) amend the
Merger Agreement, (b) extend the time for the performance of any of the
obligations or other acts of the other parties thereto, (c) waive any
inaccuracies in the representations and warranties contained therein or in any
document delivered pursuant thereto, or (d) waive compliance with any of the
agreements or conditions contained therein. However, after any approval of the
Merger Agreement by the stockholders of Gateway, there may not be, without
further approval of such stockholders, any amendment or waiver of the Merger
Agreement which modifies either the amount or the form of the Merger
Consideration to be delivered to the stockholders of Gateway.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Gateway Board of Directors,
stockholders should be aware that members of Gateway's management and the
Gateway Board of Directors have interests in the Merger that are in addition to
the interests of stockholders generally. The Gateway Board of Directors was
aware of these interests and considered them, among other matters, in approving
the Merger Agreement and the transactions contemplated thereby.
OPERATIONS OF GATEWAY AND CATLETTSBURG FEDERAL. Peoples intends to maintain
Gateway as a separate holding company subsidiary of Peoples for a period of not
less than two years from the Effective Time. In addition, the Merger Agreement
provides that Peoples will maintain Catlettsburg Federal as a separate
subsidiary of Gateway (or a successor or alternative subsidiary of Peoples) for
a period of not less than two years from the Effective Time. Following such
two-year period, Peoples may, in its sole discretion, determine to merge or
consolidate Catlettsburg Federal with other Peoples subsidiaries as it
determines to be appropriate.
BOARDS OF DIRECTORS OF GATEWAY AND CATLETTSBURG FEDERAL. Pursuant to the
Merger Agreement, effective as of the Effective Time, Rebecca R. Jackson and
John H. Fugeman, who are presently directors of Gateway (in the event of the
death, disability or other inability to serve, Gateway and Peoples shall
mutually agree upon another individual presently or at such time serving as a
director of Gateway to replace such person in this capacity) in addition to
Robert E. Evans, RobRoy Walters and Carol A. Schneeberger of Peoples, will be
elected to the Board of Directors of Gateway and, David B. Baker, Robert E.
Evans, Norman R. Menshouse, Carol A. Schneeberger, RobRoy Walters and Joseph H.
Wesel of Peoples will be elected to the Board of Directors of Catlettsburg
Federal. The existing directors of Catlettsburg Federal may continue to serve as
directors of Catlettsburg Federal.
OFFICERS AND EMPLOYEES OF GATEWAY AND CATLETTSBURG FEDERAL. Pursuant to the
Merger Agreement, Rebecca R. Jackson, the current President and Chief Executive
Officer of Catlettsburg Federal, will continue to be retained by Catlettsburg
Federal in accordance with the terms of her employment agreement. However,
Peoples does not intend to have Ms. Jackson serve as Chief Executive Officer of
Gateway after the Merger nor does it intend to renew her employment agreement at
the annual anniversary date of such agreement. All employees of Gateway and
Catlettsburg Federal immediately prior to the Effective Time will remain
employees of Gateway and Catlettsburg Federal at the Effective Time and, except
for Rebecca R. Jackson, will be employed by Gateway and Catlettsburg Federal as
at-will employees at the same salary they are receiving from Gateway or
Catlettsburg Federal. Peoples does not intend to impose job eliminations at
Gateway or Catlettsburg Federal as a result of the Merger.
TRANSFERRED EMPLOYEES. All employees of Gateway or it subsidiaries
immediately prior to the Effective Time who are employed by Peoples or its
subsidiaries immediately following the Effective Time ("Transferred Employees")
will be covered by Peoples' employee benefit plans on substantially the same
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basis as any employee of Peoples or its subsidiaries in a comparable position.
Notwithstanding the foregoing, Peoples may determine to continue any of the
Gateway benefit plans for Transferred Employees in lieu of offering
participation in Peoples' benefit plans providing similar benefits (e.g.,
medical and hospitalization benefits), to terminate any of the Gateway benefit
plans, or to merge any such benefit plans with Peoples' benefit plans, provided
the result is the provision of the benefits to Transferred Employees that are
substantially similar to the benefits provides to Peoples' employees generally.
Except as specially provided in the Merger Agreement and as otherwise prohibited
by law, Transferred Employees' service with Gateway will be recognized as
service with Peoples for purposes of eligibility to participate and vesting, if
applicable (but not for purposes of benefit accrual) under Peoples' benefit
plans, subject to applicable break-in-service rules.
HEALTH PLANS. Peoples has agreed that any pre-existing condition,
limitation or exclusion in its medical, long-term disability and life insurance
plans will not apply to Transferred Employees or their covered dependents who
are covered under a medical or hospitalization indemnity plan maintained by
Gateway at the Effective Time and who then change coverage to Peoples' medical
or hospitalization indemnity health plan at the time such Transferred Employees
are first given the option to enroll.
GATEWAY ESOP. The Merger Agreement provides that prior to the Effective
Time, Gateway may amend the Gateway Employee Stock Ownership Plan (the "Gateway
ESOP") to provide for: (i) elimination of any requirement for a participant to
be employed as of the last day of the year to receive an employer contribution,
other annual additions or allocations; (ii) clarification that any unallocated
assets remaining after payment of the Gateway ESOP loan will be treated as
earnings; and (iii) such other changes as may be necessary under the Tax Reform
Act of 1986, as amended. From and after June 17, 1997, Gateway may make no
further contributions to the Gateway ESOP, except in an amount to pay any
required installment payment on the Gateway ESOP loan. In addition, prior to the
Effective Time, Gateway and its representatives, with the full cooperation of
Peoples, will use their best efforts to: (i) submit to an Application of
Determination upon Termination relating to the Gateway ESOP which discloses the
proposed allocation of the cash remaining in the suspense account (after the
repayment of the Gateway ESOP loan) without regard to Section 415 of the Code;
and (ii) maintain the status of the Gateway ESOP as a plan qualified under
Section 401(a) and 4975 of the Code. At the Effective Time or as soon thereafter
as is practicable and permissible under the Code, Gateway and Peoples will cause
the Gateway ESOP loan to be repaid with the Merger Consideration received by the
Gateway ESOP with respect to unallocated shares of Gateway Common Stock. If the
IRS issues a favorable determination letter with respect to termination of the
Gateway ESOP and proposed allocation of the remaining suspense account to
participants, Peoples and Gateway will, as soon thereafter as practicable,
distribute the Gateway ESOP benefits to the Gateway ESOP participants pursuant
to the terms of the Gateway ESOP. If the IRS determines that it will not issue a
favorable determination letter with respect to the proposed allocation because
of the Section 415 limitations, then the maximum allocations of earnings will be
made to a participant on a plan termination basis consistent with the
limitations under Section 415 of the Code. Any remaining cash attributable to
unallocated shares of Gateway Common Stock will remain in the suspense account
and be allocated to the accounts of such participant without a violation of the
limitation in Section 415. Upon the last distribution of the cash or other
assets attributable to unallocated shares remaining in the suspense account, the
Gateway ESOP will be terminated in accordance with applicable law.
In the event that, following the Effective Time, the employment of any
Gateway ESOP participant who was employed by Gateway is involuntarily terminated
without cause by Gateway, such participant (or his or her beneficiary or
beneficiaries) will receive a cash bonus from Gateway as soon as practicable
after the date on which the final allocation of earnings from the suspense
account is made, equal to the amount such participant would have received if he
or she had continued to be a participant in the Gateway ESOP, at his or her
then-current annualized compensation as such term is defined in the Gateway
ESOP, through the date of the termination of the ESOP Trust; provided, however,
that neither Peoples nor Gateway will
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be obligated to make any such cash payment under any circumstances in which such
payments are not or will not be deductible because of Section 280G of the Code.
Peoples and the Gateway will adopt such additional amendments to the Gateway
ESOP as may be reasonably required by the IRS as a condition to granting a
favorable determination letter, provided that such amendments do not
substantially change the terms outlined above or result in a material adverse
change in the business, operations, assets, financial condition or prospects of
Peoples or Gateway or an additional material liability to Peoples or Gateway.
INDEMNIFICATION; INSURANCE. The Merger Agreement provides that from and
after the Effective Time through the fifth anniversary of the Effective Time,
Peoples (the "Indemnifying Party") will indemnify and hold harmless and provide
directors and officers liability insurance to each present and former director
and officer of Gateway or any Gateway subsidiary determined as of the Effective
Time. From the Effective Time and continuing thereafter, the current officers
and directors of Gateway will be indemnified and provided directors' and
officers' liability insurance by Peoples for their acts and omissions arising
out of matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time exactly as is
provided on the date of the Merger Agreement in Article Five of the Code of
Regulations of Peoples and with the existing directors and officers' liability
insurance policy as of the date of the Merger Agreement, each of which may be
changed, altered, modified or discontinued in good faith and solely if it does
not discriminate against directors or officers of Gateway or any Gateway
subsidiary with respect to the insurance and indemnification so provided for.
Other than as set forth above, no director or executive officer of Gateway
or Peoples has any direct or indirect material interest in the Merger, except in
the case of Gateway directors and executive officers, insofar as ownership of
Gateway Common Stock and existing options might be deemed such an interest.
RESALE CONSIDERATIONS WITH RESPECT TO THE PEOPLES COMMON SHARES
The Peoples Common Shares that will be issued if the Merger is consummated
have been registered under the Securities Act and listed on The Nasdaq National
Market and will be freely transferable, except for Peoples Common Shares
received by persons, including directors and executive officers of Gateway, who
may be deemed to be "affiliates" of Gateway under Rule 145 promulgated under the
Securities Act. Affiliates may not sell their Peoples Common Shares acquired
pursuant to the Merger, except pursuant to an effective registration statement
under the Securities Act covering such Peoples Common Shares or in compliance
with Rule 145 or another applicable exemption from the registration requirements
of the Securities Act. Persons who may be deemed to be affiliates of Gateway
generally include individuals or entities that control, are controlled by, or
are under common control with, Gateway and may include certain officers and
directors of Gateway as well as any stockholders who own more than 10% of the
Gateway Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Elias, Matz, Tiernan & Herrick L.L.P., special counsel to Gateway, has
rendered an opinion to Peoples and Gateway as to the principal federal income
tax consequences expected to result from the Merger. Such opinion is included as
an exhibit to the Registration Statement. Neither the opinion nor this summary
addresses any tax considerations under foreign, state or local laws, or the tax
considerations to certain stockholders in light of their particular
circumstances, including persons who are not United States citizens, or who are
resident aliens, life insurance companies, dealers in securities, tax exempt
entities, stockholders who received their shares through the exercise of
employee stock options or through other compensation arrangements, and
stockholders who do not hold their shares as "capital assets" within the meaning
of Section 1221 of the Code.
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No rulings have been requested from the Internal Revenue Service ("IRS") as
to the federal income tax consequences of the Merger. Stockholders should be
aware that the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is not binding
on the IRS. Stockholders should also be aware that some of the tax consequences
of the Merger are governed by provisions of the Code as to which there are no
final regulations and little or no judicial or administrative guidance. The
opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon the federal
income tax laws as in effect on the date of such opinion and as those laws are
currently interpreted. There can be no assurance that future legislation,
regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements contained herein.
The federal income tax consequences discussed below are conditioned upon,
and the opinion of Elias, Matz, Tiernan & Herrick L.L.P. is based upon, the
accuracy as of the date hereof and at, as of and after the Effective Time of the
Merger of certain assumptions, including, but not limited to, the following
(taking into account for purposes hereof all of the events which are
contemplated under the Merger Agreement): (A) that, pursuant to the Merger, the
holders of Gateway Common Stock receive Peoples Common Shares having a value as
of the Effective Time of the Merger of not less than fifty percent (50%) of the
value of the Gateway Common Stock as of the same date; (B) that following the
Merger, Peoples will continue the historic business of Gateway or use a
significant portion of Gateway's historic business assets in a business; and (C)
that a bona fide corporate business purpose exists for the Merger.
Peoples and Gateway believe that all of the foregoing assumptions are
accurate as of the date hereof, and will be accurate at, as of and after the
Effective Time of the Merger. If either Peoples or Gateway learns before the
Effective Time of the Merger that such assumptions are false and that its
counsel therefore believes that the Merger is unlikely to be treated as a
tax-free reorganization, then additional stockholder approval will be obtained
before consummation of the Merger.
Elias, Matz, Tiernan & Herrick L.L.P. has rendered an opinion to Peoples and
Gateway, based upon the assumptions set forth herein, that the Merger will be
treated as a reorganization within the meaning of Section 368 of the Code and
will have the following federal income tax consequences: (i) no gain or loss
will be recognized by Peoples, PAC or Gateway as a result of the Merger; (ii) no
gain or loss will be recognized by the stockholders of Gateway who exchange
their Gateway Common Stock solely for Peoples Common Shares pursuant to the
Merger (except with respect to cash received in lieu of a fractional share
interest in Peoples Common Shares); (iii) the tax basis of the Peoples Common
Shares received by stockholders who exchange all of their Gateway Common Stock
solely for Peoples Common Shares in the Merger will be the same as the tax basis
of the Gateway Common Stock surrendered in exchange therefor (reduced by any
amount allocable to a fractional share interest for which cash is received); and
(iv) any stockholders of Gateway who receive cash in exchange for their shares
of Gateway Common Stock will recognize gain, if any, equal to the lesser of (a)
the excess of the amount of cash plus the fair market value of any Peoples
Common Shares received in the Merger over the stockholder's adjusted tax basis
in the Gateway Common Stock, or (b) the amount of cash received.
Unless an exception is available under applicable law or regulations, 31% of
the cash portion of the Merger Consideration payable to a stockholder will be
withheld unless that payee provides a tax identification number (social security
number or employer number) and certifies that such number is correct on a Form
W-9 which will be provided with the Letter of Transmittal and Election Form that
will be used to exchange shares of Gateway Common Stock for the Merger
Consideration.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase for financial reporting
purposes. Under this method of accounting, Peoples will record the acquisition
of Gateway at its cost at the Effective Time of the Merger, which cost would
include the cash paid in the Merger, the fair value of the Peoples Common Shares
issued in the Merger and all direct acquisition costs. The purchase price will
be allocated to the
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acquired assets and assumed liabilities of Gateway based upon their estimated
fair values at the Effective Time of the Merger in accordance with generally
accepted accounting principles. The purchase price in excess of the fair values
of the identifiable net assets acquired will be recorded as an intangible asset
and amortized over a period of 15 years for financial accounting purposes. The
reported income of Peoples will include the operations of Gateway after the
Effective Time of the Merger. See "Pro Forma Condensed Consolidated Financial
Statements (Unaudited)."
DISSENTERS' RIGHTS
Any owner of shares of Gateway Common Stock has the right under Subtitle 13
of the KBCA to object to the Merger and demand to be paid in cash the fair value
of such shares upon complying in full with the provisions of Subtitle 13. THE
FOLLOWING DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROVISIONS OF THE
KBCA OR SUBTITLE 13 OF THE KBCA AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THOSE PROVISIONS, A COPY OF WHICH IS ATTACHED HERETO AS APPENDIX C. SUCH
PROVISIONS MUST BE STRICTLY COMPLIED WITH OR A STOCKHOLDER'S DISSENTERS' RIGHTS
WILL BE LOST.
Pursuant to Kentucky Revised Statutes ("KRS") Sections 271B.13-010 to
271B.13-310, any stockholder of Gateway who desires to dissent from the Merger
must deliver a written objection to the Merger to Gateway before the vote on the
Merger at the Special Meeting and must not vote his shares in favor of the
Merger. The failure to vote against the Merger will not constitute a waiver of
the stockholder's dissenter's rights if all statutory requisites are satisfied;
a vote against the proposed Merger will not itself satisfy the notice
requirement of the dissenters' right statute. If the Merger is approved by the
required vote, the surviving corporation must deliver, within ten (10) days
after the date of the Special Meeting, a written notice to each stockholder who
has properly delivered a written objection to the Merger and did not vote in
favor of the Merger. Such notice (the "Dissenters' Notice") must: (i) state
where the dissenter must send a payment demand and when and where the dissenter
must deliver certificates for his shares; (ii) supply a form for the
stockholders' demand for payment; (iii) set a date, not fewer than thirty (30)
days nor more than sixty (60) days after the Dissenters' Notice is delivered, by
which date the surviving corporation must receive the stockholders' payment
demand; and (iv) include a copy of KRS 271B.13-010 to 271B.13-310. A stockholder
who is sent the Dissenters' Notice must demand payment, certify whether he
acquired beneficial ownership of his shares before the date of the first
announcement of the Merger (as set forth in the Dissenters' Notice) and deposit
his or her Gateway Stock Certificates in accordance with the terms of the
Dissenters' Notice. Any stockholder failing to demand payment by the dates
specified in the Dissenters' Notice or failing to deposit his or her Gateway
Stock Certificate at the place and by the times specified in the Dissenters'
Notice will be bound by the terms of the proposed Merger.
At the Effective Time of the Merger, or upon its receipt of a payment demand
from the stockholder, the surviving corporation must pay the amount the
surviving corporation estimates to be the fair value of the shares, plus accrued
interest, to each dissenter who properly submits payment demand and deposits his
shares. The payment must be accompanied by certain of the surviving
corporation's financial statements, a statement of the surviving corporation's
estimate of the fair value of the shares, an explanation of how interest was
calculated and a statement of the dissenters' right to demand payment if
dissatisfied with the payment. The surviving corporation may elect to withhold
payment from any dissenter who became the beneficial owner of shares after the
date of the first announcement of the Merger, in which case the surviving
corporation must send an offer to pay its estimate of the fair value of the
shares, together with a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated and a statement of the
dissenters' right to demand payment if dissatisfied with the offer.
A dissenting stockholder may notify the surviving corporation in writing of
his own estimate of the fair value of the shares and the amount of interest due,
and demand payment of his estimate (less any payment already received), or in
the case of a dissenter who acquired his shares after the first announcement of
the Merger, reject the surviving corporation's offer and demand payment of his
estimate of the fair value of the shares and interest due, if: (i) the dissenter
believes that the amount paid or offered is less than the fair
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value of the shares or that the interest due is incorrectly calculated; (ii) the
surviving corporation fails to make payment within sixty (60) days after the
date set for demanding payment in the Dissenters' Notice, or (iii) if the Merger
does not occur, and the surviving corporation fails to return deposited
certificates within sixty (60) days after the date set for demanding payment. A
dissenter waives his rights to demand payment if dissatisfied with the surviving
corporation's payment for his shares or offer to pay if the dissenter fails to
notify the surviving corporation in writing within thirty (30) days after the
surviving corporation made or offered payment for his shares.
If a dissenter's demand for payment remains unsettled, the surviving
corporation must commence a proceeding within sixty (60) days after receiving
payment demand in the Circuit Court of Boyd County, Kentucky, and petition the
Court to determine the fair value of the shares and accrued interest. If the
surviving corporation does not commence the proceeding within the sixty (60) day
period, it must pay each dissenter whose demand remains unsettled the amount the
dissenter demanded. The surviving corporation also must make all dissenters
whose demands remain unsettled parties to the proceeding. Each dissenter will be
entitled to judgment for the amount, if any, for which the Court finds the fair
value of his shares, plus interest, exceeds the amount paid by the surviving
corporation, or the fair value plus accrued interest of any shares for which the
surviving corporation offered to pay its estimate of the fair value of such
shares.
All costs of the proceedings will be assessed against the surviving
corporation, except the Court may assess the costs against all or some of the
dissenters, in amounts the Court finds equitable, to the extent the Court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment. The Court may also assess the fees and expenses of counsel and experts
for the respective parties in the amount the Court finds equitable, (i) against
the surviving corporation and in favor of any or all dissenters, if the Court
finds the surviving corporation did not substantially comply with the
requirements of KRS 271B.13-200 to 271B.13-280, or (ii) against either the
surviving corporation or a dissenter, in favor of any other party, if a Court
finds the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith. If the Court finds that the
services of counsel for any dissenter was of substantial benefit to other
dissenters similarly situated and that the fees for those services should not be
assessed against the surviving corporation, the Court may award to these
counselors reasonable fees to be paid out of the amounts awarded the dissenters
who were benefited.
The foregoing summary of the rights of dissenting stockholders is qualified
in its entirety by reference to the provisions of KRS Sections 271B.13-010 to
271B.13- 310, which are set forth in full in Appendix C to this Proxy
Statement/Prospectus.
It is a condition to Peoples' obligation to consummate the Merger that the
number of dissenters' shares be less than 10% of the Gateway Common Stock
immediately prior to the Effective Time. See "The Merger--Conditions to the
Merger." Peoples has reserved the right to waive this condition at any time.
EXPENSES OF THE MERGER
The Merger Agreement provides that Peoples and Gateway will each bear and
pay all costs and expenses incurred by it in connection with the transactions
contemplated by the Merger Agreement, including, without limitation, legal,
accounting, investment banking and printing expenses, provided, however, that
Peoples and Gateway will share equally in the costs of printing the Registration
Statement and this Proxy Statement/Prospectus.
In order to increase the likelihood that the transactions contemplated by
the Merger Agreement will be consummated, the Merger Agreement provides that if
an Acquisition Transaction has occurred and the Gateway Board of Directors is
excused from recommending approval of the Merger to the Gateway stockholders and
the Gateway stockholders do not approve the Merger Agreement, then in
consideration of Peoples' costs and expenses in connection with the Merger
Agreement and the transactions contemplated thereunder, Gateway will pay
$300,000 to Peoples as an agreed-upon termination fee. In the event that the
Merger Agreement is terminated on account of an intentional breach of any of the
representations
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and warranties or of any of the covenants or agreements set forth therein,
Gateway will pay to Peoples, in the case of a breach by Gateway, or Peoples will
pay to Gateway, in the case of a breach by Peoples, the sum of $600,000 as
agreed-upon liquidated damages.
STOCKHOLDERS AGREEMENT
In conjunction with the Merger Agreement, Peoples has also entered into a
Stockholders Agreement with each of the directors of Gateway. Pursuant to such
Stockholders Agreement, each of the directors of Gateway has agreed, among other
things, not to sell, pledge, transfer or otherwise dispose of his or her shares
of Gateway Common Stock prior to the Special Meeting and to vote such shares of
Gateway Common Stock in favor of the Merger Agreement.
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PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The pro forma condensed consolidated balance sheet as of June 30, 1997, and
the related pro forma condensed consolidated statements of income for the six
months ended June 30, 1997 and for the year ended December 31, 1996, give effect
to the acquisition of 100% of the outstanding Common Stock of Gateway by
Peoples. The pro forma information is based on the historical consolidated
financial statements, including the notes thereto, of Peoples that are
incorporated by reference in to this Proxy Statement/Prospectus (see
"Incorporation of Certain Documents by Reference" and "Peoples Selected
Consolidated Financial Information") and the historical consolidated financial
statements of Gateway, including the notes thereto, included elsewhere herein
(see "Index to Gateway Consolidated Financial Statements" and "Gateway Selected
Consolidated Financial Information").
The pro forma information set forth below gives effect to the Merger under
the purchase method of accounting. The pro forma condensed statements of income
give effect to the Merger as if it had occurred at the beginning of each period
presented. The pro forma consolidated per share data gives effect to the assumed
issuance of 354,168 Peoples Common Shares, which assumes that the Per Share
Stock Consideration is $12.79 (based upon an Exchange Ratio of 0.4978, assuming
the Peoples Market Value is $37.75), resulting in 3,800,236 Peoples Common
Shares outstanding following the Merger.
This pro forma information may not necessarily be indicative of the
operating results or financial position that would have actually occurred if the
Merger had been consummated at the beginning of each period presented, nor is it
necessarily indicative of future operating results or financial position.
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PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------------------------------------------------------
AS REPORTED
----------------------------- PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS COMBINED
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks............... $ 22,389,000 $ 83,000 -- $ 22,472,000
Interest-bearing deposits in other
banks............................... 836,000 2,279,000 (2,000,000)(a) 1,115,000
Federal funds sold.................... 3,300,000 -- -- 3,300,000
-------------- ------------- -------------- ------------
Total cash and cash equivalents... 26,525,000 2,362,000 (2,000,000) 26,887,000
Available-for-sale investment
securities, at estimated fair value... 147,856,000 -- 34,800,000(a)(b)(c) 182,656,000
Held-to-maturity, at amortized cost..... -- 39,558,000 (39,558,000)(c) --
Loans, net.............................. 467,445,000 21,086,000 153,000(b) 488,684,000
Allowance for loan losses............... (7,298,000) (81,000) -- (7,379,000)
-------------- ------------- -------------- ------------
Net loans 460,147,000 21,005,000 153,000 481,305,000
Bank premises and equipment, net........ 11,321,000 349,000 309,000(b) 11,979,000
Other assets............................ 15,668,000 554,000 2,497,000(b) 18,719,000
-------------- ------------- -------------- ------------
Total assets...................... $ 661,517,000 $ 63,828,000 $ (3,799,000) $721,546,000
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
LIABILITIES:
Deposits:
Non-interest bearing.................. 58,678,000 -- -- 58,678,000
Interest bearing...................... 486,652,000 46,318,000 (64,000)(b) 532,906,000
-------------- ------------- -------------- ------------
Total deposits.................... 545,330,000 46,318,000 (64,000) 591,584,000
Short-term borrowings:
Federal funds purchased and securities
sold under repurchase agreements.... 19,175,000 -- -- 19,175,000
Federal Home Loan Bank advances....... 600,000 -- -- 600,000
-------------- ------------- -------------- ------------
Total short-term borrowings....... 19,775,000 -- -- 19,775,000
Long-term borrowings.................... 30,601,000 -- -- 30,601,000
Accrued expenses and other
liabilities........................... 6,896,000 248,000 157,000(b) 7,301,000
-------------- ------------- -------------- ------------
Total liabilities................. $ 602,602,000 $ 46,566,000 $ 93,000 $649,261,000
-------------- ------------- -------------- ------------
STOCKHOLDERS' EQUITY:
Common stock, no par value.............. 34,442,000 11,000 13,359,000(a) 47,812,000
Additional paid-in capital.............. -- 7,950,000 (7,950,000)(a) --
Net unrealized holding gain on
available-for-sale securities, net of
deferred taxes........................ 1,305,000 -- -- 1,305,000
Retained earnings....................... 23,355,000 10,147,000 (10,147,000)(a) 23,355,000
Employee benefit plans.................. -- (846,000) 846,000(a) --
Treasury stock, at cost................. (187,000) -- -- (187,000)
-------------- ------------- -------------- ------------
Total stockholders' equity........ $ 58,915,000 $ 17,262,000 $ (3,892,000) $ 72,285,000
-------------- ------------- -------------- ------------
Total liabilities and
stockholders' equity............ $ 661,517,000 $ 63,828,000 $ (3,799,000) $721,546,000
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
</TABLE>
48
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
-----------------------
<CAPTION>
PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans.............................. $20,758,000 $ 749,000 $ (3,000)(d1) $21,504,000
Interests and dividends on:
Obligations of U.S. Government and its agencies....... 3,609,000 1,404,000 (147,000)(d2) 4,866,000
Obligations of states and political subdivisions...... 672,000 16,000 -- 688,000
Other interest income................................... 845,000 66,000 (55,000)(d3) 856,000
----------- ---------- ----------- -----------
Total interest income................................. 25,884,000 2,235,000 (205,000) 27,914,000
Interest Expense:
Interest on deposits.................................... 10,640,000 1,155,000 13,000(d4) 11,808,000
Interest on short-term borrowings....................... 407,000 15,000 -- 422,000
Interest on long-term borrowings........................ 977,000 -- -- 977,000
----------- ---------- ----------- -----------
Total interest expense................................ 12,024,000 1,170,000 13,000 13,207,000
----------- ---------- ----------- -----------
Net interest income................................. 13,860,000 1,065,000 (218,000) 14,707,000
Provision for loan losses................................. 1,229,000 -- -- 1,229,000
----------- ---------- ----------- -----------
Net interest income after provision for loan
losses............................................ 12,631,000 1,065,000 (218,000) 13,478,000
Total other income........................................ 2,849,000 7,000 -- 2,856,000
Total other expenses...................................... 9,426,000 531,000 45,000(d5,6,7,8,9) 10,002,000
----------- ---------- ----------- -----------
Income before federal income taxes........................ 6,054,000 541,000 (263,000) 6,332,000
Total federal income taxes................................ 1,927,000 193,000 (66,000)(d10) 2,054,000
----------- ---------- ----------- -----------
Net income................................................ $ 4,127,000 $ 348,000 $(197,000) $ 4,278,000
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Earnings per share:
Primary................................................. $1.17 $0.33 -- $1.10
Assuming full dilution.................................. $1.16 $0.33 -- $1.09
Weighted average number of shares outstanding:
Primary................................................. 3,540,317 1,041,240 -- 3,894,485
Assuming full dilution.................................. 3,567,657 1,072,821 -- 3,921,825
</TABLE>
49
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C>
AS REPORTED
-----------------------
<CAPTION>
PRO FORMA PRO FORMA
PEOPLES GATEWAY ADJUSTMENTS COMBINED
----------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans..................................... $37,140,000 $1,358,000 $ (7,000)(d1) $38,491,000
Interests and dividends on:
Obligations of U.S. Government and its agencies.............. 7,205,000 3,158,000 (293,000)(d2) 10,070,000
Obligations of states and political subdivisions............. 1,402,000 35,000 -- 1,437,000
Other interest income.......................................... 1,650,000 159,000 (110,000)(d3) 1,699,000
----------- ---------- -------------- -----------
Total interest income........................................ 47,397,000 4,710,000 (410,000) 51,697,000
----------- ---------- -------------- -----------
Interest Expense:
Interest on deposits........................................... 18,880,000 2,654,000 25,000(d4) 21,559,000
Interest on short-term borrowings.............................. 1,449,000 -- -- 1,449,000
Interest on long-term borrowings............................... 1,637,000 -- -- 1,637,000
----------- ---------- -------------- -----------
Total interest expense....................................... 21,966,000 2,654,000 25,000 24,645,000
----------- ---------- -------------- -----------
Net interest income........................................ 25,431,000 2,056,000 (435,000) 27,052,000
----------- ---------- -------------- -----------
Provision for loan losses........................................ 1,965,000 -- -- 1,965,000
----------- ---------- -------------- -----------
Net interest income after provision for loan losses........ 23,466,000 2,056,000 (435,000) 25,087,000
Total other income............................................... 5,178,000 30,000 -- 5,208,000
Total other expenses............................................. 17,522,000 1,313,000 130,000(d5,6,7,8,9) 18,965,000
----------- ---------- -------------- -----------
Income before federal income taxes............................... 11,122,000 773,000 (565,000) 11,330,000
Total federal income taxes....................................... 3,471,000 243,000 (145,000)(d10) 3,569,000
----------- ---------- -------------- -----------
Net income....................................................... $ 7,651,000 $ 530,000 $ (420,000) $ 7,761,000
----------- ---------- -------------- -----------
----------- ---------- -------------- -----------
Earnings per share:
Primary........................................................ $2.20 $0.48 -- $2.02
Assuming full dilution......................................... $2.18 $0.48 -- $2.01
Weighted average number of shares outstanding:
Primary........................................................ 3,480,999 1,094,395 -- 3,835,167
Assuming full dilution......................................... 3,506,996 1,095,201 -- 3,861,164
</TABLE>
50
<PAGE>
PEOPLES BANCORP, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant to the Merger Agreement, Peoples will pay Gateway stockholders a
total consideration of approximately $19,648,000 for the purchase of 100% of the
outstanding common stock of Gateway, based on the average of the bid and ask
price of $37.75 of Peoples on September 2, 1997. Related professional costs and
expenses are estimated to be approximately $330,000 (of which $75,000 is
estimated for Peoples and $255,000 is estimated to be incurred by Gateway prior
to consummation of the Merger). Peoples will pay approximately $18.75 per share
for the outstanding shares of Gateway. The pro forma financial statements assume
the Merger Consideration will be structured as follows: 32% cash (or $6,278,000)
and 68% stock (354,168 shares of Peoples valued at $13,370,000). The pro forma
statements assume that the Merger will be accounted for under the purchase
method of accounting.
(a) The total cash component of the Merger Consideration is calculated
below:
<TABLE>
<S> <C>
Gateway Common Stock outstanding at June 30, 1997, net of 50,407 unallocated
shares in employee benefit plans............................................. 1,025,347
@ 32% allocated for cash payment............................................... x 32%
----------
Gateway shares to be paid with cash consideration.............................. 328,111
Cash payment per share......................................................... x $18.75
----------
Subtotal....................................................................... $6,152,000
Effect of cash payment for 32% of the value of outstanding stock options....... 126,000
----------
Total estimated cash payment to Gateway stockholders........................... 6,278,000
Estimated acquisition costs.................................................... 330,000
----------
Total cash outlay.............................................................. $6,608,000
----------
----------
</TABLE>
The funds for the cash portion of the Merger Consideration were assumed to
come from the following sources:
<TABLE>
<S> <C>
Withdrawal of interest-earning deposits in other institutions.................. $2,000,000
Maturities and sales of securities............................................. 4,608,000
----------
Total cash outlay.............................................................. $6,608,000
----------
----------
</TABLE>
The remaining Merger Consideration will be in the form of Peoples Common
Stock as shown below:
<TABLE>
<S> <C>
Shares of Gateway Common Stock outstanding at June 30, 1997.................... 1,025,347
@ 68% allocated for stock consideration........................................ x 68%
----------
Gateway shares to be paid with stock consideration............................. 697,236
Exchange ratio................................................................. 0.4978
----------
Subtotal....................................................................... 347,084
Shares to be issued for 68% of value of outstanding stock options.............. 7,084
----------
Total shares of Peoples Common Shares to be issued............................. 354,168
Peoples Market Value........................................................... x $37.75
----------
Total value of Peoples Common Shares to be issued.............................. $13,370,000
----------
----------
Total cash outlay.............................................................. $6,608,000
Total value of Peoples Common Shares to be issued.............................. 13,370,000
----------
Estimated total purchase price............................................... $19,978,000
----------
----------
</TABLE>
51
<PAGE>
(b) Under purchase accounting, Gateway's assets and liabilities are adjusted
to their estimated fair values at the consummation date. The estimated fair
value adjustments have been determined by Peoples based upon information set
forth in the notes to Gateway's financial statements included elsewhere in this
Registration Statement and other information available to Peoples' management.
No assurance can be given that such estimated fair values represent fair values
that would ultimately be determined at the effective date of the Merger.
Following are the pro forma adjustments made to reflect Gateway's estimated fair
values at June 30, 1997:
<TABLE>
<CAPTION>
NET ASSETS
------------------
<S> <C>
INCREASE
(DECREASE)
$ 17,262,000
Net assets as reported by Gateway
Fair value adjustments:
Investments................................................................................. (150,000)
Loans....................................................................................... 153,000
Bank premises and equipment................................................................. 309,000
Deposit base intangibles.................................................................... 85,000
Certificates of deposit..................................................................... 64,000
Deferred income tax liability............................................................... (157,000)
Costs in excess of fair value of net assets acquired........................................ 2,412,000
------------------
$ 19,978,000
------------------
------------------
</TABLE>
(c) Currently 100% of Gateway's investment portfolio is classified as
held-to-maturity securities. At the date of consummation of the Merger, Peoples
will classify such securities as available-for-sale.
(d) For purposes of determining the pro forma effect of the Merger on
Peoples' consolidated statements of income for the six months ended June 30,
1997 and year ended December 31, 1996, the following pro forma adjustments have
been made:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<C> <S> <C> <C>
(1) Amortization/accretion of adjustments to investments and loans................. $ (3,000) $ (7,000)
(2) Decrease in interest income resulting from the use of investment securities, at
an assumed interest rate of 6.35%............................................ (147,000) (293,000)
(3) Decrease in interest income resulting from the use of interest-bearing
deposits, at an assumed interest rate of 5.5%................................ (55,000) (110,000)
(4) Amortization/accretion of adjustments to certificates of deposits.............. (13,000) (25,000)
(5) Amortization of deposit base intangibles over the estimated average lives of
the deposit relationships on an accelerated basis............................ (12,000) (24,000)
(6) Depreciation of adjustments to fixed assets over an estimated average remaining
life of 10 years............................................................. (15,000) (30,000)
(7) Amortization of purchase price in excess of fair value of net assets acquired
over 15 years................................................................ (70,000) (140,000)
(8) Adjustment to eliminate ESOP and RRP expense................................... 85,000 130,000
(9) Amortization of capitalized costs over 5 years................................. (33,000) (66,000)
(10) Decrease in income tax provision associated with adjustments................... 66,000 145,000
</TABLE>
52
<PAGE>
ADJOURNMENT OF SPECIAL MEETING
Each proxy solicited hereby requests authority to vote for an adjournment of
the Special Meeting, if an adjournment is deemed to be necessary. Gateway may
seek an adjournment of the Special Meeting for not more than 30 days in order to
enable Gateway to solicit additional votes in favor of the proposal to adopt the
Merger Agreement in the event that such proposal has not received the requisite
vote of stockholders at the Special Meeting and such proposal has not received
the negative votes of the holders of a majority of the Gateway Common Stock. If
Gateway desires to adjourn the meeting with respect to foregoing proposal, it
will request a motion that the meeting be adjourned for up to 30 days with
respect to such proposal (and solely with respect to such proposal, provided
that a quorum is present at the Special Meeting), and no vote will be taken on
such proposal at the originally scheduled Special Meeting. Each proxy solicited
hereby, if properly signed and returned to the Company and not revoked prior to
its use, will be voted on any motion for adjournment in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted in favor of any motion to adjourn the meeting.
Unless revoked prior to its use, any proxy solicited for the Special Meeting
will continue to be valid for any adjournment of the Special Meeting, and will
be voted in accordance with instructions contained therein, and if no contrary
instructions are given, for the proposal in question.
Any adjournment will permit Gateway to solicit additional proxies and will
permit a greater expression of the stockholders' views with respect to such
proposal. Such an adjournment would be disadvantageous to stockholders who are
against the proposal, because an adjournment will give Gateway additional time
to solicit favorable votes and thus increase the chances of passing such
proposal.
If a quorum is not present at the Special Meeting, no proposal will be acted
upon and the Board of Directors of Gateway will adjourn the Special Meeting to a
later date in order to solicit additional proxies on the proposal being
submitted to stockholders.
An adjournment for up to 30 days will not require either the setting of a
new record date or notice of the adjourned meeting as in the case of an original
meeting. Gateway has no reason to believe that an adjournment of the Special
Meeting will be necessary at this time.
BECAUSE THE GATEWAY BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE PROPOSAL TO APPROVE THE MERGER AGREEMENT, AS DISCUSSED ABOVE, THE GATEWAY
BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE POSSIBLE
ADJOURNMENT OF THE SPECIAL MEETING. THE HOLDERS OF A MAJORITY OF THE GATEWAY
COMMON STOCK PRESENT, IN PERSON OR BY PROXY, AT THE SPECIAL MEETING WILL BE
REQUIRED TO APPROVE A MOTION TO ADJOURN THE SPECIAL MEETING.
53
<PAGE>
OWNERSHIP OF GATEWAY COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GATEWAY
The following table includes, as of the Record Date, certain information as
to the Gateway Common Stock beneficially owned by (i) each person or entity,
including any "group" as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended ("1934 Act"), who or which was known by Gateway
to be the beneficial owner of more than 5% of the issued and outstanding Gateway
Common Stock, (ii) the directors of Gateway, and (iii) all directors and
executive officers of Gateway and Catlettsburg Federal as a group.
<TABLE>
<CAPTION>
GATEWAY COMMON STOCK
BENEFICIALLY OWNED
AS OF
, 1997(1)
--------------------
NAME OF BENEFICIAL OWNER NO. %
- - -------------------------------------------------------------------------------------- --------- ---
<S> <C> <C>
Barclays Global Investors, N.A........................................................ 64,018(2) 6.0%
45 Fremont Street
San Francisco, California 94105
Directors:
John H. Fugeman..................................................................... 36,676(3) 3.4%
Rebecca R. Jackson.................................................................. 21,327(4) 2.0
Harold Freedman..................................................................... 14,136(5) 1.3
Hunter E. Clark..................................................................... 23,493(6) 2.2
Charles M. Hedrick.................................................................. 9,266(7) *
All directors and executive officers of Gateway and Catlettsburg Federal
as a group (5 persons).............................................................. 104,898(8) 9.8%
</TABLE>
- - ------------------------
* Represents less than 1% of the outstanding Gateway Common Stock.
(1) For purposes of this table, pursuant to rules promulgated under the 1934
Act, an individual is considered to beneficially own shares of Gateway
Common Stock if he or she directly or indirectly has or shares (i) voting
power, which includes the power to vote or to direct the voting of the
shares; or (ii) investment power, which includes the power to dispose or
direct the disposition of the shares. Unless otherwise indicated, an
individual has sole voting power and sole investment power with respect to
the indicated shares. Shares which are subject to stock options and which
may be exercised within 60 days of the Record Date are deemed to be
outstanding for the purpose of computing the percentage of Gateway Common
Stock beneficially owned by such person.
(2) Based on a Schedule 13G filed pursuant to the 1934 Act on February 14, 1997.
(3) Includes 22,115 shares held jointly with Mr. Fugeman's son and 12,445 shares
which may be acquired by Mr. Fugeman upon the exercise of stock options.
(4) Includes 6,687 shares held jointly with Ms. Jackson's spouse, 1,779 shares
held by Ms. Jackson's Individual Retirement Account ("IRA"), 2,149 shares
held by Ms. Jackson's spouse's IRA, 3,618 shares held by Gateway's Employee
Stock Ownership Plan ("ESOP") for the account of Ms. Jackson, and 4,978
shares which may be acquired by Ms. Jackson upon the exercise of stock
options.
(5) Includes 10,448 shares held jointly with Mr. Freedman's son and daughter,
1,000 shares held as custodian for Mr. Freedman's grandchildren, and 2,240
shares which may be acquired by Mr. Freedman upon the exercise of stock
options.
(6) Includes 20,730 shares held jointly with Mr. Clark's spouse, 25 shares held
jointly with Mr. Clark's grandson, 25 shares held jointly with Mr. Clark's
daughter and grandson in-law, 25 shares held jointly with Mr. Clark's
daughter and son in-law, and 2,240 shares which may be acquired by Mr. Clark
upon the exercise of stock options.
(7) Includes 5,568 shares held jointly with Mr. Hedrick's spouse, 710 shares
held by Mr. Hedrick's IRA, 300 shares held by Mr. Hedrick's son, and 2,240
shares which may be acquired by Mr. Hedrick upon the exercise of stock
options.
(8) Includes 24,143 shares which may be acquired by all directors and officers
of Gateway as a group upon the exercise of stock options. Also includes
3,618 shares which are held by the ESOP, which have been allocated to the
account of Ms. Jackson and consequently, will be voted at the Annual Meeting
by Ms. Jackson.
54
<PAGE>
GATEWAY MANAGEMENT INFORMATION
As discussed under "THE MERGER--Interests of Certain Persons in the
Merger--Boards of Directors of Gateway and Catlettsburg Federal," Rebecca R.
Jackson and John H. Fugeman, currently directors of Gateway, will continue to
serve as directors of the surviving corporation after consummation of the
Merger. The business experience of each of these directors for at least the past
five years is as follows:
REBECCA R. JACKSON. Age 54. Ms. Jackson has served as a director and
President and Chief Executive Officer of Gateway and Catlettsburg Federal since
October 1994. Previously, Ms. Jackson served as Executive Vice President and
Chief Executive Officer of Catlettsburg Federal from January 1991 to October
1994 and as Vice President of Administration of Catlettsburg Federal from
January 1983 to December 1990. She served as Assistant Secretary/Treasurer and
in various other positions with Catlettsburg Federal since 1963.
JOHN H. FUGEMAN. Age 82. Mr. Fugeman has served as Chairman of the Board of
Gateway and Catlettsburg Federal since April 1995 and October 1994,
respectively. Prior thereto, he served as President of Catlettsburg Federal from
August 1975 to October 1994 and as Chief Executive Officer from January 1971 to
December 1990. Mr. Fugeman has held various other positions with Catlettsburg
Federal since 1971.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information concerning
the compensation paid by Gateway for services rendered in all capacities during
the three fiscal years ended December 31, 1996 to the President and Chief
Executive Officer. No other officer of Gateway and Catlettsburg Federal had
total annual compensation in excess of $100,000 during fiscal 1996.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION
--------------------------------------- AWARDS
OTHER ----------------------- PAYOUTS
ANNUAL SECURITIES -------------
NAME AND COMPENSATION RESTRICTED UNDERLYING LTIP
PRINCIPAL POSITION YEAR SALARY BONUS (1) STOCK(2) OPTIONS(3) PAYOUTS
- - ----------------------------- --------- --------- --------- ----------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rebecca R. Jackson........... 1996 $ 66,000 $ 2,750 -- $ -- -- --
President and Chief 1995 68,212 2,550 -- 142,803 12,445 --
Executive Officer 1994 31,103(5) 2,375 -- -- -- --
<CAPTION>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION (4)
- - ----------------------------- -------------
<S> <C>
Rebecca R. Jackson........... $ 28,564
President and Chief 23,181
Executive Officer --
</TABLE>
- - ------------------------
(1) Does not include amounts attributable to miscellaneous benefits received by
the named executive officer. In the opinion of management of Gateway, the
costs to Gateway of providing such benefits to the named executive officer
during the indicated periods did not exceed the lesser of $50,000 or 10% of
the total of annual salary and bonus reported for the individual.
(2) Represents the grant of 10,578 shares of restricted Gateway Common Stock to
Ms. Jackson pursuant to Gateway's Recognition and Retention Plan and Trust
("Recognition Plan"), which were deemed to have had the indicated value at
the date of grant. The restricted Gateway Common Stock awarded to Ms.
Jackson had a fair market value of $150,737 at December 31, 1996. The awards
vest 20% each year beginning June 29, 1996, and dividends are paid on
restricted shares.
(3) Consists of stock options granted pursuant to the Gateway's 1995 Stock
Option Plan ("Option Plan") which are exercisable at the rate of 20% each
year beginning June 29, 1996.
(4) Represents the allocation on behalf of Ms. Jackson under Gateway's ESOP.
(5) Due to a change in Gateway's fiscal year end, the fiscal year ended December
31, 1994 only covers a six-month period. For the twelve months ended
December 31, 1994, salary and bonus was $59,603 and $2,375, respectively.
55
<PAGE>
The following table discloses certain information regarding the options held
at December 31, 1996 by the Chief Executive Officer. No options were exercised
during the year ended December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS AT VALUE OF OPTIONS AT
DECEMBER 31, 1996 DECEMBER 31, 1996(1)
------------------------------ --------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---------------------------------------------------------- ------------- --------------- ----------- -------------
Rebecca R. Jackson........................................ 2,489 9,956 $ 1,867 $ 7,467
</TABLE>
- - ------------------------
(1) Based on a per share market price of $14.25 at December 31, 1996.
DIRECTORS' COMPENSATION
During the year ended December 31, 1996, members of the Board of Directors
of Gateway and Catlettsburg Federal other than Ms. Jackson, received total fees
of $500 per month, regardless of attendance at meetings.
EMPLOYMENT AGREEMENTS
Gateway and Catlettsburg Federal (collectively the "Employers") have entered
into an employment agreement with Ms. Jackson. The Employers have agreed to
employ Ms. Jackson for a term of two years in her current position and at her
present salary. The term of such employment agreement will be extended each year
for a successive additional one-year period unless the Employers or the officer
elects, not less than 30 days prior to the annual anniversary date, not to
extend the employment term.
The employment agreement is terminable with or without cause by the
Employers. The officer has no right to compensation or other benefits pursuant
to the employment agreement for any period after voluntary termination or
termination by the Employers for cause, disability, retirement or death,
provided, however, that (i) in the event that the officer terminates her
employment because of failure of the Employers to comply with any material
provision of the employment agreement or (ii) the employment agreement is
terminated by the Employers other than for cause, disability, retirement or
death or by the officer as a result of certain adverse actions which are taken
with respect to the officer's employment following a Change in Control of
Gateway, as defined, Ms. Jackson will be entitled to a cash severance amount
equal to two times her base salary. In addition, Ms. Jackson will be entitled to
a continuation of benefits similar to those she is receiving at the time of such
termination for the remaining term of the agreement or until she obtains
full-time employment with another employer.
A Change in Control is generally defined in the employment agreement to
include any change in control required to be reported under the federal
securities laws, as well as (i) the acquisition by any person of 25% or more of
Gateway's outstanding voting securities and (ii) a change in a majority of the
directors of Gateway during any two-year period without the approval of at least
two-thirds of the persons who were directors of Gateway at the beginning of such
period.
The employment agreement provides that in the event that any of the payments
to be made thereunder or otherwise upon termination of employment are deemed to
constitute "excess parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended ("Code"), then such payments and
benefits received thereunder will be reduced, in the manner determined by the
employee, by the amount, if any, which is the minimum necessary to result in no
portion of the payments and benefits being non-deductible by the Employers for
federal income tax purposes. Excess parachute payments generally are payments in
excess of three times the base amount, which is defined to mean the recipient's
average annual compensation from the employer includable in the recipient's
gross income during the most recent five taxable years ending before the date on
which a change in control of the employer occurred. Recipients of excess
parachute payments are subject to a 20% excise tax on the amount by which such
payments exceed the base amount, in addition to regular income taxes, and
56
<PAGE>
payments in excess of the base amount are not deductible by the employer as
compensation expense for federal income tax purposes.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
All loans or extensions of credit to executive officers and directors of
Gateway and Catlettsburg Federal are required to be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with the general public and must not involve
more than the normal risk of repayment or present other unfavorable features.
Catlettsburg Federal's policy provides that all loans made by Catlettsburg
Federal to its directors and officers are made in the ordinary course of
business, are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not involve more than the normal risk of collectibility or
present other unfavorable features. As of December 31, 1996, none of
Catlettsburg Federal's directors and executive officers had aggregate loan
balances in excess of $60,000.
57
<PAGE>
GATEWAY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Gateway (also referred to herein as the "Company") is a Kentucky corporation
organized in 1994 by Catlettsburg Federal Savings and Loan Association (the
"Association") for the purpose of acquiring all of the capital stock of the
Association issued in the conversion (the "Conversion") of the Association from
a federally-chartered mutual savings and loan association to a
federally-chartered stock savings bank known as Catlettsburg Federal Savings
Bank (the "Bank"). The Conversion was completed on January 18, 1995. The only
significant assets of the Company are the capital stock of the Bank and the net
conversion proceeds retained by the Company. To date, the business of the
Company has consisted of the business of the Bank.
The Bank conducts business from its main office located in Catlettsburg,
Kentucky and one full-service branch office located in Grayson, Kentucky. The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent
permitted by law. At June 30, 1997, the Company had total consolidated assets of
$63.8 million, total consolidated liabilities of $46.5 million, and consolidated
stockholders' equity of $17.3 million.
The Bank is primarily engaged in attracting deposits from the general public
and using those funds to invest in mortgage-backed securities and United States
Government and federal agency securities and to originate loans secured by
single-family residences located in Boyd County and surrounding counties in
Northeastern Kentucky. To a lesser extent, the Bank also makes loans secured by
savings accounts.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earnings assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
which consist of passbook savings accounts and certificates of deposit. The
Company's net income is also affected by its provision for loan losses, as well
as its non-interest income, including fees and gains or losses on sales of
assets, and its operating expenses, including compensation and benefits,
occupancy and equipment expenses, federal deposit insurance, miscellaneous other
expenses and federal income taxes.
The Company established December 31 as its fiscal year end, effective as of
December 31, 1994. The Company took such action in order to report its results
as a public company in a manner which is consistent with the way the Bank has
traditionally conducted its business. Although the Bank has historically
operated its business and filed its tax returns on a calendar year basis, its
financial accounting records were maintained on a June 30 fiscal year basis.
The financial information presented herein, for the years ended prior to
December 31, 1995, is for the Bank only, since prior to 1995, the Company had
not yet completed the Conversion or issued any stock.
CHANGES IN FINANCIAL CONDITION
GENERAL. At June 30, 1997, the Company's total assets amounted to $63.8
million, compared to $66.4 million at December 31, 1996 and $73.4 million at
December 31, 1995. Total assets decreased by $2.6 million, or 3.9%, from
December 31, 1996 to June 30, 1997, and by $7.0 million, or 9.5%, from December
31, 1995 to December 31, 1996. The $2.6 million decrease from December 31, 1996
to June 30, 1997 consisted primarily of decreases in investment securities held
to maturity and mortgage-backed securities held to maturity of $3.1 million and
$2.5 million, respectively, partially offset by increases in cash and loans
receivable of $1.1 million and $1.9 million, respectively. The $7.0 million
decrease from December 31, 1995 to December 31, 1996 consisted primarily of
decreases in cash of $5.2 million and investment securities of $3.9 million,
partially offset by a $2.2 million increase in loans receivable.
58
<PAGE>
CASH. These balances consist of cash on hand and short-term (liquid)
interest-bearing deposits in other financial institutions. The $1.1 million
increase, from $1.3 million at December 31, 1996 to $2.4 million at June 30,
1997, was primarily due to the retention of proceeds from maturing investment
securities and principal repayments on mortgage-backed securities during the
period, less cash requirements to fund loan demand and maturing savings
deposits. The $5.2 million decrease, from $6.5 million at December 31, 1995 to
$1.3 million at December 31, 1996, resulted from the funding of loan
originations, the decrease in deposits, the payment of cash dividends, and the
repurchase of the Company's common stock, partially offset by a decrease in
investment securities.
INVESTMENT SECURITIES. Investment securities consist primarily of U.S.
Treasury and U.S. Governmental agency securities. The $3.1 million decrease,
from $17.5 million at December 31, 1996 to $14.4 million at June 30, 1997,
resulted from maturing securities with no corresponding reinvestments. The $3.9
million decrease, from $21.4 million at December 31, 1995 to $17.5 million at
December 31, 1996 resulted from new purchases of $13.3 million, offset by $17.2
million in proceeds from calls and maturities.
At June 30, 1997, the market value of the Company's investment securities
portfolio was less than the carrying value by approximately $150,000, as
compared to an unrealized loss of approximately $100,000 at December 31, 1996
and an unrealized gain of approximately $100,000 at December 31, 1995. These
changes in market value are not deemed to be significant and the Company
intends, and has the ability, to hold its investment securities to maturity.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities have always been a
primary component of the Company's interest-earning assets, due to the
relatively low demand for competitive-rate, single family mortgage loans in the
Company's lending area. The $2.5 million decrease, from $27.7 million at
December 31, 1996 to $25.2 million at June 30, 1997 consisted entirely of
principal repayments. For the year ended December 31, 1996, the Company received
$5.8 million in principal repayments and reinvested the $5.8 million in new
mortgage-backed securities.
At June 30, 1997, the market value of the Company's mortgage-backed
securities portfolio exceeded the carrying value by approximately $394,000. This
compared to unrealized gains of approximately $40,000 and $500,000 at December
31, 1996 and 1995, respectively. The Company intends, and has the ability, to
hold its mortgage-backed securities to maturity.
LOANS RECEIVABLE, NET. Loans receivable, net, increased from $19.1 million
at December 31, 1996 to $21.0 million at June 30, 1997, an increase of 9.9%. For
the year ending December 31, 1996, loans receivable increased $2.2 million, or
13.0%. Such increases resulted from a continuing emphasis on a competitive loan
pricing policy as part of the Company's strategy to increase its mortgage loan
market share.
OFFICE PROPERTIES AND EQUIPMENT. The Company's net investment in facilities
and equipment totaled approximately $349,000 at June 30, 1997, as compared to
$358,000 and $367,000 at December 31, 1996 and 1995, respectively.
LIABILITIES. The Company's liabilities consist primarily of customer
deposits. Liabilities decreased $2.9 million, or 5.9%, from $49.4 million at
December 31, 1996 to $46.5 million at June 30, 1997. This followed a $5.5
million decrease, or 10.0%, for the year ended December 31, 1996. Deposits
decreased $2.9 million, or 5.9%, from $49.2 million at December 31, 1996 to
$46.3 million at June 30, 1997. The Company experienced a $4.1 million, or 7.7%,
decrease in deposits during the year ended December 31, 1996. Such decreases can
be attributed to relatively unchanged market rates of interest paid on deposits
during the periods when compared to higher yielding investment alternatives
available to the Company's customers. Also, the other significant change in
liabilities from December 31, 1995 to December 31, 1996 was a $1.4 million
decrease in dividends payable.
59
<PAGE>
Occasionally, borrowings from the FHLB of Cincinnati are utilized to satisfy
short-term liquidity needs. The Company borrowed and repaid $3.2 million from
the FHLB during the six months ended June 30, 1997. The Company had no
comparable borrowings during the years ended December 31, 1996 and 1995.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity totaled $17.3
million at June 30, 1997, as compared to $17.0 million and $18.5 million at
December 31, 1996 and 1995, respectively. The $.3 million increase for the
period ended June 30, 1997 was primarily attributable to net income for the
period of $348,000 and the release of common stock to the employee benefit
plans, offset by the payment of dividends. The $1.5 million decrease for the
year ended December 31, 1996 was primarily due to the Company's repurchase of
121,216 shares of its common stock during the year at a cost of approximately
$1.7 million and the payment of dividends of approximately $433,000, offset by
the addition of net income.
60
<PAGE>
RESULTS OF OPERATIONS
AVERAGE BALANCES, NET INTEREST INCOME, AND YIELDS EARNED AND RATES
PAID. The following table presents for the period indicated the total dollar
amount of interest from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest expense on average
interest-bearing liabilities, expressed both in dollars and rates, and the net
interest margin. The table does not reflect any effect of income taxes. All
average balances are based on month-end balances.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
SIX MONTHS ENDED JUNE 30, 31,
---------------------------------------------------------------------------- -----------
1997 1996 1996
------------------------------------- ------------------------------------- -----------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE(1) BALANCE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3)....... $ 20,191 $ 749 7.42% $ 17,174 $ 662 7.71% $ 17,789
Mortgage- backed
securities............... 26,297 911 6.93 28,746 955 6.64 28,792
Investment securities...... 15,503 509 6.57 21,428 648 6.05 20,134
Other interest-earning
assets................... 2,454 66 5.38 4,028 100 4.97 2,830
----------- ----------- ----------- ----------- -----------
Total interest-earning
assets................... 64,445 2,235 6.94 71,376 2,365 6.63 69,545
----------- ----------- ----------- -----------
Non-interest-earning
assets................... 927 964 930
----------- ----------- -----------
Total assets........... 65,372 $ 72,340 $ 70,475
----------- ----------- -----------
----------- ----------- -----------
Interest-bearing liabilities:
Deposits:
Passbook accounts........ 2,814 49 3.48 $ 3,411 60 3.52 $ 3,228
Certificate accounts..... 44,635 1,106 4.96 50,399 1,322 5.25 49,101
FHLB advances.............. 375 15 8.00 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities.............. 47,824 1,170 4.89 53,810 1,382 5.14 52,329
----------- ----------- ----------- -----------
Non-interest-bearing
liabilities................ 345 452 444
----------- ----------- -----------
Total liabilities............ 48,169 54,262 52,773
Equity....................... 17,203 18,078 17,702
----------- ----------- -----------
Total liabilities and
equity................. $ 65,372 $ 72,340 $ 70,475
----------- ----------- -----------
----------- ----------- -----------
Net interest income; Interest
rate spread................ $ 1,065 2.05% $ 983 1.49%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net interest margin (4)...... 3.31% 2.75%
----------- -----------
----------- -----------
Average interest-earning
assets to average
interest-bearing
liabilities................ 134.75% 131.54%
----------- -----------
----------- -----------
<CAPTION>
1995 1994
----------------------------------- -----------------------------------
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- --------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3)....... $ 1,358 7.63% $ 14,675 $ 1,133 7.72% $ 10,313 $ 877 8.50%
Mortgage- backed
securities............... 1,935 6.72 29,331 2,019 6.88 30,706 2,092 6.81
Investment securities...... 1,258 6.25 23,266 1,371 5.89 21,629 1,080 4.99
Other interest-earning
assets................... 159 5.62 5,609 304 5.42 3,310 112 3.38
----------- ----------- ----------- ----------- -----------
Total interest-earning
assets................... 4,710 6.77 72,881 4,827 6.62 65,958 4,161 6.31
----------- --------- ----------- --------- ----------- ---------
Non-interest-earning
assets................... 997 730
----------- -----------
Total assets........... $ 73,878 $ 66,688
----------- -----------
----------- -----------
Interest-bearing liabilities:
Deposits:
Passbook accounts........ 115 3.56 $ 4,521 163 3.61 $ 10,539 $ 365 3.46
Certificate accounts..... 2,538 5.17 48,196 2,510 5.21 46,535 2,020 4.34
FHLB advances.............. -- -- -- -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities.............. 2,653 5.07 52,717 2,673 5.07 57,074 2,385 4.18
----------- --------- ----------- --------- ----------- ---------
565 332
----------- -----------
Non-interest-bearing
liabilities................
Total liabilities............ 53,282 57,406
Equity....................... 20,596 9,282
----------- -----------
Total liabilities and
equity................. $ 73,878 $ 66,688
----------- -----------
----------- -----------
Net interest income; Interest
rate spread................ $ 2,057 1.70% $ 2,154 1.55% $ 1,776 2.13%
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
Net interest margin (4)...... 2.96% 2.96% 2.69%
--------- --------- ---------
--------- --------- ---------
Average interest-earning
assets to average
interest-bearing
liabilities................ 132.90% 138.25% 115.57%
--------- --------- ---------
--------- --------- ---------
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
YEAR ENDED JUNE 30,
------------------------------------- -----------------------------------
1994 1994
------------------------------------- -----------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE(1) BALANCE INTEREST RATE
----------- ----------- ----------- ----------- ----------- ---------
Interest-earning assets:
Loans receivable (3)....... $ 10,747 $ 430 8.01% $ 10,154 $ 854 8.41%
Mortgage- backed
securities............... 30,455 1,054 6.92 30,384 2,178 7.17
Investment securities...... 21,453 562 5.24 19,256 936 4.86
Other interest-earning
assets................... 2,942 50 3.43 5,987 178 2.97
----------- ----------- ----------- -----------
Total interest-earning
assets................... 65,597 2,096 6.39 65,781 4,146 6.30
----------- ----------- ----------- ---------
Non-interest-earning
assets................... 535 593
----------- -----------
Total assets........... $ 66,132 $ 66,374
----------- -----------
----------- -----------
Interest-bearing liabilities:
Deposits:
Passbook accounts........ $ 9,760 171 3.50 $ 10,822 394 3.64
Certificate accounts..... 46,585 1,016 4.36 46,328 2,061 4.45
FHLB advances.............. -- -- -- -- -- --
----------- ----------- ----------- -----------
Total interest-bearing
liabilities.............. 56,345 1,187 4.21 57,150 2,455 4.30
----------- ----------- ----------- ---------
331 317
----------- -----------
Non-interest-bearing
liabilities................
Total liabilities............ 56,676 57,467
Equity....................... 9,456 8,907
----------- -----------
Total liabilities and
equity................. $ 66,132 $ 66,374
----------- -----------
----------- -----------
Net interest income; Interest
rate spread................ $ 909 2.18% $ 1,691 2.00%
----------- ----------- ----------- ---------
----------- ----------- ----------- ---------
Net interest margin (4)...... 2.77% 2.57%
----------- ---------
----------- ---------
Average interest-earning
assets to average
interest-bearing
liabilities................ 116.42% 115.10%
----------- ---------
----------- ---------
</TABLE>
- - ------------------------
(1) Annualized.
(2) At June 30, 1997, the yields earned and rates paid were as follows: loans
receivable, 7.93%; mortgage-backed securities, 6.51%;investment securities,
6.37%; other interest earning assets, 6.10%; total interest-earning assets,
6.93%; deposits, 4.92%; total interest-bearing liabilities, 4.92%; interest
rate spread, 2.01%.
(3) Includes non-accrual loans.
(4) Net interest margin is net interest income divided by average
interest-earning assets.
61
<PAGE>
RATE/VOLUME ANALYSIS. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------
------------------------------------- 1995
COMPARED
1997 COMPARED TO 1996 1996 COMPARED TO 1995 TO 1994
------------------------------------- ------------------------------------- ---------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO
---------------------- INCREASE ---------------------- INCREASE ---------
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE) RATE
--------- ----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.............. $ (24) $ 111 $ 87 $ (14) $ 239 $ 225 $ (114)
Mortgage-backed securities.... 46 (90) (44) (47) (37) (84) (94)
Investment securities......... 63 (202) (139) 77 (190) (113) 209
Other interest-earning
assets...................... 9 (43) (34) 9 (154) (145) 114
--- ----- --- --- ----- ----- ---------
Total interest-earning
assets.................. 94 (224) (130) 25 (142) (117) 115
--- ----- --- --- ----- ----- ---------
Interest-bearing liabilities:
Deposits:
Passbook accounts........... (1) (10) (11) (2) (47) (49) 30
Certificate accounts........ (70) (146) (216) (19) 49 30 410
FHLB advances............... -- 15 15 -- -- -- --
--- ----- --- --- ----- ----- ---------
Total interest-bearing
liabilities............. (71) (141) (212) (21) 2 (19) 440
--- ----- --- --- ----- ----- ---------
Increase (decrease) in net
interest income............... $ 165 $ (83) $ 82 $ 46 $ (144) $ (98) $ (325)
--- ----- --- --- ----- ----- ---------
--- ----- --- --- ----- ----- ---------
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------
1994 COMPARED TO 1993
-------------------------------------
INCREASE
(DECREASE)
TOTAL DUE TO TOTAL
INCREASE ---------------------- INCREASE
VOLUME (DECREASE) RATE VOLUME (DECREASE)
----------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.............. $ 370 $ 256 $ (42) $ 14 $ (28)
Mortgage-backed securities.... 21 (73) (74) 37 (37)
Investment securities......... 82 291 67 94 161
Other interest-earning
assets...................... 78 192 (6) (76) (82)
----- ----- --- --- ---
Total interest-earning
assets.................. 551 666 (55) 69 14
----- ----- --- --- ---
Interest-bearing liabilities:
Deposits:
Passbook accounts........... (223) (193) (13) (16) (29)
Certificate accounts........ 71 481 (57) 16 (41)
FHLB advances............... -- -- -- -- --
----- ----- --- --- ---
Total interest-bearing
liabilities............. (152) 288 (70) -- (70)
----- ----- --- --- ---
Increase (decrease) in net
interest income............... $ 703 $ 378 $ 15 $ 69 $ 84
----- ----- --- --- ---
----- ----- --- --- ---
</TABLE>
62
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE
30, 1996
NET INCOME. Net income increased $9,000, or 2.7%, from $339,000 for the six
months ended June 30, 1996 to $348,000 for the six months ended June 30, 1997.
The increase resulted from a decrease in interest expense of $212,000, or 15.3%,
which was offset by decreases in interest income of $130,000, or 5.5%, non-
interest income of $14,000, or 66.7%, and increases in non-interest expenses of
$18,000, or 3.5%, and the provision for income taxes of $41,000, or 27.0%.
INTEREST INCOME. The $130,000 decrease in interest income, from $2,365,000
for the six months ended June 30, 1996 to $2,235,000 for the comparable 1997
period was primarily due to lower volumes of interest earning assets, except for
loans receivable, partially offset by higher yielding investment securities and
mortgage-backed securities. The average yield on interest-earning assets
increased from 6.63% for the six months ended June 30, 1996 to 6.94% for the six
months ended June 30, 1997.
INTEREST EXPENSE. The $212,000 decrease in interest expense, from
$1,382,000 for the six months ended June 30, 1996 to $1,170,000 for the
comparable 1997 period resulted primarily from a lower volume of
interest-bearing liabilities, and to a lesser extent, from lower rates paid on
deposits. The average rate paid on interest-bearing liabilities fell to 4.89%
from 5.14% for the six months ended June 30, 1997 as compared to the six months
ended June 30, 1996.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities resulted in an interest rate spread of 2.05% for
the six months ended June 30, 1997 as compared to 1.49% for the six months ended
June 30, 1996, primarily due to higher yielding mortgage-backed securities and
investment securities, along with the decline in rates paid on interest-bearing
liabilities, offset by a slightly lower yielding loan portfolio.
PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan
losses for the six months ended June 30, 1997 and 1996. Management's decision to
make no provision for loan losses reflects their assessment that the current
loan loss allowance is adequate. Management considers non-performing loans, past
due loans, the overall quality of the loan portfolio, and prior loan loss
experience in making this determination. Non-performing loans increased slightly
at June 30, 1997 to $529,000, up from $209,000 at December 31, 1996. All of the
increase is attributable to single-family residential loans, all of which are
well secured. Management does not expect additional losses as a result of this
increase.
NON-INTEREST INCOME. The $14,000 decrease in non-interest income, from
$21,000 for the six months ended June 30, 1996 to $7,000 for the six months
ended June 30, 1997, resulted from $14,000 in partial recoveries during the 1996
period of prior years foreclosed real estate losses, with no comparable
recoveries during the 1997 period.
NON-INTEREST EXPENSE. Non-interest expense increased $18,000, from $513,000
for the six months ended June 30, 1996 to $531,000 for the six months ended June
30, 1997. This resulted primarily from increases in compensation and benefits of
$29,000 and professional services expenses of $39,000, partially offset by a
reduction in SAIF deposit insurance premiums of $48,000. The increase in
compensation and benefits was largely due to a $36,000 increase in ESOP
compensation expense for the 1997 period as compared to the 1996 period. During
the 1996 period, the Company had more dividends available which had been paid on
unallocated ESOP shares to meet debt service requirements on the ESOP loan, thus
reducing the Company's required contributions in the 1996 period as compared to
the 1997 period. The increase in professional services expenses was primarily
the result of additional expenses incurred during the 1997 six month period in
connection with the pending acquisition of the Company by Peoples Bancorp, Inc.
See Note 19 to the Consolidated Financial Statements. The reduction in the SAIF
deposit insurance premiums reflects the consequences of the 1996 legislation
which lowered the Bank's deposit insurance assessment from $.23 per hundred of
insured deposits to $.064 per hundred.
63
<PAGE>
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$41,000, from $152,000 for the six months ended June 30, 1996 to $193,000 for
the comparable 1997 period, primarily due to increased pre-tax income. The
effective tax rates were 35.7% and 31.0% for the six months ended June 30, 1997
and 1996, respectively. The increase in the effective tax rate resulted from the
reduction in the 1997 period in available Kentucky net operating loss carrybacks
which resulted in state tax refunds during the 1996 period. The Company is
subject to Kentucky income taxes whereas the Bank is not.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
NET INCOME. Net income decreased $291,000, or 35.4%, from $821,000 for the
year ended December 31, 1995 to $530,000 for the year ended December 31, 1996.
The 1996 decrease was primarily due to a one-time assessment by the FDIC to
restore the SAIF to the statutorily prescribed level of 1.25% of insured
deposits. The pretax amount of this assessment was $336,000, without which net
income for the year ended December 31, 1996 would have been $751,000.
INTEREST INCOME. Interest income decreased $117,000, or 2.4%, from
$4,827,000 for the year ended December 31, 1995 to $4,710,000 for the year ended
December 31, 1996. The decrease resulted primarily from lower volumes of
investment securities and other interest-earning assets, offset by an increase
in the average balance of loans receivable. The average yield on
interest-earning assets increased modestly from 6.62% for 1995 to 6.77% for
1996.
INTEREST EXPENSE. Interest expense decreased $20,000, or .7%, from
$2,673,000 for 1995 to $2,653,000 for the 1996 fiscal year. The decrease was
primarily due to a slightly lower volume of interest-bearing liabilities during
the year. The average rate paid on interest-bearing liabilities remained at
approximately 5.07% for 1996, the same as 1995.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities resulted in an interest rate spread of 1.70% for
the year ended December 31, 1996 as compared to 1.55% for the year ended
December 31, 1995, primarily due to the increased yield on investment
securities.
PROVISION FOR LOAN LOSSES. The Company recorded no provision for loan
losses during the year ended December 31, 1996, as compared to a provision of
$20,000 for the year ended December 31, 1995. Management's decision to make no
provision for loan losses reflects their assessment that the current allowance
for loan losses is adequate, given that non-performing assets to total assets
continues to remain at historically low levels, constituting .31% and .56% at
December 31, 1996 and 1995, respectively. The allowance for loan losses to total
loans outstanding at December 31, 1996 and 1995 was .42% and .48%, respectively.
Although management utilizes its best judgement in providing for loan
losses, there can be no assurance that the Company will not have to increase its
provision for loan losses in the future as a result of future increases in
non-performing loans or for other reasons.
NON-INTEREST INCOME. Non-interest income increased $19,000 for the year
ended December 31, 1996 as compared to 1995. The increase was due primarily to
$14,000 in gains recognized on foreclosed real estate during 1996. Such gains
represented partial recoveries of losses sustained in prior years.
NON-INTEREST EXPENSE. Non-interest expense increased $420,000, or 47.0%,
from $893,000 for the year ended December 31, 1995 to $1,313,000 for the year
ended December 31, 1996. The increase resulted largely from increased SAIF
deposit insurance premiums of $336,000, and increased compensation and benefits
and professional services expenses of $42,000 and $25,000, respectively. The
increased costs of SAIF deposit insurance resulted from the special one-time
assessment referred to above. The special assessment was paid by all SAIF
insured institutions as part of the recapitalization of the SAIF. Compensation
and benefits expenses increased primarily due to expenses associated with the
Company's employee
64
<PAGE>
benefit plans while professional services expenses increased due to increased
costs associated with operating as a public company.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased by
$187,000, or 43.5%, for the year ended December 31, 1996 as compared to 1995,
due to the decrease in pre-tax income. The effective tax rate for the year ended
December 31, 1996 was 31.4% as compared to 34.4% for 1995. The decrease was the
result of a reduction in the amount of income subject to state income tax for
the year ended December 31, 1996 as compared to December 31, 1995, at an
effective rate of approximately 5.28%.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
NET INCOME. Net income increased $127,000, or 18.3%, from $694,000 for the
year ended December 31, 1994 to $821,000 for the year ended December 31, 1995.
The increase resulted primarily from increased interest income of $666,000, or
16.0%, which was partially offset by increases in interest expense of $288,000,
or 12.1%, the provision for loan losses of $20,000, or 100.0%, non-interest
expense of $123,000, or 16.0%, and $93,000, or 27.6%, in the provision for
income taxes.
INTEREST INCOME. The $666,000 increase in interest income for 1995 as
compared to 1994 was primarily due to the increased volume of the loan
portfolio, and increased yields earned on investment securities, other
interest-earning assets and mortgage-backed securities, which was partially
offset by a decline in the yield earned on loans. The yield on loans declined
due to an aggressive loan pricing program implemented to regain mortgage loan
market share. The average yield earned on interest-earning assets increased from
6.31% for 1994 to 6.62% for 1995.
INTEREST EXPENSE. The $288,000 increase in interest expense for 1995 as
compared to 1994 resulted primarily from an .87% increase in the rates paid on
certificate accounts, which was partially offset by a $4.4 million, or 7.7%,
decrease in the average balance of deposits for the year ended December 31, 1995
as compared to 1994.
The difference in the yield on interest-earning assets and the rate paid on
interest-bearing liabilities was reflective of rising market rates of interest,
resulting in an interest rate spread of 1.55% for the year ended December 31,
1995 as compared to 2.13% for the year ended December 31, 1994.
PROVISION FOR LOAN LOSSES. During the year ended December 31, 1995, the
Company provided $20,000 for possible loan losses, as compared to no provision
for 1994. The provision was made due to the increase in the size of the loan
portfolio. Management does not believe that the quality of the loan portfolio
has been compromised by its growth. Non-performing assets to total assets
remained at historically low levels, constituting .56% and .46% at December 31,
1995 and 1994, respectively, while the allowance for loan losses to total loans
outstanding was .48% and .53% at the end of each respective year.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Company will not have to increase its
provision for loan losses in the future as a result of future increases in
non-performing loans or for other reasons.
NON-INTEREST INCOME. Non-interest income decreased $15,000, or 60.0%, for
the year ended December 31, 1995 as compared to 1994. The decrease resulted
primarily from a $13,000 decrease in loan fees and other fee income,
attributable to the discontinuance of loan origination fees as part of the
Bank's new loan pricing policy.
NON-INTEREST EXPENSE. The $123,000 increase in non-interest expense for
1995 as compared to 1994 resulted primarily from increases in compensation and
benefits of $107,000 and other non-interest expense of $121,000, which was
offset by the lack of a contingency reserve in 1995 and SAIF deposit insurance
premiums of $7,800. Occupancy expenses remained relatively unchanged with a 1995
increase of $2,900, to $39,000.
65
<PAGE>
Of the $107,000 increase in compensation and benefits, approximately $63,000
is attributable to the Company's contributions to the ESOP, while $45,000 is
attributable to expense recognized in connection with the Company's RRP Plan
which was approved by the stockholders during 1995.
The $121,000 increase in other non-interest expenses reflects increased
costs associated with operating as a public company.
During 1994, the Bank established a $100,000 contingency reserve to be used
to refund to certain borrowers and former borrowers of the Bank certain interest
payments which had been improperly collected in prior periods. Such refunds were
made in January, 1995.
The decrease in the SAIF insurance premiums is due to reduced insured
deposits during 1995 as compared to 1994.
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
$93,000, from $337,000 for the year ended December 31, 1994 to $430,000 for the
year ended December 31, 1995, due to increased pre-tax income. The effective tax
rate for the year ended December 31, 1995 was 34.4% as compared to 32.7% for
1994. The increase in the effective tax rate is due to the Company (excluding
income earned by the Bank) paying Kentucky state income taxes for 1995, the
first year of its operations.
ASSET AND LIABILITY MANAGEMENT
The lending activities of savings and loan associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The deposit
accounts of savings associations generally bear interest rates that reflect
market rates and largely mature or are subject to repricing within a short
period of time. This factor, in combination with substantial investments in
long-term, fixed-rate loans and investments securities, has historically caused
the income earned by savings associations on their loan and investment
portfolios to adjust more slowly to changes in interest rates than their cost of
funds.
The Bank originates both fixed-rate and adjustable-rate residential real
estate loans as market conditions dictate. Historically, the Bank only
originates loans to hold until maturity. The Bank also purchases substantial
amounts of fixed-rate, mortgage-backed securities to hold until maturity.
Adjustable rate loans comprise approximately 56.6% of the mortgage loan
portfolio at June 30, 1997. The Company has ample liquidity in the form of
interest-bearing cash and short-term investments. These items, repricing within
six months, constituted 5.1% of the Company's total assets at June 30, 1997.
With loan demand being slow in the Bank's market area during the past ten
years, management has looked for alternate ways to enhance net income and
improve the yield on interest-earning assets. Cash flow from loan repayments and
new deposits have historically been invested principally in mortgage-backed
securities, with such balances amounting to $25.2 million, or 39.5%, of total
assets at June 30, 1997. The Bank maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities represent a
participation interest in a pool of single-family mortgages. The principal and
interest payments on mortgage-backed securities are passed from the mortgage
originators, as servicer, through intermediaries (generally U.S. Government
agencies and government-sponsored enterprises) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such U.S. Government agencies and government sponsored enterprises, which
guarantee the payment of principal and interest to investors, primarily include
the Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association and Government National Mortgage Association.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. At June 30, 1997, the
66
<PAGE>
weighted average contractual maturity of the Bank's mortgage-backed securities
was approximately 6.51 years.
As part of its efforts to maximize net interest income and manage the risks
associated with changing interest rates, management of the Bank uses the "market
value of portfolio equity" ("NPV") methodology which the Office of Thrift
Supervision ("OTS") has adopted as part of its capital regulations. Although the
Bank would not be subject to the NPV regulation because such regulation does not
apply to institutions with less than $300 million in assets and risk based
capital in excess of 12%, the application of the NPV methodology may illustrate
the Bank's interest rate risk.
Under this methodology, interest rate risk exposure is assessed by reviewing
the estimated changes in the Bank's NPV which would hypothetically occur if
interest rates rapidly rise or fall all along the yield curve. Projected values
of NPV at both higher and lower regulatory defined rate scenarios are compared
to base case values (no changes in rates) to determine the sensitivity to
changing interest rates.
Presented below, as of June 30, 1997, is an analysis of the Bank's interest
rate risk ("IRR") as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates. The table also
contains the policy that the Board of Directors deems advisable in the event of
various changes in interest rates. Such limits have been established with
consideration of the impact of various rate changes and the Bank's currently
strong capital position.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
CHANGES IN ---------------------------------------
INTEREST
RATES MARKET VALUE OF PORTFOLIO EQUITY
(BASIS BOARD LIMIT ---------------------------------------
POINTS) % CHANGE $ CHANGE IN NPV $ CHANGE IN NPV
- - ------------- --------------- ---------------- ---------------------
<S> <C> <C> <C>
(IN THOUSANDS)
+400 (40)% $ (5,014) (31)%
+300 (30) (3,682) (23)
+200 (20) (2,363) (15)
+100 (10) (1,139) (7)
-- -- -- --
-100 (10) 994 6
-200 (20) 1,863 11
-300 (30) 2,755 17
-400 (40) 3,775 23
</TABLE>
The OTS uses the above NPV calculation to monitor an institution's IRR. The
OTS has promulgated regulations regarding a required adjustment to the
institution's risk-based capital based on IRR. The application of the OTS'
methodology quantifies IRR as the change in the NPV which results from a
theoretical 200 basis point increase or decrease in market interest rates. If
the NPV from either calculation would decrease by more than 2% of the present
value of the institution's assets, the institution must deduct 50% of the amount
of the decrease in excess of such 2% in the calculation of risk-based capital.
At June 30, 1997, 2% of the present value of the Bank's assets was approximately
$1.1 million, and, as shown in the table, a 200 basis point increase or decrease
in market interest rates would not significantly impact the Bank's regulatory
capital calculation. However, if the regulation were applicable, the Bank would
deduct an interest rate risk component from its regulatory capital of
approximately $643,000, bringing its risk-based capital ratio to 76.9%, as
compared to the 8% regulatory requirement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Bank's primary
sources of funds are deposits, amortization, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities
67
<PAGE>
and short term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. In addition, the Bank invests excess funds
in overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Bank has been able to generate
sufficient cash through its deposits, and occasionally utilizes advances from
the Federal Home Loan Bank to meet short-term liquidity needs. At June 30, 1997,
the Bank had no outstanding advances from the Federal Home Loan Bank of
Cincinnati or other borrowings. It did borrow and repay $3.2 million in advances
during the six months ended June 30, 1997.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Bank maintains a
strategy of investing in various investment and mortgage-backed securities and
residential mortgage loans. The Bank uses its sources of funds primarily to meet
its ongoing commitments, and to maintain a portfolio of mortgage-backed and
investment securities. At June 30, 1997, the total approved loan commitments
outstanding amounted to $168,500. At the same date, there were no commitments
under unused lines of credit. Certificates of deposit scheduled to mature in one
year or less at June 30, 1997, totaled $32.2 million. Management believes that a
significant portion of maturing deposits will remain with the Bank. At June 30,
1997, the Bank had a liquidity ratio of 21.92% which exceeded the required
minimum liquid asset ratio of 5.0% of assets.
RECAPITALIZATION OF SAIF
The deposits of the Bank are currently insured by the SAIF. Both the SAIF
and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund that
covers commercial bank deposits, are required by law to attain and thereafter
maintain a reserve ratio of 1.25% of insured deposits.
The BIF fund met its target reserve level in September 1995, but the SAIF
was not expected to meet its target reserve level until at least 2002.
Consequently, in late 1995, the FDIC approved a final rule regarding deposit
insurance premiums which, effective with respect to the semiannual premium
assessment beginning January 1, 1996, reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to an annual minimum of
$2,000) for institutions in the lowest risk category. Deposit insurance premiums
for SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category).
On September 30, 1996, President Clinton signed into law legislation which
eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve ratio of the SAIF to 1.25% of insured deposits.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment of 65.7
basis points on SAIF-assessable deposits as of March 31, 1995, which was accrued
as an expense on September 30, 1996. The Bank's one-time special assessment
amounted to approximately $336,000 ($221,800 net of related tax benefits). The
payment of such special assessment had the effect of immediately reducing the
Bank's capital by such an amount. Nevertheless, management does not believe that
this one-time special assessment will have a material adverse effect on the
Company's consolidated financial condition or cause non-compliance with the
Bank's regulatory capital requirements.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to increase assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will
68
<PAGE>
pay 6.4 basis points to fund the FICO while BIF member institutions will pay
about 1.3 basis points. The Bank's insurance premiums, which had amounted to 23
basis points were reduced to 6.4 basis points effective January 1, 1997,
resulting in lower SAIF premiums of approximately $48,000 for the six months
ended June 30, 1997 as compared to June 30, 1996.
RECENT ACCOUNTING PRONOUNCEMENTS
In management's opinion, there are no recent accounting pronouncements which
have been adopted, or pending pronouncements that, if adopted, which have had or
would have a significant effect on the Company's financial position or results
of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements of the Company and related notes presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates. In the current interest rate environment, liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
69
<PAGE>
BUSINESS OF GATEWAY
LENDING ACTIVITIES
GENERAL. At June 30, 1997, the Bank's net loans receivable totalled $21.0
million, or 32.9% of the Company's total assets at such date, as compared to
$19.1 million, or 28.8% of total assets at December 31, 1996. The Bank's primary
lending emphasis has been, and continues to be, the origination of conventional
loans secured by first liens on single-family residences located primarily in
Boyd, Carter and Greenup Counties, Kentucky. Conventional residential real
estate loans are loans which are neither insured by the Federal Housing
Administration ("FHA") nor partially guaranteed by the Veterans Administration
("VA"). At June 30, 1997, the Bank had $18.5 million, or 88.1% of the total loan
portfolio invested in single-family residential loans. To a significantly lesser
extent, the Bank's loan portfolio also includes home equity loans, loans secured
by multi-family residential properties and commercial real estate and loans
secured by savings deposits. Virtually all of the Bank's mortgage loans are
secured by properties located in Kentucky.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
JUNE 30,
1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- -----------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family
residential........... $ 18,524 88.1% $ 16,785 87.9% $ 15,206 89.6% $ 10,338
Multi-family
residential........... 888 4.2 903 4.7 585 3.4 105
Commercial real
estate................ 1,002 4.8 792 4.1 362 2.2 331
----------- ----- ----------- ----- ----------- ----- -----------
Total real estate
loans............... 20,414 97.1 18,480 96.7 16,153 95.2 10,774
Other loans:
Loans secured by savings
accounts.............. 603 2.9 621 3.3 810 4.8 738
----------- ----- ----------- ----- ----------- ----- -----------
Total loans........... 21,017 100.0% 19,101 100.0% 16,963 100.0% 11,512
Less:
Allowance for loan
losses................ (81) (81) (81) (61)
Net deferred cost
reserve............... 69 56 38 --
----------- ----------- ----------- -----------
Net loans............. $ 21,005 $ 19,076 $ 16,920 $ 11,451
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
JUNE 30,
1994
--------------------------
PERCENTAGE AMOUNT PERCENTAGE
------------- ----------- -------------
<S> <C> <C> <C>
Real estate loans:
Single-family
residential........... 89.8% $ 8,999 88.5%
Multi-family
residential........... 0.9 186 1.8
Commercial real
estate................ 2.9 379 3.7
----- ----------- -----
Total real estate
loans............... 93.6 9,564 94.0
Other loans:
Loans secured by savings
accounts.............. 6.4 607 6.0
----- ----------- -----
Total loans........... 100.0% 10,171 100.0%
Less:
Allowance for loan
losses................ (61)
Net deferred cost
reserve............... --
-----------
Net loans............. $ 10,110
-----------
-----------
</TABLE>
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at June 30, 1997 regarding the dollar amount of
loans maturing in the Bank's gross loan portfolio, based on the contractual
terms to maturity. Demand loans and loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE 1-3 YEARS DUE 3-5 YEARS DUE 5-10 YEARS DUE 10-15 YEARS DUE 15 YEARS
DUE 1 YEAR AFTER AFTER AFTER AFTER AND MORE AFTER
OR LESS 6/30/97 6/30/97 6/30/97 6/30/97 6/30/97
------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Single-family
residential......... $ 50 $ 189 $ 683 $ 2,796 $ 7,213 $ 7,593
Multi-family
residential......... 11 484 -- 342 51 --
Commercial real
estate.............. -- -- 145 346 356 155
Other................. 603 -- -- -- -- --
----- ----- ----- ------ ------ ------
Total............. $ 664 $ 673 $ 828 $ 3,484 $ 7,620 $ 7,748
----- ----- ----- ------ ------ ------
----- ----- ----- ------ ------ ------
<CAPTION>
TOTAL
---------
<S> <C>
Single-family
residential......... $ 18,524
Multi-family
residential......... 888
Commercial real
estate.............. 1,002
Other................. 603
---------
Total............. $ 21,017
---------
---------
</TABLE>
70
<PAGE>
The following table sets forth the dollar amount of gross loans due after
one year from June 30, 1997 which have fixed interest rates or which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
FIXED FLOATING OR
RATES ADJUSTABLE-RATES TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Single-family residential................................................... $ 7,611 $ 10,863 $ 18,474
Multi-family residential.................................................... 825 71 877
Commercial real estate...................................................... 401 601 1,002
--------- ------- ---------
Total..................................................................... $ 8,837 $ 11,516 $ 20,353
--------- ------- ---------
--------- ------- ---------
</TABLE>
Scheduled contractual amortization of loans does not reflect the expected
term of the Bank's loan portfolio. The average life of loans is substantially
less than their contractual terms because of prepayments and due-on-sale
clauses, which give the Bank the right to declare a conventional loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
rates are higher than rates on existing mortgage loans and, conversely, decrease
when rates on existing mortgage loans are lower than current mortgage loan rates
(due to refinancings of adjustable-rate and fixed-rate loans at lower rates).
Under the latter circumstances, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates.
LOAN ACTIVITY. The following table shows total loans originated, purchased
and repaid during the periods indicated. There were no loans sold during the
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SIX MONTHS
JUNE 30, DECEMBER 31, ENDED YEAR ENDED
-------------------- ------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Loan originations:
Single-family residential..................... $ 3,201 $ 1,594 $ 4,543 $ 7,651 $ 3,899 $ 2,315 $ 2,943
Multi-family residential...................... -- -- -- -- 145 80 65
Commercial real estate........................ 439 101 670 -- -- -- --
Other......................................... 271 232 389 324 474 131 539
--------- --------- --------- --------- --------- ------ -----------
Total loans originated...................... 3,911 1,927 5,602 7,975 4,518 2,526 3,547
--------- --------- --------- --------- --------- ------ -----------
Loans purchased:
Multi-family residential...................... -- 350 350 500 -- -- --
Commercial real estate........................ -- -- -- 29 -- -- --
--------- --------- --------- --------- --------- ------ -----------
Total loans purchased....................... -- 350 350 529 -- -- --
--------- --------- --------- --------- --------- ------ -----------
Loan principal reductions....................... 1,874 1,999 3,911 3,091 3,157 1,247 4,300
--------- --------- --------- --------- --------- ------ -----------
Net increase (decrease) before other items.... 2,037 278 2,041 5,413 1,361 1,279 (753)
Increase (decrease) due to other items, net..... (108) 24 115 56 129 62 218
--------- --------- --------- --------- --------- ------ -----------
Net increase (decrease) in loan portfolio..... $ 1,929 $ 302 $ 2,156 $ 5,469 $ 1,490 $ 1,341 $ (535)
--------- --------- --------- --------- --------- ------ -----------
--------- --------- --------- --------- --------- ------ -----------
</TABLE>
The lending activities of the Bank are subject to underwriting standards and
loan origination procedures established by the Bank's Board of Directors.
Applications for mortgage loans are taken at each of the Bank's offices. Loan
applications are forwarded to the main office, which supervises the process of
obtaining credit reports, appraisals and other documentation involved with a
loan. Effective in February 1995, the Bank requires that a property appraisal be
obtained in connection with all new
71
<PAGE>
mortgage loans which are performed by an outside, certified appraiser. Prior
thereto, appraisals generally were performed by the Bank's loan officer. The
Bank requires that hazard insurance be maintained on all security properties and
that flood insurance be maintained if the property is within a designated flood
plain. The Bank receives a title opinion from an attorney in connection with
closing the loan.
Residential mortgage loan applications are primarily developed from
referrals, existing customers and walk-in customers. All other loan applications
are obtained in the same manner, as well as by advertising.
Applications for residential mortgage loans are required to be approved by
three members of the Board of Directors, regardless of size. The Bank's Chief
Executive Officer has authority to approve home equity loans in amounts of not
more than $10,000 provided that the Bank's underwriting requirements are
otherwise satisfied. All of such loans are subsequently ratified by the Board.
Loan originations totalled $3.9 million during the six months ended June 30,
1997, as compared to $1.9 million during six months ended June 30, 1996. Single
family loan originations constituted $3.2 million during the six months ended
June 30, 1997 as compared to $1.6 million during the comparable 1996 period. The
Bank originated $439,000 and $101,000 in commercial real estate loans during the
six months ended June 30, 1997 and 1996, respectively. No multi-family
residential loans were originated in either period. In 1995, the Bank adopted a
competitive mortgage loan pricing policy to regain market share in single-family
lending which has resulted in the $17.5 million of originations over the past
two and one-half years, following a relatively inactive period of mortgage
lending during the preceding three years.
Loan originations totaled $5.6 million during the year ended December 31,
1996, as compared to $8.0 million during the year ended December 31, 1995.
Single-family residential loan originations constituted $4.5 million, as
compared to $7.7 million in 1995. During 1996, the Bank originated $670,000 in
commercial real estate loans and no multi-family residential loans, while in
1995, the Bank did not originate any multi-family residential or commercial real
estate loans.
The Bank will from time to time purchase whole residential loans and
participation interests in loans that meet its underwriting criteria. During
1995, the Bank purchased participation interests in multi-family residential and
commercial real estate loans of $500,000 (constituting 20.5% of the whole loan)
and $29,000 (constituting 5.4% of the whole loan), respectively. The properties
securing the multi-family residential loan are located in North Canton, Ohio
while the property securing the commercial real estate loan is located in the
Bank's market area. During 1996, the Bank purchased participation interests in a
multi-family residential real estate loan of $350,000 (constituting 40.0% of the
whole loan). The property securing the loan is located in Canton, Ohio. No loans
were purchased during the six months ended June 30, 1997. At June 30, 1997, the
Bank had no purchased single-family residential loans in its portfolio and three
participation interests in multi-family and commercial real estate loans
totalling $844,000.
SINGLE-FAMILY RESIDENTIAL LOANS. The Bank's single-family residential
mortgage loans consist almost exclusively of conventional loans. While the vast
majority of conventional residential mortgage loans originated by the Bank are
originated under terms and documentation of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"),
prior to February 1995, such loans are non-conforming because of the lack of a
certified appraiser. Effective in February 1995, all residential mortgage loans
are appraised by an outside, certified appraiser. Thus, all new originations
from that date forward conform to FHLMC or FNMA guidelines. However, the Bank
has traditionally sought quality loan originations for portfolio and has not had
a desire to sell loans. The Bank does not believe that holding non-conforming
loans has materially increased its risks.
The single-family residential mortgage loans offered by the Bank currently
consist of fixed-rate and adjustable-rate loans. Fixed-rate loans generally have
maturities ranging from 15 to 25 years and are fully amortizing with monthly
loan payments sufficient to repay the total amount of the loan with interest by
the end of the loan term. At June 30, 1997, $7.6 million, or 41.1% of the Bank's
single-family residential mortgage loans were fixed-rate loans.
72
<PAGE>
The adjustable-rate loans currently offered by the Bank have interest rates
which adjust every year in accordance with the Federal Housing Finance Board's
National Average Contract Mortgage Rate for the Purchase of Previously Occupied
Homes by Combined Lenders. The Bank's adjustable-rate single-family residential
real estate loans generally have a cap of 1% on any increase or decrease in the
interest rate at any adjustment date, and a limit of a 2% decrease and a 5%
increase over the life of the loan. The Bank's adjustable-rate loans require
that any payment adjustment resulting from a change in the interest rate of an
adjustable-rate loan be sufficient to result in full amortization of the loan by
the end of the loan term and, thus, do not permit any of the increased payment
to be added to the principal amount of the loan, or so-called negative
amortization. At June 30, 1997, $10.9 million or 58.9% of the Bank's
single-family residential mortgage loans were adjustable-rate loans.
Adjustable-rate loans decrease the risks associated with changes in interest
rates but involve other risks, primarily because as interest rates increase the
loan payment by the borrower increases to the extent permitted by the terms of
the loan, thereby increasing the potential for default. Moreover, as interest
rates increase, the marketability of the underlying collateral property may be
adversely affected by higher interest rates. The Bank believes that these risks,
which have not had a material adverse effect on the Bank to date because of the
generally declining interest rate environment in recent years, generally are
less than the risks associated with holding fixed-rate loans in an increasing
interest rate environment.
The Bank currently will lend up to 85% of the appraised value of the
property securing a single-family residential loan (referred to as the
loan-to-value ratio). The Bank does not require private mortgage insurance. The
Bank's current policy is to limit the principal balance of such loans to
$175,000, although exceptions can be permitted by the Board.
The Bank offers home equity loans to those borrowers with whom it has a
first mortgage loan, in amounts up to $10,000, which are secured by the
underlying equity in the borrower's home. Home equity loans are amortizing loans
and generally have maximum terms of five years. The Bank's home equity loans
generally require combined loan-to-value ratios of 85% or less.
Federal law imposes limitations on the aggregate amount of loans that a
savings institution may make to any one borrower, including related entities.
The permissible amount of loans-to-one borrower generally may not exceed 15% of
unimpaired capital and surplus. Loans in an amount equal to an additional 10% of
unimpaired capital and surplus also may be made to a borrower if the loans are
fully secured by readily marketable securities. At June 30, 1997, the Bank's
five largest loans or groups of loans-to-one borrower, including related
entities, ranged from an aggregate of $184,000 to $489,000 and the Bank's
loans-to-one borrower limit was $2.3 million at such date. All of such loans
were performing as of June 30, 1997.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. At June 30,
1997, the Bank's multi-family residential loan portfolio was comprised of three
apartment dwellings which contain between four and 15 units and two loan
participations, one secured by 42 duplexes and the other by a 48 unit apartment
complex. The Bank will originate loans up to 80% of the value of the security
property for terms of up to 25 years in the case of 2-4 family loans and for
terms of 20 years for larger loans. Multi-family residential loans are generally
originated with principal balances of up to $125,000 for 2-4 family loans and
$250,000 for greater sizes, although the Board will consider exceptions. During
1995, the Bank purchased a $500,000, or 20.5%, participation interest in a $2.4
million loan secured by 42 duplexes located in North Canton, Ohio. During 1996,
the Bank purchased a $350,000, or 40.0%, participation interest in a $875,000
loan secured by a 48 unit apartment complex located in Canton, Ohio. At June 30,
1997, the Bank had $888,000 or 4.2% of the total loan portfolio invested in
multi-family residential loans.
At June 30, 1997, the Bank's commercial real estate portfolio was comprised
of 15 loans, with principal balances ranging from $19,000 to $192,000. The
properties which secure such loans are local facilities and include a pharmacy,
video store, bakery, dentist and lawyer's office, garage, office buildings,
funeral home, nursing home, church and sports complex. The Bank's underwriting
standard is the same as for larger multi-family residential loans set forth
above. During 1995, the Bank purchased a $29,000, or
73
<PAGE>
5.4%, participation interest in a $535,000 loan. The Bank, along with several
other area financial institutions located in Boyd and Greenup Counties,
Kentucky, participated on a pro rata basis based on asset size in making a loan
for the construction of a building through the economic development committee of
Boyd and Greenup Counties, Kentucky. The loan was repaid during the six months
ended June 30, 1997. At June 30, 1997, the Bank's commercial real estate loan
portfolio amounted to $1.0 million or 4.8% of the total loan portfolio.
The Bank conducted its normal due diligence investigation, including
inspection of the specific properties, in connection with participation
interests purchased during 1996 and 1995.
The Bank evaluates various aspects of commercial and multi-family
residential real estate loan transactions in an effort to mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the market, location and physical
condition. The Bank also generally imposes a debt coverage ratio (the ratio of
net cash from operations before payment of debt service to debt service) of not
less than 125% for multi-family loans and for commercial real estate loans. The
underwriting analysis also includes credit checks and a review of the financial
condition of the borrower and guarantor, if applicable. An appraisal report is
prepared by the Bank's appraiser to substantiate property values for every
commercial real estate and multi-family loan transaction.
Multi-family and commercial real estate lending entails different and
significant risks when compared to single-family residential lending because
such loans typically involve large loan balances to single borrowers and because
the payment experience on such loans is typically dependent on the successful
operation of the project or the borrower's business. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, or other commercial space. The Bank attempts to minimize
its risk exposure by limiting such lending to proven owners, only considering
properties with existing operating performance which can be analyzed, requiring
conservative debt coverage ratios, and periodically monitoring the operation and
physical condition of the collateral.
OTHER LOANS. At June 30, 1997, the Bank had $603,000 or 2.9% of the total
loan portfolio invested in loans secured by savings accounts. The Bank will
originate such loans in an amount up to the account balance at 2% points over
the rate paid on the account.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan, the
Bank attempts to cure the deficiency by contacting the borrower and seeking
payment. Contacts are generally made 30 days after a payment is due. In most
cases, deficiencies are cured promptly. If a delinquency continues, additional
efforts are made to collect the loan. While the Bank generally prefers to work
with borrowers to resolve such problems, when the account becomes 90 days
delinquent, the Bank institutes foreclosure proceedings or takes such other
action as may be necessary to minimize any potential loss.
Loans are placed on non-accrual status when, in the judgment of management,
the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more. For
purposes of the table below, loans greater than 90 days delinquent which are
still accruing are current with respect to the payment of interest and do not
otherwise constitute "slow loans" as defined by federal regulation.
74
<PAGE>
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Bank's non-performing assets at the dates indicated. The Bank
had no troubled debt restructurings during the periods.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------- JUNE 30,
1997 1996 1995 1994 1994
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accruing loans:
Single-family residential........................................... $ 441 $ 82 $ 265 $ 108 $ 82
Accruing loans greater than 90 days delinquent:
Single-family residential........................................... 46 79 85 133 18
Commercial real estate.............................................. 42 48 64 81 89
----- --------- --------- --------- -----
Total accruing loans greater than 90 days delinquent.............. 88 127 149 214 107
----- --------- --------- --------- -----
Total non-performing loans............................................ 529 209 414 322 189
Real estate owned..................................................... 44 -- -- -- --
----- --------- --------- --------- -----
Total non-performing assets........................................... $ 573 $ 209 $ 414 $ 322 $ 189
----- --------- --------- --------- -----
----- --------- --------- --------- -----
Total non-performing loans as a percentage of total loans............. 2.52% 1.09% 2.45% 2.81% 1.86%
----- --------- --------- --------- -----
----- --------- --------- --------- -----
Total non-performing assets as a percentage of total assets........... 0.90% 0.31% 0.56% 0.46% 0.28%
----- --------- --------- --------- -----
----- --------- --------- --------- -----
</TABLE>
The Bank's total non-performing assets to total assets were relatively
insignificant at June 30, 1997, amounting to $573,000 or 0.90% of total assets.
Of this amount, $88,000 or 15.4% of total non-performing assets were currently
paying but are considered delinquent solely because the obligers at some time in
the past did not make one or more required payments of principal and interest.
As long as such missed payments in excess of 90 days remain outstanding, the
Bank will treat such loans as delinquent, even though regular and required
payments are being made. At June 30, 1997, the Bank had one accruing commercial
real estate loan which was reported as greater then 90 days outstanding. This
loan has been outstanding for in excess of seven years and has paid down to less
than 45% of the loan's original principal balance.
The Bank's total non-performing assets have increased from $414,000 or 0.56%
of total assets at December 31, 1995 to $573,000 or 0.90% of total assets at
June 30, 1997. Of the $159,000 or 38.4% increase, $176,000 is attributable to an
increase in non-accruing loans, $44,000 is attributable to an increase in real
estate owned which consists of one foreclosed property, offset by a reduction in
accruing loans greater than 90 days delinquent of $61,000. All of the $176,000
increase in non-accruing loans is attributable to single-family residential
loans, such loans consisting of five loans with balances ranging from $15,000 to
$224,000 at June 30, 1997. All of these loans are well secured and no losses are
anticipated.
At June 30, 1997 and December 31, 1996 and 1995, respectively, approximately
$8,841, $1,394 and $3,050, respectively, in gross interest income would have
been recorded in the period then ended on loans accounted for on a non-accrual
basis if such loans had been current in accordance with their original terms and
had been outstanding throughout the period or since origination if held for part
of the period. For the six months ended June 30, 1997, the years ended December
31, 1996, 1995 and 1994 and the six months ended December 31, 1994, no amount
was included in net income for these same loans prior to the time they were
placed on non-accrual status, and $6,200 was included in net income for the year
ended June 30, 1994.
ALLOWANCE FOR LOAN LOSSES. The Bank's policy is to establish reserves for
estimated losses on loans when it determines that a significant and probable
decline in value occurs. The allowance for losses on loans is maintained at a
level believed adequate by management to absorb potential losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and
75
<PAGE>
other relevant factors. The allowance is increased by provisions for loan losses
which are charged against income. The Bank's allowance for loan losses has
historically been predicated on its low loss experience.
The following table sets forth an analysis of the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED SIX MONTHS
JUNE 30, DECEMBER 31, ENDED YEAR ENDED
-------------------- ------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total loans outstanding................... $ 21,017 $ 17,303 $ 19,101 $ 16,963 $ 11,512 $ 11,512 $ 10,171
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
Average loans outstanding................. $ 20,191 $ 17,174 $ 17,789 $ 14,675 $ 10,313 $ 10,747 $ 10,154
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
Balance at beginning of period............ $ 81 $ 81 $ 81 $ 61 $ 61 $ 61 $ 157
Charge-offs............................... -- -- -- -- -- -- (96)(1)
Recoveries................................ -- -- -- -- -- -- --
--------- --------- --------- --------- --------- ------------ -----------
Net charge-offs........................... -- -- -- -- -- -- (96)
--------- --------- --------- --------- --------- ------------ -----------
Provision for loan losses................. -- -- -- 20 -- -- --
--------- --------- --------- --------- --------- ------------ -----------
Balance at end of period.................. $ 81 $ 81 $ 81 $ 81 $ 61 $ 61 $ 61
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
Allowance for loan losses as a percent of
total loans outstanding................. 0.39% 0.47% 0.42% 0.48% 0.53% 0.53% 0.60%
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
Ratio of net charge-offs to average loans
outstanding............................. --% --% --% --% --% -- % 0.95%
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
</TABLE>
- - ------------------------
(1) All related to multi-family residential properties.
During the six months ended June 30, 1997 and 1996, and for the year ended
December 31, 1996, the Bank made no provision for loan losses as compared to a
$20,000 provision in 1995. The 1995 provision was made due to the increase in
the size of the loan portfolio, and despite continued growth, management feels
that the current allowance for loan losses is commensurate with the high quality
of the Bank's loan portfolio. Management does not believe that the quality of
the loan portfolio has been compromised by its growth.
Although management utilizes its best judgment in providing for loan losses,
there can be no assurance that the Bank will not have to increase its provision
for loan losses in the future as a result of future increases in non-performing
loans or for other reasons.
The following table sets forth information concerning the allocation of the
Bank's allowance for loan losses (general and specific allowances) by loan
category at the dates indicated. The general valuation
76
<PAGE>
allowance is allocated based upon the balance of the loan category to the total
loan portfolio. Other loans consist of loans secured by deposits of the Bank;
therefore, no allowance has been allocated to these loans.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------------------------------------------------------
1997 1996 1995 1994
------------------------------ ------------------------------ ------------------------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO OF LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT
----------- ----------------- ----------- ----------------- ----------- ----------------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Single-family
residential.......... $ 74 88.1% $ 74 87.9% $ 76 89.6% $ 58
Multi-family
residential.......... 4 4.2 4 4.7 3 3.4 1
Commercial real
estate............... 3 4.8 3 4.1 2 2.2 2
Other.................. -- 2.9 -- 3.3 -- 4.8 --
--- ----- --- ----- --- ----- ---
Total.............. $ 81 100.0% $ 81 100.0% $ 81 100.0% $ 61
--- ----- --- ----- --- ----- ---
--- ----- --- ----- --- ----- ---
<CAPTION>
JUNE 30,
1994
--------------------------
<S> <C> <C> <C>
PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO
TOTAL LOANS AMOUNT TOTAL LOANS
------------- ----------- -------------
<S> <C> <C> <C>
Single-family
residential.......... 89.8% $ 57 88.5%
Multi-family
residential.......... 0.9 1 1.8
Commercial real
estate............... 2.9 3 3.7
Other.................. 6.4 -- 6.0
----- --- -----
Total.............. 100.0% $ 61 100.0%
----- --- -----
----- --- -----
</TABLE>
MORTGAGE-BACKED SECURITIES AND INVESTMENT SECURITIES
GENERAL. Federally-chartered savings institutions have authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings and loan
associations, certain bankers' acceptances and Federal funds. Subject to various
restrictions, federally-chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally-chartered savings
institutions are otherwise authorized to make directly.
The Bank's Chief Executive Officer has authority to implement the Bank's
Board approved investment policy. The Chief Executive Officer may make purchases
of up to $1.0 million without prior approval of the Board. All of such purchases
are required to be reported to the Board for ratification at the next scheduled
meeting. Pursuant to the Bank's investment policy, all securities are to be
purchased for investment, with the primary objective of safety of principal and
liquidity and, secondarily, with consideration given to the yield to be earned.
The Bank is authorized to invest in U.S. Government and agency issues,
mortgage-backed securities issued by the FHLMC, FNMA and Government National
Mortgage Association ("GNMA"), municipal bonds issued by state or local
authorities (which generally must be rated in one of the top categories by one
of the nationally recognized rating services) and certificates of deposit in
insured institutions up to a maximum of $100,000 per institution.
MORTGAGE-BACKED SECURITIES. The Bank maintains a significant portfolio of
mortgage-backed securities as a means of investing in housing-related mortgage
instruments without the costs associated with originating mortgage loans for
portfolio retention and with limited credit risk of default which arises in
holding a portfolio of loans to maturity. Mortgage-backed securities (which also
are known as mortgage participation certificates or pass-through certificates)
represent a participation interest in a pool of single-family mortgages. The
principal and interest payments on mortgage-backed securities are passed from
the mortgage originators, as servicer, through intermediaries (generally U.S.
Government agencies and government-sponsored enterprises) that pool and
repackage the participation interests in the form of securities, to investors
such as the Bank. Such U.S. Government agencies and government sponsored
enterprises, which guarantee the payment of principal and interest to investors,
primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC is a public corporation chartered by the U.S. Government and owned
by the 12 Federal Home Loan Banks and federally-insured savings institutions.
The FHLMC issues participation certificates backed principally by conventional
mortgage loans. The FHLMC guarantees the timely payment of interest and the
ultimate return of principal on participation certificates. The FNMA is a
private corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC
77
<PAGE>
and FNMA securities are not backed by the full faith and credit of the United
States, but because the FHLMC and the FNMA are U.S. Government-sponsored
enterprises, these securities are considered to be among the highest quality
investments with minimal credit risks. The GNMA is a government agency within
the Department of Housing and Urban Development which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low- and middle-income housing,
there are limits to the maximum size of loans that qualify for these programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize certain obligations. At June 30, 1997, none of the Bank's
mortgage-backed securities were pledged as security for an obligation.
Mortgage-backed securities issued or guaranteed by the FNMA or the FHLMC (except
interest-only securities or the residual interests in CMOs) are weighted at no
more than 20.0% for risk-based capital purposes, compared to a weight of 50.0%
to 100.0% for residential loans. See "Regulation--The Bank--Regulatory Capital
Requirements."
The Bank's mortgage-backed securities are all classified as "held to
maturity" based upon the Bank's intent and ability to hold such securities to
maturity at the time of purchase, in accordance with GAAP. The mortgage-backed
securities of the Bank are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts using a method which approximates a
level yield. See Notes 1, 4 and 16 of the Notes to Consolidated Financial
Statements incorporated by reference into Item 7 hereof.
The following table sets forth the composition of the Bank's mortgage-backed
securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------- JUNE 30,
1997 1996 1995 1994 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
GNMA certificates.......................................... $ 1,401 $ 1,531 $ 1,963 $ 2,264 $ 2,459
FNMA certificates.......................................... 5,298 5,662 3,751 3,895 4,039
FHLMC certificates......................................... 18,626 20,623 22,068 23,551 25,000
--------- --------- --------- --------- ---------
25,325 27,816 27,782 29,710 31,498
Unamortized premiums....................................... 2 3 5 8 10
Unearned discounts......................................... (124) (156) (169) (205) (229)
--------- --------- --------- --------- ---------
$ 25,203 $ 27,663 $ 27,618 $ 29,513 $ 31,279
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average interest rate............................. 6.51% 6.52% 6.62% 6.65% 6.67%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
78
<PAGE>
The following table sets forth the activity in the Bank's mortgage-backed
securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
AS OF OR FOR THE SIX AS OF OR FOR THE AS OF OR FOR
MONTHS ENDED YEAR ENDED THE SIX MONTHS
JUNE 30, DECEMBER 31, ENDED YEAR ENDED
-------------------- ------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Mortgage-backed securities at beginning
of period............................. $ 27,663 $ 27,618 $ 27,618 $ 29,513 $ 30,985 $ 31,279 $ 28,836
Purchases............................... -- 4,933 5,827 1,875 4,871 505 10,883
Repayments.............................. (2,491) (3,029) (5,835) (3,823) (6,401) (2,298) (8,491)
Accretion and amortization, net......... 31 28 53 53 58 27 51
--------- --------- --------- --------- --------- ------- -----------
Mortgage-backed securities at end of
period................................ $ 25,203 $ 29,550 $ 27,663 $ 27,618 $ 29,513 $ 29,513 $ 31,279
--------- --------- --------- --------- --------- ------- -----------
--------- --------- --------- --------- --------- ------- -----------
</TABLE>
At June 30, 1997, the weighted average contractual maturity of the Bank's
mortgage-backed securities was approximately 6.8 years. The actual maturity of a
mortgage-backed security is less than its stated maturity due to prepayments of
the underlying mortgages. Prepayments that are faster than anticipated may
shorten the life of the security and adversely affect its yield to maturity. The
yield is based upon the interest income and the amortization of any premium or
discount related to the mortgage-backed security. In accordance with GAAP,
premiums and discounts are amortized over the estimated lives of the loans,
which decrease and increase interest income, respectively. The prepayment
assumptions used to determine the amortization period for premiums and discounts
can significantly affect the yield of the mortgage-backed security, and these
assumptions are reviewed periodically to reflect actual prepayments. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of falling mortgage interest rates, if the
coupon rate of the underlying mortgages exceeds the prevailing market interest
rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because
to the extent that the Bank's mortgage-related securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate. The declining yields
earned during recent periods is a direct response to falling interest rates and
accelerated prepayments.
INVESTMENT SECURITIES. The following table sets forth certain information
relating to the Bank's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------- JUNE 30,
1997 1996 1995 1994 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
U.S. Treasury securities................................... $ 2,999 $ 2,999 $ 2,999 $ 6,998 $ 9,497
FHLB bonds................................................. 3,750 4,450 10,349 5,685 4,949
FNMA bonds................................................. 4,041 4,540 2,536 3,048 2,550
FHLMC bonds................................................ 2,248 3,246 1,250 750 746
Municipal bonds............................................ 479 480 553 663 710
FHLB stock................................................. 823 794 741 693 672
Intrieve, Inc. stock....................................... 15 15 15 15 15
Government money market fund............................... -- 1,000 3,000 3,000 3,000
--------- --------- --------- --------- ---------
Total.................................................... $ 14,355 $ 17,524 $ 21,443 $ 20,852 $ 22,139
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
79
<PAGE>
The following table sets forth certain information regarding the maturities
of the Bank's investment securities at June 30, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OVER 10
UNDER 1 YEAR 1-5 YEARS 6-10 YEARS YEARS
---------------------- ---------------------- ---------------------- ---------
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
--------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities....................... $ 2,999 5.13% $ -- --% $ -- --% $ --
FHLB bonds..................................... 500 4.40 2,000 6.40 -- -- 1,250
FNMA bonds..................................... 500 8.00 500 6.10 3,041 6.72 --
FHLMC bonds.................................... -- -- 498 5.99 1,250 6.89 500
Municipal bonds................................ 50 7.00 51 4.50 289 7.21 89
FHLB stock..................................... -- -- -- -- -- -- 823
Intrieve, Inc. stock........................... -- -- -- -- -- -- 15
--------- --- --------- --- --------- --- ---------
Total...................................... $ 4,049 5.41% $ 3,049 6.25% $ 4,580 6.54% $ 2,677
--------- --- --------- --- --------- --- ---------
--------- --- --------- --- --------- --- ---------
<CAPTION>
<S> <C>
WEIGHTED
AVERAGE
YIELD
-----------
<S> <C>
U.S. Treasury securities....................... --%
FHLB bonds..................................... 7.34
FNMA bonds..................................... --
FHLMC bonds.................................... 7.66
Municipal bonds................................ 7.20
FHLB stock..................................... 7.00
Intrieve, Inc. stock........................... --
---
Total...................................... 7.25%
---
---
</TABLE>
The Bank's investment securities are classified as "held to maturity" based
upon the Bank's intent and ability to hold such securities to maturity at the
time of purchase, in accordance with GAAP. Investment securities are carried at
cost, with any discounts or premiums recognized in interest income using the
interest method over the period to maturity.
SOURCES OF FUNDS
GENERAL. The Bank's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through its branch offices. The Bank also derives funds from amortization and
prepayments of outstanding loans and mortgage-backed securities, from maturing
investment securities and, occasionally, from advances from the FHLB of
Cincinnati. Loan repayments are a relatively stable source of funds, while
deposits inflows and outflows are significantly influenced by general interest
rates and money market conditions. The Bank may use borrowings to supplement its
deposits as a source of funds.
DEPOSITS. The Bank's current deposit products include passbook accounts and
certificates of deposit ranging in terms from seven days to 5 years. The Bank's
deposit products also include Individual Retirement Account ("IRA")
certificates.
The Bank's deposits are obtained from residents in its primary market area.
The Bank attracts local deposit accounts by offering competitive interest rates.
The Bank utilizes traditional marketing methods to attract new customers and
savings deposits, including print media and radio advertising.
80
<PAGE>
The following table sets forth the dollar amount and average interest rates
of deposits in the various types of deposit programs offered by the Bank at the
dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
JUNE 30,
1997 1996 1995 1994
-------------------------- -------------------------- -------------------------- --------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- ------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Certificate
accounts:
2.00--
4.00%.... $ 8,778 18.9% $ 9,340 19.0% $ 8,689 16.3% $ 16,726 27.7%
4.01--
6.00%.... 29,944 64.7 36,792 74.8 40,890 76.7 35,293 58.3
6.01--
8.00%.... 4,868 10.5 106 0.2 131 0.3 129 0.2
8.01--
10.00%... -- -- 95 0.2 91 0.1 125 0.2
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total
certificate
accounts(1).. 43,590 94.1 46,333 94.2 49,801 93.4 52,273 86.4
Transaction
accounts:
Passbook
accounts... 2,728 5.9 2,862 5.8 3,487 6.6 8,213 13.6
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total
deposits... $ 46,318 100.0% $ 49,195 100.0% $ 53,288 100.0% $ 60,486 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
JUNE 30,
1994
--------------------------
AMOUNT PERCENTAGE
----------- -------------
<S> <C> <C>
Certificate
accounts:
2.00--
4.00%.... $ 24,389 42.1%
4.01--
6.00%.... 21,929 37.9
6.01--
8.00%.... 129 0.2
8.01--
10.00%... 144 0.2
----------- -----
Total
certificate
accounts(1).. 46,591 80.4
Transaction
accounts:
Passbook
accounts... 11,338 19.6
----------- -----
Total
deposits... $ 57,929 100.0%
----------- -----
----------- -----
</TABLE>
- - ------------------------
(1) Includes $6.2 million, $6.7 million and $6.9 million in IRA accounts at June
30, 1997 and December 31, 1996 and 1995, respectively.
The following table sets forth the savings activities of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS
JUNE 30, DECEMBER 31, ENDED YEAR ENDED
-------------------- ------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
--------- --------- --------- --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Deposits............................... $ 7,224 $ 8,529 $ 14,028 $ 28,986 $ 24,454 $ 16,021 $ 17,089
Withdrawals............................ 11,081 9,594 20,364 38,424 23,278 14,488 17,147
--------- --------- --------- --------- --------- ------------ -----------
Net increase (decrease) before interest
credited............................. (3,857) (1,065) (6,336) (9,438) 1,176 1,533 (58)
Interest credited...................... 980 1,154 2,243 2,240 2,041 1,024 2,092
--------- --------- --------- --------- --------- ------------ -----------
Net increase (decrease) in
deposits......................... $ (2,877) $ 89 $ (4,093) $ (7,198) $ 3,217 $ 2,557 $ 2,034
--------- --------- --------- --------- --------- ------------ -----------
--------- --------- --------- --------- --------- ------------ -----------
</TABLE>
Deposits decreased $2.9 million, or 5.9%, for the six months ended June 30,
1997, due to a $3.9 million net decrease before interest credited of $1.0
million. For the year ended December 31, 1996, deposits decreased $4.1 million,
or 7.7%, due to a $6.3 million net decrease before interest credited of $2.2
million. Passbook accounts declined $134,000 and $625,000, while certificates of
deposit decreased $2.7 million and $3.5 million for the six months ended June
30, 1997 and the year ended December 31, 1996, respectively. The decrease in
deposits resulted from customers moving funds to alternate capital markets
yielding higher short-term rates of return during 1997 and 1996 as compared to
interest rates being offered by the Bank.
Deposits decreased $7.2 million, or 11.9%, during fiscal 1995 due to a $9.4
million net decrease in deposits before interest credited of $2.2 million.
Passbook accounts declined $4.7 million while certificates
81
<PAGE>
of deposit decreased $2.5 million. A significant portion of the decrease in
deposits is due to the Bank having held funds for the Company's stock
subscription proceeds in a passbook savings account at December 31, 1994, which
funds were utilized to purchase the Company's stock in January 1995. The
decrease in certificates of deposit can be attributed in part to customer
withdrawals for the purchase of the Company's stock.
The following table shows the contractual interest rate and maturity
information for the Bank's certificates of deposit at June 30, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
-----------------------------------------------------------
ONE YEAR OVER
OR LESS 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
--------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.00 - 4.00%........................................... $ 8,778 $ -- $ -- $ -- $ 8,778
4.01 - 6.00%........................................... 20,179 8,291 1,474 -- 29,944
6.01 - 8.00%........................................... 3,244 1,443 181 -- 4,868
8.01 - 10.00%.......................................... -- -- -- -- --
--------- ----------- ----------- ----- ---------
Total................................................ $ 32,201 $ 9,734 $ 1,655 $ -- $ 43,590
--------- ----------- ----------- ----- ---------
--------- ----------- ----------- ----- ---------
</TABLE>
The following table sets forth the maturities of the Bank's certificates of
deposit having principal amounts of $100,000 or more at June 30, 1997.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT MATURING AMOUNT
IN QUARTER ENDING: (IN THOUSANDS)
- - ------------------------------------------------------------------------------ ---------------
<S> <C>
September 30, 1997............................................................ $ 2,146
December 31, 1997............................................................. 995
March 31, 1998................................................................ 519
June 30, 1998................................................................. 403
After June 30, 1998........................................................... 1,760
------
Total certificates of deposit with
balances of $100,000 or more.............................................. $ 5,823
------
------
</TABLE>
BORROWINGS. The Bank may obtain advances from the FHLB of Cincinnati upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate and
range of maturities. At June 30, 1997, the Bank had no outstanding advances from
the FHLB of Cincinnati. It did, however, borrow and repay $3,250,000 during the
six months ended June 30, 1997, such funds being used for short-term liquidity
needs.
SUBSIDIARIES
The Bank is permitted to invest up to 2% of its assets in the capital stock
of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. The Bank's only
subsidiary, C&F Services, Inc., was formed in 1977 to purchase stock in a data
processing company, Intrieve, Inc. (formerly Savings & Loan Data Corporation.)
The subsidiary is otherwise inactive. This subsidiary had no income or expenses
during the year ended June 30, 1994, the six months ended December 31, 1994, the
three years ended December 31, 1996 and the six months ended June 30, 1997. As
of June 30, 1997, the net book value of the Bank's investment in its service
corporations was $15,000.
82
<PAGE>
COMPETITION
The Bank faces strong competition both in attracting deposits and making
real estate loans. Its most direct competition for deposits has historically
come from other savings institutions, credit unions and commercial banks located
within 15 miles of Catlettsburg, which covers Boyd County, Kentucky, Cabell
County, West Virginia and Lawrence County, Ohio, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, during times of high interest rates, the Bank has faced
additional significant competition for investors' funds from short-term money
market securities, mutual funds and other corporate and government securities.
The ability of the Bank to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans principally
from other savings institutions, commercial banks and mortgage banking
companies. The Bank competes for loans principally through the interest rates
and, currently, by not charging loan fees, and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
OFFICES
The following table sets forth certain information with respect to the
offices and other properties of Gateway at June 30, 1997.
<TABLE>
<CAPTION>
NET BOOK
VALUE
DESCRIPTION/ADDRESS LEASED/OWNED OF PROPERTY DEPOSITS
- - ----------------------------------------------------------------------- --------------- -------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Main Office............................................................ Own $ 28,700 $ 37,683
2713 - 2717 Louisa Street
Catlettsburg, KY
Branch Office.......................................................... Own $ 255,100 $ 8,633
380 South Carol Malone Boulevard
Grayson, KY
</TABLE>
83
<PAGE>
REGULATION AND SUPERVISION OF GATEWAY
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of Gateway and Catlettsburg Federal. The description of
these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
Gateway is a unitary savings and loan holding companies subject to the
provisions of the Home Owners' Loan Act ("HOLA") and the regulations of the OTS.
Catlettsburg Federal is a federally chartered savings institutions subject to
OTS regulations, oversight and supervision. The Merger will have no effect upon
Catlettsburg Federal's status as a federally chartered savings institution.
GATEWAY. Gateway is a registered savings and loan holding company and is
subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company,
Catlettsburg Federal is subject to certain restrictions in its dealings with
Gateway and affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, the
Director may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet a QTL test, then
such unitary holding company also shall become subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
shall register as, and become subject to the restrictions applicable to, a bank
holding company. See "--Catlettsburg Federal--Qualified Thrift Lender Test."
If Gateway were to acquire control of another savings institution, other
than through merger or other business combination with Catlettsburg Federal,
Gateway would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of Gateway and any of its subsidiaries
(other than Catlettsburg Federal or other subsidiary savings institutions) would
thereafter be subject to further restrictions. No multiple savings and loan
holding company or subsidiary thereof which is not a savings institution shall
commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof any business activity,
other than: (i) furnishing or performing management services for a subsidiary
savings institution; (ii) conducting an insurance agency or escrow business;
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution; (iv) holding or managing properties used or
occupied by a subsidiary savings institution; (v) acting as trustee under deeds
of trust; (vi) those activities authorized by regulation as of March 5, 1987 to
be engaged in by multiple savings and loan holding companies; or (vii) unless
the Director of the OTS by regulation prohibits or limits such activities for
savings and loan holding companies, those activities authorized by the Federal
Reserve Board as permissible for bank holding companies. The activities
described in (i) through (vi) above may only be engaged in after giving the OTS
prior notice and being informed that the OTS does not object to such activities.
In addition, the activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and loan
holding company.
84
<PAGE>
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution (such as Gateway) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the FRA place restrictions on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater than 10%
stockholder of a savings institution (a "principal stockholder"), and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At June 30, 1997, Catlettsburg Federal was in compliance
with the above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances, savings
and loan holding companies are prohibited from acquiring, without prior approval
of the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or (ii)
more than 5% of the voting shares of a savings institution or holding company
thereof which is not a subsidiary. Except with the prior approval of the
Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings and loan holding
company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Under applicable law, the Federal Reserve Board is authorized to approve an
application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that
85
<PAGE>
controls a savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the Bank Insurance Fund ("BIF")
with the approval of the appropriate federal banking agency and the Federal
Reserve Board. There have been a number of acquisitions of savings institutions
by bank holding companies in recent years.
CATLETTSBURG FEDERAL. The OTS has extensive regulatory authority over the
operations of savings institutions. As part of this authority, savings
institutions are required to file periodic reports with the OTS and are subject
to periodic examinations by the OTS. The investment and lending authority of
savings institutions are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings institutions and may also apply to state-chartered
savings institutions. Such regulation and supervision is primarily intended for
the protection of depositors.
The OTS' enforcement authority over all savings institutions and their
holding companies 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. The OTS is required, except
under certain circumstances, to make public disclosure of final enforcement
actions.
INSURANCE OF ACCOUNTS. The deposits of Catlettsburg Federal are insured to
the maximum extent permitted by the SAIF, which is administered by the FDIC, and
are backed by the full faith and credit of the United States Government. As
insurer, the FDIC 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 threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings institutions, after giving the OTS
an opportunity to take such action.
Both the SAIF and BIF are statutorily required to be capitalized to a ratio
of 1.25% of insured reserve deposits. While the BIF has reached the required
reserve ratio, the SAIF is not expected to be recapitalized until 2002 at the
earliest. Legislation has authorized $8 billion for the SAIF; however, such
funds only become available to the SAIF if the FDIC determines that the funds
are needed to cover losses of the SAIF and several other stringent criteria are
met.
Under current FDIC regulations, SAIF member institutions are assigned to one
of three capital groups which are based solely on the level of an institution's
capital--"well capitalized," "adequately capitalized," and "undercapitalized."
These three groups are then divided into three subgroups which reflect varying
levels of supervisory concern, from those which are considered to be healthy to
those which are considered to be of substantial supervisory concern. The matrix
so created results in nine assessment risk classifications, with rates ranging
from .23% for well capitalized, healthy institutions to .31% for
undercapitalized institutions with substantial supervisory concerns. The
insurance premiums for Catlettsburg Federal for the first semi-annual period in
1996 was .23% of insured deposits.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $2,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
On September 30, 1996, President Clinton signed into law legislation which
eliminates the premium differential between SAIF-insured institutions and
BIF-insured institutions by recapitalizing the SAIF's reserves to the required
ratio. The legislation required all SAIF member institutions to pay a one-time
special assessment to recapitalize the SAIF, with the aggregate amount to be
sufficient to bring the reserve
86
<PAGE>
ratio in the SAIF to 1.25% of insured deposits. The legislation also provides
for the merger of the BIF and the SAIF, with such merger being conditioned upon
the prior elimination of the thrift charter.
Implementing FDIC regulations imposed a one-time special assessment equal to
65.7 basis points for all SAIF-assessable deposits as of March 31, 1995, which
was accrued as an expense on September 30, 1996. Catlettsburg Federal's one-time
special assessment amounted to $335,937. Net of related tax benefits, the
one-time special assessment amounted to $221,718. The payment of such special
assessment had the effect of immediately reducing Catlettsburg Federal's capital
by such amount. Nevertheless, management does not believe that this one-time
special assessment had a material adverse effect on Catlettsburg Federal's
consolidated financial condition.
In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to fund
the FICO, while BIF member institutions will pay approximately 1.3 basis points.
Catlettsburg Federal's insurance premiums, which had amounted to 23 basis
points, were thus reduced to 6.4 basis points effective January 1, 1997. Based
upon the $49.2 million of assessable deposits at December 31, 1996, Catlettsburg
Federal would expect to pay $20,400 less in insurance premiums per quarter
during 1997.
The FDIC may terminate the deposit insurance of any insured depository
institution, including Catlettsburg Federal, if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of Catlettsburg Federal's deposit insurance.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings institutions are
required to maintain minimum levels of regulatory capital. The OTS has
established capital standards applicable to all savings institutions. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The OTS also is authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given the
same definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings institution's
intangible assets, with only a limited exception for purchased mortgage
servicing rights. Both core and tangible capital are further reduced by an
amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other than
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At June 30, 1997, Catlettsburg Federal had no investment in
subsidiaries which was impermissible and required to be deducted from its
capital calculation.
87
<PAGE>
A savings institution is allowed to include both core capital and
supplementary capital in the calculation of its total capital for purposes of
the risk-based capital requirements, provided that the amount of supplementary
capital does not exceed the savings institution's core capital. Supplementary
capital generally consists of hybrid capital instruments; perpetual preferred
stock which is not eligible to be included as core capital; subordinated debt
and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
repossessed assets or loans more than 90 days past due. Single-family
residential real estate loans which are not past-due or non-performing and which
have been made in accordance with prudent underwriting standards are assigned a
50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans. Off-
balance sheet items also are adjusted to take into account certain risk
characteristics.
In August 1995, the OTS and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Under the policy statement, the OTS will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The OTS intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
The following table sets forth Catlettsburg Federal's compliance with each
of its three capital requirements at June 30, 1997.
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- --------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Actual regulatory capital....................................................... $ 15,305 $ 15,305 $ 15,385
Amount currently required....................................................... 928 1,856 1,540
--------- --------- -----------
Excess regulatory capital....................................................... $ 14,377 $ 13,449 $ 13,845
--------- --------- -----------
--------- --------- -----------
Actual regulatory capital as a percentage(1).................................... 24.7% 24.7% 80.2%
Percentage currently required................................................... 1.5 3.0 8.0
--------- --------- -----------
Excess regulatory capital as a percentage in excess of requirement.............. 23.2% 21.7% 72.2%
--------- --------- -----------
--------- --------- -----------
</TABLE>
- - ------------------------
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $61.9 million. Risk-based capital is computed as a percentage of
adjusted risk-weighted assets of $19.2 million.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator or
receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
correction actions.
LIQUIDITY REQUIREMENTS. All savings institutions 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. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings
88
<PAGE>
institutions. At the present time, the required minimum liquid asset ratio is
5%. Catlettsburg Federal has consistently exceeded such regulatory liquidity
requirement and, at June 30, 1997, had a liquidity ratio of 21.9%.
QUALIFIED THRIFT LENDER TEST. Under Section 2303 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended ("Code"). The QTL test set forth in the HOLA requires a thrift
institution to maintain 65% of portfolio assets in Qualified Thrift Investments
("QTIs"). Portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. Generally, QTIs are residential
housing related assets. At June 30, 1997, the amount of Catlettsburg Federal's
assets which were invested in QTIs was 91.2%, which exceeded the percentage
required to qualify Catlettsburg Federal under the QTL test. A savings
institution that does not meet the QTL test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, it must cease any activity and not retain any investment not
permissible for a national bank and immediately repay any outstanding FHLB
advances (subject to safety and soundness considerations).
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions by
savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt and
other transactions charged to the capital account of a savings institution to
make capital distributions. Generally, the regulation creates a safe harbor for
specified levels of capital distributions from institutions meeting at least
their minimum capital requirements, so long as such institutions notify the OTS
and receive no objection to the distribution from the OTS. Savings institutions
and distributions that do not qualify for the safe harbor are required to obtain
prior OTS approval before making any capital distributions.
Generally, savings institutions that before and after the proposed
distribution meet or exceed their fully phased-in capital requirements, or Tier
1 institutions, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75% of
net income over the most recent four-quarter period. The "surplus capital ratio"
is defined to mean the percentage by which the institution's ratio of total
capital to assets exceeds the ratio of its fully phased-in capital requirement
to assets. "Fully phased-in capital requirement" is defined to mean an
institution's capital requirement under the statutory and regulatory standards
applicable on December 31, 1994, as modified to reflect any applicable
individual minimum capital requirement imposed upon the institution. Failure to
meet fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 institution as a result of such a determination. Catlettsburg
Federal currently is a Tier 1 institution for purposes of the regulation dealing
with capital distributions.
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OTS regulations also prohibit Catlettsburg Federal from declaring or paying
any dividends or from repurchasing any of its stock if, as a result, the
regulatory (or total) capital of Catlettsburg Federal would be reduced below the
amount required to be maintained for the liquidation account established by it
for certain depositors in connection with its conversion from mutual to stock
form. In addition, such regulations prohibit an institution from repurchasing
any of its stock for a period of at least one year from the date of its
conversion.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation 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 OTS, in connection with its examination of a savings
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 by such institution. FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a rating system
which identifies four levels of performance that may describe an institution's
record of meeting community needs: outstanding, satisfactory, needs to improve
and substantial noncompliance. The CRA also requires all institutions to make
public disclosure of their CRA ratings. Catlettsburg Federal received a
"satisfactory" rating as a result of its most recent evaluation.
LOANS TO ONE BORROWER. The permissible amount of loans-to-one borrower now
generally follows the national bank standard for all loans made by savings
institutions, as compared to the pre-FIRREA rule that applied that standard only
to commercial loans made by federally chartered savings institutions. The
national bank standard generally does not permit loans-to-one borrower to exceed
the greater of $500,000 or 15% of unimpaired capital and surplus. Loans in an
amount equal to an additional 10% of unimpaired capital and surplus also may be
made to a borrower if the loans are fully secured by readily marketable
securities. For information about the largest borrowers from Catlettsburg
Federal, see "Description of Business--Lending Activities--Single-Family
Residential Loans."
BRANCHING BY FEDERAL SAVINGS INSTITUTIONS. The OTS' policy statement on
branching by federally-chartered savings institutions permits nationwide
branching to the extent allowed by federal statute. Current OTS policy generally
permits a federally-chartered savings institution to establish branch offices
outside of its home state if the institution meets the domestic building and
loan test under the Internal Revenue Code or an asset composition test set forth
in the Code, and if, with respect to each state outside of its home state where
the institution has established branches, the branches, taken alone, also
satisfy one of the two tax tests. An institution seeking to take advantage of
this authority would have to have a branching application approved by the OTS,
which would consider the regulatory capital of the institution and its record
under the CRA, as amended, among other things.
ACCOUNTING REQUIREMENTS. Applicable OTS accounting regulations and
reporting requirements apply the following standards: (i) regulatory reports
will incorporate GAAP when GAAP is used by federal banking agencies; (ii)
savings institution transactions, financial condition and regulatory capital
must be reported and disclosed in accordance with OTS regulatory reporting
requirements that will be at least as stringent as for national banks; and (iii)
the Director of the OTS may prescribe regulatory reporting requirements more
stringent than GAAP whenever the Director determines that such requirements are
necessary to ensure the safe and sound reporting and operation of savings
institutions.
FEDERAL HOME LOAN BANK SYSTEM. Catlettsburg Federal is a member of the FHLB
of Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is
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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.
As a member, Catlettsburg Federal is required to purchase and maintain stock
in the FHLB of Cincinnati in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
Cincinnati, whichever is greater. At June 30, 1997, Catlettsburg Federal had
$822,600 in FHLB stock, which was in compliance with this requirement. For the
years ended December 31, 1994, 1995 and 1996 and the six months ended June 30,
1997, dividends paid by the FHLB of Cincinnati to Catlettsburg Federal totalled
approximately $38,100, $48,400, $53,300 and $28,300, respectively.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. At June 30, 1997, Catlettsburg Federal was in
compliance with applicable requirements. However, because required reserves must
be maintained in the form of vault cash or a noninterest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
FEDERAL TAXATION
GENERAL. Gateway and Catlettsburg Federal are subject to the corporate tax
provisions of the Code, as well as certain additional provisions of the Code
which apply to thrift and other types of financial institutions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to Gateway and
Catlettsburg Federal.
FISCAL YEAR. For the fiscal year ended December 31, 1996, Gateway and
Catlettsburg Federal filed separate tax returns. Filing separate tax returns has
no adverse effect on Gateway or Catlettsburg Federal.
METHOD OF ACCOUNTING. Catlettsburg Federal maintains its books and records
for federal income tax purposes using the accrual method of accounting. The
accrual method of accounting generally requires that items of income be
recognized when all events have occurred that establish the right to receive the
income and the amount of income can be determined with reasonable accuracy, and
that items of expense be deducted at the later of (i) the time when all events
have occurred that establish the liability to pay the expense and the amount of
such liability can be determined with reasonable accuracy or (ii) the time when
economic performance with respect to the item of expense has occurred.
BAD DEBT RESERVES. Prior to the enactment, on August 20, 1996, of the Small
Business Job Protection Act of 1996 (the "Small Business Act"), for federal
income tax purposes, thrift institutions such as Catlettsburg Federal, which met
certain definitional tests primarily relating to their assets and the nature of
their business, were permitted to establish tax reserves for bad debts and to
make annual additions thereto, which additions could, within specified
limitations, be deducted in arriving at their taxable income. Catlettsburg
Federal's deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, could be computed using an
amount based on a six-year moving average of Catlettsburg Federal's actual loss
experience (the "Experience Method"), or a percentage equal to 8.0% of
Catlettsburg Federal's taxable income (the "PTI Method"), computed without
regard to this deduction and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve.
Under the Small Business Act, the PTI Method was repealed and Catlettsburg
Federal will be required to use the Experience Method of computing additions to
its bad debt reserve for taxable years beginning with Catlettsburg Federal's
taxable year beginning January 1, 1996. In addition, Catlettsburg Federal will
be required to recapture (i.e., take into taxable income) over a six-year
period, beginning with Catlettsburg Federal's taxable year beginning January 1,
1996, the excess of the balance of its bad debt reserves (other than the
supplemental reserve) as of December 31, 1995 over (a) the greater of the
balance
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of such reserves as of December 31, 1987 or (b) an amount that would have been
the balance of such reserves as of December 31, 1995 had Catlettsburg Federal
always computed the additions to its reserves using the Experience Method.
However, under the Small Business Act such recapture requirements will be
suspended for each of the two successive taxable years beginning January 1, 1996
in which Catlettsburg Federal originates a minimum amount of certain residential
loans during such years that is not less than the average of the principal
amounts of such loans made by Catlettsburg Federal during its six taxable years
preceding January 1, 1996.
At December 31, 1996, the federal income tax reserves of Catlettsburg
Federal included $2,445,443 for which no federal income tax has been provided,
of this amount, $2,365,694 and $79,749 are attributable to pre-1987 and
post-1987 bad debt reserves, respectively. Catlettsburg Federal will recapture
into income approximately $13,291 per year over the six year period beginning
January 1, 1996, subject to suspension for two years in the event the
residential loan exemption is met as discussed above.
DISTRIBUTIONS. If Catlettsburg Federal distributes cash or property to its
stockholders, and the distribution is treated as being from its pre-1987 bad
debt reserves, the distribution will cause Catlettsburg Federal to have
additional taxable income. A distribution is deemed to have been made from
pre-1987 bad debt reserves to the extent that (a) the reserves exceed the amount
that would have been accumulated on the basis of actual loss experience, and (b)
the distribution is a "non-qualified distribution." A distribution with respect
to stock is a non-dividend distribution to the extent that, for federal income
tax purposes, (i) it is in redemption of shares, (ii) it is pursuant to a
liquidation of the institution, or (iii) in the case of a current distribution,
together with all other such distributions during the taxable year, it exceeds
the institution's current and post-1951 accumulated earnings and profits. The
amount of additional taxable income created by a non-dividend distribution is an
amount that when reduced by the tax attributable to it is equal to the amount of
the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of 20%
on a base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides that
an item of tax preference is the excess of the bad debt deduction allowable for
a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax preference
that constitute AMTI include (a) tax exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years beginning after 1989, 75% of the
excess (if any) of (i) adjusted current earnings as defined in the Code, over
(ii) AMTI (determined without regard to this preference and prior to reduction
by net operating losses). Net operating losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum tax may be used as credits against
regular tax liabilities in future years.
AUDIT BY IRS. Catlettsburg Federal's consolidated federal income tax
returns for taxable years through 1993 have been closed for the purpose of
examination by the IRS.
STATE TAXATION
The State of Kentucky imposes no income or franchise taxes on savings
institutions. However, Gateway (on an unconsolidated basis) and Catlettsburg
Federal's wholly-owned subsidiaries must pay a Kentucky state income tax, as
well as a tax on capital. The tax on income is 4.0% for the first $25,000 of
taxable income, 5.0% for the next $25,000, 6.0% for the next $60,000, 7.0% for
the next $150,000 and 8.25% for all income over $250,000. The tax on capital is
.0021 times the capital employed.
Catlettsburg Federal is subject to an annual Kentucky ad valorem tax.
Assessed at the beginning of each calendar year, this tax is 0.1% of
Catlettsburg Federal's savings accounts, common stock, capital and retained
income with certain deductions allowed for amounts borrowed by depositors and
for securities guaranteed by the U.S. Government or certain of its agencies.
During the year ended December 31, 1996, the amount of such expense for
Catlettsburg Federal was $55,400.
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DESCRIPTION OF PEOPLES COMMON SHARES
The following is a summary of the material attributes of the Peoples Common
Shares.
GENERAL
The Amended Articles of Incorporation of Peoples (as amended, the "Peoples
Articles") authorize 12,000,000 common shares, each without par value. As of
September , 1997, Peoples Common Shares were outstanding. The Peoples
Common Shares are quoted on The Nasdaq National Market. The Peoples Common
Shares are not savings accounts, deposits or other obligations of any bank or
non-bank subsidiary and are not insured by the FDIC or any other government
agency.
VOTING RIGHTS
Each Peoples Common Share entitles the holder thereof to one vote for the
election of directors and for all other matters submitted to the shareholders of
Peoples for their consideration. Peoples shareholders are not entitled to
exercise cumulative voting in the election of directors.
The Code of Regulations of Peoples (the "Peoples Regulations") provides that
all elections of directors will be determined by a plurality of the votes cast.
Any other matters submitted to the shareholders of Peoples for their vote will
be decided by the vote of such proportion of the Peoples Common Shares as is
required by law, the Peoples Articles or the Peoples Regulations.
Article SEVENTH of the Peoples Articles provides that a majority of the
voting power of Peoples may approve (1) a proposed amendment to the Peoples
Articles; (2) proposed new regulations or an alteration, amendment or repeal of
the Peoples Regulations; (3) an agreement of merger or consolidation involving
Peoples; (4) a proposed combination or majority share acquisition involving the
issuance of shares of Peoples and requiring shareholder approval; (5) a proposal
to sell, lease, exchange, transfer or otherwise dispose of all or substantially
all of the property and assets of Peoples; (6) a proposed dissolution of
Peoples; or (7) a proposal to fix or change the number of directors by action of
the shareholders of Peoples, unless the proposal at issue is affirmatively voted
against by three members of the Board of Directors, in which case the proposal
must be approved by 75% of the voting power of Peoples entitled to vote thereon.
NOMINATION PROCEDURE; NUMBER OF DIRECTORS; CLASSIFIED BOARD OF DIRECTORS;
REMOVAL OF DIRECTORS
The Peoples Regulations provide that shareholder nominations for election to
the Peoples Board of Directors must be made in writing and must be delivered or
mailed to the Secretary of Peoples not less than fourteen days nor more than
fifty days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than twenty-one days' notice of the
meeting is given to the shareholders, such nomination must be delivered or
mailed to the Secretary of Peoples not later than the close of business on the
seventh day following the day on which the notice of the meeting was mailed.
Such notification must contain the following information to the extent known by
the notifying shareholder: (a) the name, age, business address and residence
address of each proposed nominee; (b) the principal occupation or employment of
each proposed nominee; (c) the total number of Peoples Common Shares
beneficially owned by each proposed nominee and the notifying shareholder; and
(d) any other information required to be disclosed with respect to a nominee for
election as a director of Peoples in proxy solicitations pursuant to Section
14(a) of the Exchange Act. Nominations which the chairman of the meeting
determines are not made in accordance with the Peoples Regulations will be
disregarded.
Pursuant to the Peoples Regulations, the number of Peoples directors is
currently fixed at nine. The number of directors may be fixed or changed at a
meeting of the shareholders called for the purpose of electing directors at
which a quorum is present, upon the approval of a majority of the voting power
of Peoples unless the proposal is affirmatively voted against by three members
of the Board of Directors, in
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which case the proposal must be approved by 75% of the voting power of Peoples
entitled to vote thereon. The directors may fix or change the number of
directors by the affirmative vote of a majority of the authorized number of
directors and may fill any director's office that is created by an increase in
the number of directors; however, the directors may not increase the number of
directors to more than fifteen nor reduce the number of directors to less than
nine.
The Peoples Board of Directors is divided into three classes, each
containing at least three directors; and the election of each class of directors
constitutes a separate election. Directors serve for terms of three years and
until their respective successors are duly elected and qualified, or until their
earlier resignation, removal from office or death. As a result of the
classification of the Peoples Board, a minimum of two annual meetings of
shareholders will be necessary for a majority of the members of the Peoples
Board to stand for election.
A director or directors of Peoples may be removed from office, only for
cause, by the affirmative vote of the holders of at least 75% of the voting
power of Peoples entitling them to elect directors in place of those to be
removed.
PRE-EMPTIVE RIGHTS
Holders of Peoples Common Shares do not have pre-emptive rights.
REPURCHASES
Peoples has the right to repurchase, if and when any shareholder desires to
sell, or on the happening of any event is required to sell, Peoples Common
Shares previously issued; however, Peoples may not repurchase Peoples Common
Shares if immediately thereafter its assets would be less than its liabilities
plus its stated capital, if any, or if Peoples is insolvent or would be rendered
insolvent by such a purchase.
DIVIDEND RIGHTS
Holders of outstanding Peoples Common Shares are entitled to receive
dividends when and if declared by the Board of Directors of Peoples from funds
legally available therefore. An Ohio corporation, such as Peoples, may pay
dividends out of surplus, however created, but must notify its shareholders if a
dividend is paid out of capital surplus.
The ability of Peoples to obtain funds for the payment of dividends and for
other cash requirements is largely dependent on the amount of dividends which
may be declared by its subsidiary financial institutions (Peoples Bank, First
National Bank and Russell Federal) and other subsidiaries. At December 31, 1996,
approximately, $7,257,000 of retained net profits of the financial institutions
subsidiaries were available for the payment of dividends to Peoples without
regulatory approval. However, the Federal Reserve expects Peoples to serve as a
source of strength to its subsidiary banks, which may require it to retain
capital for further investment in subsidiaries, rather than for dividends for
shareholders. Peoples Bank, First National Bank and Russell Federal may not pay
dividends to Peoples if, after paying such dividends, they would fail to meet
the required minimum levels under the risk-based capital guidelines and the
minimum leverage ratio requirements. Peoples Bank and First National Bank must
have the approval of their respective regulatory authorities if a dividend in
any year would cause the total dividends for that year to exceed the sum of the
current year's net profits and the retained net profits for the preceding two
years, less required transfers to surplus. Russell Federal 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
Russell Federal's tangible, core of 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.
If the current minimal capital requirements following a proposed capital
distribution are not met, Russell Federal must obtain prior approval from the
OTS. Payment of dividends by the bank subsidiaries may be restricted at any time
at the discretion of the regulatory authorities, if they deem such dividends to
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constitute an unsafe and/or unsound banking practice. These provisions could
have the effect of limiting the ability of Peoples to pay dividends on
outstanding Peoples Common Shares.
Prior to the enactment of the Small Business Jobs Protection Act (the "1996
Act") which was signed into law on August 21, 1996, earnings appropriated to bad
debt reserves and deducted for federal income tax purposes could not be used by
Russell Federal to pay cash dividends to Peoples without the payment of federal
income taxes by Peoples at the then current income tax rate on the amount deemed
distributed, which would include the amount of any federal income taxes
attributable to the distribution. As a result of modifications enacted in the
1996 Act, pre-1988 bad debt reserves which are not otherwise recaptured, may be
recaptured if they are used for payment of cash dividends or other distributions
to a shareholder. Thus, any dividends to Peoples that would reduce amounts
appropriated to Russell Federal's pre-1988 bad debt reserves and deducted for
federal income tax purposes could create a significant tax liability for Russell
Federal. The impact of this regulation is insignificant to Peoples. However,
Peoples intends to make full use of the favorable tax treatment afforded to
Russell Federal and Peoples does not contemplate any distribution by Russell
Federal in a manner which would create the above-mentioned federal tax
liabilities.
LIQUIDATION RIGHTS
In the event of liquidation, after payment in full of all amounts required
to be paid to creditors or provision for such payment, each holder of Peoples
Common Shares will be entitled to share ratably, according to the number of
Peoples Common Shares held by such shareholder, in all remaining assets of
Peoples legally available for distribution to its shareholders.
COMPARISON OF RIGHTS OF HOLDERS OF PEOPLES COMMON SHARES AND
HOLDERS OF GATEWAY COMMON STOCK
GENERAL
The rights of holders of Peoples Common Shares are governed by the OGCL and
the Peoples Articles and Peoples Regulations, while the rights of holders of
Gateway Common Stock are governed by Gateway's Articles of Incorporation, as
amended ("Articles"), and Bylaws, as amended ("Bylaws"), and the KBCA. Upon
consummation of the Merger, stockholders of Gateway will become shareholders of
Peoples and their rights as shareholders of Peoples will be governed by the
Peoples Articles, the Peoples Regulations and the OGCL.
THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
DIFFERENCES AFFECTING THE RIGHTS OF GATEWAY'S STOCKHOLDERS, BUT RATHER
SUMMARIZES THE MORE SIGNIFICANT DIFFERENCES AFFECTING THE RIGHTS OF SUCH
STOCKHOLDERS AND CERTAIN IMPORTANT SIMILARITIES. THE SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PEOPLES ARTICLES AND PEOPLES REGULATIONS, THE
ARTICLES AND BYLAWS OF GATEWAY AND APPLICABLE LAWS AND REGULATIONS.
AUTHORIZED CAPITAL STOCK
Peoples' authorized capital stock consists of 12,000,000 Peoples Common
Shares, of which were outstanding on September , 1997. The Peoples
Common Shares are quoted on The Nasdaq National Market.
Gateway's authorized capital stock consists of 4,000,000 shares of Gateway
Common Stock, of which 1,081,665 shares were outstanding on September ,
1997, and 1,000,000 shares of preferred stock, no par value per share ("Gateway
Preferred Stock"), of which no shares were issued and outstanding. The Gateway
Preferred Stock is issuable in series, each series having such rights and
preferences as Gateway's Board may fix and determine. The shares of Gateway
Common Stock are quoted on The Nasdaq Stock Market, Small-Cap Market.
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ISSUANCE OF CAPITAL STOCK
Under the OGCL, Peoples may issue Peoples Common Shares and rights or
options for the purchase of Peoples Common Shares on such terms and for such
consideration as may be determined by the Peoples Board of Directors. Neither
the OGCL nor the Peoples Articles and Peoples Regulations require shareholder
approval of any such issuance unless such issuance (i) results in a control
share acquisition, (ii) is in connection with a merger, combination or majority
share acquisition and involves shares entitling the holders thereof to exercise
at least one-sixth of the voting power of Peoples following the consummation of
the transaction or (iii) necessitates an increase in the authorized number of
Peoples Common Shares. In addition, the Rules of The Nasdaq Stock Market
generally require corporations, such as Peoples, with securities which are
quoted on The Nasdaq National Market to obtain shareholder approval of issuances
resulting in a change in control of Peoples or in connection with certain
transactions involving issuances of shares representing at least 20% of the
voting power of Peoples and most stock compensation plans for directors and
officers of Peoples. Shareholder approval of stock-related compensation plans
also may be sought in certain instances in order to qualify such plans for
favorable federal income tax and/or securities law treatment under current laws
and regulations.
The Gateway Board of Directors has the authority to establish series of
unissued shares of any class of capital stock by fixing and determining the
designations, preferences, limitations and relative rights, including voting
rights, of the shares of any series so established to the same extent that such
designations, preferences, limitations and relative rights could be stated if
fully set forth in the Gateway Articles. Except to the extent required by
governing law, rule or regulation, the shares of capital stock may be issued
from time to time by the Board of Directors without further approval of
stockholders. Gateway has the authority to purchase its capital stock out of
funds lawfully available therefor, which funds shall include, without
limitation, Gateway's unreserved and unrestricted capital. Except as provided in
Article V of the Gateway Articles (or in any resolution or resolutions adopted
by the Board of Directors pursuant thereto), the exclusive voting power shall be
vested in the Gateway Common Stock, the holders thereof being entitled to one
vote for each share of such Gateway Common Stock standing in the holder's name
on the books of Gateway. Subject to any rights and preferences of any class of
stock having preference over the Gateway Common Stock, holders of Gateway Common
Stock shall be entitled to such dividends as may be declared by the Board of
Directors out of funds lawfully available therefor. Upon any liquidation,
dissolution or winding up of the affairs of Gateway, whether voluntary or
involuntary, holders of Gateway Common Stock shall be entitled to receive pro
rata the remaining assets of Gateway after the payment or provision for payment
of Gateway's debts and liabilities and after the holders of any class of stock
having preference over the Gateway Common Stock have been paid in full any sums
to which they may be entitled. The Board of Directors is authorized to provide,
by resolution or resolutions, out of the unissued shares of preferred stock, for
series of preferred stock. The Board of Directors also has sole authority to
determine the terms of any one or more series of Preferred Stock, including
voting rights, conversion rates, and liquidation preferences.
BOARD OF DIRECTORS
GENERAL
The Peoples Regulations provide for a classified Board of Directors
consisting of twelve directors, divided into three classes and elected for
three-year terms. The number of directors may be fixed or changed at a meeting
of the shareholders upon the approval of a majority of the voting power of
Peoples unless the proposal is affirmatively voted against by three members of
the Peoples Board of Directors, in which case the proposal must be approved by
75% of the voting power of Peoples entitled to vote thereon. The number of
directors may also be fixed or changed by the Peoples Board of Directors by the
affirmative vote of a majority of the authorized number of directors; however,
the Peoples Board may not increase the number of directors to more than fifteen
or reduce the number to fewer than nine.
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The Articles of Gateway provide for a classified Board of Directors which
currently consists of five directors, divided into three classes as nearly equal
in number as possible, with one class to be elected annually. The number of
directors may be determined by resolution of the Board of Directors as provided
in Gateway's Bylaws, as may be amended from time to time, provided, however,
that the Board of Directors may increase or decrease the number of directors by
no more than 30 percent of the number of directors last approved by the
stockholders and only the stockholders may increase or decrease by more than 30
percent the number of directors last approved by the stockholders. In addition,
the number of directors may not be less than five nor greater than 21.
NOMINATIONS
The Peoples Regulations provide that shareholder nominations for election to
the Peoples Board of Directors must be made in writing and must be delivered or
mailed to the Secretary of Peoples not less than fourteen days nor more than
fifty days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than twenty-one days' notice of the
meeting is given to the shareholders, such nomination must be delivered or
mailed to the Secretary of Peoples not later than the close of business on the
seventh day following the day on which the notice of the meeting was mailed.
Such notification must contain the following information to the extent known by
the notifying shareholder: (a) the name, age, business address and residence
address of each proposed nominee; (b) the principal occupation or employment of
each proposed nominee; (c) the total number of shares of Peoples Common Shares
beneficially owned by each proposed nominee and the notifying shareholder; and
(d) any other information required to be disclosed with respect to a nominee for
election as a director of Peoples in proxy solicitations pursuant to Section
14(a) of the Exchange Act. Nominations which the chairman of the meeting
determines are not made in accordance with the Peoples Regulations will be
disregarded.
Article VII.D of the Gateway Articles governs nominations for election to
the Board, and provides that nominations for election to the Board of Directors
may be made by, or at the direction of, a majority of the Board or by a
stockholder eligible to vote at an annual meeting of stockholders who has
complied with the notice provisions in that section. Written notice of a
stockholder nomination must be delivered to, or mailed to and received at, the
principal executive offices of Gateway not less than 60 days prior to the
anniversary date of the immediately preceding annual meeting. Each such notice
shall set forth: (a) as to each person whom the stockholder proposes to nominate
as a director, and as to the stockholder giving the notice, (i) the name, age,
business address and residence address of such person; (ii) the principal
occupation or employment of such person; (iii) the class and number of shares of
the Gateway Common Stock beneficially owned by such person on the date of the
stockholder notice; and (iv) such other information regarding such person as
would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Commission; and (b) to the extent known by the stockholder
giving the notice, (i) the name and address of any other stockholders supporting
such nominees; and (ii) the class and number of shares of the Gateway Common
Stock beneficially owned by any other stockholders supporting such nominees, on
the date of such stockholder notice.
MANDATORY RETIREMENT
No person will be eligible to be elected as a Peoples director unless he or
she (i) is in the position of chief executive officer or active leadership
within his or her business or professional interest which must be located within
the geographic area in which Peoples or any of its subsidiaries operate or do
business or (ii) serves as an executive officer of Peoples or one of its
subsidiaries. A director will not be eligible for nomination and re-election as
a director of Peoples following the fifth anniversary of the termination of such
person's qualifying executive or leadership position; however, such five-year
limitation will not be applicable to a person who retires as Chairman of the
Board or Chief Executive Officer of Peoples. When a person's eligibility to
serve as a director of Peoples terminates, such person must submit his or her
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resignation as a director effective at the pleasure of the Board and may not be
nominated and re-elected as a Peoples director.
There are no similar provisions in either the Articles or Bylaws of Gateway.
REMOVAL AND FILLING OF VACANCIES
A director or directors of Peoples may be removed from office, only for
cause, by the affirmative vote of the holders of at least 75% of the voting
power of Peoples entitling them to elect directors in place of those to be
removed. Vacancies in the Board of Directors of Peoples and any newly-created
directorships resulting from an increase in the number of Peoples directors may
be filled by the Peoples Board, acting by the vote of a majority of the
directors then in office, even if less than a quorum. A director elected to the
Peoples Board to fill a vacancy will hold office for the unexpired portion of
the term of the director whose place has been filled. A director elected to the
Peoples Board to fill a newly-created directorship resulting from an increase in
the number of directors will hold office until the next election of the class
for which the director was elected.
Directors of Gateway may be removed only with cause at a duly constituted
meeting of stockholders called expressly for that purpose upon the vote of the
holders of at least two-thirds of the total votes eligible to be cast by
stockholders. Cause for removal exists only if the director whose removal is
proposed has been either declared of unsound mind by an order of a court of
competent jurisdiction, convicted of a felony or of an offense punishable by
imprisonment for a term of more than one year by a court of competent
jurisdiction or has been deemed liable by a court of competent jurisdiction for
gross negligence or misconduct in the performance of such director's duties to
Gateway. Any vacancy occurring in the Board of Directors for any reason
(including an increase in the number of authorized directors) may be filled by
the affirmative vote of a majority of the Whole Board of Directors and a
majority of the Continuing Directors then in office (as defined by Article X of
the Gateway Articles), though less than a quorum of the Board, or by the sole
remaining director, and a director appointed to fill a vacancy shall serve until
the next succeeding annual election of directors and until his successor has
been elected and qualified.
VOTING RIGHTS
Each Peoples Common Share entitles the holder thereof to one vote for the
election of directors and for all other matters submitted to the shareholders of
Peoples for their consideration. Peoples shareholders are not entitled to
exercise cumulative voting in the election of directors.
Each share of Gateway Common Stock entitles the holder thereof to one vote
for the election of directors and on such other matters as are required to be
presented to them under Kentucky law or Gateway's Articles or as are otherwise
presented to them by the Board of Directors. Gateway shareholders are entitled
to exercise cumulative voting in the election of directors.
PAYMENT OF DIVIDENDS
Peoples can pay dividends on its outstanding Common Shares in accordance
with the terms of the OGCL. The OGCL generally provides that Peoples may declare
and pay dividends to its shareholders, provided that the dividend does not
exceed the combination of the surplus of Peoples (defined generally as the
excess of Peoples' assets plus stated capital over its liabilities) and is not
in violation of the rights of the holders of shares of any other class. In
addition, no dividend may be paid when Peoples is insolvent or there is
reasonable ground to believe that by such payment Peoples would be rendered
insolvent. Please also see the discussion of the dividend rights of Peoples
shareholders in "DESCRIPTION OF PEOPLES COMMON SHARES--Dividend Rights."
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Gateway can pay dividends if, as and when declared by its Board of
Directors, subject to compliance with limitations which are imposed by law. The
holders of Gateway Common Stock are entitled to receive and share equally in
such dividends as may be declared by the Board of Directors of Gateway out of
funds legally available therefor. Declarations of dividends by the Board of
Directors depends upon a number of factors, including investment opportunities
available to Gateway or Catlettsburg Federal, capital requirements, regulatory
limitations, Gateway's and Catlettsburg Federal's financial condition and
results of operations, tax considerations and general economic conditions.
SPECIAL MEETINGS OF SHAREHOLDERS
The Peoples Regulations contain a provision pursuant to which special
meetings of shareholders may only be called by the Chairman of the Board, the
President or, in the case of the President's absence, death or disability, the
Vice President authorized to exercise the authority of the President, the
Secretary, the directors by action in a meeting, or a majority of the directors
acting without a meeting or the holders of at least a majority of all shares
outstanding and entitled to vote at the meeting.
Article IX.A. of the Gateway Articles provides that special meetings of the
Gateway stockholders, for any purpose or purposes, may only be called by the
affirmative vote of a majority of the Whole Board of Directors (as defined in
Article X of the Gateway Articles) and a majority of the Continuing Directors
(as defined in Article X of the Gateway Articles), the Chief Executive Officer
or the holders of not less than 50% of all votes entitled to be cast at the
special meeting.
SHAREHOLDER ACTION WITHOUT A MEETING
The Peoples Regulations provide that any action permitted to be taken by the
shareholders at a meeting may be taken without a meeting if a consent in writing
setting forth the action so taken is signed by all of the shareholders entitled
to vote.
The Gateway Articles provide that any action permitted to be taken by the
stockholders at a meeting may be taken without a meeting if a consent in writing
setting forth the action so taken is signed by all of the stockholders who would
be entitled to vote at a meeting for such purpose and filed with the Secretary
of Gateway as part of the corporate records.
PRE-EMPTIVE RIGHTS
Neither the shareholders of Peoples nor the stockholders of Gateway have
pre-emptive rights.
MERGERS AND CONSOLIDATIONS
Under the OGCL, an agreement of merger or consolidation must be approved by
the directors of each constituent corporation and adopted by the shareholders of
each constituent Ohio corporation (other than the surviving corporation) holding
at least two-thirds of the corporation's voting power, or a different proportion
but not less than a majority of the voting power, as provided in the articles.
The Peoples Articles provide that a majority of the voting power of Peoples may
approve a consolidation or merger, unless the proposal is voted against by three
members of the Board of Directors, in which case the consolidation or merger
must be approved by 75% of the voting power of Peoples. In the case of a merger,
the agreement must also be adopted by the shareholders of the surviving
corporation by similar vote, if one or more of the following conditions exist:
(a) the articles or regulations of the surviving corporation then in effect
require that the agreement be adopted by the shareholders or by the holders of a
particular class of shares of that corporation; (b) the agreement conflicts with
the articles or regulations of the surviving corporation then in effect, or
changes the articles or regulations, or authorizes any action that, if it were
being made or authorized apart from the merger, would otherwise require adoption
by the shareholders or by the holders of a particular class of shares of that
corporation; (c) the merger involves the issuance or
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transfer by the surviving corporation to the shareholders of the other
constituent corporation or corporations of such number of shares of the
surviving corporation as will entitle the holders of the shares immediately
after the consummation of the merger to exercise one-sixth or more of the voting
power of that corporation in the election of directors; or (d) the agreement of
merger makes such change in the directors of the surviving corporation as would
otherwise require action by the shareholders or by the holders of a particular
class of shares of that corporation.
Under the KBCA, a plan of merger must be approved by the directors of each
corporation party to the merger and approved by each voting group of
stockholders entitled to vote separately on the plan by a majority of all the
votes entitled to be cast on the plan by that voting group, unless the articles
of incorporation or the board of directors require a greater vote. Action by the
stockholders of the surviving corporation on a plan of merger shall not be
required if: (a) the articles of incorporation of the surviving corporation will
not differ (except for certain enumerated amendments) from its articles before
the merger; (b) each stockholder of the surviving corporation whose shares were
outstanding immediately before the effective date of the merger will hold the
same number of shares, with identical designations, preferences, limitations,
and relative rights, immediately after; (c) the number of voting shares
outstanding immediately after the merger, plus the number of voting shares
issuable as a result of the merger (either by the conversion of securities
issued pursuant to the merger or the exercise of rights and warrants issued
pursuant to the merger) will not exceed by more than 20 percent the total number
of voting shares of the surviving corporation outstanding immediately before the
merger; and (d) the number of participating shares outstanding immediately after
the merger, plus the number of participating shares issuable as a result of the
merger (either by the conversion of securities issued pursuant to the merger or
the exercise of rights and warrants issued pursuant to the merger) will not
exceed by more than 20 percent the total number of participating shares
outstanding immediately before the merger.
Article XI of Gateway's Articles provides that for a period of five years
from the date of Conversion of Catlettsburg Federal from the mutual to stock
form, January 18, 1995, no person shall directly or indirectly offer to acquire
or acquire the beneficial ownership of (i) more than 10% of the issued and
outstanding shares of any class of an equity security of Gateway, or (ii) any
securities convertible into, or exercisable for, any equity securities of
Gateway if, assuming conversion or exercise by such person of all securities of
which such person is the beneficial owner which are convertible into, or
exercisable for, such equity securities (but of no securities convertible into,
or exercisable for, such equity securities of which such person is not the
beneficial owner), such person would be the beneficial owner of more than 10% of
any class of an equity security of Gateway. The term "person" is broadly defined
to prevent circumvention of this restriction.
The foregoing restrictions do not apply to (i) any offer with a view toward
public resale made exclusively to Gateway by underwriters or a selling group
acting on its behalf, (ii) any tax-qualified employee benefit plan or
arrangement established by Gateway or Catlettsburg Federal and any trustee of
such a plan or arrangement, and (iii) any other offer or acquisition approved in
advance by the affirmative vote of two-thirds of Gateway's entire Board of
Directors. In the event that shares are acquired in violation of Article XI, all
shares beneficially owned by any person in excess of 10% shall be considered
"Excess Shares" and shall not be counted as shares entitled to vote and shall
not be voted by any person or counted as voting shares in connection with any
matters submitted to stockholders for a vote, and the Board of Directors may
cause such Excess Shares to be transferred to an independent trustee for sale on
the open market or otherwise, with the expenses of such trustee to be paid out
of the proceeds of the sale.
OTHER CORPORATE TRANSACTIONS
Subject to certain exceptions, under the OGCL, the approval of two-thirds of
the voting power of the corporation, or a different proportion (not less than a
majority of the corporation's voting power) as provided in the articles, is
required for (i) the consummation of combinations and majority share
acquisitions involving the transfer or issuance of such number of shares as
would entitle the holders
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thereof to exercise at least one-sixth of the voting power of such corporation
in the election of directors immediately after the consummation of such
transaction, (ii) the disposition of all or substantially all of the
corporation's assets other than in the regular course of business and (iii)
voluntary dissolutions. The Peoples Articles provide that a majority of the
voting power may approve such transactions except where three members of the
Board of Directors have voted against any such proposal, in which case 75% of
the voting power of Peoples must approve it.
Under the KBCA, the approval of a majority of all the votes entitled to be
cast, or a greater vote as provided in the articles or by the board of
directors, is required for (i) the disposition of all or substantially all of
the corporation's assets other than in the regular course of business and (ii)
voluntary dissolutions.
AMENDMENT OF ARTICLES
Under the OGCL, an amendment to the articles must be adopted by the
affirmative vote of the holders of shares entitling them to exercise two-thirds
of the voting power of the corporation on the proposal, or a different
proportion, but not less than a majority of the voting power, as provided in the
articles. The Peoples Articles provide that a majority of the voting power of
Peoples may approve a proposal to amend the Peoples Articles unless three
members of the Board of Directors vote against the proposed amendment, in which
case 75% of the voting power of Peoples must approve the amendment.
Gateway's Articles generally provide that the Articles may be amended as set
forth under the KBCA (i.e., generally upon the recommendation of the board of
directors and the affirmative vote of a majority of all of the stockholder votes
entitled to be cast on the matter), except that any amendment to Articles VI (no
preemptive rights), VII (board of directors), VIII (indemnification, etc. of
officers, directors, employees and agents), IX (meetings of stockholders and
stockholder proposals), XI (restrictions on offers and acquisitions of Gateway's
equity securities) and Article XII (amendment of articles of incorporation and
bylaws), must be approved by the affirmative vote of the holders of at least
two-thirds of the then outstanding shares of the class or classes entitled to
vote thereon at the meeting, voting together as a single class. Article X
(certain business combinations and acquisitions of stock) shall be amended with
the affirmative vote of (i) the holders of two-thirds or more of the outstanding
Voting Shares (as defined in the Articles), voting separately as a class, and
(ii) an Independent Majority of Stockholders (as defined in the Articles);
provided, however, that the foregoing shall not apply to, and such vote shall
not be required for, any such amendment, change or repeal recommended to
stockholders by the favorable vote of not less than two-thirds of the Whole
Board of Directors (as defined in the Articles), including a majority of the
Continuing Directors (as defined in the Articles), and any such amendment,
change or repeal so recommended shall require only the vote, if any, required
under the applicable provisions of the KBCA, the Articles and the Bylaws of
Gateway.
ANTITAKEOVER STATUTES
The statutes described below apply to Peoples.
OHIO CONTROL SHARE ACQUISITION ACT
Section 1701.831 of the Ohio Revised Code (the "Ohio Control Share
Acquisition Act") provides that certain notice and informational filings and
special shareholder meetings and voting procedures must occur prior to
consummation of a proposed "control share acquisition," which is defined as any
acquisition of shares of an "issuing public corporation" that would entitle the
acquirer, directly or indirectly, alone or with others, to exercise or direct
the voting power of the issuing public corporation in the election of directors
within any of the following ranges: (a) one-fifth or more but less than
one-third of such voting power; (b) one-third or more but less than a majority
of such voting power; or (c) a majority or more of such voting power. An
"issuing public corporation" is defined as an Ohio corporation with fifty or
more shareholders that has its principal place of business, principal executive
offices, or substantial assets within
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the State of Ohio, and as to which no valid close corporation agreement exists.
Assuming compliance with the notice and informational filing requirements
prescribed by the Ohio Control Share Acquisition Act, the proposed control share
acquisition may take place only if, at a duly convened special meeting of
shareholders, the acquisition is approved by both a majority of the voting power
of the issuing public corporation in the election of directors represented at
the meeting and a majority of such voting power remaining after excluding the
voting shares owned by the acquiring shareholder and certain "interested
shares," including shares owned by officers elected or appointed by the
directors of the issuing public corporation and by directors who are also
employees of the issuing public corporation. "Interested shares" also include
those shares acquired by a person or group between the date of the first
disclosure of a proposed control share acquisition or change-in-control
transaction and the date of the special meeting of shareholders held pursuant to
the Ohio Control Share Acquisition Statute. Shares acquired during that period
by a person or group will be deemed "interested shares" only if (i) the amount
paid for the shares by such person or group exceeds $250,000 or (ii) the number
of shares acquired by such person or group exceeds 1/2 of 1% of the outstanding
voting shares.
The Ohio Control Share Acquisition Act does not apply to a corporation whose
articles of incorporation or regulations so provide. The Ohio Control Share
Acquisition Act applies to Peoples since it has not taken any corporate action
to opt out of it.
OHIO MERGER MORATORIUM STATUTE
Chapter 1704 of the Ohio Revised Code (the "Ohio Merger Moratorium Statute")
prohibits certain business combinations and transactions between an "issuing
public corporation" and a beneficial owner of shares representing 10% or more of
the voting power of the corporation (an "Interested Shareholder") for at least
three years after the Interested Shareholder becomes such, unless the board of
directors of the issuing public corporation approves either (i) the transaction
or (ii) the acquisition of the corporation's shares that resulted in the person
becoming an Interested Shareholder, in each case before the Interested
Shareholder became such. Examples of transactions regulated by the Ohio Merger
Moratorium Statute include asset sales, mergers, consolidations, loans,
voluntary dissolutions, and the transfer of shares ("Moratorium Transactions").
After the three-year period, a Moratorium Transaction may take place provided
that certain conditions are satisfied, including that (a) the board of directors
approves the transaction, (b) the transaction is approved by the holders of
shares with at least two-thirds of the voting power of the corporation (or a
different proportion set forth in the articles of incorporation), including at
least a majority of the outstanding shares after excluding shares controlled by
the Interested Shareholder, or (c) the business combination results in
shareholders, other than the Interested Shareholder, receiving a "fair price"
plus interest for their shares.
A corporation may elect not to be covered by the Ohio Merger Moratorium
Statute by the adoption of an appropriate amendment to its articles of
incorporation. The Ohio Merger Moratorium Statute applies to Peoples since it
has not taken any corporate action to opt out of it.
The statute described below applies to Gateway.
Pursuant to Section 271B.12-210 of the KBCA, Article X of Gateway's Articles
generally imposes supermajority vote requirements for approval of certain
"Business Combinations" with or proposed by any person (other than Catlettsburg
Federal or any subsidiary) who directly or indirectly is the beneficial owner of
more than 10% of the outstanding voting shares of Catlettsburg Federal (a
"Related Person"). A vote of 80% of all outstanding voting shares, plus an
Independent Majority of Stockholders, which is defined as a majority of the
outstanding voting shares that are not beneficially owned or controlled by a
Related Person, would be required to effectuate such a transaction, except in
cases where the transaction (i) has been approved by two-thirds of the Whole
Board of Directors (as defined in Article X of the Gateway Articles) at a time
prior to the acquisition of 10% or more of the outstanding Voting Shares (as
defined in Article X of the Gateway Articles) by the Related Person, (ii) has
been approved by two-thirds of the Whole Board
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of Directors (as defined in Article X of the Gateway Articles), including a
majority of the directors who are not affiliated with the Related Person
("Continuing Directors") after such acquisition or (iii) meets certain minimum
price and form of consideration criteria and procedural conditions described
therein.
A "Business Combination" is defined to include the following transactions:
(a) a merger or consolidation of Gateway or any of its subsidiaries with a
Related Person; (b) the sale or other disposition by Gateway or any of its
subsidiaries of assets having an aggregate fair market value of more than 10% of
Gateway's consolidated assets as of the end of the most recent fiscal year to a
Related Person; (c) the purchase or other acquisition by Gateway's or any of its
subsidiaries of assets having an aggregate fair market value of more than 10% of
Gateway's consolidated assets as of the end of the most recent fiscal year from
a Related Person; (d) the issuance of voting stock or other securities
convertible into voting stock of Gateway or any of its subsidiaries to a Related
Person; and (e) any reclassification of securities, recapitalization, or other
transaction which has the direct or indirect effect of increasing the
proportionate share of the outstanding stock (or of any class or series of
stock) of Gateway, or any subsidiary of Gateway, owned by a Related Person or
the adoption of any plan or proposal to liquidate or dissolve Gateway.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
The Regulations of Peoples provide that Peoples will indemnify its directors
or officers against expenses (including, without limitation, attorneys' fees,
filing fees, court reporter's fees and transcript costs), judgments, fines and
amounts paid in settlement by reason of the fact that they are or were
directors, officers, employees or agents of Peoples or, at the request of
Peoples, were serving another entity in a similar capacity, if the directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of Peoples. With regard to criminal
matters, directors and officers will be similarly indemnified by Peoples if the
directors or officers had no reasonable cause to believe their conduct was
unlawful. Directors or officers claiming indemnification will be presumed to
have acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of Peoples and, with respect to any criminal
matter, to have had no reasonable cause to believe their conduct was unlawful.
Peoples will not indemnify any officer or director of Peoples who was a
party to any completed action or suit instituted by (or in the right of) Peoples
for any matter asserted in such action as to which the officer or director has
been adjudged to be liable for acting with reckless disregard for the best
interests of Peoples or misconduct (other than negligence) in the performance of
his or her duty to Peoples. However, should the court in which the action was
brought determine that the officer or director is fairly and reasonably entitled
to such indemnity, Peoples must indemnify such officer or director to the extent
permitted by the court.
Any indemnification not precluded by the Peoples Regulations will be made by
Peoples only upon a determination that the director or officer has met the
applicable standard of conduct. Such determination may be made only (a) by a
majority vote of a quorum of disinterested directors, (b) if such a quorum is
not obtainable or if a majority of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel, (c) by the
shareholders, or (d) by the court, if any, in which such action was brought.
Expenses incurred in defending any action, suit or proceeding will be paid by
Peoples in advance upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount if such director or officer is not
entitled to be indemnified by Peoples.
The Peoples Regulations state that the indemnification provided thereby is
not exclusive of any other rights to which any person seeking indemnification
may be entitled. Additionally, the Peoples Regulations provide that Peoples may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Peoples, or who is or was serving
another entity at the request of Peoples, against any liability asserted against
him or her and incurred by him or her in such capacity, or
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arising out of his or her status as such, whether or not Peoples would have the
obligation or power to indemnify him or her under the Peoples Regulations.
Ohio has codified the directors' common law duty of care and, in part, their
common law duty of loyalty. Under the OGCL, a director must perform his or her
duties as a director, including his or her duties as a member of any committee
of the directors upon which he or she serves, in good faith, in a manner he or
she reasonably believes to be in or not opposed to the best interests of the
corporation, and with the care that an ordinarily prudent person in a like
position would use under similar circumstances. Under Ohio law, a director is
not liable for monetary damages unless it is proved by clear and convincing
evidence that his action or failure to act was undertaken with deliberate intent
to cause injury to the corporation or with reckless disregard for the best
interests of the corporation. This higher standard of proof must be met in any
action brought against a director for breach of his duties, including any action
involving or affecting (i) a change or potential change in control of the
corporation, (ii) a termination or potential termination of a director's service
to the corporation as a director or (iii) a director's service in any other
position or relationship with the corporation. The higher standard of proof,
however, does not affect the liability of directors for unlawful loans,
dividends or distributions under Section 1701.95 of the OGCL.
Consistent with Ohio law, the Peoples Articles provide that members of the
Peoples Board of Directors, when evaluating any offer of another party to (a)
make a tender or exchange offer for any shares of Peoples, (b) merge or
consolidate Peoples with another corporation or (c) purchase or otherwise
acquire all or substantially all of the properties and assets of Peoples, in
connection with the exercise of their judgment in determining what they
reasonably believe to be in the best interest of Peoples, must consider the
interests of Peoples' shareholders and, in their discretion, may consider any of
the following: (i) the interests of Peoples' employees, suppliers, creditors and
customers; (ii) the economy of Ohio and the nation; (iii) community and societal
considerations; and (iv) the long-term as well as the short-term interests of
Peoples and its shareholders, including the possibility that those interests may
be best served by the continued independence of Peoples.
Pursuant to provisions of the KBCA, the Articles and Bylaws of Gateway
provide that a director of Gateway will not be personally liable to Gateway or
any of its stockholders for monetary damages for actions taken, or for any
failure to take any action, as a director except for liability where the
director (i) is involved in a transaction in which the director's personal
financial interest is in conflict with the interests of the Corporation or its
stockholders; (ii) acts, or fails to act, in a manner not in good faith or which
involves intentional misconduct or is known to the director to be in violation
of law; (iii) votes for an unlawful distribution to stockholders; or (iv)
receives an improper personal benefit. In addition, a director shall not be
liable unless he has breached or failed to perform the duties of the director's
office in compliance with the KBCA or, in the case of an action for monetary
damages, the breach or failure to perform constituted willful misconduct or
wanton or reckless disregard for the best interests of Gateway and its
stockholders. This provision precludes certain stockholder derivative actions
and may be construed to preclude other third party claims against the directors
and officers of Gateway, even if such actions would otherwise be beneficial to
stockholders of Gateway. This provision applies to actions taken by a director
only in that capacity. The Articles of Incorporation provide that any amendment
or repeal of these provisions will not adversely affect any right of a director
of Gateway with respect to any acts or omissions of such director occurring
prior to such amendment or repeal.
The KBCA permits, and Gateway's Articles and Bylaws provide, that Gateway
shall indemnify and advance expenses to all directors, officers, employees and
agents to the fullest extent provided by the law of the State of Kentucky, but
only if the indemnified party conducted himself in good faith and reasonably
believed in the case of conduct in his official capacity, that his conduct was
in the best interests of Gateway and in all other cases, that his conduct was at
least not opposed to its best interests and, in the case of any criminal
proceedings, the indemnified party had no reasonable cause to believe his
conduct was unlawful. This indemnity will cover any director, officer, agent or
employee made a party, or threatened to be made
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a party to any threatened, pending or completed, action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative, by reason
of the fact that such person is or was a director, officer, employee or agent of
Gateway or any predecessor of Gateway or is or was serving at the request of
Gateway against liability and expenses (including court costs and attorney's
fees), judgments, fines and/or amounts paid in settlement or compromise and
reasonably incurred by such person in connection with such suit or action. The
indemnity may continue as to a person who has ceased to be a director, officer,
employee or agent of Gateway and may inure to the benefit of his heirs and
executors. No right of indemnity provided to any person under Gateway's Articles
may be reduced or eliminated by any amendment of the Articles or Bylaws with
respect to any act or omission by such persons before such amendment.
The indemnification provisions also require Gateway to pay reasonable
expenses of any director (and permit Gateway to pay the reasonable expenses of
any officer, employee or agent of Gateway) in advance of the final disposition
of any action, suit or proceeding as authorized by Gateway's Board of Directors,
provided that the indemnified person furnishes Gateway with a written statement
of his good faith belief that he has met the required statutory standard of
conduct and undertakes in writing to repay Gateway if it is ultimately
determined that such person was not entitled to indemnification. The directors
and officers of Gateway have a personal interest in these provisions and may
personally benefit from them, even at the potential expense of the stockholders
of Gateway.
The determination of whether to indemnify a director, officer, employee or
agent of Gateway or that the indemnification is permissible and the amount, form
of indemnification and the authorization of such indemnification shall be made
by: (a) the Board of Directors of Gateway by a majority vote of a quorum of
directors consisting of directors who are not at that time parties to the
proceeding; (b) if a quorum of directors cannot be obtained, then by the
majority vote of a committee of the Board, to be designated by the Board of
Directors (in which designated directors who are party to the proceedings may
participate), consisting of two or more directors who are not parties to the
proceedings; (c) by special legal counsel selected by the Board or its committee
or if a quorum cannot be obtained or a committee cannot be selected, the special
legal counsel will be selected by a majority vote of the full Board of
Directors, with directors who are parties to the proceeding voting; or (d) by
the stockholders of Gateway, but shares owned by or voted under the control of
directors who at the time are parties to the proceeding shall not be voted on
the determination.
The rights of indemnification provided in Gateway's Articles and Bylaws are
not exclusive of any other rights which may be available under Gateway's Bylaws,
any insurance or other agreement, by vote of stockholders or disinterested
directors or otherwise. In addition, the Articles of Incorporation authorize
Gateway to maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of Gateway, whether or not Gateway would have the
power to provide indemnification to such person. By action of the Board of
Directors, Gateway may create and fund a trust fund or fund of any nature, and
may enter into agreements with its directors, officers, agents or employees for
securing or insuring in any manner its obligation to indemnify or advance
expenses provided for in the provisions of the Articles and Bylaws regarding
indemnification. The rights of indemnification provided to directors, officers,
employees and agents of Gateway reduce the likelihood of certain stockholder
derivative actions and may discourage other third party claims against the
directors or officers, even if such actions otherwise would be beneficial to
stockholders of Gateway.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Gateway pursuant
to the foregoing provisions, Gateway has been informed that in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
105
<PAGE>
STOCKHOLDER PROPOSALS
Any proposal which a stockholder wishes to have included in the proxy
materials of Gateway relating to the next annual meeting of stockholders if the
Merger is not consummated, which currently is scheduled to be held in April
1998, must be received at the principal executive offices of Gateway, 2717
Louisa Street, Catlettsburg, Kentucky 41129, Attention: Hunter E. Clark,
Secretary, no later than December 16, 1997. If such proposal is in compliance
with all of the requirements of Rule 14a-8 under the 1934 Act, it will be
included in the proxy statement and set forth on the form of proxy issued for
such annual meeting of stockholders. It is urged that any such proposals be sent
certified mail, return receipt requested.
Stockholder proposals which are not submitted for inclusion in Gateway's
proxy materials pursuant to Rule 14a-8 under the Exchange Act may be brought
before an annual meeting pursuant to Article IX.C. of Gateway's Articles, which
provides that business at an annual meeting of stockholders must be (a) properly
brought before the meeting by or at the direction of the Board of Directors, or
(b) otherwise properly brought before the meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
Gateway. To be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive offices of Gateway not later than 60
days prior to the anniversary date of the mailing of proxy materials by Gateway
in connection with the immediately preceding annual meeting of stockholders of
Gateway.
LEGAL OPINIONS
The legality of the of Peoples Common Shares to be issued in the Merger and
certain other legal matters relating to the Merger are being passed upon by
Charles R. Hunsaker, Esq., general counsel to Peoples, and certain federal
income tax consequences of the Merger and certain other legal matters relating
to the Merger are being passed upon by Elias, Matz, Tiernan & Herrick L.L.P,
special counsel to Gateway.
EXPERTS
The consolidated financial statements of Peoples at December 31, 1996 and
1995, and for each of the two years in the period ended December 31, 1996,
incorporated by reference in the Proxy Statement which is referred to and made a
part of this Prospectus and Registration Statement, have been audited by Ernst &
Young LLP, independent auditors, and for the year ended December 31, 1994, by
Coopers & Lybrand L.L.P., independent auditors, as set forth in their respective
reports thereon incorporated by reference herein, and are included in reliance
upon such reports given upon the authority of such firms as experts in
accounting and auditing.
The consolidated financial statements of Gateway as of December 31, 1996 and
1995, and for the years ended December 31, 1996 and 1995 for the six months
ended December 31, 1994 and for the year ended June 30, 1994, have been included
in this Proxy Statement/Prospectus in reliance upon the report of Kelley,
Galloway & Company, PSC, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
106
<PAGE>
INDEX TO GATEWAY CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report............................................................................... F-1
Consolidated Balance Sheets at June 30, 1997 (unaudited) and December 31, 1996 and 1995.................... F-2
Consolidated Statements of Income for the six months ended June 30, 1997 and 1996 (unaudited) and for the
years ended December 31, 1996, 1995 and 1994 (unaudited), for the six months ended December 31, 1994 and
for the year ended June 30, 1994......................................................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for the six months ended June 30, 1997
(unaudited) and for the years ended December 31, 1996 and 1995, for the six months ended December 31,
1994, and for the year ended June 30, 1994............................................................... F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) and for
the years ended December 31, 1996, 1995 and 1994 (unaudited), for the six months ended December 31, 1994
and for the year ended June 30, 1994..................................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-6
</TABLE>
107
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
Gateway Bancorp, Inc.
Catlettsburg, Kentucky 41129
We have audited the accompanying consolidated balance sheets of Gateway
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1996 and 1995, for the six months ended
December 31, 1994, and for the year ended June 30, 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe 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
Gateway Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995, for the six months ended December 31, 1994, and for the year
ended June 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for fees and costs associated with loan
originations and its method of accounting for pensions in 1995, and its method
of accounting for investment securities in 1994.
/s/ Kelley, Galloway & Company, PSC
February 7, 1997,
except for Note 19 as
to which the date is
June 17, 1997
F-1
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CASH, including interest-bearing deposits of $2,278,685, $1,270,685
and $6,305,467, respectively...................................... $ 2,361,532 $ 1,348,415 $ 6,542,257
INVESTMENT SECURITIES HELD TO MATURITY, approximate market value of
$14,205,100, $17,414,800 and $21,539,900, respectively............ 14,355,165 17,523,931 21,443,489
LOANS RECEIVABLE, less allowance for loan losses of $80,758......... 21,005,191 19,075,792 16,920,304
MORTGAGE-BACKED SECURITIES HELD TO MATURITY, approximate market
value of $25,596,900, $27,703,100 and $28,128,100, respectively... 25,202,763 27,663,022 27,618,404
ACCRUED INTEREST RECEIVABLE......................................... 371,848 430,055 493,502
FORECLOSED REAL ESTATE.............................................. 43,963 -- --
OFFICE PROPERTIES AND EQUIPMENT..................................... 348,813 358,497 366,995
INCOME TAXES REFUNDABLE............................................. 105,764 15,323 --
OTHER ASSETS........................................................ 33,290 23,902 23,725
------------- ------------- -------------
$ 63,828,329 $ 66,438,937 $ 73,408,676
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS............................................................ $ 46,317,816 $ 49,194,746 $ 53,287,904
INCOME TAXES PAYABLE:
Current........................................................... -- -- 66,730
Deferred.......................................................... 165,288 111,808 96,872
DIVIDENDS PAYABLE................................................... -- -- 1,366,717
ACCRUED INTEREST PAYABLE............................................ 31,676 32,864 35,155
OTHER LIABILITIES................................................... 51,372 70,866 77,035
------------- ------------- -------------
Total liabilities............................................... 46,566,152 49,410,284 54,930,413
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 1,000,000 shares authorized........ -- -- --
Common stock, $.01 par value, 4,000,000 shares authorized;
1,075,754, 1,075,754 and 1,196,970 shares issued and
outstanding, respectively....................................... 10,758 10,758 11,970
Employee benefit plans............................................ (846,209) (918,319) (1,098,907)
Additional paid-in capital........................................ 7,950,404 7,930,355 9,502,671
Retained earnings--substantially restricted....................... 10,147,224 10,005,859 10,062,529
------------- ------------- -------------
Total stockholders' equity...................................... 17,262,177 17,028,653 18,478,263
------------- ------------- -------------
$ 63,828,329 $ 66,438,937 $ 73,408,676
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-2
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
------------------------ --------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
----------- ----------- --------- --------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Interest Income:
Loans receivable -
Mortgage loans................... $ 729,684 $ 639,021 $1,314,190 $1,083,388 $ 835,991 409,848 $ 810,919
Other loans...................... 19,311 23,164 43,715 49,681 40,807 20,332 43,745
Investment securities.............. 509,217 647,974 1,258,253 1,370,562 1,080,478 561,882 935,616
Mortgage-backed and related
securities....................... 910,759 955,330 1,934,639 2,019,289 2,091,863 1,053,690 2,178,285
Other interest-earning assets...... 65,936 99,742 159,387 303,977 111,659 50,427 177,831
----------- ----------- --------- --------- ----------- ------------ ---------
Total interest income.......... 2,234,907 2,365,231 4,710,184 4,826,897 4,160,798 2,096,179 4,146,396
----------- ----------- --------- --------- ----------- ------------ ---------
Interest Expense:
Passbook savings................... 49,142 59,908 115,238 162,771 364,814 170,673 393,655
Certificates of deposit............ 1,106,007 1,322,381 2,538,392 2,509,682 2,019,925 1,016,579 2,060,909
FHLB advances...................... 14,628 -- -- -- -- -- --
----------- ----------- --------- --------- ----------- ------------ ---------
Total interest expense......... 1,169,777 1,382,289 2,653,630 2,672,453 2,384,739 1,187,252 2,454,564
----------- ----------- --------- --------- ----------- ------------ ---------
Net interest income............ 1,065,130 982,942 2,056,554 2,154,444 1,776,059 908,927 1,691,832
Provision for Loan Losses -- -- -- 20,000 -- -- --
----------- ----------- --------- --------- ----------- ------------ ---------
Net interest income after
provision for loan losses.... 1,065,130 982,942 2,056,554 2,134,444 1,776,059 908,927 1,691,832
----------- ----------- --------- --------- ----------- ------------ ---------
Non-Interest Income:
Gain on sale of office building.... -- -- -- -- -- -- 21,756
Gain (loss) on foreclosed real
estate........................... -- 14,181 14,181 -- -- -- (102)
Gains on sale of investments....... -- 2,000 2,000 1,563 2,250 -- --
Loan fees.......................... -- -- -- -- 5,655 2,300 15,601
Other.............................. 6,850 4,544 13,152 8,095 17,111 12,053 17,113
----------- ----------- --------- --------- ----------- ------------ ---------
Total non-interest income...... 6,850 20,725 29,333 9,658 25,016 14,353 54,368
----------- ----------- --------- --------- ----------- ------------ ---------
Non-Interest Expense:
Compensation and benefits.......... 219,424 190,716 414,055 371,675 264,449 140,917 248,716
Occupancy and equipment............ 17,643 18,932 40,219 39,181 36,270 18,408 40,420
SAIF deposit insurance premiums.... 12,896 60,812 457,790 123,195 131,003 65,899 128,298
Contingency reserve................ -- -- -- -- 100,000 100,000 --
Other.............................. 280,486 242,030 400,845 359,338 238,011 123,429 251,746
----------- ----------- --------- --------- ----------- ------------ ---------
Total non-interest expense..... 530,449 512,490 1,312,909 893,389 769,733 448,653 669,180
----------- ----------- --------- --------- ----------- ------------ ---------
Income Before Provision for Income
Taxes.............................. 541,531 491,177 772,978 1,250,713 1,031,342 474,627 1,077,020
Provision for Income Taxes........... 193,039 152,318 243,396 430,052 337,295 155,439 365,082
----------- ----------- --------- --------- ----------- ------------ ---------
Net Income........................... $ 348,492 $ 338,859 $ 529,582 $ 820,661 $ 694,047 $ 319,188 711,938
----------- ----------- --------- --------- ----------- ------------ ---------
----------- ----------- --------- --------- ----------- ------------ ---------
Net Income Per Share................. $ .33 $ .30 $ .48 $ .69 N/A N/A N/A
----------- ----------- --------- --------- ----------- ------------ ---------
----------- ----------- --------- --------- ----------- ------------ ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-3
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997, FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994, AND FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
RETAINED
EMPLOYEE ADDITIONAL EARNINGS - TOTAL
COMMON BENEFIT PAID-IN SUBSTANTIALLY STOCKHOLDERS'
STOCK PLANS CAPITAL RESTRICTED EQUITY
--------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993........................... $ -- $ -- $ -- $ 8,562,264 $ 8,562,264
NET INCOME, year ended June 30, 1994............. -- -- -- 711,938 711,938
--------- ------------- ------------- ------------- -------------
BALANCE, June 30, 1994........................... -- -- -- 9,274,202 9,274,202
NET INCOME, six months ended December 31, 1994... -- -- -- 319,188 319,188
--------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1994....................... -- -- -- 9,593,390 9,593,390
NET INCOME, year ended
December 31, 1995.............................. -- -- -- 820,661 820,661
COMMON STOCK ISSUED, $.01 par value.............. 12,446 (500,000) 11,698,818 -- 11,211,264
DIVIDENDS DECLARED, $1.50 per share.............. -- -- (1,734,162) (110,173) (1,844,335)
ESOP SHARES RELEASED, 7,746 shares............... -- 77,460 (14,545) -- 62,915
RRP STOCK PURCHASED, 49,782 shares............... -- (721,839) -- -- (721,839)
RRP STOCK AMORTIZED, 3,136 shares................ -- 45,472 -- -- 45,472
PURCHASE OF 47,600 TREASURY SHARES............... (476) -- (447,440) (241,349) (689,265)
--------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1995....................... 11,970 (1,098,907) 9,502,671 10,062,529 18,478,263
NET INCOME, year ended
December 31, 1996.............................. -- -- -- 529,582 529,582
DIVIDENDS DECLARED, $.40 per share............... -- -- (432,777) -- (432,777)
ESOP SHARES RELEASED, 6,461 shares............... -- 64,610 (108) -- 64,502
RRP STOCK AMORTIZED, 7,998 shares................ -- 115,978 -- -- 115,978
PURCHASE OF 121,216 TREASURY SHARES.............. (1,212) -- (1,139,431) (586,252) (1,726,895)
--------- ------------- ------------- ------------- -------------
BALANCE, December 31, 1996....................... 10,758 (918,319) 7,930,355 10,005,859 17,028,653
NET INCOME, six months ended
June 30, 1997 (unaudited)...................... -- -- -- 348,492 348,492
DIVIDENDS DECLARED, $.20 per share (unaudited)... -- -- 5,000 (205,151) (200,151)
ESOP SHARES RELEASED, 2,940 shares (unaudited)... -- 29,400 15,049 (1,976) 42,473
RRP STOCK AMORTIZED, 2,946 shares (unaudited).... -- 42,710 -- -- 42,710
--------- ------------- ------------- ------------- -------------
BALANCES, June 30, 1997 (unaudited).............. $ 10,758 $ (846,209) $ 7,950,404 $ 10,147,224 $ 17,262,177
--------- ------------- ------------- ------------- -------------
--------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------------- ------------------------------
1997 1996 1996 1995
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES:
Net income...................................................... $ 348,492 $ 338,859 $ 529,582 $ 820,661
Adjustments to reconcile net income to net cash provided by
operating activities-
Provision for loan losses and uncollected interest............ -- -- -- 20,000
Provision for depreciation.................................... 10,174 10,285 20,808 18,869
Amortization and accretion.................................... (34,091) (45,230) (75,426) (76,789)
Provision (credit) for deferred income taxes.................. 53,480 24,873 14,936 3,660
ESOP compensation............................................. 42,473 6,000 14,502 62,915
RRP compensation.............................................. 42,710 45,443 115,978 45,472
Gain on sale of investment securities......................... -- (2,000) (2,000) (1,563)
Gain on sale of office building............................... -- -- -- --
Net loss on sale of foreclosed real estate.................... -- -- -- --
FHLB stock dividends.......................................... (28,300) (26,000) (53,100) (48,300)
Net change in--
Accrued interest receivable................................. 58,207 32,949 63,447 (29,413)
Other assets................................................ (9,388) (25,292) (177) (3,004)
Income taxes refundable..................................... (90,441) (111,555) (15,323) 18,227
Income taxes payable and other liabilities.................. (20,682) (23,897) (75,190) (5,041)
------------ -------------- -------------- --------------
Net cash provided by operating activities................. 372,634 224,435 538,037 825,694
------------ -------------- -------------- --------------
INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable..................... (1,973,362) (302,183) (2,155,488) (5,489,040)
Purchases of investment securities.............................. -- (13,030,499) (13,280,500) (11,473,118)
Proceeds from sales and maturities of investment securities..... 3,200,000 13,274,030 17,277,000 10,954,844
Purchases of mortgage-backed securities......................... -- (4,933,375) (5,826,994) (1,875,339)
Principal collected on mortgage-backed securities............... 2,491,416 3,028,748 5,835,960 3,823,466
Purchases of office property and equipment...................... (490) (11,469) (12,310) (20,860)
Proceeds from sale of office properties and equipment........... -- -- -- --
Proceeds from sale of foreclosed real estate.................... -- -- -- --
------------ -------------- -------------- --------------
Net cash provided by (used for) investing activities........ 3,717,564 (1,974,748) 1,837,668 (4,080,047)
------------ -------------- -------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in savings accounts..................... (133,251) (203,005) (625,117) (4,726,715)
Net increase (decrease) in certificates of deposit accounts..... (2,743,679) 291,369 (3,468,041) (2,471,541)
Decrease (increase) in prepaid stock conversion costs........... -- -- -- 278,054
Proceeds from sale of stock -- -- -- 11,211,264
Purchase of RRP stock........................................... -- -- -- (721,839)
Dividends paid.................................................. (200,151) (1,535,556) (1,749,494) (477,618)
Purchase of common stock........................................ -- (937,296) (1,726,895) (689,265)
Advances from FHLB.............................................. 3,250,000 -- -- --
Repayment of FHLB advances...................................... (3,250,000) -- -- --
------------ -------------- -------------- --------------
Net cash provided by (used for) financing activities........ (3,077,081) (2,384,488) (7,569,547) 2,402,340
------------ -------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 1,013,117 (4,134,801) (5,193,842) (852,013)
CASH AND CASH EQUIVALENTS, beginning of period.................... 1,348,415 6,542,257 6,542,257 7,394,270
------------ -------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period.......................... $ 2,361,532 $ 2,407,456 $ 1,348,415 $ 6,542,257
------------ -------------- -------------- --------------
------------ -------------- -------------- --------------
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate......................... $ 43,963 $ -- $ -- $ --
Foreclosed real estate sold and financed........................ $ -- $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid............................................... $ 230,000 $ 239,000 $ 242,000 $ 300,000
Interest paid on deposit accounts............................... $ 1,170,965 $ 1,377,870 $ 2,655,921 $ 2,663,684
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1994 1994 1994
------------ ------------ --------------
<S> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income...................................................... $ 694,047 $ 319,188 $ 711,938
Adjustments to reconcile net income to net cash provided by
operating activities-
Provision for loan losses and uncollected interest............ 165 165 (8,916)
Provision for depreciation.................................... 16,269 9,207 18,630
Amortization and accretion.................................... (77,663) (41,676) (60,538)
Provision (credit) for deferred income taxes.................. 1,241 (5,668) 13,487
ESOP compensation............................................. -- -- --
RRP compensation.............................................. -- -- --
Gain on sale of investment securities......................... -- -- --
Gain on sale of office building............................... -- -- (21,756)
Net loss on sale of foreclosed real estate.................... -- -- 102
FHLB stock dividends.......................................... (38,000) (21,000) (31,500)
Net change in--
Accrued interest receivable................................. 11,603 10,582 14,974
Other assets................................................ 336 (12,216) 26
Income taxes refundable..................................... (11,927) (7,893) (10,334)
Income taxes payable and other liabilities.................. 102,438 130,639 (17,768)
------------ ------------ --------------
Net cash provided by operating activities................. 698,509 381,328 608,345
------------ ------------ --------------
INVESTING ACTIVITIES:
Net decrease (increase) in loans receivable..................... (1,490,389) (1,341,297) 461,111
Purchases of investment securities.............................. (5,052,542) (1,251,875) (8,777,439)
Proceeds from sales and maturities of investment securities..... 4,045,979 2,575,000 1,882,020
Purchases of mortgage-backed securities......................... (4,871,378) (504,900) (10,883,001)
Principal collected on mortgage-backed securities............... 6,400,549 2,297,820 8,491,498
Purchases of office property and equipment...................... (11,624) (10,886) (264,015)
Proceeds from sale of office properties and equipment........... -- -- 28,250
Proceeds from sale of foreclosed real estate.................... -- -- 136,596
------------ ------------ --------------
Net cash provided by (used for) investing activities........ (979,405) 1,763,862 (8,924,980)
------------ ------------ --------------
FINANCING ACTIVITIES:
Net increase (decrease) in savings accounts..................... (2,886,355) (3,124,767) 1,121,527
Net increase (decrease) in certificates of deposit accounts..... 6,103,467 5,682,108 912,431
Decrease (increase) in prepaid stock conversion costs........... (278,054) (278,054) --
Proceeds from sale of stock -- -- --
Purchase of RRP stock........................................... -- -- --
Dividends paid.................................................. -- -- --
Purchase of common stock........................................ -- -- --
Advances from FHLB.............................................. -- -- --
Repayment of FHLB advances...................................... -- -- --
------------ ------------ --------------
Net cash provided by (used for) financing activities........ 2,939,058 2,279,287 2,033,958
------------ ------------ --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 2,658,162 4,424,477 (6,282,677)
CASH AND CASH EQUIVALENTS, beginning of period.................... 4,736,108 2,969,793 9,252,470
------------ ------------ --------------
CASH AND CASH EQUIVALENTS, end of period.......................... $ 7,394,270 $ 7,394,270 $ 2,969,793
------------ ------------ --------------
------------ ------------ --------------
NONCASH INVESTING ACTIVITIES:
Loans taken into foreclosed real estate......................... $ -- $ -- $ 139,749
Foreclosed real estate sold and financed........................ $ -- $ -- $ 52,376
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid............................................... $ 349,000 $ 169,000 $ 370,300
Interest paid on deposit accounts............................... $ 2,381,017 $ 1,183,615 $ 2,461,469
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-5
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Gateway Bancorp, Inc. (the "Company") was incorporated under Kentucky law in
October 1994 by Catlettsburg Federal Savings and Loan Association (the
"Association") in connection with the conversion of the Association from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings bank to be known as Catlettsburg Federal Savings Bank (the "Bank",
in mutual or stock form) and the issuance of the Bank's common stock to the
Company and the offer and sale of the Company's common stock by the Company (the
"Conversion"). As part of the Conversion, the Bank issued 1,244,570 shares of
its common stock. Total proceeds of $12,445,700 were reduced by approximately
$735,000 in conversion expenses. The financial statements for the year ended
December 31, 1994 (unaudited), for the six months ended December 31, 1994, and
for the year ended June 30, 1994, are for the Bank only, because as of December
31, 1994, the Company had not yet issued any stock, had no assets and no
liabilities and had not yet conducted any business other than of an
organizational nature.
The Company's principal business is conducted through the Bank which
conducts business from its main office located in Catlettsburg, Kentucky, and
one full-service branch located in Grayson, Kentucky. The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") to the maximum extent
permitted by law. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS"), which is the Bank's
chartering authority and primary regulator. The Bank is also subject to
regulation by the Federal Deposit Insurance Corporation ("FDIC"), as the
administrator of the SAIF, and to certain reserve requirements established by
the Federal Reserve Board ("FRB"). The Bank is a member of the Federal Home Loan
Bank of Cincinnati ("FHLB").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at June 30, 1997 (unaudited), December
31, 1996 and 1995, and for the six months ended June 30, 1997 and 1996
(unaudited) and for the years ended December 31, 1996 and 1995, include the
accounts of the Company, the Bank, and the Bank's one wholly-owned subsidiary.
The consolidated financial statements for the year ended December 31, 1994
(unaudited), for the six months ended December 31, 1994, and for the year ended
June 30, 1994, include the accounts of the Bank and its one wholly-owned
subsidiary. All significant intercompany transactions have been eliminated in
consolidation. Additionally, certain reclassifications may have been made in
order to conform with the current period's presentation. The accompanying
consolidated financial statements have been prepared on the accrual basis. The
unaudited interim financial statements at June 30, 1997, and for the six months
ended June 30, 1997 and 1996, reflect all necessary adjustments, consisting only
of normal recurring items, which in the opinion of management are necessary to
present fairly the results for the interim periods. Results of the interim
periods are not necessarily indicative of the results to be expected for the
full years.
USE OF ESTIMATES
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
F-6
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses,
and the effect of prepayments on premiums and discounts associated with
investments and mortgage-backed securities. Management believes that the
allowance for loan losses and the effect of prepayments on premiums and
discounts associated with investments and mortgage-backed securities have been
adequately evaluated. Various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and valuations of foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowance or adjustments to the valuations based on
their judgments about information available to them at the time of their
examination. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
include cash and readily available interest-bearing deposits in other financial
institutions. The Bank maintains cash deposits in other depository institutions
which occasionally exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
Federal regulations require the maintenance of certain daily reserve
balances. Based upon the regulatory calculation, the Bank's reserve requirements
at June 30, 1997 (unaudited), December 31, 1996 and 1995 were $-0-. However,
aggregate reserves (in the form of vault cash) are maintained to satisfy federal
regulatory requirements should they be needed.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Bonds and notes held to maturity are carried at amortized cost based upon
management's intent and ability to hold such securities to maturity. Adjustments
for premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Equity securities that are nonmarketable and restricted are carried at cost.
The Bank is required to maintain stock in the Federal Home Loan Bank of
Cincinnati in an amount equal to 1% of mortgage related assets (residential
mortgages and mortgage-backed securities) or 0.3% of the Bank's total assets at
December 31 of each year.
Mortgage-backed securities are stated at amortized cost since management
intends to hold such securities to maturity and they have the ability to do so.
Amortization of premiums and accretion of discounts are recognized using the
level yield method. Certain factors such as prepayments and interest rates may
impact the yields and effective maturities of mortgage-backed securities.
During 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which requires, among other things,
that debt and equity securities (including mortgage-backed securities)
classified as available for sale be reported at fair value, with unrealized
gains and losses excluded from net
F-7
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income and reported as a separate component of stockholders' equity, net of
income taxes. Management adopted SFAS No. 115 effective June 30, 1994, and
classified all investment securities and mortgage-backed securities as held to
maturity (carried at amortized cost), since it is their intent to do so. Should
any be sold, gains or losses will be recognized in income using the specific
identification method. This change had no effect on the Bank's consolidated
financial position or results of operations for any periods presented in the
accompanying financial statements.
Realized gains and losses are recognized in the statements of income using
the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, increased by net
deferred loan costs, and reduced by the allowance for loan losses.
Effective January 1, 1995, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 91, ACCOUNTING FOR NONREFUNDABLE FEES AND
COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING LOANS. In accordance with this
statement, certain direct origination costs on loans made after December 31,
1994 are deferred and amortized as a yield adjustment over the lives of the
related loans. It was determined that the implementation of SFAS No. 91 to loans
originated prior to January 1, 1995 would not have a material effect on the
consolidated financial statements.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
It is the policy of the Bank to provide a valuation allowance for estimated
losses on loans when a significant and probable decline in value occurs. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost, net of accumulated
depreciation. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method.
F-8
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes are recognized for temporary differences between
transactions recognized for financial reporting purposes and income tax
purposes. Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109.
NET INCOME PER SHARE
Net income per share for the six months ended June 30, 1997 (unaudited) and
1996 (unaudited), and for the years ended December 31, 1996 and 1995 was
computed using the weighted average number (1,041,240, 1,140,618, 1,094,395 and
1,194,033, respectively) of outstanding common shares and common stock
equivalents, if dilutive. The only common stock equivalents are stock options.
The weighted average number of common stock equivalents is calculated using the
treasury stock method. There were no shares of stock outstanding for periods
earlier than 1995. Shares which have not been committed to be released to the
ESOP are not considered to be outstanding for purposes of calculating net income
per share.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized in the consolidated
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
Cash: The carrying amount reported in the balance sheet for cash
approximates fair value.
Investment securities and mortgage-backed securities: Fair values for
investment securities and mortgage-backed securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans (for example, fixed rate mortgage 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. The carrying amount of accrued
interest receivable approximates fair value.
F-9
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deposits: The fair values disclosed for passbook accounts are, by
definition, equal to the amount payable on demand at the reporting date (that is
their carrying amounts). The fair values for certificates of deposit are
considered to approximate carrying value if they have original maturities of
less than 1 year. For other certificates of deposit, fair values are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered to a schedule of aggregated contractual maturities on such
deposits. The carrying amount of accrued interest payable approximates fair
value.
(2) INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
(UNAUDITED)
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bonds and Certificates:
U.S. Treasury securities................................. $ 2,999,594 $ -- $ 9,094 $ 2,990,500
FHLB bonds............................................... 3,750,000 -- 47,500 3,702,500
FNMA bonds............................................... 4,040,598 700 79,698 3,961,600
FHLMC bonds.............................................. 2,248,086 800 34,686 2,214,200
Municipal bonds.......................................... 479,287 19,713 300 498,700
------------- ----------- ----------- -------------
13,517,565 21,213 171,278 13,367,500
------------- ----------- ----------- -------------
Restricted Equity Securities:
Stock in FHLB, at cost................................... 822,600 -- -- 822,600
Stock in Intrieve, Inc., at cost......................... 15,000 -- -- 15,000
------------- ----------- ----------- -------------
837,600 -- -- 837,600
------------- ----------- ----------- -------------
$ 14,355,165 $ 21,213 $ 171,278 $ 14,205,100
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Weighted average interest rate........................... 6.37%
-------------
-------------
</TABLE>
F-10
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(2) INVESTMENT SECURITIES HELD TO MATURITY (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bonds and Certificates:
U.S. Treasury securities................................. $ 2,999,375 $ -- $ 19,075 $ 2,980,300
FHLB bonds............................................... 4,450,000 -- 39,700 4,410,300
FNMA bonds............................................... 4,539,807 15,598 74,405 4,481,000
FHLMC bonds.............................................. 3,246,172 10,353 27,725 3,228,800
Government money market.................................. 1,000,000 -- -- 1,000,000
Municipal bonds.......................................... 479,277 26,817 994 505,100
------------- ----------- ----------- -------------
16,714,631 52,768 161,899 16,605,500
------------- ----------- ----------- -------------
Restricted Equity Securities:
Stock in FHLB, at cost................................... 794,300 -- -- 794,300
Stock in Intrieve, Inc., at cost......................... 15,000 -- -- 15,000
------------- ----------- ----------- -------------
809,300 -- -- 809,300
------------- ----------- ----------- -------------
$ 17,523,931 $ 52,768 $ 161,899 $ 17,414,800
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Weighted average interest rate........................... 6.36%
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Bonds and Certificates:
U.S. Treasury securities................................. $ 2,998,750 $ -- $ 3,950 $ 2,994,800
FHLB bonds............................................... 10,349,417 16,782 18,999 10,347,200
FNMA bonds............................................... 2,535,769 64,631 -- 2,600,400
FHLMC bonds.............................................. 1,250,000 1,200 -- 1,251,200
Government money market.................................. 3,000,000 -- -- 3,000,000
Municipal bonds.......................................... 553,353 36,747 -- 590,100
------------- ----------- ----------- -------------
20,687,289 119,360 22,949 20,783,700
------------- ----------- ----------- -------------
Restricted Equity Securities:
Stock in FHLB, at cost................................... 741,200 -- -- 741,200
Stock in Intrieve, Inc., at cost......................... 15,000 -- -- 15,000
------------- ----------- ----------- -------------
756,200 -- -- 756,200
------------- ----------- ----------- -------------
$ 21,443,489 $ 119,360 $ 22,949 $ 21,539,900
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
Weighted average interest rate........................... 6.27%
-------------
-------------
</TABLE>
F-11
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(2) INVESTMENT SECURITIES HELD TO MATURITY (CONTINUED)
During the six months ended June 30, 1996 (unaudited) and the year ended
December 31, 1996, and during the years ended December 31, 1995 and 1994
(unaudited), the Company had investment securities held to maturity called, with
amortized costs of $100,000, $1,000,000 and $73,000, respectively, at gains of
$2,000, $1,563 and $2,250, respectively. There were no sales or calls of
investment securities held to maturity during the six months ended June 30, 1997
(unaudited), the six months ended December 31, 1994 or the year ended June 30,
1994.
The amortized cost and estimated market value of investment securities held
to maturity by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations without call or prepayment penalties.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
DECEMBER 31, 1996
(UNAUDITED) ----------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less............................. $ 4,049,730 $ 4,031,300 $ 3,509,300 $ 3,506,200
Due after one year through five years............... 3,048,527 3,026,600 5,995,078 5,961,000
Due after five years through ten years.............. 4,579,925 4,504,600 5,129,920 5,075,700
Due after ten years................................. 2,676,983 2,642,600 2,889,633 2,871,900
------------- ------------- ------------- -------------
$ 14,355,165 $ 14,205,100 $ 17,523,931 $ 17,414,800
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Investment securities held to maturity with amortized costs of approximately
$500,000, $200,000, and $500,000 and estimated market values of approximately
$498,100, $198,700, and $499,100 were pledged to secure deposits at June 30,
1997 (unaudited), December 31, 1996 and 1995, respectively.
F-12
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(3) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Real estate loans:
Single family residential......................................... $ 18,523,770 $ 16,785,592 $ 15,205,716
Multi-family residential.......................................... 888,418 903,493 585,800
Commercial real estate............................................ 1,002,515 790,993 361,678
------------- ------------- -------------
Total real estate loans......................................... 20,414,703 18,480,078 16,153,194
Other loans:
Loans on deposit accounts......................................... 602,566 620,672 809,761
------------- ------------- -------------
Total loans..................................................... 21,017,269 19,100,750 16,962,955
Net deferred cost reserve........................................... 68,680 55,800 38,107
Allowance for loan losses........................................... (80,758) (80,758) (80,758)
------------- ------------- -------------
Loans--net.......................................................... $ 21,005,191 $ 19,075,792 $ 16,920,304
------------- ------------- -------------
------------- ------------- -------------
Weighted average interest rate...................................... 7.93% 7.85% 7.80%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
------------------------ --------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
----------- ----------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Balance, beginning of period......... $ 80,758 $ 80,758 $ 80,758 $ 60,758 $ 60,758 $ 60,758 $ 157,098
Provision charged to expense......... -- -- -- 20,000 -- -- --
Loans charged-off.................... -- -- -- -- -- -- (96,340)
----------- ----------- --------- --------- ----------- ------------ ----------
Balance, end of period............... $ 80,758 $ 80,758 $ 80,758 $ 80,758 $ 60,758 $ 60,758 $ 60,758
----------- ----------- --------- --------- ----------- ------------ ----------
----------- ----------- --------- --------- ----------- ------------ ----------
</TABLE>
Nonaccrual loans for which interest had been discontinued or reduced and for
which impairment had not been recognized totaled approximately $441,000, $81,500
and $264,800 at June 30, 1997 (unaudited), December 31, 1996 and 1995,
respectively. Interest income that would have been recorded under the original
terms of the loans totaled $8,841 for the six months ended June 30, 1997
(unaudited), and $1,394 and $3,050 for the years ended December 31, 1996 and
1995, respectively.
The Bank is not committed to lend additional funds to debtors whose loans
are impaired or in nonaccrual status.
F-13
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
GNMA certificates................................................. $ 1,400,970 $ 1,530,864 $ 1,963,710
FNMA certificates................................................. 5,298,112 5,661,647 3,750,543
FHLMC certificates................................................ 18,625,385 20,623,373 22,067,943
------------- ------------- -------------
25,324,467 27,815,884 27,782,196
Unamortized premiums.............................................. 1,966 2,880 5,579
Unearned discounts................................................ (123,670) (155,742) (169,371)
------------- ------------- -------------
$ 25,202,763 $ 27,663,022 $ 27,618,404
------------- ------------- -------------
------------- ------------- -------------
Weighted average interest rate.................................... 6.51% 6.52% 6.62%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-14
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(4) MORTGAGE-BACKED SECURITIES HELD TO MATURITY (CONTINUED)
The carrying values and estimated market values of mortgage-backed
securities held to maturity consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
GNMA certificates.......................................... $ 1,376,976 $ 138,224 $ -- $ 1,515,200
FNMA certificates.......................................... 5,266,963 38,903 147,266 5,158,600
FHLMC certificates......................................... 18,558,824 426,950 62,674 18,923,100
------------- ----------- ----------- -------------
$ 25,202,763 $ 604,077 $ 209,940 $ 25,596,900
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
GNMA certificates.......................................... $ 1,502,662 $ 122,582 $ 44 $ 1,625,200
FNMA certificates.......................................... 5,626,378 50,648 196,726 5,480,300
FHLMC certificates......................................... 20,533,982 495,302 431,684 20,597,600
------------- ----------- ----------- -------------
$ 27,663,022 $ 668,532 $ 628,454 $ 27,703,100
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------- ----------- ----------- -------------
GNMA certificates.......................................... $ 1,936,803 $ 147,797 $ -- $ 2,084,600
FNMA certificates.......................................... 3,732,375 43,367 92,142 3,683,600
FHLMC certificates......................................... 21,949,226 600,221 189,547 22,359,900
------------- ----------- ----------- -------------
$ 27,618,404 $ 791,385 $ 281,689 $ 28,128,100
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
There were no sales of mortgage-backed securities held to maturity during
the six months ended June 30, 1997 and 1996 (unaudited), the years ended
December 31, 1996, 1995 and 1994 (unaudited), the six months ended December 31,
1994, or the year ended June 30, 1994.
F-15
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(5) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Land........................................................................ $ 90,000 $ 90,000 $ 90,000
Buildings and improvements.................................................. 339,145 339,145 339,145
Furniture, fixtures and equipment........................................... 164,964 164,474 152,164
----------- ---------- ----------
594,109 593,619 581,309
Less--accumulated depreciation.............................................. (245,296) (235,122) (214,314)
----------- ---------- ----------
$ 348,813 $ 358,497 $ 366,995
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
(6) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1997 1996 1995
-------------------------- -------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ------------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Passbook..................................... $ 2,728,236 5.9% $ 2,861,487 5.8% $ 3,486,604 6.5%
------------- ----- ------------- ----- ------------- -----
Certificates:
3.0-3.99%.................................. 8,777,274 19.0 9,339,968 19.0 8,688,795 16.3
4.0-4.99%.................................. 10,740,729 23.2 12,119,114 24.6 3,077,260 5.8
5.0-5.99%.................................. 23,906,610 51.6 24,672,498 50.2 37,812,482 71.0
6.0-6.99%.................................. 4,500 -- 4,500 -- 11,522 --
7.0-7.99%.................................. 103,425 .2 102,161 .2 120,079 .2
8.0-8.99%.................................. 57,042 .1 95,018 .2 91,162 .2
------------- ----- ------------- ----- ------------- -----
43,589,580 94.1 46,333,259 94.2 49,801,300 93.5
------------- ----- ------------- ----- ------------- -----
$ 46,317,816 100.0% $ 49,194,746 100.0% $ 53,287,904 100.0%
------------- ----- ------------- ----- ------------- -----
------------- ----- ------------- ----- ------------- -----
Weighted average rate........................ 4.92% 4.92% 5.26%
----- ----- -----
----- ----- -----
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $5,823,000, $6,209,000 and
$6,948,000 at June 30, 1997 (unaudited), December 31, 1996 and 1995,
respectively.
F-16
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(6) DEPOSITS (CONTINUED)
The contractual, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
-------------------------- --------------------------
<S> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT
------------- ----------- ------------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Due within one year.................................................. $ 32,200,515 73.9% $ 34,213,149 73.8%
Due after one year but within two years.............................. 9,734,253 22.3 8,172,166 17.6
Due after two years but within three years........................... 1,654,812 3.8 2,175,554 4.7
Due after three years but within four years.......................... -- -- 1,571,675 3.4
Due thereafter....................................................... -- -- 200,715 0.5
------------- ----- ------------- -----
$ 43,589,580 100.0% $ 46,333,259 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
(7) INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
---------------------- ----------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
---------- ---------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Federal:
Current.......................... $ 141,462 $ 135,545 $ 240,357 $ 412,592 $ 336,054 $ 161,107 $ 351,595
Deferred......................... 53,480 24,873 19,873 6,843 1,241 (5,668) 13,487
State:
Current.......................... (1,903) (8,100) (11,897) 13,800 -- -- --
Deferred......................... -- -- (4,937) (3,183) -- -- --
---------- ---------- ---------- ---------- ----------- ------------ ----------
$ 193,039 $ 152,318 $ 243,396 $ 430,052 $ 337,295 $ 155,439 $ 365,082
---------- ---------- ---------- ---------- ----------- ------------ ----------
---------- ---------- ---------- ---------- ----------- ------------ ----------
</TABLE>
F-17
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(7) INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the Federal income tax rate of 34% and the effective state income tax rate of
5.28% (six months ended June 30, 1997 and 1996, and years ended December 31,
1996 and 1995 only) to income before provision for income taxes as a result of
the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
---------------------- ----------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
---------- ---------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Expected provision for income
taxes............................ $ 212,713 $ 181,150 $ 303,626 $ 491,280 $ 350,656 161,373 $ 366,187
Income of Bank not subject to state
income tax....................... (30,512) (28,748) (49,684) (57,802) -- -- --
Tax-exempt interest................ (5,453) (2,550) (15,293) (11,816) (14,983) (7,535) (15,086)
Loan loss provision................ -- -- -- 6,800 -- -- --
Others--net........................ 16,291 2,466 4,747 1,590 1,622 1,601 13,981
---------- ---------- ---------- ---------- ----------- ------------ ----------
$ 193,039 $ 152,318 $ 243,396 $ 430,052 $ 337,295 $ 155,439 $ 365,082
---------- ---------- ---------- ---------- ----------- ------------ ----------
---------- ---------- ---------- ---------- ----------- ------------ ----------
</TABLE>
The net deferred income tax liability consists of income taxes applicable to
the following temporary differences between transactions recognized for
financial reporting and tax reporting purposes:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Components of the deferred tax asset:
Bad debts................................................................. $ -- $ 27,802 $ 27,802
Depreciation.............................................................. 4,993 4,993 5,968
Pension expense........................................................... 5,055 5,055 2,619
Contingency reserve....................................................... -- -- 4,452
RRP compensation expense.................................................. -- 23,982 18,643
Other..................................................................... 1,555 1,033 205
----------- ---------- ----------
Total deferred tax asset.............................................. 11,603 62,865 59,689
Valuation allowance--bad debts.............................................. -- (27,802) (27,802)
----------- ---------- ----------
Total deferred tax asset, net of valuation allowance.................. 11,603 35,063 31,887
Components of the deferred tax liability:
FHLB stock dividends...................................................... 155,826 146,204 128,150
Accretion................................................................. 667 667 609
Bad debts................................................................. 20,398 -- --
----------- ---------- ----------
Total deferred tax liability.......................................... 176,891 146,871 128,759
----------- ---------- ----------
Net deferred tax liability............................................ $ 165,288 $ 111,808 $ 96,872
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-18
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(7) INCOME TAXES (CONTINUED)
Retained earnings at June 30, 1997 (unaudited), December 31, 1996 and 1995
include approximately $2,445,000 for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation of income
to bad debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than bad debt losses or adjustments arising from carryback of
net operating losses would create income for tax purposes only, which would be
subject to the then current corporate income tax rate. The unrecorded deferred
income tax liability on the above amount was approximately $831,000 at June 30,
1997 (unaudited), December 31, 1996 and 1995.
(8) PENSION PLAN
The Bank has a qualified, non-contributory defined benefit pension plan
which covers all employees who are at least twenty and one-half years of age and
have completed six months of employment. Employees become fully vested after
seven years of service. It is the Bank's policy to fund the Plan in the amount
which is deductible for Federal income tax purposes, as actuarially determined.
Contributions to the Plan for the six months ended June 30, 1997 and 1996 were
$15,992 and $11,336, respectively (unaudited), and for the years ended December
31, 1996 and 1995 were $11,336 and $9,039, respectively. There were no
contributions made for any other period presented in the accompanying
consolidated financial statements.
The Bank adopted the provisions of FASB Statement of Financial Accounting
Standards No. 87, EMPLOYERS' ACCOUNTING FOR PENSIONS, effective January 1, 1995.
The effect of adopting Statement No. 87 had no material effect on the 1995
consolidated financial statements.
The following is a summary of the plan's funded status as of December 31,
1996 (the latest date information is available) and 1995. Management believes
Plan conditions did not materially change during the interim period ended June
30, 1997.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Plan assets (principally life insurance and annuity contracts), at estimated fair value... $ 151,327 $ 123,722
Projected benefit obligation (including vested accumulated benefit obligation of $96,131
and $82,678, respectively).............................................................. (181,374) (171,190)
---------- ----------
Funded status............................................................................. (30,047) (47,468)
Unrecognized net gain from actuarial experience........................................... (11,887) (721)
Unamortized transition amount............................................................. 38,726 40,486
---------- ----------
Net pension liability included in other liabilities....................................... $ (3,208) $ (7,703)
---------- ----------
---------- ----------
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation for 1996 and 1995 were 8.0% and 4.5%, respectively.
F-19
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
AND FOR THE YEAR ENDED JUNE 30, 1994
(8) PENSION PLAN (CONTINUED)
Net pension cost for the years ended December 31, 1996 and 1995 includes the
following components:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Service cost................................................................................ $ 11,427 $ 11,964
Interest cost on projected benefit obligation............................................... 12,808 11,966
Actual return on assets..................................................................... (13,144) (14,067)
Amortization and deferral................................................................... 4,789 6,879
--------- ---------
Net periodic pension cost................................................................... $ 15,880 $ 16,742
--------- ---------
--------- ---------
</TABLE>
During the six months ended June 30, 1997 (unaudited), and for 1996 and
1995, no distributions were made to participants.
The amount charged to pension expense during the six months ended June 30,
1997 and 1996 was $6,913 and $8,875, respectively (unaudited).
There was no amount charged to pension expense during any of the other
periods presented in the accompanying consolidated financial statements prior to
1995.
F-20
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(9) PURCHASE OF COMMON STOCK
The Company purchased 121,216 and 47,600 shares of its outstanding common
stock on the open market during 1996 and 1995, respectively. In accordance with
the 1988 amendment to the Kentucky Business Corporation Act, the purchase of
these shares has been recorded as a purchase of common stock shares, which are
authorized but unissued. The shares are available for reissuance.
(10) EMPLOYEE STOCK OWNERSHIP PLAN
The Company established an ESOP for employees of the Company and the Bank
effective upon the Conversion. Full-time employees of the Company and the Bank
who have been credited with at least 1,000 hours of service during a twelve
month period and who have attained age 21 are eligible to participate in the
ESOP. The Company loaned the ESOP $500,000 for the initial purchase of the ESOP
shares. The loan is due and payable in forty (40) equal quarterly installments
of $12,500 beginning March 31, 1995, plus interest at the rate of 8.75% per
annum. The Company and the Bank will make scheduled discretionary cash
contributions to the ESOP sufficient to amortize the principal and interest on
the loan. The Company accounts for its ESOP in accordance with Statement of
Position 93-6, "Employer's Accounting For Employee Stock Ownership Plans." As
shares are committed to be released to participants, the Company reports
compensation expense equal to the average market price of the shares during the
period. To the extent that the fair value of ESOP shares differs from the cost
of such shares, this differential will be charged or credited to equity. ESOP
compensation expense recorded during the six months ended June 30, 1997 and 1996
was $42,473 and $6,000, respectively (unaudited). For the years ended December
31, 1996 and 1995, ESOP compensation was $14,502 and $62,915, respectively. Such
amounts represent the estimated market value of the shares which were released
during each respective period, less dividends paid on unallocated shares used
for debt service.
The fair value of the unreleased ESOP shares was approximately $615,000 at
June 30, 1997 (unaudited) and $501,000 and $592,000 at December 31, 1996 and
1995, respectively. During the six months ended June 30, 1997 and 1996, the
Company used $8,024 and $39,902, respectively, (unaudited), of dividends paid on
unallocated ESOP shares to pay debt service on the outstanding loan, and $67,492
and $20,000 for the years ended December 31, 1996 and 1995, respectively.
(11) STOCK-BASED COMPENSATION PLANS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which established financial
accounting and reporting standards for stock-based compensation. The new
standard defines a fair value method of accounting for an employee stock option
or similar equity instrument. This statement gives entities the choice between
adopting the fair value method or continuing to use the intrinsic value method
under Accounting Principles Board (APB) Opinion No. 25 with footnote disclosures
of the pro forma effects if the fair value method had been adopted. The Company
has opted for the latter approach. Accordingly, no compensation expense has been
recognized for the stock option plan. Had compensation expense for the Company's
stock option plan been determined based on the fair value at the grant date for
awards during the six months ended June 30, 1997 and 1996, and for the years
ended December 31, 1996 and 1995 consistent with the provisions of
F-21
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
FASB No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income-as reported........................................... $ 348,492 $ 338,859 $ 529,582 $ 820,661
Net income-pro forma............................................. 335,823 326,119 503,439 805,515
Net income per share-as reported................................. .33 .30 .48 .69
Net income per share-pro forma................................... .32 .29 .46 .68
</TABLE>
The fair value of each option granted is estimated on the date of the grant
using the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected dividend yield............................................. $ .20 $ .20 $ .40 $ .40
Expected stock price volatility..................................... 6.38% 5.26% 5.26% 5.26%
Risk-free interest rate............................................. 6.31% 6.05% 6.05% 6.42%
Expected life of options............................................ 6.5 years 6.5 years 7 years 7 years
</TABLE>
The weighted average fair value of options granted during the six months
ended June 30, 1997 and 1996 was $2.55 and $2.09, respectively (unaudited), and
for the years ended December 31, 1996 and 1995 was $1.86 and $2.68,
respectively.
The following table summarizes information about fixed stock options
outstanding:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTED EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- - ----------------------------------------------------- ----------- --------------- ----------- ----------- -----------
December 31, 1996:
$13.50........................................... 74,667 6.2 $ 13.50 14,685 $ 13.50
June 30, 1997 (unaudited):
$13.50-$14.125................................... 75,911 5.7 $ 13.51 33,227 $ 13.51
</TABLE>
RECOGNITION AND RETENTION PLAN AND TRUST ("RRP")
The Company's stockholders approved the RRP in 1995. As of June 30, 1997
(unaudited) and December 31, 1996, 49,782 shares are available for awards to the
Company's Board of Directors and the Bank's executive officers and key
employees. During 1995, the Company purchased 49,782 shares in the open market
to fully fund the RRP at an aggregate cost of $721,839. Awards are subject to
five year vesting periods and other provisions as more fully described in the
RRP document. The deferred cost of unearned RRP shares totaled $517,679 at June
30, 1997 (unaudited), and $560,389 and $676,367 at December 31,
F-22
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
1996 and 1995, respectively, and is recorded as a charge against stockholders'
equity. Compensation cost will be recognized ratably over the five year vesting
periods only for those shares awarded. Compensation cost charged to expense for
the six months ended June 30, 1997 and 1996 was $42,710 and $45,443,
respectively (unaudited), and for the years ended December 31, 1996 and 1995 was
$115,978 and $45,472, respectively. RRP shares available which have not been
awarded totaled 17,430 at June 30, 1997 (unaudited) and December 31, 1996 and
1995. 5,894 and 6,270 shares vested during the six months ended June 30, 1997
and 1996, respectively (unaudited), while 8,186 shares vested during the year
ended December 31, 1996. No shares vested during the year ended December 31,
1995.
(12) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered
by its primary federal regulator, the Office of Thrift Supervision (the "OTS").
Failure to meet minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct material affect on the Bank and the consolidated
financial statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines involving quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgements
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). Management believes, as of June
30, 1997 (unaudited) and December 31, 1996 and 1995, the Bank meets all capital
adequacy requirements to which it is subject.
As of September 30, 1996, the most recent notification from the OTS, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized, the Bank
would have to maintain minimum total risk-based, Tier I risk-based, and
F-23
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
Tier I leverage ratios as disclosed in the table below. There are no conditions
or events since the most recent notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY PURPOSES AND
TO BE ADEQUATELY
CAPITALIZED UNDER THE
PROMPT CORRECTIVE ACTION
ACTUAL PROVISIONS
------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO
------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
As of June 30, 1997 (unaudited):
Total Risk-Based Capital
(to Risk-Weighted Assets).............................. $ 15,385,470 79.94% >$ 1,539,760 8.0%
Tier I Capital
(to Risk-Weighted Assets).............................. $ 15,305,470 79.53% >$ 769,880 4.0%
Tier I Capital
(to Adjusted Total Assets)............................. $ 15,305,470 24.74% >$ 1,856,460 3.0%
Tangible Capital
(to Adjusted Total Assets)............................. $ 15,305,470 24.74% >$ 928,230 1.5%
As of December 31, 1996:
Total Risk-Based Capital
(to Risk-Weighted Assets).............................. $ 16,928,064 86.22% >$ 1,570,660 >8.0%
Tier I Capital
(to Risk-Weighted Assets).............................. $ 16,848,064 85.81% >$ 785,330 >4.0%
Tier I Capital
(to Adjusted Total Assets)............................. $ 16,848,064 25.39% >$ 1,990,774 >3.0%
Tangible Capital
(to Adjusted Total Assets)............................. $ 16,848,064 25.39% >$ 995,387 >1.5%
As of December 31, 1995:
Total Risk-Based Capital
(to Risk-Weighted Assets).............................. $ 16,302,277 80.78% >$ 1,614,508 >8.0%
Tier I Capital
(to Risk-Weighted Assets).............................. $ 16,222,277 80.38% >$ 807,254 >4.0%
Tier I Capital
(to Adjusted Total Assets)............................. $ 16,222,277 23.25% >$ 2,092,983 >3.0%
Tangible Capital
(to Adjusted Total Assets)............................. $ 16,222,277 23.25% >$ 1,046,492 >1.5%
</TABLE>
F-24
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(13) OTHER NON-INTEREST INCOME AND EXPENSE
Other non-interest income and expense amounts are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
---------------------- ----------------------------------- DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994 1994
---------- ---------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Other non-interest income:
Rents............................ $ 368 $ 56 $ 676 $ 566 $ 942 $ 663 $ 4,763
Insurance premiums............... 813 977 2,659 3,190 3,185 1,935 3,203
Other fee income................. 1,797 -- 2,706 1,752 9,184 5,988 6,897
Miscellaneous.................... 3,872 3,511 7,111 2,587 3,800 3,467 2,250
---------- ---------- ---------- ---------- ----------- ------------ ----------
$ 6,850 $ 4,544 $ 13,152 $ 8,095 $ 17,111 $ 12,053 $ 17,113
---------- ---------- ---------- ---------- ----------- ------------ ----------
---------- ---------- ---------- ---------- ----------- ------------ ----------
Other non-interest expense:
Data processing.................. $ 17,935 $ 18,829 $ 38,225 $ 40,187 $ 35,193 $ 19,649 $ 32,951
Other insurance.................. 11,829 11,399 23,007 22,820 25,434 12,549 30,792
Building and loan tax............ 34,841 31,707 55,447 46,800 47,433 25,800 45,633
OTS assessment................... 9,837 9,947 18,034 23,033 22,977 11,592 22,395
Advertising and promotion........ 9,357 11,100 18,768 17,713 16,426 8,853 15,869
Telephone and postage............ 10,859 11,375 20,575 18,151 14,125 7,458 14,039
Professional services............ 131,615 93,105 152,421 127,577 20,615 13,676 25,478
Other............................ 54,213 54,568 74,368 63,057 55,808 23,852 64,589
---------- ---------- ---------- ---------- ----------- ------------ ----------
$ 280,486 $ 242,030 $ 400,845 $ 359,338 $ 238,011 $ 123,429 $ 251,746
---------- ---------- ---------- ---------- ----------- ------------ ----------
---------- ---------- ---------- ---------- ----------- ------------ ----------
</TABLE>
(14) CONCENTRATION OF CREDIT RISKS, COMMITMENTS AND CONTINGENCIES
The Bank is principally a local lender and, therefore, has a significant
concentration of loans to borrowers who reside in and/or which are
collateralized by real estate located in Boyd, Carter and Greenup County,
Kentucky. Employment in these areas is highly concentrated in the petroleum and
steel industries. Therefore, many debtors' ability to honor their contracts is
dependent upon these economic sectors.
In the ordinary course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. The principal commitments are
loan commitments which approximated $168,500, $466,600 and $471,125 at June 30,
1997 (unaudited), and December 31, 1996 and 1995, respectively. The Bank uses
the same credit policies for making loan commitments as it does for other loans.
The Bank was not committed to sell or purchase loans or securities at June
30, 1997 (unaudited), and December 31, 1996 or 1995.
F-25
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
(15) RELATED PARTY TRANSACTIONS
Included in loans are loans to directors, officers and their related
interests. Management's opinion is that these loans are comparable to other
loans made in the ordinary course of business. An analysis of the activity of
loans to directors and executive officers is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED SIX MONTHS YEAR
JUNE 30, DECEMBER 31, ENDED ENDED
--------------------- ------------------------ DECEMBER 31, JUNE 30,
1997 1996 1996 1995 1994 1994
---------- --------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Balance, beginning of period.................. $ 142,068 $ 80,124 $ 80,124 $ 250,774 $ 148,217 $ 197,656
New loans advanced............................ 82,873 40,934 200,814 59,537 215,757 64,714
Repayments.................................... (20,638) (32,144) (138,870) (230,187) (113,200) (114,153)
---------- --------- ----------- ----------- ------------ ----------
Balance, end of period........................ $ 204,303 $ 88,914 $ 142,068 $ 80,124 $ 250,774 $ 148,217
---------- --------- ----------- ----------- ------------ ----------
---------- --------- ----------- ----------- ------------ ----------
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 1997 1996 1995
---------------------------- ---------------------------- ----------------------------
<CAPTION>
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash........................ $ 2,361,532 $ 2,361,532 $ 1,348,415 $ 1,348,415 $ 6,542,257 $ 6,542,257
Investment securities held
to maturity............... 14,355,165 14,205,100 17,523,931 17,414,800 21,443,489 21,539,900
Loans receivable, less
allowance................. 21,005,191 21,219,000 19,075,792 19,025,849 16,920,304 16,839,964
Mortgage-backed securities
held to maturity.......... 25,202,763 25,596,900 27,663,022 27,703,100 27,618,404 28,128,100
Accrued interest
receivable................ 371,848 371,848 430,055 430,055 493,502 493,502
Financial liabilities:
Deposits.................... 46,317,816 46,487,900 49,194,746 49,418,277 53,287,904 53,385,202
Accrued interest payable.... 31,676 31,676 32,864 32,864 35,155 35,155
</TABLE>
The carrying amounts in the preceding tables are included in the
consolidated balance sheets under the applicable captions.
While these estimates of fair value are based on management's judgment of
the most appropriate factors, there is no assurance that if the Company were to
have disposed of such items at June 30, 1997, December 31, 1996 and 1995, the
estimated fair values would necessarily have been achieved at those
F-26
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
dates, since market values may differ depending on various circumstances. The
estimated fair values should not necessarily be considered to apply at
subsequent dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments are not included in the above disclosures, such
as property and equipment. Also, non-financial instruments typically not
recognized in the financial statements nevertheless may have value but are not
included in the above disclosures. These include, among other items, the trained
work force, customer goodwill, and similar items.
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is as follows:
<TABLE>
<CAPTION>
1997 QUARTER ENDED 1996 QUARTER ENDED
---------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31 JUNE 30 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ----------- --------- ------------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Total interest income...................... $ 1,115 $ 1,120 $ 1,184 $ 1,181 $ 1,197 $ 1,148
Total interest expense..................... 590 580 695 687 649 622
----------- --------- ----------- --------- ------ ------
Net interest income........................ 525 540 489 494 548 526
Provision for loan losses.................. -- -- -- -- -- --
----------- --------- ----------- --------- ------ ------
Net interest income after provision for
loan losses.............................. 525 540 489 494 548 526
Non-interest income........................ 5 2 6 15 3 5
Non-interest expense....................... 239 291 242 271 549 251
----------- --------- ----------- --------- ------ ------
Income before provision for income taxes... 291 251 253 238 2 280
Provision (credit) for income taxes........ 98 96 84 68 (2) 93
----------- --------- ----------- --------- ------ ------
Net income................................. $ 193 $ 155 $ 169 $ 170 $ 4 $ 187
----------- --------- ----------- --------- ------ ------
----------- --------- ----------- --------- ------ ------
Net income per share....................... $ .19 $ .14 $ .15 $ .15 $ .00 $ .18
----------- --------- ----------- --------- ------ ------
----------- --------- ----------- --------- ------ ------
Dividends declared per share............... $ .10 $ .10 $ .10 $ .10 $ .10 $ .10
----------- --------- ----------- --------- ------ ------
----------- --------- ----------- --------- ------ ------
</TABLE>
(18) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for the parent company only (Gateway
Bancorp, Inc.) is as follows:
F-27
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents............................................... $ 1,835,313 $ 64,500 $ 1,608,863
Investment in subsidiary................................................ 15,305,470 16,848,064 16,222,277
Investment securities held to maturity.................................. -- -- 1,986,394
Accrued interest receivable............................................. -- -- 47,302
Income taxes refundable................................................. 116,394 92,460 --
Other assets............................................................ 5,000 23,629 --
------------- ------------- -------------
$ 17,262,177 $ 17,028,653 $ 19,864,836
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Income taxes payable.................................................... $ -- $ -- $ 19,856
Dividends payable....................................................... -- -- 1,366,717
------------- ------------- -------------
Total liabilities................................................. -- -- 1,386,573
------------- ------------- -------------
Common stock............................................................ 10,758 10,758 11,970
Employee benefit plans.................................................. (846,209) (918,319) (1,098,907)
Additional paid-in capital.............................................. 7,950,404 7,930,355 9,502,671
Retained earnings....................................................... 10,147,224 10,005,859 10,062,529
------------- ------------- -------------
Total stockholders' equity........................................ 17,262,177 17,028,653 18,478,263
------------- ------------- -------------
$ 17,262,177 $ 17,028,653 $ 19,864,836
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- ------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
----------- ---------- ----------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest on investment securities............................. $ -- $ 57,171 $ 57,171 $ 269,997
Interest on other interest-earning assets..................... 37,576 13,597 29,302 43,585
----------- ---------- ----------- -----------
37,576 70,768 86,473 313,582
Non-interest income........................................... -- 2,969 2,969 1,563
Compensation and benefits..................................... (85,183) (45,443) (115,978) (45,472)
Other non-interest expense.................................... (121,584) (81,596) (141,472) (113,704)
----------- ---------- ----------- -----------
Income (loss) before income taxes and equity in undistributed
income of subsidiary........................................ (169,191) (53,302) (168,008) 155,969
Provision (credit) for income taxes........................... (60,277) (30,068) (71,803) 65,857
----------- ---------- ----------- -----------
</TABLE>
F-28
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- ------------------------
1997 1996 1996 1995
----------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) before equity in undistributed income of
subsidiary.................................................. (108,914) (23,234) (96,205) 90,112
Equity in undistributed income of subsidiary.................. 457,406 362,093 625,787 730,549
----------- ---------- ----------- -----------
Net income.................................................... $ 348,492 $ 338,859 $ 529,582 $ 820,661
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1996 1995
------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income.......................................... $ 348,492 $ 338,859 $ 529,582 $ 820,661
Adjustments to reconcile net income to net cash
flows provided by (used for) operating activities
-
Equity in undistributed income of subsidiary.... (457,406) (362,093) (625,787) (730,549)
Accretion....................................... -- (13,606) (13,606) (6,556)
Interest received on ESOP loan.................. 17,473 -- 14,502 20,061
Gain on sale of investment securities........... -- (2,969) (2,969) (1,563)
RRP compensation................................ 42,710 45,443 115,978 45,472
Changes in -
Accrued interest receivable..................... -- 47,302 47,302 (47,302)
Other assets.................................... 18,629 (19,635) (23,629) --
Income taxes refundable......................... (23,934) (49,211) (92,460) --
Income taxes payable............................ -- (19,856) (19,856) 19,856
------------ ------------- ------------- -------------
Net cash provided by (used for) operating
activities.................................. (54,036) (35,766) (70,943) 120,080
------------ ------------- ------------- -------------
Investing activities:
Dividends from subsidiary........................... 2,000,000 -- -- --
Capital contribution to subsidiary.................. -- -- -- (5,905,484)
Purchases of investment securities held to
maturity.......................................... -- -- -- (3,073,118)
Principal payments received on ESOP loan............ 25,000 -- 50,000 50,000
Proceeds from maturities and sales of investment
securities held to maturity....................... -- 2,002,969 2,002,969 1,094,843
------------ ------------- ------------- -------------
Net cash provided by (used for) investing
activities.................................... 2,025,000 2,002,969 2,052,969 (7,833,759)
------------ ------------- ------------- -------------
</TABLE>
F-29
<PAGE>
GATEWAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996,
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1994 AND FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------------- ----------------------------
1997 1996 1996 1995
------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Financing activities:
Proceeds from sale of stock......................... -- -- -- 11,211,264
Purchase of RRP stock............................... -- -- -- (721,839)
Dividends paid...................................... (200,151) (1,535,556) (1,799,494) (477,618)
Purchase of common stock............................ -- (937,296) (1,726,895) (689,265)
------------ ------------- ------------- -------------
Net cash provided by (used for) financing
activities.................................... (200,151) (2,472,852) (3,526,389) 9,322,542
------------ ------------- ------------- -------------
Net increase (decrease) in cash....................... 1,770,813 (505,649) (1,544,363) 1,608,863
Cash and cash equivalents, beginning of period........ 64,500 1,608,863 1,608,863 --
------------ ------------- ------------- -------------
Cash and cash equivalents, end of period.............. $ 1,835,313 $ 1,103,214 $ 64,500 $ 1,608,863
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
(19) PENDING ACQUISITION
On June 17, 1997, the Company entered into an Agreement and Plan of Merger
("Agreement") with Peoples Bancorp, Inc. ("Peoples"), an Ohio multi-bank holding
company headquartered in Marietta, Ohio, whereby Peoples agreed to acquire the
Company and the Bank. The Agreement provides for the acquisition of 100% of the
Company's outstanding common stock. The purchase consideration consists of
$18.75 per share of the Company's common stock, which may be paid in cash,
Peoples' common stock or both, at the election of each stockholder, as more
fully described in the Agreement. The transaction is subject to the approval of
the Company's stockholders and the receipt of all required regulatory approvals,
as well as other customary conditions.
F-30
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 17, 1997 ("Agreement"), by
and between Peoples Bancorp, Inc. ("Peoples"), an Ohio corporation headquartered
in Marietta, Ohio and Gateway Bancorp, Inc. ("Gateway"), a Kentucky corporation
headquartered in Catlettsburg, Kentucky.
WITNESSETH:
WHEREAS, the Boards of Directors of Peoples and Gateway have determined that
it is in the best interests of their respective companies and their shareholders
to consummate the business combination transactions provided for herein,
including the merger of Gateway with and into a to-be-formed subsidiary to be
formed under the laws of the State of Ohio by Peoples under the name Peoples
Acquisition Corp. ("PAC"), subject to the terms and conditions set forth herein;
and
WHEREAS, the parties desire to provide for certain undertakings, conditions,
representations, warranties and covenants in connection with the transactions
contemplated hereby; and
WHEREAS, as a condition and inducement to People's willingness to enter into
this Agreement, certain stockholders of Gateway are concurrently entering into a
Stockholder Agreement with Peoples (the "Stockholder Agreement"), in
substantially the form attached hereto as Exhibit A, pursuant to which, among
other things, such stockholders agree to vote their shares of Gateway Common
Stock (as defined herein) in favor of this Agreement and the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties and agreements herein contained, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
1.01. FORMATION OF PAC. Prior to the Effective Time (as defined in Section
1.03 hereof), Peoples shall organize PAC and shall cause PAC to fulfill all of
the obligations of PAC under this Agreement and the Plan of Merger (as defined
in Section 1.02 hereof).
1.02. THE MERGER. (a) Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.03 hereof), Gateway shall be
merged with and into PAC in accordance with the applicable provisions of the
Ohio General Corporation Law ("OGCL") (the "Merger") and pursuant to the terms
of a Plan of Merger ("Plan of Merger") attached hereto as Exhibit B, which shall
be executed by Peoples, PAC and Gateway at or prior to the Closing (as defined
in Section 1.03). PAC shall be the surviving corporation (hereinafter sometimes
called the "Surviving Corporation") of the Merger, and shall continue its
corporate existence under the laws of the State of Ohio. The name of the
Surviving Corporation shall be "Gateway Bancorp, Inc." and the Surviving
Corporation will continue to operate as a wholly owned subsidiary of Peoples.
Upon consummation of the Merger, the separate corporate existence of Gateway
shall terminate.
(b) From and after the Effective Time, the Merger shall have the effects set
forth in Section 1701.82 of the OGCL.
(c) The Articles of Incorporation, Code of Regulations and Bylaws of PAC, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation, Code of Regulations and Bylaws of the Surviving Corporation,
respectively, except that the name of the Surviving Corporation will be changed
to Gateway Bancorp, Inc. in accordance with their terms and applicable law.
(d) Upon consummation of the Merger, (i) Rebecca R. Jackson and John H.
Fugeman (who are presently directors of Gateway; in the event of the death,
disability or other inability to serve, Gateway and
<PAGE>
Peoples shall mutually agree upon another individual presently or at such time
serving as a director of Gateway to replace such person in this capacity) shall
be elected to the Board of Directors of PAC, in addition to Robert Evans, Carol
Schneeberger and RobRoy Walters, who are officers of Peoples, and (ii) the
executive officers of PAC shall consist of Robert Evans, Chairman of the Board,
RobRoy Walters, President and Chief Executive Officer, Carol Schneeberger,
Secretary and Treasurer. Directors and officers of PAC shall serve for such
terms as are specified herein and in the Articles of Incorporation, Code of
Regulations and Bylaws of PAC.
1.03. EFFECTIVE TIME; CLOSING. The Merger shall become effective upon the
occurrence of the filing of a certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Ohio pursuant to the OGCL
and Articles of Merger ("Articles of Merger") with the Secretary of State of the
Commonwealth of Kentucky pursuant to the Kentucky 1988 Business Corporation Act
("KBCA"), unless a later date and time is specified as the effective time in
such Certificate of Merger and Articles of Merger (the "Effective Time"). A
closing (the "Closing") shall take place immediately prior to the Effective Time
at 10:00 a.m., Eastern Time, on or before the tenth day following the
satisfaction or waiver, to the extent permitted hereunder, of the conditions to
the consummation of the Merger specified in Article V of this Agreement (other
than the delivery of certificates, opinions and other instruments and documents
to be delivered at the Closing), at the principal executive offices of Peoples
in Marietta, Ohio, or at such other place, at such other time, or on such other
date as the parties may mutually agree upon. At the Closing, there shall be
delivered to Peoples and Gateway the opinions, certificates and other documents
required to be delivered under Article V hereof.
1.04. EFFECT ON OUTSTANDING SHARES OF GATEWAY COMMON STOCK.
(a) By virtue of the Merger, automatically and without any action on the
part of the holder thereof, each share of common stock of Gateway, $.01 par
value per share ("Gateway Common Stock"), issued and outstanding at the
Effective Time (other than (i) shares the holder of which (the "Dissenting
Stockholder") pursuant to any applicable law providing for dissenters' or
appraisal rights is entitled to receive payment in accordance with the
provisions of any such law, as to which shares such holder shall have only the
rights provided in any such law (the "Dissenters' Shares"), (ii) shares held
directly or indirectly by Peoples (other than shares held in a fiduciary
capacity or in satisfaction of a debt previously contracted)), and (iii) shares
held as treasury stock of Gateway (collectively, the "Excluded Shares") shall
become and be converted into, at the election of the holder thereof (subject to
the provisions of this Article), the right to receive (i) $18.75 in cash (the
"Cash Consideration") or (ii) shares of common stock of Peoples, no par value
("Peoples Common Stock") which is equal to (the "Exchange Ratio") (A) if the
Peoples Market Value (as defined below) is equal to or less than $37.66 but
equal to or greater than $27.84, the quotient determined by dividing (x) $18.75
by (y) the Peoples Market Value, (B) if the Peoples Market Value is less than
$27.84, 0.6736 shares or (C) if the Peoples Market Value is greater than $37.66,
0.4978 shares (the "Stock Consideration"), or (iii) a combination thereof
(collectively, the "Merger Consideration").
(i) If, between the date of this Agreement and the Effective Time, the
outstanding shares of Peoples Common Stock shall have been changed into a
different number of shares or into a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares (each, a "Stock Adjustment"), the Stock
Consideration shall be adjusted correspondingly to the extent appropriate to
reflect the Stock Adjustment.
(ii) As used herein, "Peoples Market Value" shall be the average of the
mean between the closing high bid and low asked prices of a share of Peoples
Common Stock, as reported on the Nasdaq Stock Market (the "Nasdaq"), for the
20 consecutive trading days ending five days immediately preceding the
Closing.
(b) As of the Effective Time, each Excluded Share, other than Dissenters'
Shares, shall be cancelled and retired and cease to exist, and no exchange or
payment shall be made with respect thereto.
2
<PAGE>
(c) As of the Effective Time, all shares of Gateway Common Stock other than
Excluded Shares shall no longer be outstanding and shall be automatically
cancelled and retired and shall cease to exist, and each holder of a certificate
formerly representing any such shares of Gateway Common Stock shall cease to
have any rights with respect thereto, except the right to receive the Merger
Consideration. After the Effective Time, there shall be no transfers on the
stock transfer books of Gateway.
1.05. FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fraction of a whole share of Peoples Common Stock and no certificates or scrip
therefor will be issued in the Merger; instead, Peoples shall pay to each holder
of Gateway Common Stock who would otherwise be entitled to a fractional share an
amount in cash, rounded to the nearest cent, determined by multiplying such
fraction by the Peoples Market Value.
1.06. ELECTIONS.
(a) Subject to the allocation procedures set forth in this Article, each
holder of Gateway Common Stock will be entitled, with respect to the Merger
Consideration to be received for each share of Gateway Common Stock held by such
holder, to (i) elect to receive the Stock Consideration (a "Stock Election")
with respect to such holder's Gateway Common Stock ("Stock Election Shares"),
(ii) elect to receive the Cash Consideration (a "Cash Election") with respect to
such holder's Gateway Common Stock ("Cash Election Shares"), (iii) make no
election (a "No-Election") with respect to such holder's Gateway Common Stock
("No-Election Shares") or (iv) elect to make a Stock Election with respect to
some of such holder's shares of Gateway Common Stock and a Cash Election with
respect to the remaining shares of Gateway Common Stock held by such holder (a
"Split Election"). Any Dissenting Shares shall be deemed to be Cash Election
Shares. Notwithstanding the foregoing, in order to make a Stock Election or
Split Election, the number of shares of Gateway Common Stock a Company
stockholder elects to convert must equal or exceed 100 shares.
(b) An election form and other appropriate transmittal materials (the
"Letter of Transmittal and Election Form") will be mailed within three business
days after the Closing to each holder of record of Gateway Common Stock as of
the Effective Time permitting such holder (or in the case of nominee record
holders, the beneficial owner through proper instructions and documentation) to
make a (i) Stock Election, (ii) Cash Election, (iii) No-Election or (iv) Split
Election. Holders who hold in a variety of capacities may make a separate
election in each capacity. Any election shall have been properly made only if a
bank or trust company designated by Peoples (the "Exchange Agent") shall have
actually received a properly completed Letter of Transmittal and Election Form
by the Election Deadline, described below. A Letter of Transmittal and Election
Form will be properly completed only if accompanied by certificates representing
all shares of Gateway Common Stock covered thereby. Any shares of Gateway Common
Stock with respect to which the holder thereof shall not, as of the Election
Deadline, have made such an election by submission to and receipt by the
Exchange Agent of an effective, properly completed Letter of Transmittal and
Election Form shall be deemed to be No-Election Shares. The Exchange Agent shall
have reasonable discretion to determine when any election, modification or
revocation is received and whether any such election, modification or revocation
has been properly made.
(c) The Election Deadline shall be 5:00 p.m., Eastern Time, on the 10th
business day following but not including the date of mailing of the Letter of
Transmittal and Election Form or such other date as Peoples and Gateway shall
mutually agree upon.
1.07. ALLOCATIONS OF MERGER CONSIDERATION.
(a) As provided below, 68% of the shares of Gateway Common Stock will be
converted into the right to receive the Stock Consideration. The Exchange Agent
shall effectuate the allocations of the Merger Consideration described below
among the holders of Gateway Common Stock within five business days after the
Election Deadline.
3
<PAGE>
(b) If the aggregate number of Cash Election Shares exceeds the number of
shares of Gateway Common Stock equal to 32% of the shares of Gateway Common
Stock outstanding at the Effective Time (excluding such shares which are to be
cancelled and retired in accordance with Section 1.04(b) (the "Cash Election
Number"), all Stock Election Shares and all No-Election Shares outstanding at
the Effective Time shall be converted into the right to receive the Stock
Consideration, and the Cash Election Shares shall be converted into the right to
receive the Stock Consideration and the Cash Consideration in the following
manner:
each Cash Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the
product, rounded to the nearest 1(cent), of (x) the Cash
Consideration and (y) a fraction (the "Cash Fraction"), the
numerator of which shall be the Cash Election Number and the
denominator of which shall be the total number of Cash Election
Shares, and (ii) a number of shares of Peoples Common Stock equal
to the product, rounded to four decimal places, of (x) the Stock
Consideration and (y) a number equal to one minus the Cash
Fraction.
(c) If the aggregate number of Stock Election Shares exceeds the number of
shares of Gateway Common Stock equal to 68% of the shares of Gateway Common
Stock outstanding at the Effective Time (excluding such shares which are to be
cancelled and retired in accordance with Section 1.04(b) (the "Stock Election
Number"), all Cash Election Shares and all No-Election Shares shall be converted
into the right to receive the Cash Consideration, and all Stock Election Shares
shall be converted into the right to receive the Stock Consideration and the
Cash Consideration in the following manner:
each Stock Election Share shall be converted into the right to
receive (i) a number of shares of Peoples Common Stock equal to
the product, rounded to four decimal places, of (x) the Stock
Consideration and (y) a fraction (the "Stock Fraction"), the
numerator of which shall be the Stock Election Number and the
denominator of which shall be the total number of Stock Election
Shares, and (ii) an amount of cash, without interest, equal to the
product, rounded to the nearest 1(cent), of (x) the Cash
Consideration and (y) a number equal to one minus the Stock
Fraction.
(d) In the event that the number of Cash Election Shares does not exceed the
Cash Election Number and the number of Stock Election Shares does not exceed the
Stock Election Number, all Cash Election Shares shall be converted into the
right to receive the Cash Consideration and all Stock Election Shares shall be
converted into the right to receive the Stock Consideration. The Exchange Agent
shall consider the allocation with respect to No-Election Shares only following
consideration of those Gateway stockholders who have made Stock Elections, Cash
Elections and Split Elections. With respect to Gateway stockholders who have
No-Election Shares, the Exchange Agent will attempt to provide for Stock
Consideration equal to 68% of the Merger Consideration and Cash Consideration
equal to 32% of the Merger Consideration; provided, however, that to the extent
that it is not possible to provide for such allocation and still achieve the
result provided for in Section 1.07(a), the Exchange Agent will allocate based
on random selection so that the result provided in Section 1.07(a) will be
attained. The random selection process to be used by the Exchange Agent under
these circumstances will consist of drawing by lot or such other process as the
Exchange Agent deems equitable and necessary to effect the allocations described
in this Section 1.07.
1.08. EXCHANGE PROCEDURES.
(a) At and after the Effective Time, each certificate previously
representing shares of Gateway Common Stock shall represent only the right to
receive the Merger Consideration (the "Gateway Certificates"), except as
specifically set forth in Section 1.04.
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(b) Within three business days of the Effective Time, Peoples shall deposit,
or shall cause to be deposited, with the Exchange Agent, for the benefit of the
holders of shares of Gateway Common Stock, for exchange in accordance with this
Section 1.08, an estimated amount of cash sufficient to pay the aggregate Cash
Consideration to be paid pursuant to Section 1.04 and the aggregate amount of
cash paid in lieu of fractional shares to be paid pursuant to Section 1.05, and
Peoples shall reserve for issuance with its Transfer Agent and Registrar, the
aggregate Stock Consideration to be issued.
(c) The Letter of Transmittal and Election Form to be mailed within three
business days of the Effective Date shall specify that delivery shall be
effected, and risk of loss and title to the Gateway Certificates shall pass,
only upon delivery of Gateway Certificates to the Exchange Agent, shall be in a
form and contain any other provisions as Peoples may reasonably determine and
shall include instructions for use in effecting the surrender of the Gateway
Certificates in exchange for the Merger Consideration. Upon the proper surrender
of a Gateway Certificate or Gateway Certificates to the Exchange Agent, together
with a properly completed and duly executed Letter of Transmittal and Election
Form, the holder of such Gateway Certificate or Gateway Certificates shall be
entitled to receive in exchange therefor (i) a certificate representing that
number of whole shares of Peoples Common Stock that such holder has the right to
receive pursuant to Article I of this Agreement and (ii) a check in the amount
equal to the cash, if any, which such holder has the right to receive pursuant
to Article I of this Agreement (including any cash in lieu of any fractional
shares of Peoples Common Stock to which such holder is entitled to pursuant to
Section 1.05 and any dividend or other distributions to which such holder of
Peoples Common Stock is entitled to pursuant to Section 1.08(d)). The Gateway
Certificate or Gateway Certificates so surrendered shall forthwith be cancelled.
As soon as practicable after completion of the allocations of the Merger
Consideration and in no event later than ten business days after the Election
Deadline, the Exchange Agent shall distribute Peoples Common Stock and cash as
provided herein. The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of Peoples Common Stock held
by it from time to time hereunder, except that it shall receive and hold all
dividends or other distributions paid or distributed with respect to such shares
for the account of the persons entitled thereto. In the event of a transfer of
ownership of any shares of Gateway Common Stock not registered in the transfer
records of Gateway, the Cash Consideration shall be paid and the Stock
Consideration shall be issued to the transferee if the Gateway Certificate
representing such Gateway Common Stock is presented to the Exchange Agent,
accompanied by documents sufficient, in the reasonable judgment of Peoples and
the Exchange Agent, (x) to evidence and effect such transfer and (y) to evidence
that all applicable stock transfer taxes have been paid.
(d) No interest will be paid or accrued on the Cash Consideration. No
dividend or other distributions declared or made after the Effective Time with
respect to Peoples Common Stock shall be remitted to any person entitled to
receive shares of Peoples Common Stock until such person surrenders the Gateway
Certificate or Gateway Certificates, at which time such dividends shall be
remitted to such persons, without interest.
(e) From and after the Effective Time, there shall be no transfers on the
stock transfer records of Gateway of any shares of Gateway Common Stock that
were outstanding immediately prior to the Effective Time. If after the Effective
Time Gateway Certificates are presented to Peoples, they shall be cancelled and
exchanged for the Merger Consideration, deliverable in respect thereof pursuant
to this Agreement in accordance with the procedures set forth in this Section
1.08.
(f) Any portion of the aggregate Cash Consideration or the proceeds of any
investments thereof that remains unclaimed by the stockholders of Gateway for
six (6) months after the Effective Time shall be repaid by the Exchange Agent to
Peoples upon the written request of Peoples. After such request is made, any
stockholders of Gateway who have not theretofore complied with this Section 1.08
shall look only to Peoples for payment and issuance of their Merger
Consideration deliverable in respect of each share of Gateway Common Stock such
stockholder holds as determined pursuant to this Agreement without any
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interest thereon. If outstanding certificates for shares of Gateway Common Stock
are not surrendered or the payment for them is not claimed prior to the date on
which such payments would otherwise escheat to or become the property of any
governmental unit or agency, the unclaimed items shall, to the extent permitted
by abandoned property and any other applicable law, become the property of
Peoples (and to the extent not in its possession shall be paid over to it), free
and clear of all claims or interest of any person previously entitled to such
claims. Notwithstanding the foregoing, none of Peoples, the Exchange Agent or
any other person shall be liable to any former holder of Gateway Common Stock
for any amount delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(g) Peoples and the Exchange Agent shall be entitled to rely upon Gateway's
stock transfer books to establish the identity of those persons entitled to
receive the Merger Consideration, which books shall be conclusive with respect
thereto. In the event of a dispute with respect to ownership of stock
represented by any Gateway Certificate, Peoples and the Exchange Agent shall be
entitled to deposit any consideration represented thereby in escrow with an
independent third party and thereafter be relieved with respect to any claims
thereto.
(h) In the event any Gateway Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Gateway Certificate to be lost, stolen or destroyed and, if required by the
Exchange Agent, the posting by such person of a bond in such amount as the
Exchange Agent may direct as indemnity against any claim that may be made
against it with respect to such Gateway Certificate, the Exchange Agent will
issue in exchange for such lost, stolen or destroyed Gateway Certificate the
Merger Consideration deliverable in respect thereof pursuant to this Agreement.
1.09. STOCK OPTIONS. Immediately before the Effective Time, each option with
respect to Gateway Common Stock (a "Gateway Stock Option") that has been issued
pursuant to Gateway's Stock Option Plan and is outstanding and exercisable at
the Effective Time shall be cancelled and converted into the right to receive
from Gateway or Peoples, subject to required withholding taxes, if any, (x) cash
and Peoples Common Stock in an aggregate amount equal to the difference between
the exercise price of such Gateway Stock Option and the Merger Consideration for
each share of Gateway Common Stock subject to such Gateway Stock Option (the
"Option Payment Amount"), with 32% of such Option Payment Amount to be paid in
cash and 68% of such Option Payment Amount to be paid in Peoples Common Stock
(with any fractional shares converted to cash in accordance with Section 1.05
hereof), determined as follows: (A) if the Peoples Market Value is equal to or
less than $37.66 but equal to or greater than $27.84, the quotient determined by
dividing (x) $3.57 by (y) the Peoples Market Value, (B) if the Peoples Market
Value is less than $27.84, 0.1282 shares or (C) if the Peoples Market Value is
greater than $37.66, 0.0948 shares. The aggregate consideration to be paid to
Gateway option holders pursuant to this Section 1.09 shall be based on
appreciation of $5.25 per option.
1.10. DISSENTING SHARES. Each outstanding share of Gateway Common Stock the
holder of which has perfected his right to dissent under the KBCA and has not
effectively withdrawn or lost such right as of the Effective Time (the "Gateway
Dissenting Shares") shall not be converted into or represent a right to receive
shares of Peoples Common Stock or cash hereunder, and the holder thereof shall
be entitled only to such rights as are granted by the KBCA. Gateway shall give
Peoples prompt notice upon receipt by Gateway of any such written demands for
payment of the fair value of such shares of Gateway Common Stock and of
withdrawals of such demands and any other instruments provided pursuant to the
KBCA (any shareholder duly making such demand being hereinafter called a
"Dissenting Shareholder"). Any payments made in respect of Gateway Dissenting
Shares shall be made by the Surviving Corporation. If any Dissenting Shareholder
shall effectively withdraw or lose (through failure to perfect or otherwise) his
right to such payment at or prior to the Effective Time, such holder's shares of
Gateway Common Stock shall be converted into a right to receive cash and/or
Peoples Common Stock in accordance with the applicable provisions of this
Agreement. If such holder shall effectively withdraw or lose (through failure to
perfect or otherwise) his right to such payment after the Effective Time, each
share of Gateway Common Stock of such holder shall be converted on a share by
share basis into either the right to receive cash or Peoples Common Stock as
Peoples shall determine.
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1.11. ADDITIONAL ACTIONS. If at any time after the Effective Time, the
Surviving Corporation shall consider that any further assignments or assurances
in law or any other acts are necessary or desirable to (i) vest, perfect or
confirm, of record or otherwise, in the Surviving Corporation its rights, title
or interest in, to or under any of the rights, properties or assets of Gateway
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger, or (ii) otherwise carry out the purposes of this
Agreement, Gateway and its proper officers and directors shall be deemed to have
granted to the Surviving Corporation an irrevocable power of attorney to execute
and deliver all such proper deeds, assignments and assurances in law and to do
all acts necessary or proper to vest, perfect or confirm title to and possession
of such rights, properties or assets in the Surviving Corporation and otherwise
to carry out the purposes of this Agreement; and the proper officers and
directors of the Surviving Corporation are fully authorized in the name of
Gateway or otherwise to take any and all such action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF GATEWAY
References to "Gateway Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article II, dated as of the date hereof
and referenced to the specific sections and subsections of Article II of this
Agreement, which have been delivered by Gateway to Peoples. Gateway hereby
represents and warrants to Peoples as follows as of the date hereof:
2.01. CORPORATE ORGANIZATION.
(a) Gateway is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Kentucky. Gateway has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted and is duly licensed
or qualified to do business and is in good standing in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries (as defined below) taken as a whole. Gateway is registered as a
thrift holding company under the Home Owners' Loan Act, as amended ("HOLA").
Gateway Disclosure Schedule 2.01(a) sets forth true and complete copies of the
Articles of Incorporation or other governing instrument and Bylaws of Gateway
and the Gateway Subsidiaries as in effect on the date hereof.
For purposes of this Agreement, a "Material Adverse Effect" shall mean, with
respect to Gateway or Peoples, respectively, any effect that (i) is material and
adverse to the financial condition, results of operations or business of Gateway
and the Gateway Subsidiaries (as defined in Section 2.01(b)) taken as a whole,
or Peoples and the Peoples Subsidiaries (as defined in Section 3.01(b)) taken as
a whole, respectively, or (ii) materially impairs the ability of either Gateway,
on the one hand, or Peoples, on the other hand, to consummate the transactions
contemplated by this Agreement and the Plan of Merger, provided, however, that
Material Adverse Effect shall not be deemed to include the impact of (a) changes
in laws and regulations or interpretations thereof that are generally applicable
to the banking or savings industries, (b) changes in generally accepted
accounting principles that are generally applicable to the banking or savings
industries, (c) expenses incurred in connection with the transactions
contemplated hereby or (d) actions or omissions of a party (or any of its
subsidiaries) taken with the prior informed written consent of the other party
or parties in contemplation of the transactions contemplated hereby.
(b) The only direct or indirect subsidiaries of Gateway are Catlettsburg
Federal Savings Bank ("Catlettsburg Federal") and C&F Services, Inc. (together
the "Gateway Subsidiaries"). Each of the Gateway Subsidiaries (i) is duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation, (ii) has the corporate power and
authority to own or lease all of its properties and assets and to conduct its
business as it is now being conducted, and (iii) is duly licensed or
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qualified to do business and is in good standing in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed, qualified
or in good standing would not have a material adverse effect on the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole. Gateway and Catlettsburg Federal are in good
standing with their appropriate federal thrift regulatory agencies and each has
satisfied in all material respects all commitments, financial or otherwise, as
may have been agreed upon with such thrift regulatory agencies. Except as set
forth in Gateway Disclosure Schedule 2.01(b) and other than the Gateway
Subsidiaries, Gateway does not own or control, directly or indirectly, greater
than a 5% equity interest in any corporation, company, association, partnership,
joint venture or other entity.
2.02. CAPITALIZATION. The authorized capital stock of Gateway consists of
4,000,000 shares of Gateway Common Stock, of which 1,244,570 are issued and
outstanding and 168,816 of which are held in treasury as of the date hereof, and
1,000,000 shares of preferred stock, of which no shares are issued and
outstanding as of the date hereof. All issued and outstanding shares of capital
stock of Gateway, and all issued and outstanding shares of capital stock of each
of the Gateway Subsidiaries, have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. All of the
outstanding shares of capital stock of each of the Gateway Subsidiaries are
owned by Gateway free and clear of any liens, encumbrances, charges,
restrictions or rights of third parties of any kind whatsoever, and, except for
options to purchase 75,911 shares of Gateway Common Stock which have been
granted pursuant to Gateway's Stock Option Plan (or will be granted as of June
29, 1997 pursuant to the specific provisions of such Stock Option Plan), and
which are outstanding, none of Gateway or either of the Gateway Subsidiaries has
or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase or
issuance of any shares of capital stock of Gateway or either of the Gateway
Subsidiaries or any securities representing the right to purchase or otherwise
receive any shares of such capital stock or any securities convertible into or
representing the right to purchase or subscribe for any such stock.
2.03. AUTHORITY; NO VIOLATION.
(a) Subject to the approval of this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby by the stockholders of Gateway,
Gateway has full corporate power and authority to execute and deliver this
Agreement and the Plan of Merger and to consummate the transactions contemplated
hereby and thereby in accordance with the terms hereof and thereof. The
execution and delivery of this Agreement and the Plan of Merger and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly approved by the Board of Directors of Gateway. Except for the
approval of Gateway's stockholders of this Agreement and the Plan of Merger, no
other corporate proceedings on the part of Gateway are necessary to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Gateway and constitutes the valid and binding
obligation of Gateway, enforceable against it in accordance with and subject to
its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and except that the availability of equitable remedies (including,
without limitation, specific performance) is within the discretion of the
appropriate court.
(b) Neither the execution and delivery of this Agreement or the Plan of
Merger, nor the consummation by Gateway of the transactions contemplated hereby
and thereby in accordance with the terms hereof and thereof, or compliance by
Gateway with any of the terms or provisions hereof and thereof, will (i) violate
any provision of the Articles of Incorporation or other governing instrument or
Bylaws of Gateway or any of the Gateway Subsidiaries (including the provisions
thereof requiring approval by the Board of Directors), (ii) assuming that the
consents and approvals set forth below are duly obtained, violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Gateway or any of the Gateway Subsidiaries or any of their
respective properties or assets, or (iii) except
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as disclosed in Gateway Disclosure Schedule 2.03(b), violate, conflict with,
result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, security interest, charge or other encumbrance upon
any of the respective properties or assets of Gateway or either of the Gateway
Subsidiaries 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 Gateway or any of the Gateway Subsidiaries is
a party, or by which any of their respective properties or assets may be bound
or affected, except, with respect to (ii) and (iii) above, such as individually
or in the aggregate will not have a material adverse effect on the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole and which will not prevent or delay the
consummation of the transactions contemplated hereby. Except as set forth in
Gateway Disclosure Schedule 2.03(b) and for consents and approvals of or filings
or registrations with or notices to the Securities and Exchange Commission
("Commission"), the Secretary of State of the State of Kentucky, the Office of
Thrift Supervision ("OTS") and the stockholders of Gateway, no consents or
approvals of or filings or registrations with or notices to any federal, state,
municipal or other governmental or regulatory commission, board, agency, or
non-governmental third party are required on behalf of Gateway in connection
with (a) the execution and delivery of this Agreement and the Plan of Merger by
Gateway and (b) the consummation by Gateway of the Merger and the other
transactions contemplated hereby and thereby.
2.04. FINANCIAL STATEMENTS.
(a) Gateway has previously delivered to Peoples copies of the consolidated
statements of financial condition of Gateway as of December 31, 1996, 1995 and
1994 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years ended June 30, 1996, 1995 and 1994 in each
case accompanied by the audit reports of Kelley, Galloway & Co., PSC,
independent public accountants, as well as the unaudited consolidated statement
of financial condition of Gateway as of March 31, 1997 and the related unaudited
consolidated statement of income, changes in stockholders' equity and cash flows
for the three months ended March 31, 1997 and 1996. The consolidated statements
of financial condition of Gateway referred to herein (including the related
notes, where applicable), as well as the consolidated financial statements
contained in the reports of Gateway to be delivered by Gateway pursuant to
Section 4.04 hereof, fairly present or will fairly present, as the case may be,
the consolidated financial condition of Gateway as of the respective dates set
forth therein, and the related consolidated statements of income, changes in
stockholders' equity and cash flows (including the related notes, where
applicable) fairly present or will fairly present, as the case may be, the
results of the consolidated operations, changes in stockholders' equity and cash
flows of Gateway for the respective periods or as of the respective dates set
forth therein (it being understood that Gateway's interim financial statements
are not audited and are not prepared with related notes but reflect all
adjustments which are, in the opinion of Gateway, necessary for a fair
presentation of such financial statements).
(b) Each of the financial statements referred to in this Section 2.04
(including the related notes, where applicable) has been or will be, as the case
may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved. The books and records of
Gateway and the Gateway Subsidiaries are being maintained in material compliance
with applicable legal and accounting requirements and reflect only actual
transactions.
(c) Except to the extent reflected, disclosed or reserved against in the
consolidated financial statements referred to in the first sentence of Section
2.04(a) or the notes thereto or liabilities incurred since March 31, 1997 in the
ordinary course of business and consistent with past practice, none of Gateway
or either of the Gateway Subsidiaries has any obligation or liability, whether
absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole.
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2.05. ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) There has not been any material adverse effect or change in the
business, operations, prospects, assets or financial condition of Gateway and
the Gateway Subsidiaries taken as a whole since March 31, 1997 and to the best
knowledge of Gateway, no fact or condition exists which Gateway believes will
cause such a material adverse effect or change in the future.
(b) Neither Gateway nor either of the Gateway Subsidiaries has taken or
permitted any of the actions set forth in Section 4.02 hereof between March 31,
1997 and the date hereof.
2.06. LEGAL PROCEEDINGS. Except as disclosed in Gateway Disclosure Schedule
2.06, none of Gateway or either of the Gateway Subsidiaries is a party to any,
and there are no pending or, to the best knowledge of Gateway, threatened legal,
administrative, arbitration or other proceedings, claims, actions or
governmental investigations of any nature against Gateway or either of the
Gateway Subsidiaries, except such proceedings, claims, actions or governmental
investigations which in the good faith judgment of Gateway will not have a
material adverse effect on the business, operations, assets or financial
condition of Gateway and the Gateway Subsidiaries taken as a whole. None of
Gateway or any of the Gateway Subsidiaries is a party to any order, judgment or
decree which materially adversely affects the business, operations, assets or
financial condition of Gateway and the Gateway Subsidiaries taken as a whole.
2.07. TAXES AND TAX RETURNS.
(a) Each of Gateway and the Gateway Subsidiaries, or the affiliated,
combined or unitary group (within the meaning of applicable federal income tax
law) of which any such corporation is or was a member, as the case may be
(individually an "Affiliate" and collectively, "Affiliates"), has duly filed
(and until the Effective Time will so file) all returns, declarations, reports,
information returns and statements ("Returns") required to be filed or sent by
or with respect to them in respect of any Taxes (as hereinafter defined), and
has duly paid (and until the Effective Time will so pay) all Taxes due and
payable other than Taxes or other charges which (i) are being contested in good
faith (and disclosed in writing to Peoples) and (ii) have not finally been
determined. Gateway and its Affiliates have established (and until the Effective
Time will establish) on their books and records reserves that are adequate for
the payment of all Taxes not yet due and payable, whether or not disputed,
accrued or applicable. Except as set forth in Gateway Disclosure Schedule
2.07(a), (i) the federal income tax returns of Gateway and its Affiliates have
been examined by the Internal Revenue Service ("IRS") (or are closed to
examination due to the expiration of the applicable statute of limitations), and
(ii) the Kentucky income tax returns of Gateway and its Affiliates have been
examined by applicable authorities (or are closed to examination due to the
expiration of the statute of limitations), and in the case of both (i) and (ii)
no deficiencies were asserted as a result of such examinations which have not
been resolved and paid in full. There are no audits or other administrative or
court proceedings presently pending nor any other disputes pending, or claims
asserted for, Taxes or assessments upon Gateway or any of its Affiliates, nor
has Gateway or any of its Affiliates given any currently outstanding waivers or
comparable consents regarding the application of the statute of limitations with
respect to any Taxes or Returns.
(b) Except as set forth in Gateway Disclosure Schedule 2.07(b), none of
Gateway or any of its Affiliates (i) has requested any extension of time within
which to file any Return which Return has not since been filed, (ii) is a party
to any agreement providing for the allocation or sharing of Taxes, (iii) is
required to include in income any adjustment pursuant to Section 481(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), by reason of a voluntary
change in accounting method initiated by Gateway or any Affiliate (nor does
Gateway have any knowledge that 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.
(c) For purposes of this Agreement, "Taxes" shall mean all taxes, charges,
fees, levies or other assessments, including, without limitation, all net
income, gross income, gross receipts, sales, use, ad
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valorem, transfer, franchise, profits, license, withholding, payroll, employment
(including withholding, payroll and employment taxes required to be withheld
with respect to income paid to employees), excise, estimated, severance, stamp,
occupation, property or other taxes, customs duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) upon Gateway or any of its Affiliates.
2.08. EMPLOYEE BENEFIT PLANS.
(a) Each employee benefit plan or arrangement of Gateway or either of the
Gateway Subsidiaries which is an "employee benefit plan" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), is listed in Gateway Disclosure Schedule 2.08(a) ("Gateway Plans").
Gateway has previously furnished to Peoples true and complete copies of each of
the Gateway Plans together with (i) the most recent actuarial and financial
reports prepared with respect to any qualified Gateway Plans, (ii) the most
recent annual reports filed with any government agency, and (iii) all rulings
and determination letters and any open requests for rulings or letters that
pertain to any qualified Gateway Plans.
(b) Each Gateway Plan has been operated in compliance with its terms in all
material respects with the applicable provisions of ERISA, the Code, all
regulations, rulings and announcements promulgated or issued thereunder, and all
other applicable governmental laws and regulations.
(c) Neither Gateway nor any Gateway Subsidiary participates in or has
incurred any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as such term is defined in ERISA).
(d) The present value of all accrued benefits under each of the Gateway
Plans subject to Title IV of ERISA did not, as of the latest valuation date of
each such Plan, exceed the then current value of the assets of such plans
allocable to such accrued benefits, based upon the actuarial and accounting
assumptions currently utilized for such Gateway Plans.
(e) Neither Gateway nor either of the Gateway Subsidiaries, nor, to the best
knowledge of Gateway, any trustee, fiduciary or administrator of an Gateway Plan
or any trust created thereunder, has engaged in a "prohibited transaction," as
such term is defined in Section 4975 of the Code, which could subject Gateway or
either of the Gateway Subsidiaries, or, to the best knowledge of Gateway, any
trustee, fiduciary or administrator thereof, to the tax or penalty on prohibited
transactions imposed by said Section 4975.
(f) No Gateway Plan or any trust created thereunder has been terminated, nor
have there been any "reportable events" with respect to any Gateway Plan, as
that term is defined in Section 4043(b) of ERISA.
(g) No Gateway Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
(h) Each of the Gateway Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the IRS
to be so qualified, and Gateway is not aware of any fact or circumstance which
would adversely affect the qualified status of any such Plan.
2.09. SECURITIES DOCUMENTS AND REGULATORY REPORTS.
(a) Gateway has previously delivered or made available to Peoples a complete
copy of each final registration statement, prospectus, annual, quarterly or
current report and definitive proxy statement or other communication (other than
general advertising materials) filed pursuant to the Securities Act of 1933, as
amended ("1933 Act"), or the Securities Exchange Act of 1934, as amended ("1934
Act"), or mailed by Gateway to its stockholders as a class since January 1,
1994, and each such final registration statement, prospectus, annual, quarterly
or current report and definitive proxy statement or other communication, as of
its date, complied in all material respects with all applicable statutes, rules
and
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regulations and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading; provided that information as of a later date
shall be deemed to modify information as of an earlier date.
(b) Gateway and each of the Gateway Subsidiaries has duly filed with the OTS
and the Federal Deposit Insurance Corporation ("FDIC") in correct form the
monthly, quarterly and annual reports required to be filed under applicable laws
and regulations, and Gateway has delivered or made available to Peoples accurate
and complete copies of such reports. Gateway Disclosure Schedule 2.09(b) lists
all examinations of Gateway or of the Gateway Subsidiaries conducted by the
applicable thrift regulatory authorities since January 1, 1992 and the dates of
any responses thereto submitted by Gateway. In connection with the most recent
examinations of Gateway or the Gateway Subsidiaries by the applicable thrift
regulatory authorities, neither Gateway nor any Gateway Subsidiary was required
to correct or change any action, procedure or proceeding which Gateway or such
Gateway Subsidiary believes has not been now corrected or changed as required.
2.10. GATEWAY INFORMATION. None of the information relating to Gateway and
the Gateway Subsidiaries to be contained in (i) the Registration Statement on
Form S-4 to be filed by Peoples in connection with the issuance of shares of
Peoples Common Stock pursuant to the Merger, as amended or supplemented (or on
any successor or other appropriate form) ("Form S-4"), will, at the time the
Form S-4 becomes effective, contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, and (ii) the
proxy statement/prospectus contained in the Form S-4, as amended or
supplemented, and to be delivered to stockholders of Gateway in connection with
the solicitation of their approval of this Agreement and the transactions
contemplated hereby ("Proxy Statement/Prospectus"), as of the date such Proxy
Statement/Prospectus is mailed to stockholders of Gateway and up to and
including the date of the meeting of stockholders to which such Proxy
Statement/Prospectus relates, will contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
provided that information as of a later date shall be deemed to modify
information as of an earlier date.
2.11. COMPLIANCE WITH APPLICABLE LAW.
(a) Gateway and each of the Gateway Subsidiaries has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of Gateway and the Gateway Subsidiaries taken as a whole;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect; and to the best knowledge of Gateway and the Gateway
Subsidiaries, no suspension or cancellation of any of the same is threatened.
(b) Neither Gateway nor any of the Gateway Subsidiaries is in violation of
its respective Articles of Incorporation or other governing instrument or
Bylaws, or of any applicable federal, state or local law or ordinance or any
order, rule or regulation of any federal, state, local or other governmental
agency or body (including, without limitation, all banking, securities,
municipal securities, safety, health, zoning, anti-discrimination, antitrust,
and wage and hour laws, ordinances, orders, rules and regulations), or in
default with respect to any order, writ, injunction or decree of any court, or
in default under any order, license, regulation or demand of any governmental
agency, any of which violations or defaults could have a material adverse effect
on the business, operations, assets or financial condition of Gateway and the
Gateway Subsidiaries taken as a whole; and neither Gateway nor any Gateway
Subsidiary has received any notice or communication from any federal, state or
local governmental authority asserting that Gateway or any Gateway Subsidiary is
in violation of any of the foregoing which could have a material adverse effect
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on the business, operations, assets or financial condition of Gateway and the
Gateway Subsidiaries taken as a whole. Neither Gateway nor any Gateway
Subsidiary is subject to any regulatory or supervisory cease and desist order,
agreement, written directive, memorandum of understanding or written commitment
(other than those of general applicability to all savings associations issued by
governmental authorities), and none of them has received any written
communication requesting that they enter into any of the foregoing.
2.12. DEPOSIT INSURANCE AND OTHER REGULATORY MATTERS.
(a) The deposit accounts of Catlettsburg Federal are insured by the Savings
Association Insurance Fund administered by the FDIC to the maximum extent
permitted by the Federal Deposit Insurance Act, as amended ("FDIA"), and
Catlettsburg Federal has paid all premiums and assessments required by the FDIA
and the regulations thereunder.
(b) Catlettsburg Federal is a member in good standing of the Federal Home
Loan Bank ("FHLB") of Chicago and owns the requisite amount of stock in the FHLB
of Chicago.
(c) Catlettsburg Federal is a "qualified thrift lender," as such term is
defined in the HOLA and the regulations thereunder.
(d) Catlettsburg Federal has at all times qualified as a "domestic building
and loan association," as such term is defined in Section 7701(a)(19) of the
Code, for purposes of Section 593 of the Code.
2.13. CERTAIN CONTRACTS.
(a) Except as disclosed in Gateway Disclosure Schedule 2.13(a), neither
Gateway nor any Gateway Subsidiary is a party to, is bound or affected by,
receives, or is obligated to pay benefits under, (i) any agreement, arrangement
or commitment, including without limitation, any agreement, indenture or other
instrument relating to the borrowing of money by Gateway or any Gateway
Subsidiary or the guarantee by Gateway or any Gateway Subsidiary of any
obligation, (ii) any agreement, arrangement or commitment relating to the
employment of a consultant or the employment, election or retention in office of
any present or former director or officer of Gateway or any Gateway Subsidiary,
(iii) any contract, agreement or understanding with a labor union, (iv) any
agreement, arrangement or understanding pursuant to which any payment (whether
of severance pay or otherwise) became or may become due to any director, officer
or employee of Gateway or any of the Gateway Subsidiaries upon execution of this
Agreement or upon or following consummation of the transactions contemplated by
this Agreement (either alone or in connection with the occurrence of any
additional acts or events), (v) any agreement, arrangement or understanding to
which Gateway or any of the Gateway Subsidiaries is a party or by which any of
the same is bound which limits the freedom of Gateway or any of the Gateway
Subsidiaries to compete in any line of business or with any person, (vi) any
assistance agreement, supervisory agreement, memorandum of understanding,
consent order, cease and desist order or condition of any regulatory order or
decree with or by the OTS, the FDIC or any other regulatory agency, (vii) any
other agreement, arrangement or understanding which would be required to be
filed as an exhibit to Gateway's Annual Report on Form 10-KSB under the 1934 Act
and which has not been so filed, or (viii) any other agreement, arrangement or
understanding to which Gateway or any Gateway Subsidiary is a party and which is
material to the business, operations, assets or financial condition of Gateway
and the Gateway Subsidiaries taken as a whole (excluding loan agreements or
agreements relating to deposit accounts), in each of the foregoing cases whether
written or oral.
(b) Neither Gateway nor any Gateway Subsidiary is in default or in
non-compliance, which default or non-compliance would have a material adverse
effect on the business, operations, assets or financial condition of Gateway and
the Gateway Subsidiaries taken as a whole or the transactions contemplated
hereby, under any contract, agreement, commitment, arrangement, lease, insurance
policy or other instrument to which it is a party or by which its assets,
business or operations may be bound or affected, 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 the giving of notice,
or both, would constitute such a default or non-compliance.
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2.14. PROPERTIES AND INSURANCE.
(a) All real and personal property owned by Gateway or any of the Gateway
Subsidiaries or presently used by any of them in their respective business is in
an adequate condition (ordinary wear and tear excepted) and is sufficient to
carry on the business of Gateway and the Gateway Subsidiaries in the ordinary
course of business consistent with their past practices. Gateway and the Gateway
Subsidiaries have good and, as to owned real property, marketable title to all
material assets and properties, whether real or personal, tangible or
intangible, reflected in Gateway's consolidated statement of financial condition
as of March 31, 1997, or owned and acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for fair value in
the ordinary course of business since March 31, 1997), subject to no
encumbrances, liens, mortgages, security interests or pledges, except (i) those
items that secure liabilities that are reflected in said consolidated statement
of financial condition or the notes thereto or have been incurred in the
ordinary course of business after the date of such consolidated statement of
financial condition, (ii) statutory liens for amounts not yet delinquent or
which are being contested in good faith, (iii) such encumbrances, liens,
mortgages, security interests, pledges and title imperfections that are not in
the aggregate material to the business, operations, assets or financial
condition of Gateway and the Gateway Subsidiaries taken as a whole, and (iv)
with respect to owned real property, title imperfections noted in title reports
prior to the date hereof. Gateway and the Gateway Subsidiaries as lessees have
the right under valid and subsisting leases to occupy, use, possess and control
all property leased by them in all material respects as presently occupied,
used, possessed and controlled by Gateway and the Gateway Subsidiaries and the
consummation of the transactions contemplated hereby and by the Agreement of
Merger will not affect any such right. Gateway Disclosure Schedule 2.14(a) sets
forth an accurate listing of each lease pursuant to which Gateway or any of the
Gateway Subsidiaries acts as lessor or lessee, including the expiration date and
the terms of any renewal options which relate to the same.
(b) The business operations and all insurable properties and assets of
Gateway and the Gateway Subsidiaries are insured for their benefit against all
risks which, in the reasonable judgment of the management of Gateway, should be
insured against, in each case under valid, binding and enforceable policies or
bonds issued by insurers of recognized responsibility, in such amounts with such
deductibles and against such risks and losses as are in the opinion of the
management of Gateway adequate for the business engaged in by Gateway and the
Gateway Subsidiaries. As of the date hereof, neither Gateway nor either of the
Gateway Subsidiaries has received any notice of cancellation or notice of a
material amendment of any such insurance policy or bond or is in default under
such policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion.
2.15. ENVIRONMENTAL MATTERS. For purposes of this Agreement, the following
terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section9601, ET SEQ; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. Section6901, ET SEQ; the Clean Air Act, as amended, 42 U.S.C.
Section7401, ET SEQ; the Federal Water Pollution Control Act, as amended, 33
U.S.C. Section1251, ET SEQ; the Toxic Substances Control Act, as amended, 15
U.S.C. Section9601, ET SEQ; the Emergency Planning and Community Right to Know
Act, 42 U.S.C. Section11001, ET SEQ; the Safe Drinking Water Act, 42 U.S.C.
Section300f, ET SEQ; and all comparable state and local laws, and (2) any common
law (including without
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limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Substance.
"Hazardous Substance" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or by
quantity, including any regulated material containing any such substance as a
component. Hazardous Substances include without limitation petroleum (including
crude oil or any fraction thereof), asbestos, radioactive material, and
polychlorinated biphenyls.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated presently or within the period of five
years preceding the date hereof by Gateway or any of the Gateway Subsidiaries or
those properties which serve as collateral for loans owned by Gateway or any of
the Gateway Subsidiaries.
For purposes of this Section 2.15, "knowledge" means the actual knowledge of
the current senior executive officers of Gateway and Catlettsburg Federal,
without any duty to make inquiry into the books and records of Gateway or
Catlettsburg Federal.
(a) To the best knowledge of Gateway and the Gateway Subsidiaries, neither
Gateway nor any of the Gateway Subsidiaries has been or is in violation of or
liable under any Environmental Law, except any such violations or liabilities
which would not singly or in the aggregate have a material adverse effect on the
business, operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole.
(b) To the best knowledge of Gateway and the Gateway Subsidiaries, none of
the Loan Portfolio Properties and Other Properties Owned by Gateway or the
Gateway Subsidiaries has been or is in violation of or liable under any
Environmental Law, except any such violations or liabilities which singly or in
the aggregate would not have a material adverse effect on the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole.
(c) To the best knowledge of Gateway and the Gateway Subsidiaries, there are
no actions, suits, demands, notices, claims, investigations or proceedings
pending or threatened relating to the liability of the Loan Portfolio Properties
and Other Properties Owned by Gateway or the Gateway Subsidiaries under any
Environmental Law, including without limitation any notices, demand letters or
requests for information from any federal or state environmental agency relating
to any such liabilities under or violations of Environmental Law, except such
which would not have or result in a material adverse effect on the business,
operations, assets or financial condition of Gateway and the Gateway
Subsidiaries taken as a whole.
2.16. ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED. The allowance for
loan losses reflected on Gateway's consolidated statements of financial
condition included in the consolidated financial statements referred to in
Section 2.04 hereof is, or will be in the case of subsequently delivered
financial statements, as the case may be, in the opinion of Gateway's management
adequate in all material respects as of their respective dates under the
requirements of generally accepted accounting principles to provide for
reasonably anticipated losses on outstanding loans net of recoveries. The real
estate owned reflected on the consolidated statements of financial condition
included in the consolidated financial statements referred to in Section 2.04
hereof is, or will be in the case of subsequently delivered financial
statements, as the case may be, carried at the lower of cost or fair value, or
the lower of cost or net realizable value, as required by generally accepted
accounting principles.
2.17. MINUTE BOOKS. The minute books of Gateway (since its incorporation)
and Catlettsburg Federal (since January 1, 1992) contain complete and accurate
records of all meetings and other corporate action held or taken by their
respective Boards of Directors (including committees of their respective Boards
of Directors) and stockholders.
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2.18. AFFILIATE TRANSACTIONS.
(a) Except as disclosed in Gateway Disclosure Schedule 2.18(a) or in
Gateway's proxy statements, and except as specifically contemplated by this
Agreement, since January 1, 1993, neither Gateway nor either of the Gateway
Subsidiaries has engaged in or agreed to engage in (whether in writing or
orally) any transaction with any "affiliated person" or "affiliate" of
Catlettsburg Federal, as such terms are defined in 12 C.F.R Section561.5 and 12
C.F.R. Section563.41, respectively.
(b) Gateway Disclosure Schedule 2.18(b) sets forth the name and number of
shares of Gateway Common Stock owned as of the date hereof beneficially or of
record by any persons Gateway considers to be affiliates of Gateway ("Gateway
Affiliates") as that term is defined for purposes of Rule 145 under the 1933
Act.
2.19. BROKER FEES. Except as set forth in Gateway Disclosure Schedule 2.19,
none of Gateway, either of the Gateway Subsidiaries or any of the respective
directors or officers of such companies has employed any consultant, broker or
finder or incurred any liability for any consultant's, broker's or finder's fees
or commissions in connection with any of the transactions contemplated by this
Agreement.
2.20. DISCLOSURES. No representation or warranty contained in Article II of
this Agreement, and no statement contained in the Gateway Disclosure Schedules,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PEOPLES AND PAC
References to "Peoples Disclosure Schedules" shall mean all of the
disclosure schedules required by this Article III, dated as of the date hereof
and referenced to the specific sections and subsections of Article III of this
Agreement, which have been delivered by Peoples to Gateway. Peoples and PAC
hereby represent and warrant to Gateway as follows as of the date hereof:
3.01. CORPORATE ORGANIZATION.
(a) Peoples is a corporation duly organized, validly existing and in good
standing under the laws of the State of Ohio. Peoples has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted and is duly licensed or qualified to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed, qualified or in good standing would
not have a material adverse effect on the business, operations, assets or
financial condition of Peoples and the Peoples Subsidiaries (as defined below)
taken as a whole. Peoples is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHC Act"). Peoples Disclosure Schedule
3.01(a) sets forth true and complete copies of the Articles of Incorporation or
other governing instrument and Bylaws of Peoples and the Peoples Subsidiaries
set forth in the first sentence of Section 3.01(b) hereof as in effect on the
date hereof.
(b) The only direct or indirect subsidiaries of Peoples as of the date
hereof are The Peoples Banking and Trust Company, The First National Bank of
Southeastern Ohio, Russell Federal Savings Bank, Northwest Territory Life
Insurance Company, Inc., Northwest Territory Insurance Agencies, Inc., Northwest
Territory Life Insurance Agency, Inc. and Northwest Territory Property and
Casualty Insurance Agency, Inc. (together, the "Peoples Subsidiaries"). Each of
the Peoples Subsidiaries (i) is duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation, (ii)
has the corporate power and authority to own or lease all of its properties and
assets and to conduct its
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business as it is now being conducted, and (iii) is duly licensed or qualified
to do business and is in good standing in each jurisdiction in which the nature
of the business conducted by it or the character or location of the properties
and assets owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed, qualified or in good
standing would not have a material adverse effect on the business, operations,
assets or financial condition of Peoples and the Peoples Subsidiaries taken as a
whole. Peoples and the Peoples Subsidiaries are in good standing with their
appropriate federal and state regulatory agencies and each has satisfied in all
material respects all commitments, financial or otherwise, as may have been
agreed upon with such regulatory agencies. Other than the Peoples Subsidiaries
or as set forth in Disclosure Schedule 3.01(b), Peoples does not own or control,
directly or indirectly, greater than a 5% equity interest in any corporation,
company, association, partnership, joint venture or other entity.
3.02. CAPITALIZATION. The authorized capital stock of Peoples consists of
12,000,000 shares of Peoples Common Stock, no par value, of which 3,451,069 (as
of June 10, 1997) are issued and outstanding, net of 607 treasury shares, and no
shares of preferred stock. All issued and outstanding shares of capital stock of
Peoples, and all issued and outstanding shares of capital stock of each of the
Peoples Subsidiaries, have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights. Except as set forth on
Peoples Disclosure Schedule 3.02, all of the outstanding shares of capital stock
of each of the Peoples Subsidiaries are owned by Peoples free and clear of any
liens, encumbrances, charges, restrictions or rights of third parties of any
kind whatsoever, and, except for options to purchase 249,234 (as of June 10,
1997) shares of Peoples Common Stock which have been granted pursuant to
Peoples's stock option plans (or options granted by Peoples pursuant thereto
after the date hereof), none of Peoples or any of the Peoples Subsidiaries has
or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the transfer, purchase or
issuance of any shares of capital stock of Peoples or any of the Peoples
Subsidiaries or any securities representing the right to purchase or otherwise
receive any shares of such capital stock or any securities convertible into or
representing the right to purchase or subscribe for any such stock.
3.03. AUTHORITY; NO VIOLATION.
(a) Peoples has full corporate power and authority to execute and deliver
this Agreement and the Plan of Merger and to consummate the transactions
contemplated hereby and thereby in accordance with the terms hereof and thereof.
The execution and delivery of this Agreement and the Plan of Merger and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly approved by all necessary corporate action on the part of Peoples
and no other corporate proceedings on the part of Peoples are necessary to
consummate the transactions so contemplated. This Agreement has been duly and
validly executed and delivered by Peoples and constitutes a valid and binding
obligations of Peoples, enforceable against it in accordance with and subject to
its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and except that the availability of equitable remedies (including,
without limitation, specific performance) is within the discretion of the
appropriate court.
(b) Neither the execution and delivery of this Agreement or the Plan of
Merger by Peoples, nor the consummation by Peoples of the transactions
contemplated hereby and thereby in accordance with the terms hereof, or
compliance by Peoples with any of the terms or provisions hereof and thereof,
will (i) violate any provision of the Articles of Incorporation or other
governing instrument or Bylaws of Peoples or any of the Peoples Subsidiaries,
(ii) assuming that the consents and approvals set forth below are duly obtained,
violate any statute, code, ordinance, rule, regulation, judgment, order, writ,
decree or injunction applicable to Peoples or any of the Peoples Subsidiaries or
any of their respective properties or assets, or (iii) violate, conflict with,
result in a breach of any provisions of, constitute a default (or an event
which, with notice or lapse of time, or both, would constitute a default) under,
result in the termination of, accelerate the performance required by, or result
in the creation of any lien, security interest, charge or other encumbrance upon
any of the respective properties or assets of Peoples or any of the Peoples
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Subsidiaries 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 Peoples or any of the Peoples Subsidiaries is
a party, or by which any of their respective properties or assets may be bound
or affected, except, with respect to (ii) and (iii) above, such as individually
or in the aggregate will not have a material adverse effect on the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole and which will not prevent or delay the
consummation of the transactions contemplated hereby. Except for consents and
approvals of or filings or registrations with or notices to the Commission, the
Secretary of State of Ohio and of Kentucky, the Board of Governors of the
Federal Reserve System ("FRB"), and the OTS, no consents or approvals of or
filings or registrations with or notices to any federal, state, municipal or
other governmental or regulatory commission, board, agency or non-governmental
third party are required on behalf of Peoples in connection with (a) the
execution and delivery of this Agreement and the Plan of Merger by Peoples and
(b) the consummation by Peoples of the transactions contemplated hereby and
thereby.
3.04. FINANCIAL STATEMENTS.
(a) Peoples has previously delivered to Gateway copies of the consolidated
statements of financial condition of Peoples as of December 31, 1996, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1996, 1995
and 1994, in each case accompanied by the audit reports of Ernst & Young,
independent public accountants, as well as the unaudited consolidated statement
of financial condition of Peoples as of March 31, 1997 and the related unaudited
consolidated statements of income, changes in stockholders' equity and cash
flows for the three months ended March 31, 1997 and 1996. The consolidated
statements of financial condition of Peoples referred to herein (including the
related notes, where applicable), as well as the consolidated financial
statements contained in the reports of Peoples to be delivered by Peoples
pursuant to Section 4.04 hereof, fairly present or will fairly present, as the
case may be, the consolidated financial condition of Peoples as of the
respective dates set forth therein, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows (including the
related notes, where applicable) fairly present or will fairly present, as the
case may be, the results of the consolidated operations, changes in
stockholders' equity and cash flows of Peoples for the respective periods or as
of the respective dates set forth therein (it being understood that Peoples's
interim financial statements are not audited and are not prepared with related
notes but reflect all adjustments which are, in the opinion of Peoples,
necessary for a fair presentation of such financial statements).
(b) Each of the financial statements referred to in this Section 3.04
(including the related notes, where applicable) has been or will be, as the case
may be, prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved. The books and records of
Peoples and the Peoples Subsidiaries are being maintained in material compliance
with applicable legal and accounting requirements and reflect only actual
transactions.
(c) Except to the extent reflected, disclosed or reserved against in the
consolidated financial statements referred to in the first sentence of this
Section 3.04 or the notes thereto or liabilities incurred since March 31, 1997
in the ordinary course of business and consistent with past practice, none of
Peoples or any of the Peoples Subsidiaries has any obligation or liability,
whether absolute, accrued, contingent or otherwise, material to the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole.
3.05. ABSENCE OF CERTAIN CHANGES OR EVENTS. There has not been any material
adverse effect or change in the business, operations, prospects, assets or
financial condition of Peoples and the Peoples Subsidiaries taken as a whole
since March 31, 1997 and to the best knowledge of Peoples, no fact or condition
exists which Peoples believes will cause such a material adverse effect or
change in the future.
3.06. LEGAL PROCEEDINGS. None of Peoples or any of the Peoples Subsidiaries
is a party to any, and there are no pending or, to the best knowledge of
Peoples, threatened legal, administrative, arbitration or other
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proceedings, claims, actions or governmental investigations of any nature
against Peoples or any of the Peoples Subsidiaries, except such proceedings,
claims actions or governmental investigations which in the good faith judgment
of Peoples will not have a material adverse effect on the business, operations,
assets or financial condition of Peoples and the Peoples Subsidiaries taken as a
whole. None of Peoples or any of the Peoples Subsidiaries is a party to any
order, judgment or decree which materially adversely affects the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole.
3.07. TAXES AND TAX RETURNS.
(a) Each of Peoples and the Peoples Subsidiaries, or the affiliated,
combined or unitary group (within the meaning of applicable federal income tax
law) of which any such corporation is or was a member, as the case may be
(individually an "Affiliate" and collectively, "Affiliates"), has duly filed
(and until the Effective Time will so file) all returns, declarations, reports,
information returns and statements ("Returns") required to be filed or sent by
or with respect to them in respect of any Taxes, and has duly paid (and until
the Effective Time will so pay) all Taxes due and payable other than Taxes or
other charges which (i) are being contested in good faith (and disclosed in
writing to Gateway) and (ii) have not finally been determined. Peoples and its
Affiliates have established (and until the Effective Time will establish) on
their books and records reserves that are adequate for the payment of all Taxes
not yet due and payable, whether or not disputed, accrued or applicable. Except
as set forth in Peoples Disclosure Schedule 3.07(a), (i) the federal income tax
returns of Peoples and its Affiliates have been examined by the IRS (or are
closed to examination due to the expiration of the applicable statute of
limitations), and (ii) the applicable State income tax returns of Peoples and
its Affiliates have been examined by applicable authorities (or are closed to
examination due to the expiration of the statute of limitations), and in the
case of both (i) and (ii) no deficiencies were asserted as a result of such
examinations which have not been resolved and paid in full. There are no audits
or other administrative or court proceedings presently pending nor any other
disputes pending, or claims asserted for, Taxes or assessments upon Peoples or
any of its Affiliates, nor has Peoples or any of its Affiliates given any
currently outstanding waivers or comparable consents regarding the application
of the statute of limitations with respect to any Taxes or Returns.
(b) Except as set forth in Peoples Disclosure Schedule 3.07(b), none of
Peoples or any of its Affiliates (i) has requested any extension of time within
which to file any Return which Return has not since been filed, (ii) is a party
to any agreement providing for the allocation or sharing of Taxes, (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 initiated by Peoples
or any Affiliate (nor does Peoples have any knowledge that 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.
3.08. EMPLOYEE BENEFIT PLANS.
(a) Each employee benefit plan or arrangement of Peoples or either of the
Peoples Subsidiaries which is an "employee benefit plan" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), is listed in Peoples Disclosure Schedule 3.08(a) ("Peoples Plans").
Peoples has previously furnished or made available to Gateway true and complete
copies of each of the Peoples Plans together with (i) the most recent actuarial
and financial reports prepared with respect to any qualified Peoples Plans, (ii)
the most recent annual reports filed with any government agency, and (iii) all
rulings and determination letters and any open requests for rulings or letters
that pertain to any qualified Peoples Plans.
(b) Each Peoples Plan has been operated in compliance with its terms in all
material respects with the applicable provisions of ERISA, the Code, all
regulations, rulings and announcements promulgated or issued thereunder, and all
other applicable governmental laws and regulations.
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(c) Neither Peoples nor any Peoples Subsidiary participates in or has
incurred any liability under Section 4201 of ERISA for a complete or partial
withdrawal from a multi-employer plan (as such term is defined in ERISA).
(d) The present value of all accrued benefits under each of the Peoples
Plans subject to Title IV of ERISA did not, as of the latest valuation date of
each such Plan, exceed the then current value of the assets of such plans
allocable to such accrued benefits, based upon the actuarial and accounting
assumptions currently utilized for such Peoples Plans.
(e) Neither Peoples nor any of the Peoples Subsidiaries, nor, to the best
knowledge of Peoples, any trustee, fiduciary or administrator of a Peoples Plan
or any trust created thereunder, has engaged in a "prohibited transaction," as
such term is defined in Section 4975 of the Code, which could subject Peoples or
any of the Peoples Subsidiaries, or, to the best knowledge of Peoples, any
trustee, fiduciary or administrator thereof, to the tax or penalty on prohibited
transactions imposed by said Section 4975.
(f) No Peoples Plan or any trust created thereunder has been terminated, nor
have there been any "reportable events" with respect to any Peoples Plan, as
that term is defined in Section 4043(b) of ERISA.
(g) No Peoples Plan or any trust created thereunder has incurred any
"accumulated funding deficiency," as such term is defined in Section 302 of
ERISA.
(h) Each of the Peoples Plans which is intended to be a qualified plan
within the meaning of Section 401(a) of the Code has been determined by the IRS
to be so qualified, and Peoples is not aware of any fact or circumstance which
would adversely affect the qualified status of any such Plan.
3.09. SECURITIES DOCUMENTS AND REGULATORY REPORTS.
(a) Peoples has previously delivered or made available to Gateway a complete
copy of each final registration statement, prospectus, annual, quarterly or
current report and definitive proxy statement or other communication (other than
general advertising materials) filed pursuant to the 1933 Act or the 1934 Act or
mailed by Peoples to its stockholders as a class since January 1, 1993, and each
such final registration statement, prospectus, annual, quarterly or current
report and definitive proxy statement or other communication, as of its date,
complied in all material respects with all applicable statutes, rules and
regulations and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading; provided that information as of a later date
shall be deemed to modify information as of an earlier date.
(b) Peoples and each of the Peoples Subsidiaries has duly filed with all
applicable regulatory authorities in correct form the monthly, quarterly and
annual reports required to be filed under applicable laws and regulations, and
Peoples has delivered or made available to Gateway accurate and complete copies
of such reports. In connection with the most recent examinations of Peoples or
the Peoples Subsidiaries by the applicable regulatory authorities, neither
Peoples nor any Peoples Subsidiary was required to correct or change any action,
procedure or proceeding which Peoples or such Peoples Subsidiary believes has
not been now corrected or changed as required.
3.10. PEOPLES INFORMATION. None of the information relating to Peoples and
the Peoples Subsidiaries to be contained in (i) the Form S-4 will, at the time
the Form S-4 becomes effective, contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and (ii)
the Proxy Statement/ Prospectus, as of the date such Proxy Statement/Prospectus
is mailed to stockholders of Gateway and up to and including the date of the
meeting of stockholders to which such Proxy Statement/Prospectus relates, will
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided that information as of a later
date shall be deemed to modify information as of an earlier date.
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3.11. COMPLIANCE WITH APPLICABLE LAW.
(a) Peoples and each of the Peoples Subsidiaries has all permits, licenses,
certificates of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it to
carry on its business as it is presently being conducted and the absence of
which could have a material adverse effect on the business, operations, assets
or financial condition of Peoples and the Peoples Subsidiaries taken as a whole;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect; and to the best knowledge of Peoples and the Peoples
Subsidiaries, no suspension or cancellation of any of the same is threatened.
(b) Neither Peoples nor any of the Peoples Subsidiaries is in violation of
its respective Articles of Incorporation or other governing instrument or
Bylaws, or of any applicable federal, state or local law or ordinance or any
order, rule or regulation of any federal, state, local or other governmental
agency or body (including, without limitation, all banking, securities,
municipal securities, safety, health, zoning, anti-discrimination, antitrust,
and wage and hour laws, ordinances, orders, rules and regulations), or in
default with respect to any order, writ, injunction or decree of any court, or
in default under any order, license, regulation or demand of any governmental
agency, any of which violations or defaults could have a material adverse effect
on the business, operations, assets or financial condition of Peoples and the
Peoples Subsidiaries taken as a whole; and neither Peoples nor any Peoples
Subsidiary has received any notice or communication from any federal, state or
local governmental authority asserting that Peoples or any Peoples Subsidiary is
in violation of any of the foregoing which could have a material adverse effect
on the business, operations, assets or financial condition of Peoples and the
Peoples Subsidiaries taken as a whole. Neither Peoples nor any Peoples
Subsidiary is subject to any regulatory or supervisory cease and desist order,
agreement, written directive, memorandum of understanding or written commitment
(other than those of general applicability to all savings associations issued by
governmental authorities), and none of them has received any written
communication requesting that they enter into any of the foregoing.
3.12. DEPOSIT INSURANCE AND OTHER REGULATORY MATTERS.
(a) The deposit accounts of each applicable Peoples subsidiary is insured by
the Bank Insurance Fund or the Savings Association Insurance Fund, as the case
may be, administered by the FDIC to the maximum extent permitted by the FDIA,
and each such Peoples subsidiary has paid all premiums and assessments required
by the FDIA and the regulations thereunder.
(b) Russell Federal is a member in good standing of the FHLB of Cincinnati
and owns the requisite amount of stock in the FHLB of Cincinnati.
(c) Russell Federal is a "qualified thrift lender," as such term is defined
in the HOLA and the regulations thereunder.
(d) Russell Federal has at all times qualified as a "domestic building and
loan association," as such term is defined in Section 7701(a)(19) of the Code,
for purposes of Section 593 of the Code.
3.13. PROPERTIES AND INSURANCE.
(a) All real and personal property owned by Peoples or any of the Peoples
Subsidiaries or presently used by any of them in their respective business is in
an adequate condition (ordinary wear and tear excepted) and is sufficient to
carry on the business of Peoples and the Peoples Subsidiaries in the ordinary
course of business consistent with their past practices. Peoples and the Peoples
Subsidiaries have good and, as to owned real property, marketable title to all
material assets and properties, whether real or personal, tangible or
intangible, reflected in Peoples's consolidated statement of financial condition
as of March 31, 1997, or owned and acquired subsequent thereto (except to the
extent that such assets and properties have been disposed of for fair value in
the ordinary course of business since March 31, 1997), subject to no
encumbrances, liens, mortgages, security interests or pledges, except (i) those
items that secure liabilities
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that are reflected in said consolidated statement of financial condition or the
notes thereto or have been incurred in the ordinary course of business after the
date of such consolidated statement of financial condition, (ii) statutory liens
for amounts not yet delinquent or which are being contested in good faith, (iii)
such encumbrances, liens, mortgages, security interests, pledges and title
imperfections that are not in the aggregate material to the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole, and (iv) with respect to owned real property,
title imperfections noted in title reports prior to the date hereof. Peoples and
the Peoples Subsidiaries as lessees have the right under valid and subsisting
leases to occupy, use, possess and control all property leased by them in all
material respects as presently occupied, used, possessed and controlled by
Peoples and the Peoples Subsidiaries and the consummation of the transactions
contemplated hereby and by the Agreement of Merger will not affect any such
right.
(b) The business operations and all insurable properties and assets of
Peoples and the Peoples Subsidiaries are insured for their benefit against all
risks which, in the reasonable judgment of the management of Peoples, should be
insured against, in each case under valid, binding and enforceable policies or
bonds issued by insurers of recognized responsibility, in such amounts with such
deductibles and against such risks and losses as are in the opinion of the
management of Peoples adequate for the business engaged in by Peoples and the
Peoples Subsidiaries. As of the date hereof, neither Peoples nor either of the
Peoples Subsidiaries has received any notice of cancellation or notice of a
material amendment of any such insurance policy or bond or is in default under
such policy or bond, no coverage thereunder is being disputed and all material
claims thereunder have been filed in a timely fashion.
3.14. ENVIRONMENTAL MATTERS.
(a) To the best knowledge of Peoples and the Peoples Subsidiaries, neither
Peoples nor any of the Peoples Subsidiaries has been or is in violation of or
liable under any Environmental Law, except any such violations or liabilities
which would not singly or in the aggregate have a material adverse effect on the
business, operations, assets or financial condition of Peoples and Peoples
Subsidiaries taken as a whole.
(b) To the best knowledge of Peoples and the Peoples Subsidiaries, none of
the Loan Portfolio Properties and Other Properties Owned by Peoples or the
Peoples Subsidiaries has been or is in violation of or liable under any
Environmental Law, except any such violations or liabilities which singly or in
the aggregate would not have a material adverse effect on the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole.
(c) To the best knowledge of Peoples and the Peoples Subsidiaries, there are
no actions, suits, demands, notices, claims, investigations or proceedings
pending or threatened relating to the liability of the Loan Portfolio Properties
and Other Properties Owned by Peoples or the Peoples Subsidiaries under any
Environmental Law, including without limitation any notices, demand letters or
requests for information from any federal or state environmental agency relating
to any such liabilities under or violations of Environmental Law, except such
which would not have or result in a material adverse effect on the business,
operations, assets or financial condition of Peoples and the Peoples
Subsidiaries taken as a whole.
3.15. ALLOWANCE FOR LOAN LOSSES AND REAL ESTATE OWNED. The allowance for
loan losses reflected on Peoples's consolidated statements of financial
condition included in the consolidated financial statements referred to in
Section 3.04 hereof is, or will be in the case of subsequently delivered
financial statements, as the case may be, in the opinion of Peoples's management
adequate in all material respects as of their respective dates under the
requirements of generally accepted accounting principles to provide for
reasonably anticipated losses on outstanding loans net of recoveries. The real
estate owned reflected on the consolidated statements of financial condition
included in the consolidated financial statements referred to in Section 3.04
hereof is, or will be in the case of subsequently delivered financial
statements, as the case may be, carried at the lower of cost or fair value, or
the lower of cost or net realizable value, as required by generally accepted
accounting principles.
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3.16. MINUTE BOOKS. Since January 1, 1992, the minute books of Peoples and
the Peoples Subsidiaries contain complete and accurate records of all meetings
and other corporate action held or taken by their respective Boards of Directors
(including committees of their respective Boards of Directors) and stockholders.
3.17. BROKER FEES. Except as set forth in Peoples Disclosure Schedule 3.17,
neither Peoples nor any of its directors or officers has employed any
consultant, broker or finder or incurred any liability for any consultant's,
broker's or finder's fees or commissions in connection with any of the
transactions contemplated by this Agreement.
3.18. FUNDING AND CAPITAL ADEQUACY. At the Effective Time, Peoples will have
available to it sufficient funds to pay the Cash Consideration required to be
paid to the shareholders and option holders of Gateway under Article I hereof.
At the Effective Time, after taking into effect the Merger and the transactions
contemplated hereunder, including but not limited to the due assertion and
perfection of dissenters rights by stockholders of Gateway under the KBCA,
Peoples will have sufficient capital to satisfy all applicable regulatory
capital requirements.
3.19. PEOPLES COMMON STOCK. At the Effective Time, the Peoples Common Stock
to be issued pursuant to the terms of Article I hereof will be duly authorized
and validly issued, fully paid, nonassessable, free of preemptive rights and
free and clear of all liens, encumbrances or restrictions created by or through
Peoples, with no personal liability attaching to the ownership thereof. The
Peoples Common Stock to be issued pursuant to the terms of Article I hereof will
be issued in accordance with applicable state and federal laws, rules and
regulations.
3.20. BENEFICIAL OWNERSHIP OF GATEWAY COMMON STOCK. As of the date hereof,
Peoples does not beneficially own any shares of Gateway Common Stock or have any
option, warrant or right of any kind to acquire the beneficial ownership of any
Gateway Common Stock.
3.21. DISCLOSURES. No representation or warranty contained in Article III of
this Agreement, and no statement contained in the Peoples Disclosure Schedules,
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein not misleading.
ARTICLE IV
COVENANTS OF THE PARTIES
4.01. CONDUCT OF THE BUSINESS OF GATEWAY. During the period from the date
hereof to the Effective Time, Gateway shall, and shall cause each of the Gateway
Subsidiaries to, conduct its businesses and engage in transactions permitted
hereunder or only in the ordinary course and consistent with past practice,
except with the prior written consent of Peoples, which consent shall not be
unreasonably withheld. Gateway shall use its best efforts to (i) preserve its
business organization and that of the Gateway Subsidiaries intact, (ii) keep
available to itself and Peoples the present services of the employees of Gateway
and the Gateway Subsidiaries, and (iii) preserve for itself and Peoples the
goodwill of the customers of itself and the Gateway Subsidiaries and others with
whom business relationships exist.
4.02. NEGATIVE COVENANTS.
(a) Gateway agrees that from the date hereof to the Effective Time, except
as otherwise approved by Peoples in writing or as permitted or required by this
Agreement, Gateway will not, nor will Gateway permit any of the Gateway
Subsidiaries to:
(i) change any provision of the Articles of Incorporation or other
governing instrument or Bylaws of Gateway or either of the Gateway
Subsidiaries;
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(ii) except for the issuance of Gateway Common Stock pursuant to the
present terms of stock options which are outstanding as of the date hereof
(and identified on Gateway Disclosure Schedule 4.02), change the number of
shares of its authorized or issued capital stock or issue or grant any
option, warrant, call, commitment, subscription, award, right to purchase or
agreement of any character relating to the authorized or issued capital
stock of Gateway or either of the Gateway Subsidiaries, or any securities
convertible into shares of such capital stock, or split, combine or
reclassify any shares of its capital stock, or redeem or otherwise acquire
any shares of such capital stock; it being understood that Gateway shall
cause to be issued to the Gateway Board of Directors the options to purchase
Gateway Common Stock pursuant to the terms of the Stock Option Plan and the
shares of Gateway Common Stock pursuant to the terms of the Management
Recognition and Retention Plan which are scheduled to be awarded on June 29,
1997;
(iii) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of the capital stock of Gateway or either of the Gateway Subsidiaries,
except for regular quarterly cash dividends not in excess of $0.10 per share
of Gateway Common Stock, which, if declared, shall have payment dates and
record dates consistent with past practice;
(iv) grant any severance or termination pay (other than pursuant to
binding contracts of Gateway in effect on the date hereof and disclosed to
Peoples on Gateway Disclosure Schedule 2.13(a)), to, or enter into or amend
any employment, consulting or compensation agreement with, any of its
directors, officers or employees; or award any increase in compensation or
benefits to its directors, officers or employees, except, in the case of
employees, such as granted each January in the ordinary course of business
in an amount and consistent with past practices and policies;
(v) enter into or modify (except as may be required by applicable law or
as required by Section 4.12(e) hereof, with the prior written consent of
Peoples, which shall not be unreasonably withheld) any pension, retirement,
stock option, stock purchase, stock grant, stock appreciation right,
savings, profit sharing, deferred compensation, consulting, bonus, group
insurance or other employee benefit, incentive or welfare contract, plan or
arrangement, or any trust agreement related thereto, in respect of any of
its directors, officers or employees; or make any contributions to Gateway's
Employee Stock Ownership Plan or any other defined contribution plan or any
defined benefit pension or retirement plan other than in the ordinary course
of business consistent with past practice;
(vi) sell or dispose of any significant assets or incur any significant
liabilities, or acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) any business or entity;
(vii) make any capital expenditures in excess of $10,000 in the
aggregate, other than expenditures necessary to maintain existing assets in
good repair and other than as set forth in Gateway Disclosure Schedule
4.02(vii);
(viii) except as set forth on Gateway Disclosure Schedule 4.02(viii),
file any applications or make any contract with respect to branching or site
location or relocation;
(ix) make any material change in its accounting methods or practices,
other than changes required by generally accepted accounting principles, or
change any of its methods of reporting income and deductions for federal
income tax purposes, except as required by changes in laws or regulations;
(x) change its lending, investment, deposit or asset and liability
management or other banking policies in any material respect except as may
be required by applicable law;
(xi) engage in any transaction with an "affiliated person" or
"affiliate," in each case as defined in Section 2.18(a) hereof;
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(xii) enter into any futures contract, option or other agreement or take
any other action for purposes of hedging the exposure of its
interest-earning assets and interest-bearing liabilities to changes in
market rates of interest;
(xiii) take any action that would result in any of its representations
and warranties contained in Article II of this Agreement not being true and
correct in any material respect at the Effective Time; or
(xiv) agree to do any of the foregoing.
4.03. NO SOLICITATION. Neither Gateway nor either of the Gateway
Subsidiaries shall, nor shall Gateway or either of the Gateway Subsidiaries
authorize or permit any of its directors, officers or employees or any
investment banker, financial advisor, attorney, accountant or other
representative of Gateway or either of the Gateway Subsidiaries to, directly or
indirectly, encourage or solicit or hold discussions or negotiations with, or
provide any information to, any person, entity or group (other than Peoples)
concerning any merger, sale of substantial assets or liabilities not in the
ordinary course of business, sale of shares of capital stock or similar
transactions involving Gateway or either of the Gateway Subsidiaries (an
"Acquisition Transaction"); provided, however, that Gateway may provide
information in connection with an unsolicited possible Acquisition Transaction
if the Board of Directors of Gateway, after consulting with counsel, determines
in the exercise of its fiduciary responsibilities that such information should
be furnished. Gateway will promptly communicate to Peoples the terms of any
proposal which it may receive in respect of any such Acquisition Transaction and
shall provide Peoples with copies of (i) any written legal advice provided to
the Board of Directors of Gateway, (ii) all such written inquiries or proposals
and (iii) an accurate and complete written synopsis of all such oral inquiries
or proposals.
4.04. CURRENT INFORMATION. During the period from the date hereof to the
Effective Time, each party will cause one or more of its designated
representatives to confer on a monthly or more frequent basis with
representatives of the other party regarding its business, operations,
prospects, assets and financial condition and matters relating to the completion
of the transactions contemplated hereby. As soon as reasonably available, but in
no event more than 45 days after the end of each calendar quarter (other than
the last quarter of each calendar year) ending after the date of this Agreement,
each party will deliver to the other party its quarterly report on Form 10-Q (or
Form 10-QSB) under the 1934 Act, and, as soon as reasonably available, but in no
event more than 90 days after the end of each fiscal year, each party will
deliver to the other party its Annual Report on Form 10-K (or Form 10-KSB).
Within 25 days after the end of each month, each party shall provide the other
party with a consolidated statement of financial condition and a consolidated
statement of operations, without related notes, for such month prepared in
accordance with generally accepted accounting principles.
4.05. ACCESS TO PROPERTIES AND RECORDS; CONFIDENTIALITY.
(a) Gateway shall permit Peoples and its representatives reasonable access
to its properties and those of the Gateway Subsidiaries, and shall disclose and
make available to Peoples all books, papers and records relating to the assets,
stock ownership, properties, operations, obligations and liabilities of Gateway
and the Gateway Subsidiaries, including, but not limited to, all books of
account (including the general ledger), tax records, minute books of directors'
and stockholders' meetings, organizational documents, bylaws, material contracts
and agreements, filings with any regulatory authority, accountants' work papers,
litigation files, plans affecting employees, and any other business activities
or prospects in which Peoples may have a reasonable interest. Neither Gateway
nor either of the Gateway Subsidiaries shall be required to provide access to or
to disclose information where such access or disclosure would violate or
prejudice the rights of any customer or would contravene any law, rule,
regulation, order or judgment. Gateway will use its best efforts to obtain
waivers of any such restriction and in any event make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply. Gateway and the Gateway Subsidiaries shall make their
respective directors, officers, employees and agents and authorized
representatives (including counsel and independent public accountants) available
to
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confer with Peoples and its representatives, provided that such access shall be
reasonably related to the transactions contemplated hereby and not unduly
interfere with normal operations. Similar access shall be provided by Peoples to
Gateway and its representatives to the extent necessary to enable Gateway to
satisfy its due diligence obligations with respect to Peoples.
(b) All information furnished previously in connection with the transactions
contemplated by this Agreement or pursuant hereto shall be treated as the sole
property of the party furnishing the information until consummation of the
Merger and, if such Merger shall not occur, the party receiving the information
shall, at the request of the party which furnished such information, either
return to the party which furnished such information or destroy all documents or
other materials containing, reflecting or referring to such information; shall
use its best effort to keep confidential all such information; shall use such
information only for the purpose of consummating the transactions contemplated
by this Agreement; and shall not directly or indirectly use such information for
any competitive or commercial purposes. The obligation to keep such information
confidential shall continue for three years from the date the proposed Merger is
abandoned but shall not apply to (i) any information which (A) the party
receiving the information can establish by convincing evidence was already in
its possession prior to the disclosure thereof to it by the party furnishing the
information; (B) was then generally known to the public; (C) became known to the
public through no fault of the party receiving the information; or (D) was
disclosed to the party receiving the information by a third party not bound by
an obligation of confidentiality; or (ii) disclosures pursuant to a legal
requirement or in accordance with an order of a court of competent jurisdiction.
(c) From the date hereof until the earlier of the Effective Time or the
termination of this Agreement in accordance with the terms hereof, Gateway may
invite two persons (to be designated by Peoples) to attend all meetings of the
Board of Directors of Gateway and the Gateway Subsidiaries.
4.06. REGULATORY MATTERS.
(a) The parties hereto will cooperate with each other and use their best
efforts to prepare all necessary documentation (including without limitation the
Form S-4 and the Proxy Statement/Prospectus), to effect all necessary filings
and to obtain all necessary permits, consents, approvals and authorizations of
all third parties and governmental bodies necessary to consummate the
transactions contemplated by this Agreement and the Plan of Merger as soon as
practicable. The parties shall each have the right to review and approve in
advance all information relating to the other, as the case may be, and any of
their respective subsidiaries, which appears in any filing made with, or written
material submitted to, any third party or governmental body in connection with
the transactions contemplated by this Agreement and the Plan of Merger.
(b) Each of the parties will furnish each other with all information
concerning themselves, their subsidiaries, directors, officers and stockholders
and such other matters as may be necessary or advisable in connection with any
statement or application made by or on behalf of them, or any of their
respective subsidiaries to any governmental body in connection with the Merger
and the other transactions, applications or filings contemplated by this
Agreement and the Plan of Merger.
(c) Each of the parties will promptly furnish each other with copies of
written communications received by them or any of their respective subsidiaries
from, or delivered by any of the foregoing to, any governmental body in
connection with the Merger and the other transactions, applications or filings
contemplated by this Agreement and the Plan of Merger.
4.07. APPROVAL OF GATEWAY STOCKHOLDERS. Each party will (a) take all steps
(including, without limitation, the preparation of the Form S-4 and Proxy
Statement/Prospectus in accordance with all applicable requirements) necessary
for Gateway to duly call, give notice of, convene and hold a meeting of the
Gateway stockholders as soon as reasonably practicable for the purposes of
securing the approval of such stockholders of this Agreement and the Plan of
Merger, and (b) cooperate and consult with the other party
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with respect to the foregoing matters. In addition, Gateway shall, recommend to
its stockholders the approval of this Agreement and the Plan of Merger and the
transactions contemplated hereby and thereby, and use its best efforts to
obtain, as promptly as practicable, such approvals, provided, however, that if
the Board of Directors of Gateway shall have reasonably determined in good faith
(after consultation with its counsel) that such recommendation is reasonably
likely to constitute a breach of its fiduciary duties to the stockholders of
Gateway, then the Board of Directors of Gateway shall not be obligated to
recommend to its stockholders adoption of this Agreement and the Plan of Merger.
4.08. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all reasonable action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
satisfy the conditions to closing contained herein and to consummate and make
effective the transactions contemplated by this Agreement and the Plan of
Merger. In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement and the Plan
of Merger, the proper officers and directors of each party to this Agreement
shall take all such necessary action. Nothing in this section shall be construed
to require any party to participate in any threatened or actual legal,
administrative or other proceedings (other than proceedings, actions or
investigations to which it is a party or subject or threatened to be made a
party or subject) in connection with consummation of the transactions
contemplated by this Agreement and the Plan of Merger unless such party shall
consent in advance and in writing to such participation and the other party
agrees to reimburse and indemnify such party for and against any and all costs
and damages related thereto.
4.09. DISCLOSURE SUPPLEMENTS. From time to time prior to the Effective Time,
each party will promptly supplement or amend its respective Disclosure Schedules
delivered pursuant hereto with respect to any matter hereafter arising which, if
existing, occurring or known as of the date hereof, would have been required to
be set forth or described in such Schedules or which is necessary to correct any
information in such Schedules which has been rendered inaccurate thereby. No
supplement or amendment to such Schedules shall have any effect for the purpose
of determining satisfaction of the conditions set forth in Article V or the
compliance by Gateway with the covenants set forth in Section 4.01 hereof.
4.10. PUBLIC ANNOUNCEMENTS. The parties hereto shall approve in advance the
substance of and cooperate with each other in the development and distribution
of all news releases and other public disclosures with respect to this Agreement
and the Plan of Merger or any of the transactions contemplated hereby and
thereby, except as may be otherwise required by law or regulation and as to
which the parties releasing such information have used their best efforts to
discuss with the other parties in advance.
4.11. FAILURE TO FULFILL CONDITIONS. In the event that any of the parties
hereto determines that a condition to its respective obligations to consummate
the transactions contemplated hereby cannot be fulfilled on or prior to June 17,
1998 and that it will not waive that condition, it will promptly notify the
other party. Peoples and Gateway will promptly inform the other of any facts
applicable to them, or their respective directors or officers, that would be
likely to prevent or materially delay approval of the Merger by any governmental
authority or which would otherwise prevent or materially delay completion of the
Merger.
4.12. CERTAIN POST-MERGER AGREEMENTS.
The parties hereto agree to the following arrangements following the
Effective Time:
(a) OPERATIONS OF PAC AND CATLETTSBURG FEDERAL. Peoples intends to maintain
PAC as a separate holding company subsidiary of Peoples for a period of not less
than two years from the Effective Time. In addition, Peoples shall maintain
Catlettsburg Federal as a separate subsidiary of Gateway (or a successor or
alternative subsidiary of Peoples) for a period of not less than two years from
the Effective Time. Following such two-year period, Peoples may, in its sole
discretion, determine to merge or consolidate Catlettsburg Federal with other
Peoples subsidiaries as it determines to be appropriate.
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(b) BOARD OF DIRECTORS OF PAC AND CATLETTSBURG FEDERAL. In accordance with
Section 1.02(d) hereof, effective as of the Effective Time, Rebecca R. Jackson
and John H. Fugeman, who are presently directors of Gateway (in the event of the
death, disability or other inability to serve, Gateway and Peoples shall
mutually agree upon another individual presently or at such time serving as a
director of Gateway to replace such person in this capacity) in addition to
Robert Evans, RobRoy Walters and Carol Schneeberger, of Peoples shall be elected
to the Board of Directors of PAC and, David B. Baker, Robert E. Evans, Norman R.
Menshouse, Carol A. Schneeberger, RobRoy Walters and Joseph H. Wesel of Peoples
shall be elected to the Board of Directors of Catlettsburg Federal. The existing
directors of Catlettsburg Federal shall have the right to continue to serve as
directors of Catlettsburg Federal.
(c) OFFICERS AND EMPLOYEES OF GATEWAY AND CATLETTSBURG FEDERAL. The current
President and Chief Executive Officer of Catlettsburg Federal, Rebecca R.
Jackson will continue to be retained by Catlettsburg Federal in accordance with
the terms of her employment agreement. It is acknowledged by the parties that
Peoples does not intend to have Ms. Jackson serve as Chief Executive Officer of
the Surviving Corporation nor does it intend to renew the employment agreement
at the annual anniversary date of such agreement, as set forth in Section 2 of
such agreement. All employees of Gateway and Catlettsburg Federal immediately
prior to the Effective Time shall remain employees of Gateway and Catlettsburg
Federal at the Effective Time and, except with respect to Rebecca R. Jackson,
shall be employed by Gateway and Catlettsburg Federal as at-will employees at
the same salary they are receiving from Gateway or Catlettsburg Federal. Peoples
does not intend to impose job eliminations at Gateway or Catlettsburg Federal as
a result of the Merger.
(d) EMPLOYEE BENEFIT PLANS.
(1) Subject to the provisions of this Section 4.12, all employees of Gateway
or the Gateway Subsidiaries immediately prior to the Effective Time who are
employed by Peoples, or the Peoples Subsidiaries (the "Employers") immediately
following the Effective Time ("Transferred Employees") will be covered by
Employers' employee benefit plans on substantially the same basis as any
employee of the Employers in a comparable position. Notwithstanding the
foregoing, Peoples may determine to continue any of the Gateway benefit plans
for Transferred Employees in lieu of offering participation in the Employers'
benefit plans providing similar benefits (e.g., medical and hospitalization
benefits), to terminate any of Gateway's benefit plans, or to merge any such
benefit plans with the Employers' benefit plans, provided the result is the
provision of benefits to Transferred Employees that are substantially similar to
the benefits provided to the Employers' employees generally. Except as
specifically provided in this Section 4.12 and as otherwise prohibited by law,
Transferred Employees' service with Gateway or the Gateway Subsidiaries shall be
recognized as service with the Employers for purposes of eligibility to
participate and vesting, if applicable (but not for purposes of benefit accrual)
under the Employers' benefit plans, subject to applicable break-in-service
rules. Peoples agrees that any pre-existing condition, limitation or exclusion
in its medical, long-term disability and life insurance plans shall not apply to
Transferred Employees or their covered dependents who are covered under a
medical or hospitalization indemnity plan maintained by Gateway or the Gateway
Subsidiaries on the Effective Time and who then change coverage to the
Employers' medical or hospitalization indemnity health plan at the time such
Transferred Employees are first given the option to enroll. Notwithstanding
anything herein to the contrary, after the Effective Time, (x) any amendment to,
or grant of additional benefits under, any Gateway or the Gateway Subsidiaries
benefit plan, including stock based plans, which continues to exist subsequent
to the Effective Time, shall require the prior consent of the Peoples, and (y)
Peoples may cause any of the Gateway or the Gateway Subsidiaries benefit plans
which continue to exist, including stock based plans, to be amended in order to
provide that employees of Peoples or the Peoples Subsidiary may be participants
in such plans.
(2) Prior to the Effective Time and without any requirement to make
application to the Key District Office of the IRS in Cincinnati (the "Key
District Office"), Gateway may amend the Gateway's Employee Stock Ownership Plan
(the "Gateway ESOP") to provide for: (i) elimination of any requirement for a
participant to be employed as of the last day of the year to receive an employer
contribution, other annual
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additions or allocations, (ii) clarification that any unallocated assets
remaining after payment of the Gateway ESOP loan will be treated as earnings,
and (iii) such other changes as may be necessary under the Tax Reform Act of
1986, as amended.
(3) From and after the date of this Agreement, Gateway shall make no further
contributions to the Gateway ESOP, except in an amount to pay any required
installment payment on the Gateway ESOP loan. From and after the date of this
Agreement and prior to the Effective Time, Gateway and its representatives, with
the full cooperation of Peoples, shall use their best efforts to:
(i) submit to the Key District Office an Application of Determination
upon Termination relating to the Gateway ESOP which discloses the proposed
allocation of the cash remaining in the suspense account (after the
repayment of the Gateway ESOP loan) without regard to Section 415 of the
Code; and
(ii) maintain the status of the Gateway ESOP as a plan qualified under
Section 401(a) and 4975 of the Code. At the Effective Time or as soon
thereafter as is practicable and permissible under the Code, Gateway and
Peoples shall cause the Gateway ESOP loan to be repaid with the Merger
Consideration received by the Gateway ESOP with respect to unallocated
shares of Gateway Common Stock. If the Key District Office issues a
favorable determination letter with respect to termination of the Gateway
ESOP and proposed allocation of the remaining suspense account to
participants, Peoples and Gateway shall, as soon thereafter as practicable,
distribute the Gateway ESOP benefits to the Gateway ESOP participants
pursuant to the terms of the Gateway ESOP.
(iii) If the Key District Office determines that it will not issue a
favorable determination letter with respect to the proposed allocation
because of the Section 415 limitations, then the maximum allocations of
earnings shall be made to a participant on a plan termination basis
consistent with the limitations under Section 415 of the Code. Any remaining
cash attributable to unallocated shares of Gateway Common Stock shall remain
in the suspense account and be allocated to the accounts of such participant
without a violation of the limitation in Section 415. Upon the last
distribution of the cash or other assets attributable to unallocated shares
remaining in the suspense account, the Gateway ESOP will be terminated in
accordance with applicable law.
(4) In the event that, following the Effective Time, the employment of any
Gateway ESOP participant who was employed by Gateway is involuntarily terminated
without cause by Gateway, such participant (or his or her beneficiary or
beneficiaries) shall receive a cash bonus from Gateway as soon as practicable
after the date on which the final allocation of earnings from the suspense
account is made, equal to the amount such participant would have received if he
or she had continued to be a participant in the Gateway ESOP, at his or her
then-current annualized compensation as such term is defined in the Gateway
ESOP, through the date of the termination of the ESOP Trust; provided, however,
that neither Peoples nor Gateway shall be obligated to make any such cash
payment under any circumstances in which such payments are not or will not be
deductible because of Section 280G of the Code.
(5) Peoples and the Gateway will adopt such additional amendments to the
Gateway ESOP as may be reasonably required by the IRS as a condition to granting
such determination letter, provided that such amendments do not substantially
change the terms outlined herein or would result in a material adverse change in
the business, operations, assets, financial condition or prospects of Peoples or
Gateway or result in an additional material liability to Peoples or Gateway.
(6) To the extent permitted by applicable law, and to the extent requested
by participants in the Gateway ESOP, Peoples will permit a Gateway employee's
participant accounts in the Gateway ESOP to be rolled over into People's 401(k)
plan.
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(f) INDEMNIFICATION; INSURANCE.
From and after the Effective Time through the fifth anniversary of the
Effective Time, Peoples (the "Indemnifying Party") shall indemnify and hold
harmless and provide directors and officers liability insurance to each present
and former director and officer of Gateway or any Gateway Subsidiary determined
as of the Effective Time. From the Effective Time and continuing thereafter, the
current officers and directors of Gateway shall be indemnified and provided
directors' and officers' liability insurance by Peoples for their acts and
omissions arising out of matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time exactly as is provided on the date of this Agreement in the Code of
Regulations, Article Five, of Peoples and with the existing directors and
officers' liability insurance policy as of the date of this Agreement, each of
which may be changed, altered, modified or discontinued in good faith and solely
if it does not discriminate against directors or officers of Gateway or any
Gateway Subsidiary with respect to the insurance and indemnification provided
for herein.
ARTICLE V
CONDITIONS PRECEDENT
5.01 CONDITIONS PRECEDENT--PEOPLES, PAC AND GATEWAY. The respective
obligations of Peoples, PAC and Gateway to effect the transactions contemplated
by this Agreement and the Plan of Merger shall be subject to satisfaction of the
following conditions at or prior to the Effective Time.
(a) All corporate action necessary to authorize the execution and delivery
of this Agreement and the Plan of Merger and consummation of the transactions
contemplated hereby and thereby shall have been duly and validly taken by
Peoples, PAC and Gateway including approval by the requisite vote of the
respective shareholders of PAC and Gateway of this Agreement and the Plan of
Merger.
(b) All approvals and consents for the transactions contemplated by the
Amendment and the Plan of Merger from the FRB, the OTS and any other
governmental entity, the approval or consent of which is required for the
consummation of the Merger, and the other transactions contemplated hereby and
thereby shall have been received and all statutory waiting periods in respect
thereof shall have expired.
(c) None of Peoples, Gateway or their respective subsidiaries shall be
subject to any statute, rule, regulation, injunction or other order or decree
which shall have been enacted, entered, promulgated or enforced by any
governmental or judicial authority which prohibits, restricts or makes illegal
consummation of the Merger or any of the other transactions contemplated hereby.
(d) The Form S-4 shall have become effective under the 1933 Act, and Peoples
shall have received all state securities laws or "blue sky" permits and other
authorizations or there shall be exemptions from registration requirements
necessary to issue the Peoples Common Stock in connection with the Merger, and
neither the Form S-4 nor any such permit, authorization or exemption shall be
subject to a stop order or threatened stop order by the Commission or any state
securities authority.
(e) The shares of Peoples Common Stock to be issued in connection with the
Merger shall have been approved for listing on the Nasdaq National Market.
(f) Peoples shall have received an opinion issued by Vorys, Sater, Seymour
and Pease and Gateway shall have received an opinion issued by Elias, Matz,
Tiernan & Herrick, L.L.P., each of which opinions shall be reasonably acceptable
to the parties and to the effect that, on the basis of facts, representations
and assumptions set forth in such opinions which are consistent with the state
of facts existing at the Effective Time, the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368 of the
Code, and that accordingly:
(i) no gain or loss will be recognized by Peoples, PAC or Gateway as a
result of the Merger;
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(ii) no gain or loss will be recognized by the shareholders of Gateway
who exchange their Gateway Common Stock solely for Peoples Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Peoples Common Stock);
(iii) the tax basis of the Peoples Common Stock received by shareholders
who exchange all of their Gateway Common Stock solely for Peoples Common
Stock in the Merger will be the same as the tax basis of the Gateway Common
Stock surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received); and
(iv) any shareholders of Gateway who receive cash in exchange for their
shares of Gateway Common Stock will recognize gain, if any, equal to the
lesser of (i) the excess of the amount of cash plus the fair market value of
any Peoples Common Stock received in the Merger over the shareholder's
adjusted tax basis in their Gateway Common Stock, or (ii) the amount of cash
received.
In rendering such opinion, each law firm will require and rely upon
representations contained in certificates of officers of Peoples, PAC, and
Gateway.
5.02 CONDITIONS PRECEDENT--GATEWAY. The obligations of Gateway to effect the
transactions contemplated by this Agreement shall be subject to satisfaction of
the following conditions at or prior to the Effective Time unless waived by
Gateway pursuant to Section 6.03 hereof.
(a) The representations and warranties of Peoples as set forth in Article
III hereof shall be true and correct as of the date of this Agreement and as of
the Effective Time as though made on and as of the Effective Time (or on the
date when made in the case of any representation and warranty which specifically
relates to an earlier date), provided, however, that notwithstanding anything
herein to the contrary, this Section 5.02 shall be deemed to have been satisfied
even if such representations or warranties are not true and correct unless the
failure of any of the representations or warranties to be so true and correct
would have, individually or in the aggregate, a material adverse effect on the
financial condition, results of operations or business of Peoples on a
consolidated basis or on the ability of Peoples and Gateway, as applicable, to
consummate the Merger.
(b) Peoples and PAC shall have performed in all material respects all
obligations and complied with all covenants required to be performed and
complied with by them pursuant to this Agreement and the Plan of Merger on or
prior to the Effective Time (including without limitation the covenants set
forth in Sections 4.12).
(c) Each of Peoples and PAC shall have delivered to Gateway a certificate,
dated the date of the Closing and signed by its President and by its Chief
Financial Officer, to the effect that the conditions set forth in Sections
5.02(a) and 5.02(b) have been satisfied.
(d) Gateway shall have received the written opinion of its special counsel,
Elias, Matz, Tiernan & Herrick L.L.P., and Adkins & Adkins Attorneys, P.S.C.,
its general counsel, or another general corporate law firm licensed to practice
in Kentucky, dated the date of the Closing, that collectively address the
matters set forth in Exhibit C hereto.
(e) Gateway shall have received an opinion from Friedman, Billings, Ramsey &
Co., Inc. dated as of the date the Proxy Statement/Prospectus is mailed to the
Gateway stockholders to the effect that, in its opinion, the consideration to be
paid to stockholders of Gateway hereunder is fair to such stockholders.
(f) Peoples and/or PAC shall have furnished Gateway with such certificates
of its respective officers or others and such other documents to evidence
fulfillment of the conditions set forth in Sections 5.01 and 5.02 as such
conditions relate to Peoples or PAC as Gateway may reasonably request.
5.03 CONDITIONS PRECEDENT--PEOPLES AND PAC. The obligations of Peoples and
PAC to effect the transactions contemplated by this Agreement and Plan of Merger
shall be subject to satisfaction of the
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following conditions at or prior to the Effective Time unless waived by the
Peoples or PAC pursuant to Section 6.03 hereof.
(a) The representations and warranties of Gateway set forth in Article II
hereof shall be true and correct as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (or on the date
when made in the case of any representation and warranty which specifically
relates to an earlier date), provided, however, that notwithstanding anything
herein to the contrary, this Section 5.03(a) shall be deemed to have been
satisfied even if such representations or warranties are not true and correct
unless the failure of any of the representations or warranties to be so true and
correct would have, individually or in the aggregate, a material adverse effect
on the financial condition, results of operations or business of Gateway on a
consolidated basis or on the ability of Peoples, PAC and Gateway, as applicable,
to consummate the Merger.
(b) Gateway shall have performed in all material respects all obligations
and covenants required to be performed by it pursuant to this Agreement and the
Plan of Merger on or prior to the Effective Time.
(c) Gateway shall have delivered to Peoples a certificate, dated the date of
the Closing and signed by its Chairman and President and by its Chief Financial
Officer, to the effect that the conditions set forth in Sections 5.03(a) and
5.03(b) have been satisfied.
(d) Peoples shall have received the written opinion of Charles Hunsaker, its
General Counsel, dated the date of the Closing, that collectively address the
matters set forth in Exhibit D hereto.
(e) The Dissenters' Shares shall constitute not more than 10% of the
outstanding shares of Gateway Common Stock immediately prior to the Effective
Time.
(f) Each of the directors of Gateway shall have executed and delivered the
Stockholder Agreement, the form of which is set forth as Exhibit A hereto.
(g) Gateway shall have furnished Peoples with such certificates of its
officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 5.01 and 5.03 as such conditions relate to
Gateway as Peoples may reasonably request.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER, ETC.
6.01. TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of this Agreement by the
stockholders of Gateway:
(a) by mutual written consent of the parties hereto;
(b) by Peoples or Gateway (i) if the Effective Time shall not have occurred
on or prior to June 17, 1998 or (ii) if a vote of the stockholders of Gateway is
taken and such stockholders fail to approve this Agreement at the meeting of
stockholders (or any adjournment thereof) of Gateway contemplated by Section
4.07 hereof; unless the failure of such occurrence shall be due to the failure
of the party seeking to terminate this Agreement to perform or observe its
agreements set forth herein to be performed or observed by such party at or
before the Effective Time;
(c) by Peoples or Gateway upon written notice to the other 30 or more days
after the date upon which any application for a regulatory or governmental
approval necessary to consummate the Merger and the other transactions
contemplated hereby shall have been denied or withdrawn at the request or
recommendation of the applicable regulatory agency or governmental authority,
unless within such 30-day period a petition for rehearing or an amended
application is filed or noticed, or 30 or more days after any petition for
rehearing or amended application is denied;
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(d) by Peoples in writing if Gateway has, or by Gateway in writing if
Peoples has, breached (i) any covenant or undertaking contained herein, or (ii)
any representation or warranty contained herein, which breach would have a
material adverse effect on the business, operations, assets or financial
condition of Gateway and the Gateway Subsidiaries or Peoples and the Peoples
Subsidiaries, as applicable, taken as a whole, or upon the consummation of the
transactions contemplated hereby, in any case if such breach has not been cured
by the earlier of 30 days after the date on which written notice of such breach
is given to the party committing such breach or the Effective Time; provided
that it is understood and agreed that either party may terminate this Agreement
on the basis of any such material breach of any representation or warranty
contained herein, notwithstanding any qualification therein relating to the
knowledge of the other party;
(e) by Peoples or Gateway in writing, if any of the applications for prior
approval referred to in Section 4.06 hereof are denied or are approved
contingent upon the satisfaction of any condition or requirement which, in the
reasonable opinion of the Board of Directors of Peoples, would materially impair
the value of Gateway and the Gateway Subsidiaries to Peoples, and the time
period for appeals and requests for reconsideration has run.
(f) by Gateway or Peoples, by action of a majority of its respective Board
of Directors, in the event the Peoples Market Value is less than $27.84.
(g) by Gateway, without any liability for expenses or damages by or to
Peoples whatsoever if Peoples:
(i) changes any provision of the Articles of Incorporation or other
governing instrument or Bylaws of Peoples or PAC in a manner which would
adversely affect in any manner the terms of the Peoples Common Stock or the
ability of Peoples and PAC to consummate the transactions contemplated
hereby;
(ii) effects any recapitalization, reclassification, stock split or like
change in capitalization; or
(iii) participates in any merger, consolidation or other transaction in
which Peoples is not the surviving corporation or sells, transfers or
otherwise disposes of all or substantially all of the consolidated assets or
deposit liabilities (other than loans and investments in the ordinary
course) or the capital stock of The Peoples Banking and Trust Company, The
First National Bank of Southeastern Ohio or Russell Federal Savings Bank
directly or indirectly held by it.
6.02. EFFECT OF TERMINATION. In the event of termination of this Agreement
by either Peoples or Gateway as provided above, this Agreement shall forthwith
become void (other than Sections 4.05(b), this Section 6.02 and 7.01 hereof,
which shall remain in full force and effect) and there shall be no further
liability on the part of the parties or their respective officers or directors,
except for the liability of the parties under Sections 4.05(b) and 7.01 hereof
and except for liability for any breach of this Agreement.
6.03. AMENDMENT, EXTENSION AND WAIVER. Subject to applicable law, at any
time prior to the consummation of the Merger, whether before or after approval
thereof by the stockholders of Gateway, the parties may (a) amend this
Agreement, (b) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (c) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (d) waive compliance with any of the agreements or
conditions contained herein; provided, however, that after any approval of the
Merger by the stockholders of Gateway, there may not be, without further
approval of such stockholders, any amendment or waiver of this Agreement which
modifies either the amount or the form of the Merger Consideration to be
delivered to stockholders of Gateway. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto. Any
agreement on the part of a party hereto to any extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party, but such waiver or failure to insist on strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
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ARTICLE VII
MISCELLANEOUS
7.01. EXPENSES, LIABILITIES AND TERMINATION FEES.
(a) All costs and expenses incurred in connection with this Agreement and
the Plan of Merger and the transactions contemplated hereby and thereby
(including without limitation legal, accounting, investment banking and printing
expenses) shall be borne by the party incurring such costs and expenses,
provided that Peoples and Gateway shall share equally in the costs of printing
the Form S-4 and Proxy Statement/Prospectus.
(b) If an Acquisition Transaction shall have occurred, the Gateway Board is
excused from recommending approval of the Merger to the Gateway stockholders
pursuant to Section 4.07 hereof and the Gateway stockholders do not approve this
Agreement and the Plan of Merger, then in consideration of People's costs and
expenses in connection with this Agreement and the Plan of Merger and the
transactions contemplated hereunder and thereunder, Gateway shall pay Three
Hundred Thousand Dollars ($300,000) to Peoples as an agreed-upon termination
fee, in immediately available funds, within two business days after the
occurrence of the last of such events. If Gateway timely satisfies its
obligations pursuant to this Section 7.01(b), it shall have no further liability
to Peoples whatsoever under this Agreement.
In the event that this Agreement is terminated pursuant to Section 6.01 on
account of an intentional breach of any of the representations and warranties or
of any of the covenants or agreements set forth herein, Gateway shall pay to
Peoples, in the case of a breach by Gateway, or Peoples shall pay to Gateway, in
the case of a breach by Peoples, in immediately available funds, the sum of Six
Hundred Thousand Dollars ($600,000) as agreed-upon liquidated damages, within
two (2) business days after receipt of a demand therefor from the party entitled
to such damages. For purposes of this Section 7.01(b), in no event shall a
breach of a representation and warranty be deemed "intentional" if no member of
the board of directors and no senior officer of Gateway, or Peoples, as the case
may be, knew or should have known (based solely on the existence of clear and
uncontroverted documentation) that such representation and warranty was not true
and correct. Nothing herein shall limit the right of the non-breaching party to
seek and receive all relief and damages to which it may be entitled, at law or
in equity, on account of a non-intentional breach, including, without
limitation, legal, accounting, investment banking and printing expenses,
incurred or suffered by the non-defaulting party in connection herewith or in
the enforcement of its rights hereunder.
7.02. SURVIVAL. The respective representations, warranties and covenants of
the parties to this Agreement shall not survive the Effective Time but shall
terminate as of the Effective Time, other than covenants that by their terms are
to be performed after the Effective Time (including without limitation the
covenants set forth in Sections 4.12 hereof), provided that no such
representations, warranties or covenants shall be deemed to be terminated or
extinguished so as to deprive Peoples or Gateway (or any director, officer or
controlling person thereof) of any defense at law or in equity which otherwise
would be available against the claims of any person, including, without
limitation, any shareholder or former shareholder of either Peoples or Gateway.
7.03. NOTICES. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered personally, sent by overnight
express or mailed by prepaid registered or certified mail (return receipt
requested) or by cable, telegram or telex addressed as follows:
(a) If to Peoples, to:
Peoples Bancorp, Inc.
138 Putnam Street
Marietta, Ohio 45750
Attn: Charles Hunsaker
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Copy to:
(b) If to Gateway, to:
Gateway Bancorp, Inc.
2717 Louisa Street
Catlettsburg, Kentucky 41129
Attn: Rebecca R. Jackson
Copy to:
Elias, Matz, Tiernan and Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attn: Norman B. Antin, Esq.
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given as of the date
so mailed.
7.04. PARTIES IN INTEREST. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of the other party and, except as otherwise expressly
provided herein, that nothing in this Agreement is intended to confer, expressly
or by implication, upon any other person any rights or remedies under or by
reason of this Agreement.
7.05. COMPLETE AGREEMENT. This Agreement, including the documents and other
writings referred to herein delivered pursuant hereto, contain the entire
agreement and understanding of the parties with respect to their subject matter
and shall supersede all prior agreements and understandings between the parties,
both written and oral, with respect to such subject matter. There are no
restrictions, agreements, promises, representations, warranties, covenants or
undertakings between the parties other than those expressly set forth herein or
therein.
7.06. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
7.07. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, without giving effect to the principles of conflicts of laws
thereof.
7.08. HEADINGS. The Article and Section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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IN WITNESS WHEREOF, Peoples and Gateway have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
PEOPLES BANCORP, INC.
Attest:
/s/ Ruth I. Otto By: /s/ Robert E. Evans
Ruth I. Otto Robert E. Evans
Secretary President and Chief
Executive Officer
GATEWAY BANCORP, INC.
Attest:
/s/ Hunter E. Clark By: /s/ Rebecca R. Jackson
Hunter E. Clark Rebecca R. Jackson
Secretary President and Chief
Executive Officer
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AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
AMENDMENT, dated as of September 2, 1997, to the Agreement and Plan of
Merger (the "Agreement"), dated as of June 17, 1997, by and between Peoples
Bancorp, Inc. ("Peoples"), an Ohio corporation headquartered in Marietta, Ohio
and Gateway Bancorp, Inc. ("Gateway"), a Kentucky corporation headquartered in
Catlettsburg, Kentucky. Capitalized terms which are not otherwise defined herein
shall have the meaning set forth in the Agreement.
WHEREAS, the parties desire to make certain revisions to the Agreement as
more fully set forth herein.
NOW, THEREFORE, BE IT RESOLVED, in consideration of the foregoing, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Section 1.07 is hereby amended in its entirety to read as follows:
"1.07. ALLOCATIONS OF MERGER CONSIDERATION.
(a) As provided below, 68% of the shares of Gateway Common Stock will be
converted into the right to receive the Stock Consideration; provided however,
that to the extent the Peoples Market Value exceeds $37.66 (as set forth in
Section 1.04), the ratio of the aggregate dollar amount of Stock Consideration
to the aggregate dollar amount of Merger Consideration may exceed 68%. The
Exchange Agent shall effectuate the allocations of the Merger Consideration
described below among the holders of Gateway Common Stock within five business
days after the Election Deadline.
(b) If the aggregate number of Cash Election Shares exceeds the number of
shares of Gateway Common Stock equal to 32% of the shares of Gateway Common
Stock outstanding at the Effective Time (excluding such shares which are to be
cancelled and retired in accordance with Section 1.04(b) (the "Cash Election
Number"), all Stock Election Shares and all No-Election Shares outstanding at
the Effective Time shall be converted into the right to receive the Stock
Consideration, and the Cash Election Shares shall be converted into the right to
receive the Stock Consideration and the Cash Consideration in the following
manner:
each Cash Election Share shall be converted into the right to
receive (i) an amount in cash, without interest, equal to the
product, rounded to the nearest 1(cent), of (x) the Cash
Consideration and (y) a fraction (the "Cash Fraction"), the
numerator of which shall be the Cash Election Number and the
denominator of which shall be the total number of Cash Election
Shares, and (ii) a number of shares of Peoples Common Stock equal
to the product, rounded to four decimal places, of (x) the Stock
Consideration and (y) a number equal to one minus the Cash
Fraction.
(c) If the aggregate number of Stock Election Shares exceeds the number of
shares of Gateway Common Stock equal to 68% of the shares of Gateway Common
Stock outstanding at the Effective Time (excluding such shares which are to be
cancelled and retired in accordance with Section 1.04(b) (the "Stock Election
Number"), all Cash Election Shares and all No-Election Shares shall be converted
into the right to receive the Cash Consideration, and all Stock Election Shares
shall be converted into the right to receive the Stock Consideration and the
Cash Consideration in the following manner:
each Stock Election Share shall be converted into the right to
receive (i) a number of shares of Peoples Common Stock equal to
the product, rounded to four decimal places, of (x) the Stock
Consideration and (y) a fraction (the "Stock Fraction"), the
numerator of which shall be the Stock Election Number and the
denominator of which shall be the total number of Stock Election
Shares, and (ii) an amount of cash, without interest,
37
<PAGE>
equal to the product, rounded to the nearest 1(cent), of (x) the
Cash Consideration and (y) a number equal to one minus the Stock
Fraction.
(d) In the event that the number of Cash Election Shares does not exceed the
Cash Election Number and the number of Stock Election Shares does not exceed the
Stock Election Number, all Cash Election Shares shall be converted into the
right to receive the Cash Consideration and all Stock Election Shares shall be
converted into the right to receive the Stock Consideration. The Exchange Agent
shall consider the allocation with respect to No-Election Shares only following
consideration of those Gateway stockholders who have made Stock Elections, Cash
Elections and Split Elections. With respect to Gateway stockholders who have
No-Election Shares, the Exchange Agent will attempt to provide for Stock
Consideration equal to 68% of the Merger Consideration and Cash Consideration
equal to 32% of the Merger Consideration; provided, however, that to the extent
that it is not possible to provide for such allocation and still achieve the
result provided for in Section 1.07(a), the Exchange Agent will allocate based
on random selection so that the result provided in Section 1.07(a) will be
attained. The random selection process to be used by the Exchange Agent under
these circumstances will consist of drawing by lot or such other process as the
Exchange Agent deems equitable and necessary to effect the allocations described
in this Section 1.07."
2. Section 1.09 is hereby amended in its entirety to read as follows:
"1.09. STOCK OPTIONS. Immediately before the Effective Time, each option
with respect to Gateway Common Stock (a "Gateway Stock Option") that was issued
pursuant to Gateway's Stock Option Plan on June 29, 1995 and is outstanding and
exercisable at the Effective Time shall be cancelled and converted into the
right to receive from Gateway or Peoples, subject to required withholding taxes,
if any, (x) cash and Peoples Common Stock in an aggregate amount equal to the
difference between the exercise price of such Gateway Stock Option and the
Merger Consideration for each share of Gateway Common Stock subject to such
Gateway Stock Option (the "Option Payment Amount"), with 32% of such Option
Payment Amount to be paid in cash and 68% of such Option Payment Amount to be
paid in Peoples Common Stock (with any fractional shares converted to cash in
accordance with Section 1.05 hereof), determined as follows: (A) if the Peoples
Market Value is equal to or less than $37.66 but equal to or greater than
$27.84, the quotient determined by dividing (x) $3.57 by (y) the Peoples Market
Value, (B) if the Peoples Market Value is less than $27.84, 0.1282 shares or (C)
if the Peoples Market Value is greater than $37.66, 0.0948 shares. The aggregate
consideration to be paid to Gateway option holders pursuant to this formula
shall be based on appreciation of $5.25 per option.
For those options granted on June 29, 1996, the aforementioned formula shall
apply except that the aggregate consideration to be paid to Gateway option
holders shall be based on appreciation of $4.625 and determined as follows: (A)
if the Peoples Market Value is equal to or less than $37.66 but equal to or
greater than $27.84, the quotient determined by dividing (x) $3.145 by (y) the
Peoples Market Value, (B) if the Peoples Market Value is less than $27.84,
0.1130 shares or (C) if the Peoples Market Value is greater than $37.66, 0.0835
shares.
For those options granted on June 29, 1997, the formula in the first
paragraph shall apply except that the aggregate consideration to be paid to
Gateway option holders shall be based on appreciation of $1.1875 and determined
as follows: (A) if the Peoples Market Value is equal to or less than $37.66 but
equal to or greater than $27.84, the quotient determined by dividing (x) 0.8075
by (y) the Peoples Market Value, (B) if the Peoples Market Value is less than
$27.84, 0.0290 shares or (C) if the Peoples Market Value is greater than $37.66,
0.0214 shares."
3. Section 5.01(f) is hereby amended in its entirety to read as follows:
"(f) Peoples and Gateway shall have received an opinion issued by Elias,
Matz, Tiernan & Herrick, L.L.P., which opinion shall be reasonably acceptable to
the parties and to the effect that, on the basis of facts, representations and
assumptions set forth in such opinion which are consistent with the state of
facts
38
<PAGE>
existing at the Effective Time, the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368 of the Code,
and that accordingly:
(i) no gain or loss will be recognized by Peoples, PAC or Gateway as a
result of the Merger;
(ii) no gain or loss will be recognized by the shareholders of Gateway
who exchange their Gateway Common Stock solely for Peoples Common Stock
pursuant to the Merger (except with respect to cash received in lieu of a
fractional share interest in Peoples Common Stock);
(iii) the tax basis of the Peoples Common Stock received by shareholders
who exchange all of their Gateway Common Stock solely for Peoples Common
Stock in the Merger will be the same as the tax basis of the Gateway Common
Stock surrendered in exchange therefor (reduced by any amount allocable to a
fractional share interest for which cash is received); and
(iv) any shareholders of Gateway who receive cash in exchange for their
shares of Gateway Common Stock will recognize gain, if any, equal to the
lesser of (i) the excess of the amount of cash plus the fair market value of
any Peoples Common Stock received in the Merger over the shareholder's
adjusted tax basis in their Gateway Common Stock, or (ii) the amount of cash
received.
In rendering such opinion, each law firm will require and rely upon
representations contained in certificates of officers of Peoples, PAC, and
Gateway."
4. Section 5.02(d) is hereby amended in its entirety to read as follows:
"(d) Gateway shall have received the written opinion of Charles Hunsaker,
General Counsel to Peoples, or another general corporate law firm licensed to
practice in Ohio, dated the date of the Closing, that collectively address the
matters set forth in Exhibit C hereto."
5. Section 5.03(d) is hereby amended in its entirety to read as follows:
"(d) Peoples shall have received the written opinion of Elias, Matz, Tiernan
& Herrick L.L.P., special counsel to Gateway, and Adkins & Adkins Attorneys,
P.S.C., general counsel to Gateway, or another general corporate law firm
licensed to practice in Kentucky, dated the date of the Closing, that
collectively address the matters set forth in Exhibit D hereto."
6. Exhibits C-1 and C-2 are hereby amended by deleting the captions "EXHIBIT
C-1" and "EXHIBIT C-2" and replacing such captions with "EXHIBIT D-1" and
"EXHIBIT D-2", respectively.
7. Exhibit D is hereby amended by deleting the caption "EXHIBIT D" and
replacing such caption with "EXHIBIT C."
8. All references to "this Agreement" in the Agreement shall mean the
Agreement as amended hereby.
9. Each of the parties hereto represents to the other that (i) it has full
corporate power and authority to execute and deliver this Amendment and, subject
to the receipt of all federal regulatory approvals, to consummate the
transactions contemplated hereby, (ii) the execution and delivery of this
Amendment by such party have been duly and validly approved by the Board of
Directors of such party and, except for the approval of this Amendment by the
Gateway stockholders, no other corporate proceedings on the part of such party
are necessary in connection with such Amendment and (iii) this Amendment has
been duly and validly executed and delivered by such party and constitutes a
valid and binding obligation of such party, enforceable against such party in
accordance with its terms.
10. Except as expressly amended by this Amendment, the Agreement is hereby
ratified and confirmed in all respects.
11. This Amendment may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and each of which shall be deemed
an original.
12. This Amendment shall be governed by the laws of the State of Ohio,
without giving effect to the principles of conflicts of laws thereof.
39
<PAGE>
IN WITNESS WHEREOF, Peoples and Gateway have caused this Amendment to be
executed by their duly authorized officers as of the day and year first above
written.
<TABLE>
<S> <C> <C>
PEOPLES BANCORP, INC.
Attest:
/s/ RUTH I. OTTO By: /s/ ROBERT E. EVANS
- - ------------------------------ ---------------------------------------
Ruth I. Otto Robert E. Evans
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
GATEWAY BANCORP, INC.
Attest:
/s/ HUNTER E. CLARK By: /s/ REBECCA R. JACKSON
- - ------------------------------ ---------------------------------------
Hunter E. Clark Rebecca R. Jackson
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
40
<PAGE>
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan"), dated this day of , 1997,
is by and among Peoples Bancorp, Inc., an Ohio corporation ("Peoples"), Peoples
Acquisition Corp., an Ohio corporation and wholly-owned subsidiary of Peoples
("PAC") and Gateway Bancorp, Inc., a Kentucky corporation ("Gateway").
W I T N E S S E T H:
WHEREAS, Peoples and Gateway have entered into an Agreement and Plan of
Merger (the "Agreement") dated June 17, 1997, pursuant to which Gateway will
merge with and into PAC (the "Merger"); and
WHEREAS, Gateway and PAC desire to merge on the terms and conditions herein
provided;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto, intending to be legally
bound hereby, agree as follows:
SECTION 1. THE MERGER
Subject to the terms and conditions of the Plan, at the Effective Time (as
defined in Section 2 below), Gateway shall merge with and into PAC in accordance
with the applicable provisions of the Ohio General Corporation Law ("OGCL") and
the Kentucky Business Corportion Act (the "KBCA"). PAC shall be the surviving
corporation (the "Surviving Corporation") and shall operate under the name
"Gateway Bancorp, Inc." Upon consummation of the Merger, the separate corporate
existence of Gateway shall cease.
SECTION 2. EFFECTIVE TIME
The Merger shall become effective upon the occurrence of the filing of a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Ohio pursuant to the OGCL and Articles of Merger ("Articles of
Merger") with the Secretary of State of the Commonwealth of Kentucky pursuant to
the KBCA, unless a later date and time is specified as the effective time in
such Certificate of Merger and Articles of Merger (the "Effective Time").
SECTION 3. ARTICLES OF INCORPORATION, CODE OF REGULATIONS AND BYLAWS
The Articles of Incorporation, Code of Regulations and Bylaws of PAC in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation, Code of Regulations and Bylaws of the Surviving Corporation,
except that effective as of the Effective Time, the name of the Surviving
Corporation shall be "Gateway Bancorp, Inc."
SECTION 4. EFFECTS OF THE MERGER
From and after the Effective Time, the Merger shall have the effects set
forth in Section 1701.82 of the OGCL and Section 271 B.11-060 of the KCBA.
SECTION 5. DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Merger:
(i) The directors of the Surviving Corporation shall consist of five (5)
persons, the names of which are set forth as Appendix A to this Plan and
incorporated by reference herein;
(ii) The executive officers of the Surviving Corporation shall be as set
forth in Appendix B to this Plan and incorporated herein by reference.
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SECTION 6. EFFECT ON SHARES OF GATEWAY COMMON STOCK
At the Effective Time:
(i) Each share of common stock of Gateway, par value, $0.01 per share,
issued and outstanding will be converted to a right to receive the Merger
Consideration as defined and pursuant to the terms and conditions set
forth in Section 1.04 of the Agreement; and
(ii) Each share of PAC capital stock issued and outstanding shall remain
issued and outstanding.
SECTION 7. ADDITIONAL ACTIONS
If at any time after the Effective Time, the Surviving Corporation shall
consider that any further assignments or assurances in law or any other acts are
necessary or desirable to:
(i) Vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its rights, title or interest in, to or under any of the
rights, properties or assets of Gateway acquired, or to be acquired by
the Surviving Corporation as a result of, or in connection with, the
Merger, or
(ii) otherwise carry out the purposes of the Agreement and the Plan of
Merger,
Gateway and its proper director and officers shall be deemed to have granted
to Surviving Corporation an irrevocable power of attorney to execute and deliver
all such proper deeds, assignments and assurances in law and to do all acts
necessary or proper to vest, perfect or confirm title to and possession of such
rights, properties or assets in the Surviving Corporation and otherwise to carry
out the purposes of the Agreement and the Plan of Merger; and the proper
directors and officers of the Surviving Corporation are fully authorized in the
name of Gateway or otherwise to take any and all such action.
SECTION 8. COUNTERPART
This Plan may be executed in one or more counterparts, each of which shall
be deemed to be an original but all of which together shall constitute an
agreement.
SECTION 9. GOVERNING LAW
(i) This Plan shall be governed in all respects, including but not limited
to, validity, interpretation, effect and performance, by the laws of the
State of Ohio.
(ii) Section headings are not to be considered part of this Plan, are solely
for convenience of reference, and shall not affect the meaning or
interpretation of this Plan or any of its provisions.
SECTION 10. AMENDMENT
Subject to applicable law and Section 6.03 of the Agreement, this Plan may
be amended, modified or supplemented only by written agreement of Peoples, PAC
and Gateway at any time prior to the Effective Time.
SECTION 11. WAIVER
Subject to Section 6.03 of the Agreement, any of the terms of conditions of
this Plan may be waived at any time by whichever of the parties hereto is
entitled to the benefit thereof by action taken by the Board of Directors of
such waiving party.
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<PAGE>
SECTION 12. ASSIGNMENT; TERMINATION
This Plan may not be assigned by any party hereto without the prior written
consent of the other party. This Plan shall terminate upon the termination of
the Agreement in accordance with its terms.
SECTION 13. ACKNOWLEDGMENT
Each party to this Plan acknowledges and affirms that its Board of Directors
has:
(i) Approved the Agreement, this Plan and the Merger; and
(ii) Authorized the execution of the Agreement and the Plan; and
(iii) Empowered its signatories to execute the Agreement and this Plan.
IN WITNESS WHEREOF, the parties hereto have duly executed this Plan as of
the day and year first above written:
<TABLE>
<S> <C> <C>
PEOPLES ACQUISITION CORP.
Attest:
/s/ RUTH I. OTTO By: /s/ ROBERT E. EVANS
- - ------------------------------ ---------------------------------------
Ruth I. Otto Robert E. Evans
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
PEOPLE BANCORP, INC.
/s/ RUTH I. OTTO By: /s/ ROBERT E. EVANS
- - ------------------------------ ---------------------------------------
Ruth I. Otto Robert E. Evans
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
GATEWAY BANCORP, INC.
/s/ HUNTER E. CLARK By: /s/ REBECCA R. JACKSON
- - ------------------------------ ---------------------------------------
Hunter E. Clark Rebecca R. Jackson
SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
43
<PAGE>
APPENDIX B
[LETTERHEAD]
June 16, 1997
Board of Directors
Gateway Bancorp, Inc.
2717 Louisa Street
Catlettsburg, KY 41129
Board of Directors:
You have requested that Friedman, Billings, Ramsey & Co., Inc. ("FBR"),
provide you with its opinion as to the fairness, from a financial point of view,
to holders of common stock ("Stockholders") of Gateway Bancorp, Inc. ("GATEWAY"
or the "Company") of the Consideration (as hereinafter defined) to be received
by them pursuant to the Agreement and Plan of Merger between Peoples Bancorp,
Inc. ("Peoples") and GATEWAY (the "Merger Agreement"), pursuant to which GATEWAY
will be merged with and into Peoples Acquisition Corp., a to-be-formed
subsidiary of Peoples (the "Merger"). The Merger Agreement provides, among other
things, that each issued and outstanding share of common stock of GATEWAY (other
than those shares subject to dissenters' rights), par value $0.01 per share,
shall be converted into the right to receive from Peoples $18.75 per share in
cash and/or Peoples common stock (the "Consideration"), subject to certain terms
and conditions including 68% of the aggregate Consideration being paid in
Peoples common stock and 32% of the aggregate Consideration being paid in cash.
The Merger Agreement will be considered at a special meeting of the Stockholders
of GATEWAY. The terms of the Merger are more fully set forth in the Merger
Agreement.
In delivering this opinion, FBR has completed the following tasks:
1. reviewed Peoples Annual Reports to Stockholders for the fiscal years
ended December 31, 1995 and 1996 and Peoples Annual Reports on Form 10-K
filed with the Securities and Exchange Commission (the "SEC") for the
fiscal years ended December 31, 1994 through 1996;
2. reviewed GATEWAY's Annual Report on Form 10-KSB filed with the SEC for
the fiscal year ended December 31, 1996;
3. reviewed Peoples Quarterly Reports on Form 10-Q for the fiscal quarters
ended September 30, 1996 and March 31, 1997 filed with the SEC;
4. reviewed GATEWAY's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended June 30, 1996, September 30, 1996 and March 31, 1997 filed
with the SEC;
5. reviewed GATEWAY's unaudited financial statements for the five months
ended May 31, 1997;
6. reviewed the reported market prices and trading activity for Peoples
common stock for the period January 1994 through June 12, 1997;
7. discussed the financial condition, results of operations, business and
prospects of GATEWAY and Peoples with the managements of GATEWAY and
Peoples;
8. compared the results of operations and financial condition of GATEWAY and
Peoples with those of certain publicly-traded financial institutions (or
their holding companies) that FBR deemed to be reasonably comparable to
GATEWAY or Peoples, as the case may be;
9. participated in discussions and negotiations among representatives of
GATEWAY and representatives of Peoples;
10. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions that FBR deemed to be reasonably
comparable;
<PAGE>
11. reviewed the financial terms, to the extent publicly available, of
certain acquisition transactions entered into by Peoples;
12. reviewed a copy of the Merger Agreement; and
13. performed such other analyses and reviewed and analyzed such other
information as FBR deemed appropriate.
In rendering this opinion, FBR did not assume responsibility for
independently verifying, and did not independently verify, any financial or
other information concerning GATEWAY and Peoples furnished to it by GATEWAY or
Peoples, or the publicly-available financial and other information regarding
GATEWAY, Peoples and other financial institutions (or their holding companies).
FBR has assumed that all such information is accurate and complete. FBR has
further relied on the assurances of management of GATEWAY and Peoples that they
are not aware of any facts that would make such financial or other information
relating to such entities inaccurate or misleading. With respect to financial
forecasts for GATEWAY provided to FBR by its management, FBR has assumed, for
the purposes of this opinion, that the forecasts have been reasonably prepared
on bases reflecting the best available estimates and judgments of its management
at the time of preparation as to the future financial performance of GATEWAY.
FBR has assumed that there has been no material change in GATEWAY's assets,
financial condition, result of operations, business or prospects since December
31, 1996. FBR did not undertake an independent appraisal of the assets or
liabilities of GATEWAY nor was FBR furnished with any such appraisals. FBR is
not an expert in the evaluation of allowances for loan losses, was not requested
to and did not review such allowances, and was not requested to and did not
review any individual credit files of GATEWAY. FBR's conclusions and opinion are
necessarily based upon economic, market and other conditions and the information
made available to FBR as of the date of this opinion. FBR expresses no opinion
on matters of a legal, regulatory, tax or accounting nature related to the
Merger.
FBR, as part of its institutional brokerage, research and investment banking
practice, is regularly engaged in the valuation of securities and the evaluation
of transactions in connection with mergers and acquisitions of commercial banks,
savings institutions and financial institution holding companies, initial and
secondary offerings, mutual-to-stock conversions of savings institutions, as
well as business valuations for other corporate purposes for financial
institutions and real estate related companies. FBR has experience in, and
knowledge of, the valuation of bank and thrift securities in Kentucky, Ohio and
the rest of the United States.
FBR has acted as a financial advisor to GATEWAY in connection with the
Merger and will receive a fee for services rendered which is contingent upon the
consummation of the Merger. In the ordinary course of FBR's business, it may
effect transactions in the securities of GATEWAY or Peoples for its own account
and/or for the accounts of its customers and, accordingly, may at any time hold
long or short positions in such securities. From time to time, principals and/or
employees of FBR may also have positions in the securities.
Based upon and subject to the foregoing, as well as any such other matters
as we consider relevant, it is FBR's opinion, as of the date hereof, that the
Consideration is fair, from a financial point of view, to the Stockholders of
GATEWAY.
This letter is solely for the information of the Board of Directors of
GATEWAY and may not be relied upon by any other person or used for any other
purpose, reproduced, disseminated, quoted from or referred to without FBR's
prior written consent.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By: /s/ Eugene S.
Weil_____________________
Eugene S. Weil
Senior Vice President
<PAGE>
APPENDIX C
KENTUCKY REVISED STATUTES ANNOTATED
TITLE XXIII. PRIVATE CORPORATIONS AND ASSOCIATIONS
CHAPTER 271B. BUSINESS CORPORATIONS
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Section 271B.13-010 Definitions.
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under KRS 271B.13-020 and who exercises that right when and in
the manner required by KRS 271B.13-200 to 271B.13-280.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable. In
any transaction subject to the requirements of KRS 271B.12-210 or exempted by
KRS 271B.12-220(2), "fair value" shall be at least an amount required to be paid
under KRS 271B.12-220(2) in order to be exempt from the requirements of KRS
271B.12-210.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
Section 271B.13-020 Right to dissent.
(1) A shareholder shall be entitled to dissent from, and obtain payment of
the fair value of his shares in the event of, any of the following corporate
actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
1. If shareholder approval is required for the merger by KRS
271B.11-030 or the articles of incorporation and the shareholder is
entitled to vote on the merger; or
2. If the corporation is a subsidiary that is merged with its parent
under KRS 271B.11-040;
C-1
<PAGE>
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one (1) year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
1. Alters or abolishes a preferential right of the shares to a
distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
3. Excludes or limits the right of the shares to vote on any matter
other than a limitation by dilution through issuance of shares or other
securities with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under KRS 271B.6-040;
(e) Any transaction subject to the requirements of KRS 271B.12-210 or
exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this chapter shall not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
Section 271B.13-030 Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he shall dissent with respect to all
shares beneficially owned by any one (1) person and notify the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
shall be determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(a) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(b) He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
Section 271B.13-200 Notice of dissenters' rights.
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert DISSENTERS'
RIGHTS under this subtitle and the corporation shall undertake to provide a copy
of this subtitle to any shareholder entitled to vote at the shareholders'
meeting upon request of that shareholder.
C-2
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(2) If corporate action creating dissenters' rights under KRS 271B.13-020 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in KRS 271B.13-220.
Section 271B.13-210 Notice of intent to demand payment.
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(a) Shall deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action
is effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section shall not be entitled to payment for his shares under this chapter.
Section 271B.13-220 Dissenters' notice.
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10) days after
the date the proposed corporate action was authorized by the shareholders, or,
if no shareholder authorization was obtained, by the board of directors, and
shall:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty (30), nor more than sixty (60) days
after the date the notice provided in subsection (1) of this section is
delivered; and
(e) Be accompanied by a copy of this subtitle.
Section 271B.13-230 Duty to demand payment.
(1) A shareholder who is sent a dissenters' notice described in KRS
271B.13-220 shall demand payment, certify whether he acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to subsection (2)(c) of KRS 271B.13-220, and deposit
his certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his share certificates
under subsection (1) of this section shall retain all other rights of a
shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice,
shall not be entitled to payment for his shares under this subtitle.
Section 271B.13-240 Share restrictions.
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(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares shall retain all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
Section 271B.13-250 Payment.
(1) Except as provided in KRS 271B.13-270, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall pay
each dissenter who complied with KRS 271B.13-230 the amount the corporation
estimates to be the fair value of his shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial statements,
if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment under KRS
271B.13-280.
Section 271B.13-260 Failure to take action.
(1) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under KRS 271B.13-220 and repeat the payment demand
procedure.
Section 271B.13-270 After-acquired shares.
(1) A corporation may elect to withhold payment required by KRS 271B.13-250
from a dissenter unless he was the beneficial owner of the shares before the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full satisfaction
of his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under KRS
271B.13-280.
Section 271B.13-280 Procedure if shareholder dissatisfied with payment or offer.
(1) A dissenter may notify the corporation 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 payment under KRS 271B.13-250), or reject the
corporation's offer under KRS 271B.13-270 and demand payment of the fair value
of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS 271B.13-250 or
offered under KRS 271B.13-270 is less than the fair value of his shares or
that the interest due is incorrectly calculated;
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(b) The corporation fails to make payment under KRS 271B.13-250 within
sixty (60) days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty (60) days after the date set
for demanding payment.
(2) A dissenter waives his right to demand payment under this section unless
he shall notify the corporation of his demand in writing under subsection (1) of
this section within thirty (30) days after the corporation made or offered
payment for his shares.
Section 271B.13-300 Court action.
(1) If a demand for payment under KRS 271B.13-280 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty (60) day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office (or, if none in this state,
its registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section shall be plenary and exclusive. The court may
appoint one (1) or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters shall be
entitled to the same discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding shall be entitled to
judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under KRS
271B.13-270.
Section 271B.13-310 Court costs and counsel fees.
(1) The court in an appraisal proceeding commenced under KRS 271B.13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters, if
the court finds the corporation did not substantially comply with the
requirements of KRS 271B.13-200 to 271B.13-280; or
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(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ARTICLE FIVE of the Regulations of the Registrant governs the
indemnification of officers and directors of the Registrant. ARTICLE FIVE
provides:
SECTION 5.01. MANDATORY INDEMNIFICATION. The corporation shall indemnify any
officer or director of the corporation who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (including,
without limitation, any action threatened or instituted by or in the right of
the corporation), by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee, or agent of another
corporation (domestic or foreign, nonprofit or for profit), partnership, joint
venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, he had no reasonable cause to believe his conduct was unlawful. A
person claiming indemnification under this Section 5.01 shall be presumed, in
respect of any act or omission giving rise to such claim for indemnification, to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal matter, to have had no reasonable cause to believe his conduct was
unlawful, and the termination of any action, suit or proceeding by judgment,
order, settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, rebut such presumption.
SECTION 5.02. COURT-APPROVED INDEMNIFICATION. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding:
(A) the corporation shall not indemnify any officer or director of the
corporation who was a party to any completed action or suit instituted by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, trustee,
officer, employee, or agent of another cooperation (domestic or foreign,
nonprofit or for profit), partnership, joint venture, trust or other enterprise,
in respect of any claim, issue or matter asserted in such action or suit as to
which he shall have been adjudged to be liable for acting with reckless
disregard for the best interests of the corporation or misconduct (other than
negligence) in the performance of his duty to the corporation unless and only to
the extent that the Court of Common Pleas of Washington County, Ohio or the
court in which such action or suit was brought shall determine upon application
that, despite such adjudication of liability, and in view of all the
circumstances of the case, he is fairly and reasonably entitled to such
indemnity as such Court of Common Pleas or such other court shall deem proper;
and
(B) the corporation shall promptly make any such unpaid indemnification as
is determined by a court to be proper as contemplated by this Section 5.02.
SECTION 5.03. INDEMNIFICATION FOR EXPENSES. Anything contained in the
Regulations or elsewhere to the contrary notwithstanding, to the extent that an
officer or director of the corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
5.01, or in defense of any claim, issue or matter therein, he shall be promptly
indemnified by the corporation against expenses (including, without limitation,
attorneys' fees, filing fees, court reporters' fees and transcript costs)
actually and reasonably incurred by him in connection therewith.
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SECTION 5.04. DETERMINATION REQUIRED. Any indemnification required under
Section 5.01 and not precluded under Section 5.02 shall be made by the
corporation only upon a determination that such indemnification of the officer
or director is proper in the circumstances because he has met the applicable
standard of conduct set forth in Section 5.01. Such determination may be made
only (A) by a majority vote of a quorum consisting of directors of the
corporation who were not and are not parties to, or threatened with, any such
action, suit or proceeding, or (B) if such a quorum is not obtainable or if a
majority of a quorum of disinterested directors so directs, in a written opinion
by independent legal counsel other than an attorney, or a firm having associated
with it an attorney, who has been retained by or who has performed services for
the corporation, or any person to be indemnified, within the past five years, or
(C) by the shareholders, or (D) by the Court of Common Pleas of Washington
County, Ohio or (if the corporation is a party thereto) the court in where such
an action, suit or proceeding was brought, if any; any such determination may be
made by a court under division (D) of this Section 5.04 at any time [including,
without limitation, any time before, during or after the time any such
determination may be requested of, be under consideration by or have been denied
or disregarded by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by the shareholders under
division (C) of this Section 5.04]; and no failure for any reason to make any
such determination, and no decision for any reason to deny any such
determination, by the disinterested directors under division (A) or by
independent legal counsel under division (B) or by shareholders under division
(C) of this Section 5.04 shall be evidence in rebuttal of the presumption
recited in Section 5.01. Any determination made by the disinterested directors
under division (A) or by independent legal counsel under division (B) of this
Section 5.04 to make indemnification in respect of any claim, issue or matter
asserted in an action or suit threatened or brought by or in the right of the
corporation shall be promptly communicated to the person who threatened or
brought such action or suit, and within ten (10) days after receipt of such
notification such person shall have the right to petition the Court of Common
Pleas of Washington County, Ohio or the court in which such action or suit was
brought, if any, to review the reasonableness of such determination.
SECTION 5.05. ADVANCES FOR EXPENSES. Expenses (including, without
limitation, attorneys' fees, filing fees, court reporters' fees and transcript
costs) incurred in defending any action, suit or proceeding referred to in
Section 5.01 shall be paid by the corporation in advance of the final
disposition of such action, suit or proceeding to or on behalf of the officer or
director promptly as such expenses are incurred by him, but only if such officer
or director shall first agree, in writing, to repay all amounts so paid in
respect of any claim, issue or other matter asserted in such action, suit or
proceeding in defense of which he shall not have been successful on the merits
or otherwise:
(A) if it shall ultimately be determined as provided in Section 5.04 that he
is not entitled to be indemnified by the corporation as provided under Section
5.01; or
(B) if, in respect of any claim, issue or other matter asserted by or in the
right of the corporation in such action or suit, he shall have been adjudged to
be liable for acting with reckless disregard for the best interests of the
corporation or misconduct (other than negligence) in the performance of his duty
to the corporation, unless and only to the extent that the Court of Common Pleas
of Washington County, Ohio or the court in which such action or suit was brought
shall determine upon application that, despite such adjudication of liability,
and in view of all the circumstances, he is fairly and reasonably entitled to
all or part of such indemnification.
SECTION 5.06. ARTICLE FIVE NOT EXCLUSIVE. The indemnification provided by
this Article Five shall not be exclusive of, and shall be in addition to, any
other rights to which any person seeking indemnification may be entitled under
the Articles or the Regulations or any agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be an officer or director of the
corporation and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
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SECTION 5.07. INSURANCE. The corporation may purchase and maintain insurance
or furnish similar protection, including but not limited to, trust funds,
letters of credit, or self-insurance, on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation (domestic or foreign, nonprofit or for profit),
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the obligation or
the power to indemnify him against such liability under the provisions of this
Article Five. Insurance may be purchased from or maintained with a person in
which the corporation has a financial interest.
SECTION 5.08. CERTAIN DEFINITIONS. For purposes of this Article Five, and as
examples and not by way of limitation:
(A) A person claiming indemnification under this Article Five shall be
deemed to have been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 5.01, or in defense of any
claim, issue or other matter therein, if such action, suit or proceeding shall
be terminated as to such person, with or without prejudice, without the entry of
a judgment or order against him, without a conviction of him, without the
imposition of a fine upon him and without his payment or agreement to pay any
amount in settlement thereof (whether or not any such termination is based upon
a judicial or other determination of the lack of merit of the claims made
against him or otherwise results in a vindication of him); and
(B) References to an "other enterprise" shall include employee benefit
plans; references to a "fine" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent, with respect
to an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" within the meaning of that term as used in this Article Five.
SECTION 5.09. VENUE. Any action, suit or proceeding to determine a claim for
indemnification under this Article Five may be maintained by the person claiming
such indemnification, or by the corporation, in the Court of Common Pleas of
Washington County, Ohio. The corporation and (by claiming such indemnification)
each such person consent to the exercise of jurisdiction over its or his person
by the Court of Common Pleas of Washington County, Ohio in any such action, suit
or proceeding.
Division (E) of Section 1701.13 of the Ohio Revised Code governs
indemnification by an Ohio corporation and provides as follows:
(E) (1) A corporation may indemnify or agree to indemnify any person who was
or is a party, or is threatened to be made a party, to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise, against expenses, including attorney's fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding , if he had
no reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
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corporation and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust, or
other enterprise, against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged to
be liable for negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that, the court of common pleas
or the court in which such action or suit was brought determines, upon
application, that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses as the court of common pleas or such other
court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in division (E) (1) or (2) of this
section, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the action, suit, or proceeding.
(4) Any indemnification under division (E) (1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case, upon a determination that indemnification of the director,
trustee, officer, employee, member, manager, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
division (E) (1) or (2) of this section. Such determination shall be made as
follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with the action, suit, or proceeding referred to in division (E) (1) or (2)
of this section;
(b) If the quorum described in division (E) (4) (a) of this section is
not obtainable or if a majority vote of a quorum of disinterested directors
so directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation or any person
to be indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which the action, suit,
or proceeding referred to in division (E) (1) or (2) of this section was
brought.
Any determination made by the disinterested directors under division (E) (4)
(a) or by independent legal counsel under division (E) (4) (b) of this section
shall be promptly communicated to the person who threatened or brought the
action or suit by or in the right of the corporation under division (E) (2) of
this section, and, within ten days after receipt of such notification, such
person shall have the right to petition
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the court of common pleas or the court in which such action or suit was brought
to review the reasonableness of such determination.
(5) (a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding to in division (E) (1) or (2) of this
section, the articles or the regulations of a corporation state, by specific
reference to this division, that the provisions of this division do not apply to
the corporation and unless the only liability asserted against a director in an
action, suit, or proceeding referred to in division (E) (1) or (2) of this
section is pursuant to section 1701.95 of the Revised Code, expenses, including
attorney's fees, incurred by a director in defending the action, suit or
proceeding shall be paid by the corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding, upon receipt of an
undertaking by or on behalf of the director in which he agrees to do both of the
following:
(i) Repay such amount if it is proved by clear and convincing evidence
in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the action,
suit, or proceeding.
(b) Expenses, including attorney's fees, incurred by a director, trustee,
officer, employee, member, manager, or agent in defending any action, suit, or
proceeding referred to in division (E) (1) or (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding, as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, member, manager, or agent to repay such amount, if it
ultimately is determined that he is not entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to, any other rights granted to those seeking
indemnification under the articles, the regulations, any agreement, a vote of
shareholders or disinterested directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding their
offices or positions, and shall continue as to a person who has ceased to be a
director, trustee, officer, employee, member, manager, or agent and shall inure
to the benefit of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit, or
self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust, or
other enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
this section. Insurance may be purchased from or maintained with a person in
which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to division
(E) (1) or (2) of this section does not limit the payment of expenses as they
are incurred, indemnification, insurance, or other protection that may be
provided pursuant to divisions (E) (5), (6), and (7) of this section. Divisions
(E) (1) and (2) of this section do not create any obligation to repay or return
payments made by the corporation pursuant to divisions (E) (5), (6) or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity, or is or was
serving at the request of such constituent entity as a director, trustee,
officer, employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a limited liability company, or a partnership,
joint venture, trust, or other enterprise, shall stand in the same position
under this section
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with respect to the new or surviving corporation as he would if he had served
the new or surviving corporation in the same capacity.
The Registrant has purchased insurance coverage under a policy which insures
directors and officers against certain liabilities which might be incurred by
them in such capacity.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(a) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- - ------------ ----------------------------------------------------------------------------------------- -------------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of June 17, 1997, as amended as of September 2, (1)
1997, between Peoples and Gateway, including a related Plan of Merger, attached as
Exhibit B thereto
2(b) Stockholders Agreement, dated as of June 17, 1997, between Peoples and certain
stockholders of Gateway
3(a)(i) Amended Articles of Incorporation of Peoples as filed with the Ohio Secretary of State on (2)
May 3, 1993
3(a)(ii) Certificate of Amendment to Amended Articles of Incorporation of Peoples as filed with (3)
the Ohio Secretary of State on April 9, 1996
3(a)(iii) Amended Articles of Incorporation of Peoples (reflecting amendments through April 9, (3)
1996) [for purposes of Commission reporting compliance only; not filed with the Ohio
Secretary of State]
3(b) Regulations of Peoples (2)
4 Pledge Agreement dated March 18, 1997, between Peoples and Fountain Square Commercial
Funding Corp.
5 Opinion of Charles R. Hunsaker regarding legality of securities being registered *
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax *
consequences
10(a) Deferred Compensation Agreement dated November 16, 1976 between Robert E. Evans and The (4)
Peoples Banking and Trust Company, as amended March 13, 1979
10(b) Peoples Bancorp Inc. Retirement Savings Plan (Amended and Restated Effective January 1, (5)
1996)
10(c) Peoples Bancorp Inc. Retirement Plan and Trust (Amended and Restated Effective January 1, (5)
1989)
10(d) Summary of the Incentive Bonus Plan of Peoples Bancorp Inc. effective for calendar year (7)
ended December 31, 1996
10(e) Summary of the Performance Compensation Plan of Peoples Bancorp Inc. effective for (6)
calendar year beginning January 1, 1997
10(f) Peoples Bancorp. Inc. Amended and Restated 1993 Stock Option Plan (8)
10(g) Form of Stock Option Agreement used in connection with grant of non-qualified stock (5)
options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan
10(h) Form of Stock Option Agreement dated May 20, 1993, used in connection with grant of (5)
incentive stock options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option
Plan
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- - ------------ ----------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10(i) Form of Stock Option Agreement dated November 10, 1994, used in connection with grant of (5)
incentive stock options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option
Plan
10(j) Peoples Bancorp Inc. 1995 Stock Option Plan (9)
10(k) Form of Stock Option Agreement used in connection with grant of non-qualified stock (5)
options to non-employee directors of Peoples under Peoples Bancorp Inc. 1995 Stock Option
Plan
10(l) Form of Stock Option Agreement used in connection with grant of non-qualified stock (5)
options to non-employee directors of Peoples' subsidiaries under Peoples Bancorp Inc.
1995 Stock Option Plan
10(m) Deferred Compensation Plan for Directors of Peoples Bancorp, Inc. and Subsidiaries
13 Peoples Bancorp, Inc. Annual Report to Shareholders for the fiscal year ended December (6)
31, 1996 [not deemed filed except for portions thereof which are specifically
incorporated into this Registration Statement on Form S-4]
21 Subsidiaries of Peoples (6)
23(a) Consent of Charles R. Hunsaker (contained in the opinion included as Exhibit 5) --
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as --
Exhibit 8)
23(c) Consent of Ernst & Young LLP
23(d) Consent of Coopers & Lybrand L.L.P.
23(e) Consent of Kelley, Galloway & Company P.C.
23(f) Consent of Friedman, Billings, Ramsey & Co., Inc.
24 Powers of Attorney (included in the signature page to the initial filing of this --
Registration Statement)
99(a) Form of proxy for the Gateway special meeting
</TABLE>
- - ------------------------
* To be filed by amendment.
(1) Exhibit is attached as Appendix A to the Proxy Statement/Prospectus included
herein.
(2) Incorporated herein by reference to Peoples' Registration Statement on Form
8-B filed July 20, 1993 (File No. 0-16772).
(3) Incorporated herein by reference to Peoples' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996 (File No. 0-16772).
(4) Incorporated herein by reference to the Registration Statement on Form S-14
(Registration No. 2-68524) of Peoples Delaware, Peoples' predecessor.
(5) Incorporated herein by reference to Peoples' Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 0-16772).
(6) Incorporated herein by reference to Peoples' Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-16772).
(7) Incorporated herein by reference to Peoples Delaware's Annual Report on Form
10-K for fiscal year ended December 31, 1992 (File No. 0-16772).
(8) Incorporated herein by reference to Peoples' Registration Statement on Form
S-8 filed August 25, 1993 (Registration No. 33-67878).
II-7
<PAGE>
(9) Incorporated herein by reference to Peoples' Registration Statement on Form
S-8 filed May 24, 1995 (Registration No. 33-59569).
Peoples' management contracts or compensatory plans or arrangements consist
of Exhibit Nos.
10(a)-(m) listed above.
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a) (1) (i) and (a) (1) (ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling
II-8
<PAGE>
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b) 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Marietta, State of Ohio,
on the 25th day of September 1997.
PEOPLES BANCORP INC.
BY: /S/ ROBERT E. EVANS
-----------------------------------------
Robert E. Evans
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each of the directors and/or officers of
Peoples Bancorp Inc. whose signature appears below hereby appoints Robert E.
Evans, as his attorney-in-fact to sign in his name and behalf, in any and all
capacities stated below and to file with the Securities and Exchange Commission
any and all amendments, including post-effective amendments, to this
Registration Statement on Form S-4, making such changes in the Registration
Statement as appropriate, and generally to do all such things in their behalf in
their capacities as directors and/or officers to enable Peoples Bancorp Inc. to
comply with the provisions of the Securities Act of 1933, and all requirements
of the Securities and Exchange Commission.
<TABLE>
<S> <C>
/s/ ROBERT E. EVANS
------------------------
Robert E. Evans
PRESIDENT, CHIEF Date: September 25,
EXECUTIVE OFFICER 1997
AND DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
/s/ GEORGE W. BROUGHTON
------------------------ Date: September 25,
George W. Broughton 1997
DIRECTOR
/s/ WILFORD D. DIMIT
------------------------ Date: September 25,
Wilford D. Dimit 1997
DIRECTOR
/s/ BARTON S. HOLL
------------------------ Date: September 24,
Barton S. Holl 1997
DIRECTOR
/s/ REX E. MAIDEN
------------------------ Date: September 25,
Rex E. Maiden 1997
DIRECTOR
/s/ NORMAN J. MURRAY
------------------------ Date: September 25,
Norman J. Murray 1997
DIRECTOR
</TABLE>
II-10
<PAGE>
<TABLE>
<S> <C>
/s/ PAUL T. THEISEN
------------------------ Date: September 25,
Paul T. Theisen 1997
DIRECTOR
/s/ THOMAS C. VADAKIN
------------------------ Date: September 25,
Thomas C. Vadakin 1997
DIRECTOR
/s/ JOSEPH H. WESEL
------------------------
Joseph H. Wesel Date: September 25,
CHAIRMAN OF THE BOARD 1997
AND DIRECTOR
/s/ JEFFREY D. WELCH
------------------------
Jeffrey D. Welch Date: September 25,
TREASURER (PRINCIPAL 1997
ACCOUNTING OFFICER)
/s/ JOHN W. CONLON
------------------------
John W. Conlon Date: September 25,
CHIEF FINANCIAL OFFICER 1997
(PRINCIPAL
FINANCIAL OFFICER)
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ----------------------------------------------------------------------------------------- -------------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of June 17, 1997, as amended as of September 2,
1997 between Peoples and Gateway, including a related Plan of Merger, attached as Exhibit
B thereto (1)
2(b) Stockholders Agreement, dated as of June 17, 1997, between Peoples and certain
stockholders of Gateway
3(a)(i) Amended Articles to Incorporation of Peoples as filed with the Ohio Secretary of State on
May 3, 1993 (2)
3(a)(ii) Certificate of Amendment to Amended Articles of Incorporation of Peoples as filed with
the Ohio Secretary of State on April 9, 1996 (3)
3(a)(iii) Amended Articles of Incorporation of Peoples (reflecting amendments through April 9,
1996) [for purposes of Commission reporting compliance only; not filed with the Ohio
Secretary of State] (3)
3(b) Regulations of Peoples (2)
4 Pledge Agreement dated March 18, 1997, between Peoples and Fountain Square Commercial
Funding Corp.
5 Opinion of Charles R. Hunsaker regarding legality of securities being registered *
8 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. regarding certain federal income tax
consequences *
10(a) Deferred Compensation Agreement dated November 16, 1976 between Robert E. Evans and The
Peoples Banking and Trust Company, as amended March 13, 1979 (4)
10(b) Peoples Bancorp Inc. Retirement Savings Plan (Amended and Restated Effective January 1,
1996) (5)
10(c) Peoples Bancorp Inc. Retirement Plan and Trust (Amended and Restated Effective January 1,
1989) (5)
10(d) Summary of the Incentive Bonus Plan of Peoples Bancorp Inc. effective for calendar year
ended December 31, 1996 (7)
10(e) Summary of the Performance Compensation Plan of Peoples Bancorp Inc. effective for
calendar year beginning January 1, 1997 (6)
10(f) Peoples Bancorp. Inc. Amended and Restated 1993 Stock Option Plan (8)
10(g) Form of Stock Option Agreement used in connection with grant of non-qualified stock
options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option Plan (5)
10(h) Form of Stock Option Agreement dated May 20, 1993, used in connection with grant of
incentive stock options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option
Plan (5)
10(i) Form of Stock Option Agreement dated November 10, 1994, used in connection with grant of
incentive stock options under Peoples Bancorp Inc. Amended and Restated 1993 Stock Option
Plan (5)
10(j) Peoples Bancorp Inc. 1995 Stock Option Plan (9)
10(k) Form of Stock Option Agreement used in connection with grant of non-qualified stock
options to non-employee directors of Peoples under Peoples Bancorp Inc. 1995 Stock Option
Plan (5)
10(l) Form of Stock Option Agreement used in connection with grant of non-qualified stock
options to non-employee directors of Peoples' subsidiaries under Peoples Bancorp Inc.
1995 Stock Option Plan (5)
10(m) Deferred Compensation Plan for Directors of Peoples Bancorp, Inc. and Subsidiaries
13 Peoples Bancorp, Inc. Annual Report to Shareholders for the fiscal year ended December
31, 1996 [not deemed filed except for portions thereof which are specifically
incorporated into this Registration Statement on Form S-4] (6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ----------------------------------------------------------------------------------------- -------------
<S> <C> <C>
21 Subsidiaries of Peoples (6)
23(a) Consent of Charles R. Hunsaker (contained in the opinion included as Exhibit 5) --
23(b) Consent of Elias, Matz, Tiernan & Herrick L.L.P. (contained in the opinion included as
Exhibit 8) --
23(c) Consent of Ernst & Young LLP
23(d) Consent of Coopers & Lybrand L.L.P.
23(e) Consent of Kelley, Galloway & Company P.C.
23(f) Consent of Friedman, Billings, Ramsey & Co., Inc.
24 Powers of Attorney (included in the signature page to the initial filing of this
Registration Statement) --
99(a) Form of proxy for the Gateway special meeting
</TABLE>
- - ------------------------
* To be filed by amendment.
(1) Exhibit is attached as Appendix A to the Proxy Statement/Prospectus included
herein.
(2) Incorporated herein by reference to Peoples' Registration Statement on Form
8-B filed July 20, 1993 (File No. 0-16772).
(3) Incorporated herein by reference to Peoples' Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996 (File No. 0-16772).
(4) Incorporated herein by reference to the Registration Statement on Form S-14
(Registration No. 2-68524) of Peoples Delaware, Peoples' predecessor.
(5) Incorporated herein by reference to Peoples' Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (File No. 0-16772).
(6) Incorporated herein by reference to Peoples' Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-16772).
(7) Incorporated herein by reference to Peoples Delaware's Annual Report on Form
10-K for fiscal year ended December 31, 1992 (File No. 0-16772).
(8) Incorporated herein by reference to Peoples' Registration Statement on Form
S-8 filed August 25, 1993 (Registration No. 33-67878).
(9) Incorporated herein by reference to Peoples' Registration Statement on Form
S-8 filed May 24, 1995 (Registration No. 33-59569).
<PAGE>
Exhibit 2(b)
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated as of June 17, 1997, by and among Peoples
Bancorp, Inc. (the "Acquiror"), an Ohio corporation, and certain stockholders of
Gateway Bancorp, Inc. (the "Company"), a Kentucky corporation, named on Schedule
I hereto (collectively the "Stockholders").
WITNESSETH:
WHEREAS, the Acquiror and the Company have entered into an Agreement and
Plan of Merger, dated as of the date hereof (the "Agreement"), which is being
executed simultaneously with the execution of this Stockholder Agreement and
provides for, among other things, the merger of the Company with and into
Peoples Acquisition Corp., an Ohio corporation and a wholly owned subsidiary of
the Acquiror (the "Merger"); and
WHEREAS, in order to induce the Acquiror to enter into the Agreement, each
of the Stockholders agrees to, among other things, vote in favor of the
Agreement in his or her capacity as a stockholder of the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements set forth herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Ownership of Acquiror Common Stock. Each Stockholder represents and
warrants that the Stockholder has or shares the right to vote and dispose of the
number of shares of common stock of the Company, $.01 par value per share
("Company Common Stock"), set forth opposite such Stockholder's name on Schedule
I hereto.
2. Agreements of the Stockholders. Each Stockholder covenants and agrees
that:
(a) such Stockholder shall, at any meeting of the Company's
stockholders called for the purpose, vote, or cause to be voted, all shares
of Company Common Stock in which such stockholder has the right to vote
(whether owned as of the date hereof or hereafter acquired) in favor of
the Agreement;
(b) except as otherwise expressly permitted hereby, such Stockholder
shall not, prior to the meeting of the Company's stockholders referred to
in Section 2(a) hereof or the earlier termination of the Agreement in
accordance with its terms, sell, pledge, transfer or otherwise dispose of
the Stockholder's shares of Company Common Stock; and
<PAGE>
(c) such Stockholder shall use his reasonable best efforts to take or
cause to be taken all action, 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 agreements contemplated by this
Stockholder Agreement.
Each Stockholder further agrees that the Company's transfer agent shall be
given an appropriate stop transfer order and shall not be required to register
any attempted transfer of shares of Company Common Stock, unless the transfer
has been effected in compliance with the terms of this Stockholder Agreement.
3. Successors and Assigns. A Stockholder may sell, pledge, transfer or
otherwise dispose of his shares of Company Common Stock, provided that, with
respect to any sale, transfer or disposition which would occur on or before the
meeting of the Company's stockholders referred to in Section 2(a) hereof, such
Stockholder obtains the prior written consent of the Acquiror and that any
acquiror of such Company Common Stock expressly agrees in writing to be bound by
the terms of this Stockholder Agreement.
4. Termination. The parties agree and intend that this Stockholder
Agreement be a valid and binding agreement enforceable against the parties
hereto and that damages and other remedies at law for the breach of this
Stockholder Agreement are inadequate. This Stockholder Agreement may be
terminated at any time prior to the consummation of the Merger by mutual written
consent of the parties hereto and shall be automatically terminated in the event
that the Agreement is terminated in accordance with its terms.
5. Notices. Notices may be provided to the Company and the Stockholders
in the manner specified in Section 7.03 of the Agreement, with all notices to
the Stockholders being provided to them at the Company in the manner specified
in such section.
6. Governing Law. This Stockholder Agreement shall be governed by the
laws of the State of Ohio without giving effect to the principles of conflicts
of laws thereof.
7. Counterparts. This Stockholder Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same and each of
which shall be deemed an original.
8. Headings and Gender. The Section headings contained herein are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Stockholder Agreement. Use of the masculine gender
herein shall be considered to represent the masculine, feminine or neuter gender
whenever appropriate.
2
<PAGE>
IN WITNESS WHEREOF, the Acquiror by a duly authorized officer, and each of
the Stockholders have caused this Stockholder Agreement to be executed as of the
day and year first above written.
PEOPLES BANCORP, INC.
By: /s/ Robert E. Evans
-----------------------
Name: Robert E. Evans
Title: President and
Chief Executive Officer
COMPANY STOCKHOLDERS:
/s/ Hunter E. Clark
----------------------------
Hunter E. Clark
/s/ Harold Freedman
----------------------------
Harold Freedman
/s/ John H. Fugeman
----------------------------
John H. Fugeman
/s/ Charles M. Hedrick
----------------------------
Charles M. Hedrick
/s/ Rebecca R. Jackson
----------------------------
Rebecca R. Jackson
3
<PAGE>
SCHEDULE I
Number of Shares of
Company Common Stock
Name of Stockholder Beneficially Owned
- - -------------------------------- ---------------------------------
Hunter E. Clark 23,493(1)
Harold Freedman 14,136(2)
John H. Fugeman 36,676(3)
Charles M. Hedrick 9,266(4)
Rebecca R. Jackson 21,327(5)
- - -------------------------
(1) Includes 2,240 shares which may be acquired upon the exercise of vested
options and 896 recognition plan shares earned as of June 29, 1997. Does
not include additional awards of 311 options and 124 recognition plan
shares on June 29, 1997 and 3,360 options and 1,344 recognition plan shares
awarded on June 29, 1995 which options shall become vested and shares shall
be deemed earned upon the change in control.
(2) Includes 2,240 shares which may be acquired upon the exercise of vested
options and 896 recognition plan shares earned as of June 29, 1997. Does
not include additional awards of 311 options and 124 recognition plan
shares on June 29, 1997 and 3,360 options and 1,344 recognition plan shares
awarded on June 29, 1995 which options shall become vested and shares shall
be deemed earned upon the change in control.
(3) Includes 12,445 shares which may be acquired upon the exercise of vested
options and 4,230 recognition plan shares earned as of June 29, 1997. Does
not include 18,669 options and 6,348 recognition plan shares awarded on
June 29, 1995 which options shall become vested and shares shall be deemed
earned upon the change in control.
(4) Includes 2,240 shares which may be acquired upon the exercise of vested
options and 896 recognition plan shares earned as of June 29, 1997. Does
not include additional awards of 311 options and 124 recognition plan
shares on June 29, 1997 and 3,360 options and 1,344 recognition plan shares
awarded on June 29, 1995 which options shall become vested and shares shall
be deemed earned upon the change in control.
(5) Includes 4,978 shares which may be acquired upon the exercise of vested
options and 4,230 recognition plan shares earned as of June 29, 1997. Does
not include 7,467 options and 6,348 recognition plan shares awarded on June
29, 1995 which options shall become vested and shares shall be deemed
earned upon the change in control.
4
<PAGE>
EXHIBIT 4
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ("Agreement") is made this 18th day of March, 1997
by and between PEOPLES BANCORP INC., an Ohio corporation ("Pledgor"), and
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP., a Delaware corporation ("Pledgee").
1. Definitions. "Obligations", as used herein, means all loans,
advances, indebtedness and other obligations of Pledgor to Pledgee and all
affiliates of Fifth Third Bancorp, of every kind and description whether now
existing or hereafter arising including without limitation those owed by
Pledgor to others and required by Pledgee by purchase, assignment or
otherwise) and whether direct or indirect, primary or as guarantor or surety,
absolute or contingent, liquidated or unliquidated, matured or unmatured,
whether or not secured by additional collateral, and including without
limitation all liabilities obligations and indebtedness arising under the
Credit Agreement, between Pledgor and Pledgee, dated of even date herewith,
the $3,000,000 Term Note, dated of even date herewith, executed by Pledgor
and made to Pledgee, and all other instruments and agreements evidencing,
guarantying or securing any of the Obligations, and all Obligations to
perform or forbear from performing acts, all amounts represented by letters
of credit now or hereafter issued by Pledgee for the benefit of or at the
request of Pledgor, and all expenses and attorneys' fees incurred by Pledgee
under this Agreement or any other document or instrument related thereto or
related to any of the Obligations.
2. Pledge. Pledgor pledges, mortgages, assigns, transfers, delivers,
deposits, sets over and confirms as a first priority security interest to
Pledgee and its successors and assigns all of Pledgor's right, title and
interest in and to:
all outstanding common capital stock of The First National Bank of
Southeastern Ohio,
and all income, dividends and other distributions thereon and the proceeds
thereof (collectively, the "Interest"), as collateral security for payment
and performance by the Pledgor of the Obligations. All dividends and
distributions (in the form of cash, property, stock or other securities)
arising out of the Interest (collectively "Distributions") shall immediately
become subject to the lien and security interest of this Agreement and upon
acquisition of any such additional Interest, Pledgor agrees to deliver to
Pledgee, all documents evidencing the Interest and any additional
documentation requested by Pledgee to perfect and protect Pledgee's interest
therein.
All certificates evidencing the Interest are herewith delivered to the
Secured Party accompanied by assignments executed in blank.
3. Representations and Warranties. Pledgor respresents and warrants to
Pledgee that:
(a) Pledgor is the sole holder of record and sole beneficial owner of
the Interest, free and clear of any security interest, pledge, or other lien
or encumbrance (collectively "Lien");
(b) Pledgor has the right and requisite authority to pledge, mortgage,
assign, transfer, deliver, deposit, set over and confirm the Interest to
Pledgee as provided herein;
(c) Pledgor has obtained all necessary consents, approvals,
authorizations or orders of any person, corporation, partnership, trust,
governmental entity, or other entity required for the execution and delivery
of this Agreement or the delivery of the Interest to Pledgee as provided
herein; and
(d) there are no restrictions on the transfer of the Interest except as
set forth on the face of any certificate evidencing the Interest.
The representations and warranties set forth in this Section 3 shall
survive the execution and delivery of this Agreement.
<PAGE>
4. Covenants. Pledgor covenants and agrees that until payment in full
of all of the Obligations:
(a) After the occurrence of an Event of Default (as defined in Section 5
below), Pledgee shall be entitled to all Distributions. Until paid, all
rights to such Distributions shall remain subject to the lien and security
interest of this Agreement. In the event that Pledgor receives any
Distribution after the occurrence of an Event of Default Pledgor shall notify
Pledgee thereof, hold such Distribution in trust for the benefit of Pledgee
and, if requested by Pledgee, shall immediately deliver such Distribution in
the form received by Pledgor. In the event that the Distribution is in the
form of a check or other instrument, Pledgor shall provide Pledgee with all
necessary endorsements thereon;
(b) Without the prior written consent of Pledgee, Pledgor will not
attempt to or further sell, assign, transfer, mortgage, pledge or otherwise
further encumber any of Pledgor's rights in or to the Interest or any unpaid
Distributions or grant a Lien therein to any other party; and
(c) Pledgor will, at Pledgor's expense, obtain, execute, acknowledge and
deliver all such instruments and take all such action necessary (or as
Pledgee may from time to time request) in order to ensure Pledgee shall have
and retain the benefits of the first priority lien and security interest in
the Interest.
5. Remedies. (a) After the occurrence of a default or an Event of
Default under any of the Obligations (herein an "Event of Default"), Pledgee
is hereby authorized and empowered, at its election, to transfer and register
in its name or in the name of its nominee the whole or any part of the
Interest, to exercise the voting rights with respect thereto, to collect and
receive all Distributions made thereon, to sell in one or more sales after 7
days' notice (which notice Pledgor hereby agrees is commercially reasonable)
but without any previous notice or advertisement, the whole or any part of
the Interest and to otherwise act with respect to the Interest as though
Pledgee was the outright owner thereof, Pledgor hereby irrevocably constituting
and appointing Pledgee as the proxy and attorney-in-fact of Pledgor,
provided, however, the Pledgee shall not have any duty to exercise any such
right or to preserve the same and shall not be liable for any failure to do
so or for any delay in doing so. Any sale may be either for cash or upon
credit or for future delivery at such price as Pledgee may deem fair, and
Pledgee may be the purchaser of the whole or any part of the Interest so sold
and hold the same thereafter in its own right free from any claim of the
Pledgor or any right of redemption. Each sale shall be made to the highest
bidder, but Pledgee may reject any bid at such sale which, in its sole
discretion, it shall deem inadequate. Demands of performance, except as
otherwise herein specifically provided for, notices of sale, advertisements
and the presence of property at sale are hereby waived and any sale hereunder
may be conducted by an auctioneer or by any officer or agent of Pledgee.
(b) If, at the original time or times appointed for the sale of the
whole or any party of the Interest, the highest bid, if there be but one sale,
shall be inadequate to discharge in full all the Obligations, or if the
Interest by offered for sale in lots, if at any of such sales, the highest
bid for the lot offered for sale would indicate to Pledgee, in its
discretion, the likelihood that the proceeds of the sales of all of the
Interest will be insufficient to discharge all the Obligations, the Pledgee
may, on one or more occasions, postpone any of said sales by public
announcement at the time of sale or the time or previous postponement of
sale, an no other notice of such postponement of postponements of sale need
be given, any other notice being hereby waived; provided, however, that any
sale or sales made after such postponement shall be after 7 days' notice to
Pledgor. The Pledgee shall be authorized at any sale (if it deems it
advisable to do so) to restrict the prospective bidders or purchasers to
persons who represent and agree that they are purchasing the Interest for
their own account in compliance with Regulation D of the Securities Act of
1933 or any other applicable exemption under the Act.
(c) In the event of any sale(s) hereunder, Pledgee shall, after deduction
all costs or expenses of every kind (including, to the full extent permitted
by law, attorneys' fees and disbursements) for care, safekeeping, collection,
sale, delivery or otherwise, apply the residue of the proceeds of the sale(s)
to the payment or reduction, wither in whole or in part, of the Obligations
returning the surplus, if any, to Pledgor.
2
<PAGE>
(d) Pledgor agrees that it will not at any time plead, claim or take the
benefit of any appraisal, valuation, stay, extension, moratorium or
redemption law now or hereafter in force in order to prevent or delay the
enforcement of this Agreement, or the absolute sale or transfer to Pledgee
of the whole or any part of the Interest or the possession thereof by any
purchaser at any sale hereunder, and Pledgor waives the benefit of all such
laws. Pledgor agrees that it will not interfere with any right, power and
remedy of Pledgee provided for in this Agreement or now or hereafter existing
at law or in equity or by statute or otherwise, or beginning of the exercise
by Pledgee of any one or more of such rights, powers or remedies. No failure
or delay on the part of Pledgee to exercise any such rights, power or remedy
and no notice or demand which may be given to or made upon Pledgor by Pledgee
with respect to any such remedies shall operate as waiver hereof, or limit or
impair Pledgee's right to take any action or to exercise any power or remedy
hereunder, without notice or demand, or prejudice its rights as against
Pledgor in any respect.
6. Waiver. No delay on Pledgee's part in exercising any power of sale,
lien, option or other right hereunder, and no notice or demand which may be
given to or made upon Pledgor by Pledgee with respect to any power of sale,
lien, option or other right hereunder, shall constitute a waiver thereof, or
limit or impair Pledgee's right to take any action or to exercise any power
of sale, lien option, or any other right hereunder without notice or demand,
or prejudice Pledgee's rights as against Pledgor in any respect. In addition,
no action taken by Pledgee hereunder shall in any way impair or limit
Pledgee's right to exercise any or all rights or remedies Pledgee may
otherwise have against Pledgor with respect to any Obligations. This
Agreement shall not, in any manner, be construed as a compromise of any
Obligations except to the extent that a Distribution is applied to reduce the
Obligations and then only to the extent and in the amount of such
Distribution actually received by Pledgee. This is an absolute, unconditional
and continuing pledge and will remain in full force and effect until the
Obligations have been fully paid to the Pledgee. This pledge will extend to
and cover renewals of the Obligations and any number of extensions of time
for payment thereof and will not be affected by any surrender, exchange,
acceptance or release by the Pledgee of any other pledge or any security held
by it for any of the Obligations. Notice of acceptance of this pledge, notice
of extensions of credit to the Pledgor from time to time, notice of default,
diligence, presentment, protest, demand for payment, notice of demand or
protest, and any defense based upon a failure of Pledgee to comply with the
notice requirements of the applicable version of Uniform Commercial Code
Section 9-504 are hereby waived. Pledgee, at any time and from time to time,
without consent of Pledgor, may change the manner, place or terms of payment
of or interest rates on, or change or extend the time of payment of, or renew
or alter, any of the Obligations, without impairing or releasing the
liabilities of Pledgor hereunder. Pledgee in its sole discretion may
determine the reasonableness of the period which may elapse prior to the
making of demand for any payment upon the Pledgor or any guarantor and it
need not pursue any of its remedies against any other party before having
recourse against Pledgor under this pledge.
7. Indemnification. Pledgor agrees to indemnify and hold the Pledgee
harmless from and against any taxes, liabilities, claims and damages,
including reasonable attorney's fees and disbursements, and other expenses
incurred or arising by reason of the taking or the failure to take action by
Pledgee, in good faith, under this Agreement and in respect of any
transactions effected in connection with this Agreement, including without
limitation, any taxes payable in connection with the delivery or registration
of the Interest as provided herein. The obligations of Pledgor under this
Section shall survive the termination of this Agreement.
8. Miscellaneous. This Agreement shall be binding upon Pledgor and
Pledgor's heirs, administrators, successors and assigns, and shall inure to
the benefit of, and be enforceable by, the Pledgee and its successors,
transferees and assigns. None of the terms or provisions of this Agreement
may be waived, altered, modified or amended except in writing duly signed for
and on behalf of the Pledgee and the Pledgor.
9. Governing Law. All acts and transactions hereunder and the rights
and obligations of the parties hereto shall be governed, construed and
interpreted in accordance with the domestic laws of the State of Pledgee's
principal place of business.
3
<PAGE>
10. Jury Waiver. PLEDGOR AND PLEDGEE HEREBY WAIVE THE RIGHT TO TRIAL BY
JURY OF ANY MATTERS ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
Dated this 18th day of March, 1997.
PLEDGOR:
PEOPLES BANCORP INC.
By: John W. Conlon
-----------------------------------
Its: Chief Financial Officer
----------------------------------
PLEDGEE:
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP.
By: -----------------------------------
Its: ------------------------------------
4
<PAGE>
OHIO AFFILIATES
A FIFTH THIRD BANCORP BANK
Amended and Restated 2
Note: Retain Customer Copy for your records Revolving
Note
OFFICER NO 90-new NOTE NO. 95848900018
-------------------- -----------
$3,000,000.00 March 18, 1997
- - ------------------------------- -------- --
City Cincinnati State OH (Effective Date)
--------- --
On or before the Due Date below, the undersigned a (check one) /X/ corporation
/ / partnership / / individual / / limited liability company, for value
received and if more than one, jointly and severally, promise to pay to the
order of The Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, OH
--------------------------------------------------------------
(Name and Address of Bank)
(hereinafter referred to as "Bank") the sum of three million and 00/100 --------
---------------------------------
Dollars (hereinafter referred to as the "Borrowing") plus interest as
provided herein, less such amounts as shall have been repaid in accordance
with this note. The outstanding balance of this note will appear on a
supplemental bank record and is not necessarily the face amount of this note.
Such record shall be conclusive as to the balance due of this note at any
time.
The principal sum outstanding shall bear interest per annum at the rate of 0%
-
greater than the "Prime Rate" (the rate announced by the Bank from time to
time) on the above Effective Date. In the event of a change in said Prime
Rate, the rate of this note shall be changed immediately to that ratio which
shall be greater than the new Prime Rate by the amount stated in this clause.
Interest shall be computed based on a year of 360 days and charged for the
actual number of days elapsed.
Prior to the due Date, Bank may (but is not obligated to) lend to the
undersigned such amounts as may from time to time be requested by the
undersigned provided that the principal amount borrowed shall not at any time
exceed the Borrowing and further provided that no Event of Default as defined
herein shall exist.
Principal shall be due and payable: / / At Maturity: /X/ In Installments in
the amount of $150,000 shall be due the 1st day of each / / Month /X/ Six
------- ---
Months beginning January 2, 1998 with a final payment on January 2, 2003 of
--------- -- --------- ----
the principal amount then owing plus all interest due therein. Principal and
interest payments shall be made at Bank's address above unless otherwise
designed to Bank in writing. Interest shall be due and payable: / / At
Maturity: /X/ On the 1st day of each / / Month /X/ 6 months beginning
---
July 1, 1997.
- - ------ --
To secure repayment of this note and all modifications, extensions and
renewals thereof, and all other obligations (as herein defined) of the
undersigned to Bank, the Undersigned grants Bank a security interest in all
of the undersigned's now owned or hereafter acquired interests in all
property in which Bank is, at any time, granted a lien for any Obligation,
and all property in possession of Bank including, without limitation, money,
securities, instruments, documents, letters of credit, chattel paper, or
other property delivered to Bank in transit, for safekeeping, or for
collection or exchange for other property, all distributions, dividends,
warrants, securities or other rights in addition to such property, all rights
to payment from and claims against Bank and all proceeds thereof, and all
real and personal property described below ("Collateral"). The undersigned
agrees to immediately deliver such additional dividend warrants, securities
or other property of rights thereto to Bank immediately upon receipt as
additional Collateral and until delivery to hold same same in trust for bank.
The undersigned agrees that the Bank may, at any time, call for additional
Collateral satisfactory to it. All documents executed in connection with this
note and all Collateral, including without limitation the following, further
secure the Obligations:
16,000 shares of Common Stock of The First National Bank of Southeastern Ohio
- - -----------------------------------------------------------------------------
The Obligations secured by the Collateral (herein, the "Obligations") shall
include this note and each and every liability of the undersigned jointly or
severally to Bank and all affiliates of Fifth Third Bancorp however created,
direct or contingent, due or to become due whether now existing or hereafter
arising, participated in whole or in part, created by trust agreement, lease,
overdraft, agreement, or otherwise, in any manner by the undersigned. The
undersigned also grants Bank a security interest in all of the Collateral as
agent for all affiliates of Fifth Third Bancorp for all Obligations of the
undersigned to such affiliates. Said security interest shall not be enforced
to the extent prohibited by the Truth in Landing Act as implemented by
Federal Reserve Regulation Z.
The undersigned certifies that the proceeds of this loan are to be used for
business purposes. If this note is a renewal, in whole or in part, of a
previous Obligation, the acceptance by Bank of this note shall not effectuate
a payment but rather a continuation of the previous Obligation.
Bank may charge, and the undersigned agrees to pay on the above Effective
Date, a note processing fee in an amount determined by Bank.
Events of Default:
This note, and all other Obligations of the undersigned to Bank, shall be and
become immediately due and payable at the option of the Bank, without any
demand or notice whatsoever, upon the occurrence of any of the following
described events, each of which shall constitute an Event of Default:
(1) Any failure to make any payment when due of the principal or interest on
this note, the occurrence of any event of default as therein defined on any
other Obligation of the undersigned, or a default in the Obligations under
any security documents.
(2) The death or dissolution of the undersigned, of any endorser or
guarantor, or if the undersigned is a partnership, the death or dissolution
of a general partner.
(3) Any failure to submit to Bank current financial information upon request.
(4) The creation of any lien (except a lien to Bank) or the issuance of an
attachment against or seizure of any of the property of, or the entry of a
judgment against, the undersigned.
(5) In the Judgment of Bank, any adverse change occurs in the ability of the
undersigned to [copy illegible from this point on]
<PAGE>
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP.
Uncommitted Note
$3,000,000 NOTE No. ----------------
Cincinnati, Ohio March 18, 1997
(Effective Date)
On or before the Due Date below, PEOPLES BANCORP INC., an Ohio corporation
(hereinafter referred to as "Borrower") for value received, and if more than
one, jointly and severally, promise to pay to the order of FOUNTAIN SQUARE
COMMERCIAL FUNDING CORP., a Delaware corporation, whose address is c/o The
Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263
(hereinafter referred to as "Lender") the sum of THREE MILLION DOLLARS
($3,000,000) (hereinafter referred to as the "Borrowing") plus interest as
provided herein, less such amounts as shall have been repaid in accordance
with this note. The outstanding balance of this note will appear on a
supplemental bank record and is not necessarily the face amount of this note.
Such record shall be conclusive as to the balance due of this note at any
time.
The principal sum outstanding shall bear interest per annum at the rate or
rates agreed to by Lender and Borrower from time to time as set forth on the
Addendum to Note attached hereto. Interest shall be computed based on a year
of 360 days and charged for the actual number of days elapsed.
Prior to the Due Date, Lender may (but is not obligated to) lend the borrower
such amounts as may from time to time be requested by the Borrower provided
that the principal amount borrowed shall not at any time exceed the Borrowing
and further provided that no Event of Default as defined herein shall exist.
Principal and interest shall be paid as set forth on the Addendum attached
hereto or as agreed between Lender and Borrower from time to time. Principal
and interest payments shall be made at Lender's address above unless
otherwise designated by Lender in writing.
To secure repayment of this note and all modifications, extensions and
renewals thereof, and all other Obligations (as herein defined) of the
Borrower to Lender, the Borrower grants Lender a security interest in all of
the Borrower's, now owned or hereafter acquired interests in all property in
which Lender is at any time, granted a lien for any Obligation, and all
property in possession of Lender including, without limitation, money,
securities, instruments, documents, letters of credit, chattel paper, or
other property delivered to Lender in transit, for safekeeping, or for
collection or exchange for other property, all distributions, dividends,
warrants, securities and other rights in addition to such property, all
rights to payment from and claims against Lender and all proceeds thereof,
and all real and personal property described below ("Collateral"). The
Borrower agrees to immediately deliver such additional dividends, warrants,
securities or other property or rights thereto to Lender immediately upon
receipt as additional Collateral and until delivery to hold same in trust for
Lender. The Borrower agrees that the Lender may, at any time, call for
additional Collateral satisfactory to it. All documents executed in
connection with this note and all Collateral, including without limitation
the following, further secure the Obligations:
a Pledge Agreement, dated of even date herewith, between Borrower and Lender,
pledging to Lender all outstanding shares of common capital stock of The
First National Bank of Southeastern Ohio.
The Obligations secured by the Collateral (herein, the "Obligations") shall
include this note and each and every liability of the Borrower jointly or
severally to Lender and all affiliates of Fifth Third Bancorp however
created, direct or contingent, due or to become due, whether now existing or
hereafter arising, participated in whole or in part, created by trust
agreement, lease, overdraft, agreement, or otherwise, in any manner acquired
by the Borrower. Said security interest shall not be enforced to the extent
prohibited by the Truth in Lending Act as implemented by Federal Reserve
Regulation Z.
<PAGE>
The Borrower certifies that the proceeds of this loan are to be used
for business purposes. If this note is a renewal, in whole or in part, of a
previous Obligation, the acceptance by Lender of this note shall not
effectuate a payment but rather a continuation of the previous Obligation.
Lender may charge that the Borrower agrees to pay on the above Effective
Date, a note processing fee in an amount determined by Lender.
Events of Default:
This note, and all other Obligations of the Borrower to Lender, shall be
and become immediately due and payable at the option of the Lender, without
any demand or notice whatsoever, upon the occurrence of any of the following
described events, each of which shall constitute an Event of Default:
1) Any failure to make any payment when due of the principal or interest on
this note, the occurrence of any event of default as therein defined on
any other Obligation of the Borrower, or a default in the Obligations
under any security documents or in performing any covenants set forth in
the Addendum attached hereto.
2) The death or dissolution of the Borrower, or any endorser or guarantor,
or if the Borrower is a partnership, the death or dissolution of a
general partner.
3) Any failure to submit to Lender current financial information upon
request.
4) The creation of any lien (except a lien to Lender) or the issuance of an
attachment against or seizure of any of the property of, or the entry
of judgment against, the Borrower.
5) [Illegible] ny adverse change in the ability of the Borrower to
repay the
as itself insecure.
6) [Illegible] f the creditors of, or the commencement of any
bankruptcy, receivership,
liquidation proceedings by or against the Borrower
or any endorser or
7) [Illegible] nt proceedings by attachment, levy or otherwise,
against any Collateral, any
ny property deposited with the Lender by the Borrower
or any endorser or
8) [Illegible] security and the Borrower has not furnished
satisfactory additional security
on demand.
9) The occurrence of an Event of Default under any indebtedness of any kind
of Borrower owed to The Fifth Third Bank or any wholly-owned
subsidiaries of Fifth Third Bancorp.
Upon the occurrence of an Event of Default herein described Lender may,
at its option, cease making advances hereunder, declare this note and all
other Obligations of the Borrower, to be fully due and payable in their
aggregate amount together with accrued interest plus any applicable
prepayment premiums, fees, and charges.
In addition to any other remedy permitted by law, the Lender may at any
time, without notice, apply the Collateral to this note or such other
Obligations, whether due or not, and Lender may, at its option, proceed to
enforce and protect its rights by an action at law or in equity or by any
other appropriate proceedings. Notwithstanding any other legal or equitable
rights of Lender, Lender, in the Event of Default, is (a) hereby irrevocably
appointed and constituted attorney-in-fact, with full power of substitution,
to exercise all rights of ownership with respect to Collateral including, but
not limited to, the right to collect all income of other distributions arising
therefrom and to exercise all voting rights connected with Collateral; and
(b) is hereby given full power to collect, sell assign, transfer and deliver
all of said Collateral or any part thereof, or any substitutes therefore, or
any additions thereto, through any private or public sale without either
demand or notice to the Borrower, or any advertisement, the same being hereby
expressly waived, at which sale Lender is authorized to purchase said
property or any part thereof, free from any right of redemption on the part
of the Borrower, which is hereby expressly waived and released. In case of
sale for any cause, after deducting all costs and expenses of every kind,
Lender may apply, at it shall deem proper, the residue of the proceeds of
such sale toward the payment of any one or more or all of the Obligations of
the Borrower, whether due or not due, to Lender, after such application and
the return of any surplus, the Borrower
-2-
<PAGE>
agrees to be and remains liable to Lender for any and every deficiency after
application as foresaid upon this and any other Obligation. The Borrower
shall pay all costs of collection incurred by Lender, including its attorney's
fees, if this note is referred to an attorney for collection, whether or not
payment is obtained before entry of judgment, which costs and fees are
Obligations secured by the Collateral.
If any payment is not paid when due (whether by acceleration or otherwise) or
within 10 days thereafter, Borrower agrees to pay to Lender a late payment
fee as provided for in any loan agreement or 5% of the payment amount,
whichever is greater with a minimum fee of $20.00. After an Event of Default,
the Borrower agrees to pay to Lender a fixed charge of $25.00, or the
Borrower agrees that Lender may, without notice, increase the above stated
interest rate by 6%, whichever is greater. Under no circumstances shall said
interest rate be raised to a rate which shall be in excess of the maximum
rate of interest allowable under the state and/or federal usury laws in force
at the time of such change.
The Borrower may prepay all or part of this note, which prepaid amounts shall
be applied to the amounts due in reverse order of their due dates. Upon such
prepayments, including involuntary prepayment by acceleration, the Borrower
shall pay a premium of 2% of the maximum principal amount permitted under
this note. Partial prepayments shall not excuse and subsequent payment due.
ENTIRE AGREEMENT: The Borrower agrees that there are no [copy illegible] ch
are not expressed in this note and the documents referred to herein.
WAIVER: No failure on the part of Lender to exercise any of its righ
[copy illegible] iver of any such rights or of any default. Demand,
presentment, protest and noti [copy illegible] d notice of default are
hereby waived. Each of the Borrower, including but not [copy illegible]
mmodation makers of this note, hereby waives all suretyship defenses includin
[copy illegible] ased upon impairment of Collateral and all suretyship
defenses described in Section 3-605 of the Uniform Commercial Code, as
revised in 1990 (the "UCC"). Such waiver is entered to the full extent
permitted by Section 3-605 (i) of the UCC.
JURY WAIVER: THE BORROWER AND ANY CO-MAKERS, ACCOMMODATION MAKERS, ENDORSERS OR
GUARANTORS HEREOF, WAIVE THE RIGHT TO A TRIAL BY JURY OF ANY MATTERS ARISING
OUT OF THIS NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
The declaration of invalidity of any provision of this note shall not affect
any part of the remainder of the provisions.
This note is supplemented by the terms and conditions of an Addendum to Note
dated of even date herewith between the Borrower and Lender.
Warrant of attorney: The Borrower, jointly and severally, authorize any
attorney-at-law to appear in any court of record after maturity of this note,
whether by acceleration or otherwise, to waive the issuance and service of
process and to confess judgment against them in favor of the Lender for the
principal sum due herein together with interest, charges, court costs and
attorney's fees, and to waive and release all errors, rights of appeal,
exemptions and stays of execution. The Borrower also agrees that the attorney
acting for the Borrower as set forth in this paragraph may be compensated by
Lender for such services, and the Borrower waives any conflict of interest
caused by such representation and compensation arrangement. This warrant of
attorney to confess judgment shall be construed under the laws of the State
of Ohio.
-3-
<PAGE>
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER
FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
DATE DUE January 2, 2003 PEOPLES BANCORP INC.
---------------------------
ADDRESS 138 Putnam Street By: /s/ John W. Conlon
--------------------------- --------------------------
Marietta, OH 45750
--------------------------- Its: Chief Financial Officer
--------------------------
Accepted and agreed this 7th day of January, 1997
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP.
By:
-----------------------------------------
Its:
-----------------------------------------
4
<PAGE>
ADDENDUM TO
$3,000,000 UNCOMMITTED NOTE
FROM
PEOPLES BANCORP, INC.
TO
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP.
THIS ADDENDUM is intended to be attached to, and the provisions hereof
are hereby incorporated into that certain Uncommitted Note, dated March 18,
1997, in the principal amount of $3,000,000 (the "Note"), executed by
PEOPLES BANCORP INC., an Ohio corporation (the "Borrower") and made payable
to FOUNTAIN SQUARE COMMERCIAL FUNDING CORP., a Delaware corporation (the
"Lender"). The Borrower and the Lender agree that the terms of the note shall
be amended and supplemented by the following:
1. UNCOMMITTED LOANS
(a) AMOUNT. Subject to the terms and conditions hereof, Lender may make
extensions of credit (the "Loans") to Borrower at Borrower's request from
time to time during the term hereof, whereby the total aggregate amount of
Loans under all types of extensions of credit herein shall not exceed
$3,000,000. Borrower may from time to time request Loans from Lender up to a
total aggregate principal amount of $3,00,000 at any one time outstanding
(the "Uncommitted Facility") and which shall be evidenced by this Note.
(b) UNCOMMITTED FACILITY. THIS IS AN UNCOMMITTED FACILITY AND
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN OR ANY COURSE OF DEALING
BETWEEN LENDER AND BORROWER, THE DECISION AS TO WHETHER OR NOT TO MAKE ANY
LOANS SHALL BE IN LENDER'S SOLE AND ABSOLUTE DISCRITION.
(c) NOTICE. Borrower must give Lender written or telephonic notice of
its intention to borrower under this Note, as hereinafter provided.
(d) BORROWING. Each Loan shall be in the minimum principal sum of
$500,000. Borrower agrees to repay Lender on the date then due each Loan now
or hereinafter made by Lender to Borrower, together with interest thereon at
the agreed rate. Interest on all Loans shall be computed on the basis of a
360-day year for the actual number of days elapsed.
(e) PROCEDURES. Each request by Borrower for a Loan will be made by
telephone prior to 11:00 A.M., Cincinnati, Ohio time on any Business Day on
which a Loan is requested. Lender will, if Loans are then available to
Borrower, quote Borrower the interest rate based on the maturity requested by
Borrower. Borrower shall, at the time of quote, either accept or reject the
quote, and if accepted, Lender will credit Borrower's account for the amount
of the Loan or otherwise disburse the proceeds as agreed upon between
Borrower and Lender. The amount of the interest rat eon and the maturity date
of each Loan shall be evidenced by the ledgers and records (including
computer records) of Lender, which, in the case of a dispute, shall be
conclusive except for manifest error. The Borrower shall provide Lender with
a list of those persons authorized to orally request Loan advances under this
Agreement. Lender may rely on such list until amended in writing by Borrower.
(f) INTEREST RATE. All Loans shall bear interest at a rate agreed
between Lender and Borrower. The interest rate quoted by Lender on all Loans
shall be a fixed rate. Borrower shall have no right to prepay any Loan prior
to the agreed maturity date of such Loan.
(g) REPRICING. Each Loan shall be for a term agreed to between Lender
and Borrower, however, each Loan shall have a minimum term of at least 15
days and shall have a maturity no greater than 270 days. Each Loan, together
with interest thereon, shall be repaid in immediately available funds at the
main office of Lender on the date agreed by Lender and Borrower. All
outstanding principal and all accrued and unpaid interest shall be paid in
full
-5-
<PAGE>
on the maturity date of the Loan. In the event Borrower shall fail to pay
any Loan when due, all Loans outstandting to Borrower shall, at the option of
Lender, become immediately due and payable without presentment, demand,
protest, or notice of any kind.
(h) Prepayment. The Borrower may not prepay all or a portion of the
principal amount of any Loan in advance of the agreed upon dates of repayment.
(i) Term of Uncommitted Facility. The term of the Uncommitted Facility
will expire on July 1, 2002, and the Note will become payable in full on that
date (the "Maturity Date").
(j) Time of Payment. All payments of principal and interest made by
Borrower shall be made no later than 2:00 P.M., Cincinnati, Ohio time, on the
Business Day such payments are due. All amounts paid after such time will be
credited on the following date.
(k) Payments. All payments made hereunder shall be paid by either
Borrower instructing The Fifth Third Bank ("Fifth Third") to debit its
account at Fifth Third in the amount of the payment owed and transfer such
payment to Lender's account at Fifth Third or by wire transfer to Lender
pursuant to the following wire transfer instructions:
Account No. 1274233737
ABA No. 042000314
For credit to Fountain Square Commercial Funding Corp.
Reference: Peoples Bancorp Inc.
2. Costs. Borrower will pay to Lender its fees, costs and expenses
(including, without limitation, reasonable attorneys' fees, other
professionals' fees, appraisal fees, environmental assessment fees (including
Phase I and Phase II assessments), expert fees, court costs, litigation and
other expense (collectively, "Costs") incurred or paid by Lender in
connection with the negotiating, documenting, administering and enforcing the
Uncommitted Facility, the Loans and the defense, preservation and protection
of Lender's rights and remedies thereunder, including without limitation, any
security interest in any collateral or any other property pledged to secure
the Loans, whether incurred in bankruptcy, insolvency, foreclosure or other
litigation or proceedings or otherwise. The Costs will be due and payable upon
demand by Lender. If Borrower fails to pay the Costs when upon such demand,
Lender is entitled to disburse such sums as an advance under the Uncommitted
Facility. Thereafter, the Costs will bear interest from the date incurred or
disbursed at the hightest rate set forth in the Note. This provision will
survive the termination of this Agreement and/or the repayment of any amounts
due or the performance of any Obligation.
3. Fifth Third Line of Credit. (a) As long as this Agreement shall
remain in effect, Borrower shall maintain a separate line of credit (the
"Fifth Third Facility") with The Fifth Third Bank _____________, in an
aggregate amount equal to the amount of the Uncommitted Facility. The
maximum amount of all outstanding amounts under the Fifth Third Facility and
the Uncommitted Facility shall not at any time exceed the maximum amount of
the Uncommitted Facility.
(b) Any Event of Default under the Fifth Third Facility shall be an
Event of Default under this Note.
(c) Borrower hereby irrevocably authorizes Lender, in Lender's sole
discretion, upon the occurrence of an Event of Default under this Note, to
request, on behalf of Borrower, an advance from Fifth Third under the Fifth
Third Facility in an amount sufficient to either cure any existing payment
Event of Default or to pay the outstanding amounts under the Uncommitted
Facility in full.
4. Bankruptcy. Borrower agrees that its will not institute against, or
join any other person in instituting against, Lender any bankruptcy,
reorganization, arrangement, insolvency or liquidation, or other proceeding
-6-
<PAGE>
under any federal or state bankruptcy or similar law, for one year and a day
after the latest maturing commercial paper note issued by Lender is paid in
full.
-7-
<PAGE>
5. Rating Agencies. At Lender's Option, Lender may, upon notice that
either Standard & Poor's Rating Services, a division of the McGraw Hill
Companies, Inc. or Moody's Investor Service, Inc. has (i) lowered or
downgraded its short term commercial paper or corporate bond or other short
term rating for Borrower, or (ii) placed Borrower's securities on a watch
list of securities singled out for surveillance, with either negative or
developing implications in a Ratings Category, amend the provisions hereof to
amend the maximum amount of the Uncommitted Facility as set forth in this
Addendum and amend the Maturity Date of the Uncommitted Facility set forth in
this Addendum.
6. Proceeds of Repayment. Each Loan shall be repaid on the date of
maturity agreed to by Borrower and Lender, in the ordinary course of business
out of the cash flow generated in the normal conduct and operations of
Borrower's business.
7. Conflicts. Any conflict between the provisions of this Addendum and
the terms of the Note, the terms of this Addendum shall control.
8. Counterparts. This Addendum may be executed by the parties in one
or more counterparts which shall be combined to create a single original
version hereof.
9. Warrant of Attorney. Borrower authorizes any attorney of record to
appear for it in any court of record in the State of Ohio, after an
Obligation becomes due and payable whether by its terms or upon default,
waives the issuance and service of process, releases all errors and rights of
appeal, and confesses a judgment against it in favor of the holder of such
Obligation, for the principal amount of such Obligation plus interest
thereon, together with court costs and attorneys' fees. Stay of Execution
and all exemptions are hereby waived. If an Obligation is referred to an
attorney for collection, and the payment is obtained without the entry of a
judgement, the obligors will pay to the holder of such Obligation its
attorneys' fees.
IN WITNESS WHEREOF, this Addendum to the Revolving Note was executed on
this 18th day of March, 1997.
WARNING - BY SIGNING THIS PAPER, YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN
AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE
USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE
CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO
COMPLY WITH THE AGREEMENT OR ANY OTHER CAUSE.
Peoples Bancorp Inc.
------------------------------
By: /s/John W. Conlon
-------------------------------
Its: Chief Financial Officer
--------------------------------
Accepted and agreed this 18th day of March, 1997.
FOUNTAIN SQUARE COMMERCIAL FUNDING CORP.
By: ------------------------------
Its: ------------------------------
<PAGE>
ADDENDUM
TO
REVOLVING NOTE
FROM
PEOPLES BANCORP INC.
TO
THE FIFTH THIRD BANK
THIS ADDENDUM is intended to be attached to, and the provisions hereof
are hereby incorporated into that certain Revolving Note, dated March 18,
1997, in the principal amount of $3,000,000 (the "Note"), executed by PEOPLES
BANCORP INC., an Ohio corporation (the "Borrower") and made payable to THE
FIFTH THIRD BANK, an Ohio corporation (the "Bank").
Section 1. Loans.
1.1 Reducing Revolving Credit Loans. (a) On the date hereof,
subject to the terms and conditions hereof, Bank hereby extends to Borrower a
line of credit facility (the "Facility") under which Bank may make loans (the
"Revolving Loans") to Borrower at Borrower's request from time to time during
the term of this Note in amounts not exceeding $3,000,000. In addition to
payments of interest owed hereunder, the maximum amount of the Facility and
the principal available to Borrower shall be reduced by the amount of
$150,000 on January 2, 1998 and on the first (1st) business day of each July
and January thereafter during the term hereof. Borrower may borrow, prepay
(without penalty of charge), and reborrow under the Facility, provided that
the principal amount of all Revolving Loans outstanding at any one time under
the Facility will not exceed the foregoing limits. If the amount of
Revolving Loans outstanding at any time under the Facility exceeds the limits
set forth above, Borrower will immediately pay the amount of such excess to
Bank in cash. In the event Borrower fails to pay such excess, Bank may, in
its discretion, setoff such amount against Borrower's accounts at Bank. All
outstanding amounts of principal and all accrued and unpaid interest shall be
due and payable in full on January 2, 2003.
(b) Borrower will pay interest to Bank on the outstanding
principal amount of the Term Loan at a rate per anum equal to the interest
rate set herein. Interest will be payable in immediately available funds at
the principal office of Bank on the first (1st) day of each calendar month
during the term hereof. Any principal amount not paid when due (at maturity,
by acceleration or otherwise) will bear interest thereafter until paid at the
Default Rate; this provision does not constitute a waiver of any Events of
Default or an agreement by Bank to permit any late payments whatsoever.
(c) The proceeds of the Revolving Loans will be used for general
working capital and to fund a portion of the purchase price of acquisitions
of the assets or stock of banks and/or savings and loan associations.
1.2 Prepayment. Borrower may prepay any portion of any of the Loan
in whole or in increments of $300,000 at any time without premium or
penalty. Any prepayments in advance of any amortized payments will be
applied to reduce the outstanding principal amount of such Loan in the
inverse chronological order of maturity.
1.4 Fee. On July 1, 1997, Borrower agrees to pay to Bank a one-time,
non-refundable loan fee in an amount equal to an amount equal to the product
of (a) .125% multiplied by (b) the positive difference between the
outstanding principal balance of the Term Loan as of July 1, 1997 minus
$1,430,000.
Section 2. Representations And Warranties.
Borrower hereby warrants and represents to Bank the following:
2.1 Organization and Qualification. Borrower is duly organized,
validly existing corporation in good standing under the laws of the State of
Ohio, its state of incorporation, has the power and authority (corporate and
otherwise) to carry on its business and to enter into and perform this Note
and the other Loan Documents, is qualified and licensed to do business in
each jurisdiction in which such qualification or licensing is required. All
<PAGE>
ADDENDUM
TO
REVOLVING NOTE
FROM
PEOPLES BANCORP INC.
TO
THE FIFTH THIRD BANK
THIS ADDENDUM is intended to be attached to, and the provisions hereof
are hereby incorporated into that certain Revolving Note, dated March 18,
1997, in the principal amount of $3,000,000 (the "Note"), executed by PEOPLES
BANCORP INC., an Ohio corporation (the "Borrower") and made payable to THE
FIFTH THIRD BANK, an Ohio corporation (the "Bank").
Section I. Loans.
1.1. Reducing Revolving Credit Loans. (a) On the date hereof, subject to
the terms and conditions hereof, Bank hereby extends to Borrower a line of
credit facility (the "Facility") under which Bank may make loans (the
"Revolving Loans") to Borrower at Borrower's request from time to time during
the term of this Note in amounts not exceeding $3,000,000. In addition to
payments of interest owed hereunder, the maximum amount of the Facility and
the principal available to Borrower shall be reduced by the amount of
$150,000 on January 2, 1998 and on the first (1st) business day of each July
and January thereafter during the term hereof. Borrower may borrow, prepay
(without penalty or charge), and reborrow under the Facility, provided that
the principal amount of all Revolving Loans outstanding at any one time under
the Facility will not exceed the foregoing limits. If the amount of Revolving
Loans outstanding at any time under the Facility exceeds the limits set forth
above. Borrower will immediately pay the amount of such excess to Bank in
cash. In the event Borrower fails to pay such excess, Bank may, in its
discretion, setoff such amount against Borrower's accounts at Bank. All
outstanding amounts of principal and all accrued and unpaid interest shall be
due and payable in full on January 2, 2003.
(b) Borrower will pay interest to Bank on the outstanding principal
amount of the Term Loan at a rate per annum equal to the interest rate set
herein. Interest will be payable in immediately available funds at the
principal office of Bank on the first (1st) day of each calendar month during
the term hereof. Any principal amount not paid when due (at maturity, by
acceleration or otherwise) will bear interest thereafter until paid at the
Default Rate; this provision does not constitute a waiver of any Events of
Default or an agreement by Bank to permit any late payments whatsoever.
(c) The proceeds of the Revolving Loans will be used for general
working capital and to fund a portion of the purchase price of acquisitions
of the assets or stock of banks and/or savings and loan associations.
1.2 Prepayment. Borrower may prepay any portion of any of the Loan in
whole or in increments of $300,000 at any time without premium or penalty.
Any prepayments in advance of any amortized payments will be applied to
reduce the outstanding principal amount of such Loan in the inverse
chronological order of maturity.
1.4 Fee. On July 1, 1997, Borrower agrees to pay to Bank a one-time,
non-refundable loan fee in an amount equal to the product of (a) .00125%
multiplied by (b) the positive difference between the outstanding principal
balance of the Term Loan as of July 1, 1997 minus $1,430,000.
Section 2. Representations and Warranties.
Borrower hereby warrants and represents to Bank the following:
2.1 Organization and Qualification. Borrower is a duly organized,
validly existing corporation in good standing under the laws of the State of
Ohio, its state of incorporation, has the power and authority (corporate and
otherwise) to carry on its business and to enter into and perform this Note
and the other Loan Documents, is qualified and licensed to do business in
each jurisdiction in which such qualification or licensing is required. All
<PAGE>
information provided to Bank with respect to Borrower and its operations is
true and correct.
2.2 Due Authorization. The execution, delivery and performance by
Borrower of the Pledge Agreement, the Note and the other Loan Documents have
been duly authorized by all necessary corporate action, and will not
contravene any law or any governmental rule or order binding on Borrower, or
the articles of incorporation, code of regulations or bylaws of Borrower, nor
violate any agreement or instrument by which Borrower is bound nor result in
the creation of a Lien on any assets of Borrower except the Lien granted to
Bank herein. Borrower has duly executed and delivered this Note, the Pledge
Agreement and the other Loan Documents and they are valid and binding
obligations of Borrower enforceable according to their respective terms
except as limited by equitable principles and by bankruptcy, insolvency or
similar laws affecting the rights of creditors generally. No notice to or
consent by any governmental body is needed in connection with this
transaction.
2.3 Litigation. There are no suits or proceedings pending or threatened
against or affecting Borrower, and no proceedings before any governmental
body are pending or threatened against Borrower.
2.4 Margin Stock. No part of the Loan will be used to purchase or
carry, or to reduce or retire or refinance any credit incurred to purchase or
carry, any margin stock (within the meaning of Regulations U and X of the
Board of Governors of the Federal Reserve System) or to extend credit to
others for the purpose of purchasing or carrying any margin stock. If
requested by Bank, Borrower will furnish to Bank statements in conformity
with the requirements of Federal Reserve Form U-1.
2.5 Business. Borrower is not a party to or subject to any agreement or
restriction which in the opinion of Borrower's management is so unusual or
burdensome that it might have a material adverse effect on Borrower's
business, properties or prospects.
2.6 Licenses, etc. Borrower has obtained any and all licenses, permits,
franchises, governmental authorizations, patents, trademarks, copyrights or
other rights necessary for the ownership of its properties and the
advantageous conduct of its business. Borrower possesses adequate licenses,
patents, patent applications, copyrights, trademarks, trademark applications,
and trade names to continue to conduct its business as heretofore conducted by
it, without any conflict with the rights of any other person or entity. All
of the foregoing are in full force and effect and none of the foregoing are
in known conflict with the rights of others.
2.7 Laws and Taxes. Borrower is in compliance with all laws,
regulations, rulings, orders, injunctions, decrees, conditions or other
requirements applicable to or imposed upon Borrower by any law or by any
governmental authority, court or agency. Borrower has filed all required tax
returns and reports that are now required to be filed by it in connection
with any federal, state and local tax, duty or charge levied, assessed or
imposed upon Borrower or its assets, including unemployment, social security,
and real estate taxes. Borrower has paid all taxes which are now due and
payable. No taxing authority has asserted or assessed any additional tax
liabilities against Borrower which are outstanding on the date of this Note,
and Borrower has not filed for any extension of time for the payment of any
tax or the filing of any tax return or report.
2.8 Financial Condition. All financial information relating to Borrower
which has been or may hereafter be delivered by Borrower or on its behalf to
Bank is true and correct and has been prepared in accordance with generally
accepted accounting principles consistently applied. Borrower has no material
obligations or liabilities of any kind not disclosed in that financial
information, and there has been no material adverse change in the financial
condition of Borrower nor has Borrower suffered any damage, destruction or
loss which has adversely affected its business or assets since the submission
of the most recent financial information to Bank.
2.9 Defaults. Borrower is in compliance with all material agreements
applicable to it and there does not now exist any default or violation by
Borrower of or under any of the terms, conditions or obligations of (a) its
Articles of Incorporation or Regulations/Bylaws, or (b) any indenture,
mortgage, deed of trust, franchise, permit, contract, agreement or other
instrument to which Borrower is a party or by which it is bound, and the
consummation
-2-
<PAGE>
of the transactions contemplated by this Note will not result in such default
or violation.
Section 3. Negative Covenants.
3.1 Merger, Disposition of Assets. Borrower will not, without the prior
written consent of Bank, which consent shall not be unreasonably withheld,
(a) change its capital structure, (b) merge or consolidate with any
corporation, (c) amend or change its Articles of Incorporation or Code of
Regulations or (d) sell, transfer or otherwise dispose of all or any
substantial part of its assets, whether now owned or hereafter required.
3.2 Minimum Tangible Net Worth. Borrower will not permit its Tangible
Net Worth, on a consolidated basis, to be less than $50,000,000 as of the
date hereof which shall be increased as of the first day of each fiscal
quarter (commencing with the first fiscal quarter commencing subsequent to
the date of this Note) by any amount equal to 40% of Borrower's cumulative
earnings for each prior fiscal quarter of Borrower.
3.3 Loan Loss Reserve to Non-Performing Assets. Borrower will not
permit the ratio of (a) its Minimum Loan Loss Reserve, on a consolidated
basis (as shown on Borrower's quarterly and annual financial statements
delivered to Bank), to (b) its Non-Performing Assets (as shown on Borrower's
quarterly and annual financial statements delivered to Bank) to be less than
1.75 to 1.00 at any time during the term hereof.
3.4 Adequate Capitalization. Borrower will not permit its
Capitalization Ratios as required by 12 U.S.C. Section 1831 (and any
regulations issued thereunder) to be less that the minimums required by such
statute at any time during the term hereof.
Section 4. Definitions.
4.1 "Collateral" shall mean all shares of common capital stock of First
National Bank of Southeastern Ohio.
4.2 "Default Rate" means six percent (6%) in excess of the interest
rate otherwise in effect under amounts outstanding under the Note. In no event
will the interest rate accruing under such Note be increased to be in excess
of the maximum interest rate permitted by applicable state or federal usury
laws then in effect.
4.3 "Lien" means any security interest, mortgage, pledge, assignment,
lien or other encumbrance of any kind, including interests of vendors or
lessors under conditional sale contracts and capitalized leases.
4.4 "Loan Documents" means this Note, the Pledge Agreement, and every
other document or agreement executed by any party evidencing, guarantying or
securing any of the Obligations; and "Loan Document" means any one of the
Loan Documents.
4.5 "Obligation(s)" means all loans, advances, indebtedness,
liabilities and obligations of Borrower owed to each of Bank and the
Affiliates of Fifth Third Bancorp of every kind and description whether now
existing or hereafter arising including without limitation, those owed by
Borrower to others and acquired by Bank or any Affiliate of Fifth Third
Bancorp, by purchase, assignment or otherwise, and whether direct or
indirect, primary or as guarantor or surety, absolute or contingent,
liquidated or unliquidated, matured or unmatured, whether or not secured by
additional collateral, and including without limitation all liabilities,
obligations and indebtedness arising under this Note and other Loan
Documents, all obligations to perform or forbear from performing acts, all
amounts represented by letters of credit now or hereafter issued by Bank for
the benefit of or at the request of Borrower, and all expenses and attorneys'
fees incurred by Bank and any Affiliate of Fifth Third Bancorp under
this Note or any other document or instrument related to any of the foregoing.
4.6 "Pledge Agreement" means the Pledge Agreement of even date herewith
between Borrower and Bank, securing the Obligations.
-3-
<PAGE>
4.5 "Prime Rate" means that the rate of interest per annum announced to
be its prime rate from time to time by Bank at its principal office in
Cincinnati, Ohio whether or not Bank will at times lend to borrowers at lower
rates of interest or, if there is no such prime rate, then its base rate or
such other rate as may be substituted by Bank for the prime rate.
4.6 "Tangible Net Worth" means the total of the capital stock (less
treasury stock), paid-in surplus, general contingency reserves and retained
earnings (deficit) of Borrower and any Subsidiary as determined on a
consolidated basis in accordance with generally accepted accounting
principles, after eliminating all inter-company items and all amounts
properly attributable to minority interest, if any, in the stock and surplus
of any Subsidiary, minus the following items (without duplication of
deductions) if any, appearing on the consolidated balance sheet of Borrower:
(i) all deferred charges (less amortization, unamortized debt
discount and expense and corporate organization expenses):
(ii) the book amount of all assets which would be treated as
intangibles under generally accepted accounting principles,
including, without limitation, such items as good-will, trademark
applications, trade names, service marks, brand names, copyrights,
patents, patent applications and licenses, and rights with respect
to the foregoing:
(iii) the amount by which aggregate inventories or aggregate
securities appearing on the asset side of such consolidated balance
sheet exceed the lower of cost or market value (at the date of such
balance sheet) thereof; and
(iv) any subsequent write-up in the book amount of any asset
resulting from a revaluation thereof from the book amount entered
upon acquisition of such asset.
Section 5. Fountain Square Commercial Funding Corp.
5.1 Fountain Square Commercial Funding Corp. Indebtedness. Bank
acknowledges that Borrower has an existing loan facility with Fountain Square
Commercial Funding Corp. ("FSCFC"). Borrower agrees that the aggregate amount
of all indebtedness owed to FSCFC (the "FSCFC Indebtedness") and Bank shall
not exceed an aggregate amount of $3,000,000 at any time during the term
hereof. If the amount of such aggregate indebtedness does exceed such amount,
Borrower will repay the excess amount to Bank immediately in cash.
5.2 Advance to Repay FSCFC Indebtedness. Provided no Insolvency Event
has occurred, upon the occurrence of an Event of Default under the FSCFC
Indebtedness, Borrower hereby irrevocably instructs and authorizes Bank, upon
receipt of a request for an advance from FSCFC, to make an advance hereunder
to FSCFC in an amount sufficient to cure any payment Event of Default or to
repay the outstanding amount of the FSCFC Indebtedness in full. As used
herein, an "Insolvency Event" shall mean the filing by or against Borrower of
a petition in bankruptcy or other similar law, now or hereafter in effect.
5.3 Cross Default With FSCFC Indebtedness. The occurrence of an Event of
Default under the FSCFC Indebtedness shall be an Event of Default hereunder.
4
<PAGE>
IN WITNESS WHEREOF, this Addendum to Term Note was executed on the 8th day of
April, 1994.
WARNING-BY SIGNING THIS PAPER, YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER
FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT OR ANY OTHER CAUSE.
PEOPLES BANCORP, INC.
By: /s/ John W. Conlon
-------------------------
Its: Chief Financial Officer
-------------------------
5
<PAGE>
EXHIBIT 10(m)
PEOPLES BANCORP INC.
DEFERRED COMPENSATION PLAN FOR DIRECTORS
OF
PEOPLES BANCORP INC. AND SUBSIDIARIES
Effective January 1, 1991
1. PURPOSE AND ADMINISTRATION OF THE PLAN
The purpose of the Deferred Compensation Plan (the "Plan") is to provide a
procedure whereby a member of the Board of Directors of either PEOPLES
BANCORP INC. (the "Corporation") or a subsidiary of the Corporation (an
"Affiliate") may defer the payment of all or less than all of the fees
payable to the Director for services -as a Director (including fees payable
to a Director for services as a member of a Committee of the Board). The
term "member of the Board of Directors" for purposes of eligibility as a
Participant in this Plan includes a person who receives fees as a Director
and who serves as a statutory Director, emeritus Director or- honorary
Director of either the Corporation or an Affiliate.
The corporation shall serve as Plan Administrator and shall execute its
administrative responsibility with respect to the Plan through such employee
or employees as are designated by the Committee of at least three of the
Corporation's Board of Directors appointed by said Board to supervise the
administration of the Plan by the Corporation (the "Committee"). The decision
of the Committee with respect to any questions arising as to the
administration or interpretation of this Plan, including the discontinuance
of any or all of the provisions thereof, shall be final, conclusive and
binding. The Committee reserves the right to
<PAGE>
modify this Plan from time to time or to terminate the Plan, provided,
however, that no modification of this Plan shall void any election already in
effect for the current calendar year or any preceding calendar year.
2. ELECTION TO DEFER
A Director may elect, on or before December 31 of any year, to defer payment
of all or less than all of the fees payable to the Director for services as a
Director during the calendar year following such election and succeeding
calendar years until the Director ceases to be a Director. Any person who
shall become a Director during any calendar year, and who was not a Director
on the preceding December 31, may elect, before the Director's term begins,
to defer payment of all or a specified part of such fees for the remainder of
such calendar year and for succeeding calendar years. Any such elections
shall be made by written notice delivered to the Secretary of the Corporation.
3. DIRECTORS' DEFERRED ACCOUNTS
Fees deferred at the election of a Director shall be held in the general
funds of the Corporation and shall be credited to a separate deferred account
for the Director. The funds represented by the Director's deferred account
shall earn interest. Such interest shall be credited to the Director's
<PAGE>
deferred account on the first day of each calendar quarter and calculated on
the basis of the balance in such account on the first day of each month of
the preceding quarter. The interest rate shall be the interest rate paid by
Peoples Banking & Trust Company on a three-year certificate of deposit or an
equivalent deposit account on the last day of the preceding quarter.
4. DISTRIBUTION FROM DIRECTORS' ACCOUNTS
(a) Amounts deferred under the Plan, together with accumulated interest shall
be paid by the Corporation either in a lump sum or in approximately equal
annual installments over not more than five years, as the Director has
elected on forms provided by the Plan Administrator. Such election must be
made prior to the date on which the Director ceases to be a Director. If a
Director fails to make such an election, such amounts shall be paid in
approximately equal annual installments over 5 years. Interest as calculated
in Paragraph 3 above shall be earned on funds held for distribution
installments and will be paid with each installment.
The first installment (or the lump sum payment, if the Director so elects)
shall be paid on the first business day of the calendar year following the
year in which the Director ceases to be a director and subsequent
installments shall be paid on the first business day of each succeeding
calendar year until the entire amount credited to the Director's deferred
account shall have been paid. The term "ceases to be a director" for
purposes of commencing distribution under this Section 6 means when the
Participant ceases to receive
<PAGE>
fees as either a statutory Director, emeritus Director or honorary Director
of either the Corporation or an Affiliate.
(b) If a Director should die before full payment of all amounts in the
account, the Corporation shall, in the discretion of the Committee, either
pay or continue to pay the unpaid amounts to the Director's beneficiaries
either (i) in the same manner as it would have been paid to the Director, or
(ii) in a lump sum settlement of the remaining amount in the Director's
deferred account no sooner than the day after and not later than eighteen
months following the Director's death.
(c) The Committee may, in its discretion, accelerate the payments of those
amounts in the Director's deferred account without the consent of the
Director or the Director's beneficiaries, estate or any other person or
persons claiming through or under him. In making such determinations, due
consideration may be given to the health, financial circumstances and family
obligations of the Director. In this regard, the Director (or after his
death, his beneficiaries) may be consulted; however, he (or they) shall have
no voice in the decision reached.
5. BENEFICIARY DESIGNATION
(a) Each Director who has a deferred account hereunder may from time to time
designate any person or persons (who may be designated contingently or
successively and who may be an entity other than a natural person) as his
beneficiary or beneficiaries to whom his Plan benefits are paid if he dies
before receipt of all such benefits. Each beneficiary designation shall be
filed in the form prescribed by the Plan Administrator and will be effective
only when filed in the form prescribed by the Plan Administrator during the
Participant's lifetime. Each beneficiary
<PAGE>
designation filed with the Plan Administrator will revoke all beneficiary
designations previously filed with the Plan Administrator. The revocation of
a beneficiary designation, no matter how effected, shall not require the
consent of any designated beneficiary.
(b) If any Participant fails to designate a beneficiary in the manner
provided above, or if he is not survived by his beneficiary or beneficiaries,
any death benefit payable hereunder upon the Participant's death shall be
paid in the following order of priority:
(1) his spouse;
(2) his natural and adopted children or their issue, per stirpes;
(3) his parents or the survivor of them;
(4) his brothers and sister or their issue, per stirpes; or
(5) his other heirs-at-law; and if payable to more than one
person in a class, all persons in that class shall share
equally. Similarly, if the beneficiary survives the Director
but dies before receiving the entire death benefit otherwise
payable (and he is not survived by a second beneficiary, or the
second beneficiary also dies), and such beneficiary has not
effectively designated a beneficiary to whom his Plan benefits
<PAGE>
are to be paid if he dies before receipt of all such benefits,
the remainder shall be paid to the heir or heirs of the last
surviving beneficiary in accordance with priorities (1) through
(5) above.
6. TERMINATION OF ELECTION
A Director may terminate his election to defer payment of fees by written
notice delivered to the corporation's Secretary. Such termination shall
become effective as of the end of the calendar year in which notice of
termination is given with respect to fees payable for services as a Director
during subsequent calendar years. Amounts credited to the deferred account
of a Director prior to the effective date of termination shall not be
affected thereby and shall be paid only in accordance with Section 4.
7. NON-ASSIGNABILITY
During the Director's lifetime, the right to any deferred fees and interest
thereon shall not be transferable or assignable.
Adopted this 20th day of December, 1990.
Peoples Bancorp Inc.
By /s/Robert E. Evans
------------------------
Robert E. Evans
President and Chief
Executive Officer
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4, 33- ) and related Prospectus of Peoples
Bancorp Inc. and Subsidiaries for the registration of 504,428 shares of its
common stock and to the incorporation by reference therein of our report
dated January 31, 1997, with respect to the consolidated financial statements
of Peoples Bancorp Inc. and Subsidiaries included in its Annual Report (Form
10-K) for the year ended December 31, 1996, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
------------------------
Charleston, West Virginia
September 30, 1997
<PAGE>
EXHIBIT 23(d)
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration statement of
Peoples Bancorp Inc. on Form S-4 of our report dated January 26, 1995, on our
audit of the consolidated financial statements of Peoples Bancorp Inc. for
the year ended December 31, 1994, incorporated by reference in Peoples
Bancorp Inc.'s Annual Report on Form 10-K for the year ended December 31,
1996. We also consent to the reference to our firm under the caption
"Experts".
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
September 30, 1997
<PAGE>
EXHIBIT 23(e)
[LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our independent auditor's report dated February
7, 1997, except for Note 19 as to which the date is June 17, 1997, with respect
to the consolidated financial statements of Gateway Bancorp, Inc. as of December
31, 1996 and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995, for the six months ended December 31, 1994, and for the year ended June
30, 1994, included in the Registration Statement on Form S-4 of Peoples Bancorp,
Inc. filed with the Securities and Exchange Commission. We also consent to the
reference to our Firm in the Registration Statement under the caption "Experts."
Kelley, Galloway & Company, PSC
/s/Kelley, Galloway & Company, PSC
Ashland, Kentucky
September 26, 1997
<PAGE>
Exhibit 23(f)
[LETTERHEAD]
September 29, 1997
Board of Directors
Gateway Bancorp, Inc.
2717 Louisa Street
Catlettsburg, KY 41129
Board of Directors:
This letter will constitute our consent to the inclusion of our opinion
regarding the fairness from a financial point of view, to the shareholders of
Gateway Bancorp, Inc. ("Gateway") of the consideration to be received
pursuant to the Agreement and Plan of Merger dated as of June 17, 1997, as
amended as of September 2, 1997, by and among Gateway and Peoples Bancorp,
Inc., the summary of such opinion and the use of our name in the Registration
Statement. In giving the foregoing consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended ( the "Securities Act"), or the rules
and regulations of the Securities and Exchange Commission ( the "Commission")
with respect to any part of such Registration Statement within the meaning of
the term "experts" as used in the Securities Act and the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
/s/Eugene S. Weil
Eugene S. Weil
Senior Vice President
<PAGE>
Exhibit 99
REVOCABLE PROXY
GATEWAY BANCORP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GATEWAY
BANCORP, INC. ("COMPANY") FOR USE AT THE SPECIAL MEETING OF STOCKHOLDERS TO BE
HELD ON _____ __, 1997 AND AT ANY ADJOURNMENT THEREOF.
The undersigned, being a stockholder of the Company as of _____ __, 1997,
hereby authorizes the Board of Directors of the Company or any successors
thereto as proxies with full powers of substitution, to represent the
undersigned at the Special Meeting of Stockholders of the Company to be held at
the FIVCO Community Room located at 3000 Louisa Street, Catlettsburg, Kentucky
41129 on _______, ________ __, 1997 at __:00 _.m., Eastern Time, and at any
adjournment of said meeting, and thereat to act with respect to all votes that
the undersigned would be entitled to cast, if then personally present, as
follows:
1. PROPOSAL to adopt an Agreement and Plan of Merger dated as of June 17,
1997, as amended as of September 2, 1997, between Peoples Bancorp, Inc.
("Peoples") and Gateway, and a related Plan of Merger (together, the "Merger
Agreement"), pursuant to which (i) Gateway will be merged into Peoples
Acquisition Corp. ("PAC"), a newly-formed, wholly-owned subsidiary of Peoples
(the "Merger"), with PAC as the surviving corporation of the Merger operating
under the name "Gateway Bancorp, Inc." and (ii) each share of common stock of
Gateway, par value $.01 per share ("Gateway Common Stock"), outstanding
immediately prior to consummation of the Merger (other than shares as to which
dissenters' rights have been asserted and duly perfected in accordance with
applicable law and shares held by Peoples, Gateway or any of their respective
subsidiaries, other than shares held in a fiduciary capacity or in satisfaction
of a debt previously contracted) shall be converted into and represent the right
to receive either: (i) $18.75 in cash; (ii) a number of Peoples common shares,
no par value (the "Peoples Common Shares"), as determined by applying a formula
(the "Exchange Ratio") set forth in the Merger Agreement and based on the
average market price of Peoples Common Shares over the 20 trading day period
ending five days prior to the closing date of the Merger (the "Peoples Market
Value"), subject to the terms, conditions, limitations and procedures set forth
in the Merger Agreement; or (iii) a combination of cash and Peoples Common
Shares (the "Merger Consideration"), as described in the Proxy
Statement/Prospectus and the Merger Agreement. The Merger Agreement provides
that 68% of the aggregate Merger Consideration will consist of Peoples Common
Shares and 32% will consist of cash. Thus, the actual consideration ultimately
received by a stockholder for shares of Gateway Common Stock will depend upon
such stockholder's election, the election of other stockholders, as well as the
allocation and proration procedure as described therein.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
2. PROPOSAL to adjourn the Special Meeting to solicit additional proxies, if
necessary.
/ / FOR / / AGAINST / / ABSTAIN
3. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
(Continued and to be signed on other side)
SHARES OF THE COMPANY'S COMMON STOCK WILL BE VOTED AS SPECIFIED. IF NOT
OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ADOPTION OF THE MERGER
AGREEMENT, FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY, AND
OTHERWISE AT THE DISCRETION OF THE PROXIES. YOU MAY REVOKE THIS PROXY AT ANY
TIME PRIOR TO THE TIME IT IS VOTED AT THE SPECIAL MEETING.
Dated: , 1997
-----------------------------------
-----------------------------------
Signature(s)
Please sign this exactly as your name(s)
appear(s) on this proxy. When signing
in a representative capacity, please
give title. When shares are held
jointly, only one holder need sign.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
