<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) December 27, 1993
Trans Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Kentucky 0-13030 61-1048868
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
500 East Main Street, Bowling Green, Kentucky 42101
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (502) 781-5000
____________________________
________________________________________________________________________________
(Former name or former address, if changed since last report)
<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
On December 27, 1993, Trans Financial Bancorp, Inc. ("Trans
Financial") entered into a definitive Agreement and Plan of Reorganization and
related Plan of Merger (collectively, the "Merger Agreement") with Peoples
Financial Services, Inc., Cookeville, Tennessee, a bank and thrift holding
company organized under the laws of Tennessee ("Peoples Financial"), pursuant
to which Peoples Financial will merge with and into Trans Financial and each
outstanding share of Peoples Financial will be exchanged for 5.5 shares of
Trans Financial common stock, for aggregate consideration of approximately 1.3
million shares of Trans Financial common stock. Peoples Financial owns 100% of
the outstanding capital stock of Peoples Bank & Trust of the Cumberlands,
Cookeville, Tennessee, and Citizens Federal Savings Bank, Rockwood, Tennessee.
At September 30, 1993, Peoples Financial reported total consolidated assets of
approximately $120 million.
Upon consummation of the acquisition, Peoples Bank & Trust of the
Cumberlands and Citizens Federal Savings Bank will be wholly-owned
subsidiaries of Trans Financial. Consummation of the transactions contemplated
by the Merger Agreement is conditioned on, among other things, the approval of
the Merger Agreement by the shareholders of Peoples Financial and the receipt
of all required regulatory approvals.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. Financial Statements
The following consolidated financial statements of Peoples Financial,
notes related thereto and report of independent auditors thereon are filed as a
part of this Report:
[1] Independent Auditors' Report;
[2] Consolidated Balance Sheets as of December
31, 1992 and 1991;
[3] Consolidated Statements of Earnings for the
years ended December 31, 1992, 1991 and 1990;
[4] Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1992, 1991 and 1990;
[5] Consolidated Statements of Cash Flows for the
years ended December 31, 1992, 1991 and 1990;
[6] Notes to Consolidated Financial Statements;
2
<PAGE> 3
[7] Consolidated Balance Sheet as of September
30, 1993 (unaudited) and December 31, 1992 (unaudited);
[8] Consolidated Statements of Operations for
the three months ended September 30, 1993 and 1992 (unaudited) and the
nine months ended September 30, 1993 and 1992 (unaudited);
[9] Consolidated Statements of Stockholders'
Equity for the nine months ended September 30, 1993 and 1992
(unaudited);
[10] Consolidated Statements of Cash Flows for the
nine months ended September 30, 1993 and 1992 (unaudited); and
[11] Notes to Consolidated Financial Statements.
The following consolidated financial statements of Citizens Federal
Savings Bank, notes related thereto and report of independent auditors thereon
are filed as a part of this Report:
[11] Independent Auditors' Report;
[12] Consolidated Balance Sheets as of December
31, 1992 and 1991;
[13] Consolidated Statements of Operations for the
years ended December 31, 1992, 1991 and 1990;
[14] Consolidated Statements of Retained Earnings
for the years ended December 31, 1992, 1991 and 1990;
[15] Consolidated Statements of Cash Flows for the
years ended December 31, 1992, 1991 and 1990; and
[16] Notes to Consolidated Financial Statements.
B. Exhibits
The following exhibits are filed as a part of this report:
2(a) Agreement and Plan of Reorganization between Trans Financial
Bancorp, Inc. and Peoples Financial Services, Inc. dated as of December 27,
1993.
2(b) Plan of Merger between Trans Financial Bancorp, Inc. and
Peoples Financial Services, Inc. dated as of December 27, 1993.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Trans Financial Bancorp, Inc.
By: /s/ Douglas M. Lester
-------------------
Douglas M. Lester
Title: President and Chief Executive
Officer
Date: January 6, 1994
4
<PAGE> 5
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1992 and 1991
(With Independent Auditors' Report Thereon)
F-1
<PAGE> 6
Independent Auditors' Report
The Board of Directors
Peoples Financial Services, Inc.:
We have audited the accompanying consolidated balance sheets of Peoples
Financial Services, Inc. and subsidiary as of December 31, 1992 and 1991, and
the related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1992.
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Financial
Services, Inc. and subsidiary as of December 31, 1992 and 1991, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1992, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick
February 4, 1993
F-2
<PAGE> 7
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1992 and 1991
<TABLE>
<CAPTION>
ASSETS 1992 1991
------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 4,783,758 2,328,953
Federal funds sold 1,350,000 2,225,000
----------- -----------
Total cash and cash equivalents 6,133,758 4,553,953
----------- -----------
Securities (note 2):
Investment (approximate market value of $14,442,000 and
$10,430,000 at December 31, 1992 and 1991, respectively) 14,045,896 9,839,612
Available for sale (approximate market value of $1,533,000
at December 31, 1991) - 1,500,000
----------- -----------
Total securities 14,045,896 11,339,612
Loans receivable, net (note 3) 41,635,724 37,490,203
Accrued interest receivable 584,184 586,123
Premises and equipment, net (note 5) 1,692,198 1,245,079
Due from Resolution Trust Corporation (note 6) - 2,507,853
Other assets (notes 6 and 8) 181,230 86,466
----------- -----------
$ 64,272,990 57,809,289
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits (note 7) 56,441,121 51,190,992
Accrued interest payable 205,962 293,301
Current income taxes payable (note 8) 344,168 92,726
Accrued expenses and other liabilities 46,861 108,521
----------- -----------
Total liabilities 57,038,112 51,685,540
----------- -----------
Stockholders' equity (notes 6, 9, 10, and 11):
Common stock, par value $10.00, authorized 1,000,000
shares; issued 205,552 shares 2,055,520 2,055,520
Capital surplus 3,083,280 3,083,280
Retained earnings 2,096,078 984,949
----------- -----------
Total stockholders' equity 7,234,878 6,123,749
----------- -----------
Commitments and contingencies (notes 4, 6, and 11)
$ 64,272,990 57,809,289
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 8
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
Years ended December 31, 1992, 1991 and 1990
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 4,407,436 3,741,589 2,275,543
Interest on securities 895,486 726,848 490,124
Interest on mortgage-backed securities 196,668 228,818 219,017
Interest on Federal funds sold 99,956 122,437 183,090
Interest on deposits with banks - - 36,739
------------ ------------ ------------
Total interest income 5,599,546 4,819,692 3,204,513
Interest expense on deposits (note 7) 2,145,124 2,546,989 1,785,408
------------ ------------ ------------
Net interest income 3,454,422 2,272,703 1,419,105
Provision for loan losses (note 3) 240,000 311,000 123,296
------------ ------------ ------------
Net interest income after provision for loan losses 3,214,422 1,961,703 1,295,809
------------ ------------ ------------
Other operating income:
Service charges on deposit accounts 324,370 288,670 214,418
Other loan fees 40,442 33,685 19,350
Gain on sale of securities, net 28,868 17,808 3,374
Other operating income 58,347 92,784 64,840
------------ ------------ ------------
Total other operating income 452,027 432,947 301,982
------------ ------------ ------------
Other operating expenses:
Compensation and benefits 844,201 655,182 443,992
Occupancy and equipment 248,532 215,270 177,793
Federal deposit insurance premiums 126,746 83,431 30,325
Data processing service fees 157,978 148,829 99,698
Stationery and supplies 114,293 89,248 69,368
Professional Fees 75,639 75,388 7,813
Postage 66,015 49,499 26,564
Other operating expenses 236,924 200,890 116,381
------------ ------------ ------------
Total other operating expenses 1,870,328 1,517,737 971,934
------------ ------------ ------------
Earnings before income taxes 1,796,121 876,913 625,857
Income tax expense (note 8) 684,992 336,685 238,083
------------ ------------ ------------
Net earnings $ 1,111,129 540,228 387,774
============ ============ ============
Per share data:
Weighted average common shares outstanding 205,552 205,552 205,552
============ ============ ============
Earnings per common share $ 5.41 2.63 1.89
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 9
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1992, 1991 and 1990
<TABLE>
<CAPTION>
TOTAL
COMMON CAPITAL RETAINED STOCKHOLDERS'
STOCK SURPLUS EARNINGS EQUITY
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1989 $ 2,055,520 3,083,280 56,947 5,195,747
Net earnings for 1990 - - 387,774 387,774
--------- --------- ---------- ----------
Balance at December 31, 1990 2,055,520 3,083,280 444,721 5,583,521
Net earnings for 1991 - - 540,228 540,228
--------- --------- ---------- ----------
Balance at December 31, 1991 2,055,520 3,083,280 984,949 6,123,749
Net earnings for 1992 - - 1,111,129 1,111,129
--------- --------- ---------- ----------
Balance at December 31, 1992 $ 2,055,520 3,083,280 2,096,078 7,234,878
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 10
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1992, 1991 and 1990
<TABLE>
<CAPTION>
1992 1991 1990
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,111,129 540,228 387,774
Adjustments to reconcile net earnings to net cash and cash
equivalents provided (used) by operating activities:
Amortization of deferred loan origination fees (18,247) (17,566) (20,095)
Amortization (accretion) of premiums
or discounts on securities 1,260 3,656 (9,115)
Accretion of discount on loans acquired (476,315) (173,743) -
Provision for loan losses 240,000 311,000 123,296
Gain on sale of securities, net (28,868) (17,808) (3,374)
Depreciation and amortization of premises and equipment 118,401 108,795 104,400
Proceeds from sale of securities available for sale 4,536,809 - -
Purchases of securities available for sale (2,509,735) - -
Decrease (increase) in accrued interest receivable 1,939 (89,400) (209,973)
Decrease (increase) in other assets (94,764) 7,426 (35,900)
(Decrease) increase in accrued interest payable (87,339) 4,792 54,780
(Decrease) increase in income taxes payable 251,442 (60,894) 127,759
Decrease in accrued expenses and other liabilities (61,660) (414,771) (17,903)
---------- --------- ---------
Total adjustments 1,872,923 (338,513) 113,875
---------- --------- ---------
Net cash and cash equivalents provided by
operating activities 2,984,052 201,715 501,649
---------- --------- ---------
Cash flows from investing activities:
Net increase in loans (3,890,959) (3,278,538) (8,017,650)
Principal payments on mortgage-backed securities 1,165,949 212,776 203,829
Proceeds from sales of mortgage-backed securities - 1,389,846 1,087,585
Purchases of mortgage-backed securities (2,668,334) (1,285,700) (1,911,120)
Purchases of investment securities (4,703,365) (4,407,891) (6,744,297)
Proceeds from maturities and calls of investment securities 1,500,000 - 1,350,000
Proceeds from sales of investment securities - 1,755,313 2,944,522
Purchases of premises and equipment (565,520) (176,638) (74,273)
Net cash and cash equivalents received from purchase of assets
and liabilities 2,507,853 4,798,807 -
---------- --------- ---------
Net cash and cash equivalents used by investing activities (6,654,376) (992,025) (11,161,404)
---------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 5,250,129 1,789,803 10,199,805
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents 1,579,805 999,493 (459,950)
Cash and cash equivalents at beginning of period 4,553,953 3,554,460 4,014,410
---------- --------- ---------
Cash and cash equivalents at end of period $ 6,133,758 4,553,953 3,554,460
========== ========== ==========
</TABLE>
F-6
<PAGE> 11
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1992 1991 1990
------ ------ -------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 767,658 1,572,965 1,225,079
Income taxes 451,519 284,042 105,091
========== ========== ===========
Supplemental disclosures of noncash investing
and financing activities:
Foreclosures of loans during
the period $ - 70,396 -
Interest credited to deposits 1,670,766 1,262,533 794,058
Investment securities transferred to securities available for sale 506,532 1,500,000 -
========== ========== ===========
</TABLE>
On May 31, 1991, the Company purchased certain assets of Tennessee Federal
Savings Bank in conjunction with the purchase, liabilities were assumed as
follows (see note 6):
<TABLE>
<S> <C>
Fair value of assets acquired $ 15,885,594
Due from Resolution Trust Corporation 2,902,406
----------
Liabilities assumed $ 18,788,000
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 12
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1992 and 1991
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Peoples Financial Services, Inc. (the "Company") was organized in
March, 1990, for the purpose of becoming a holding company for
Peoples Bank and Trust of the Cumberlands (the "Bank"). The
Bank is a state chartered bank organized in June 1988. The
accounting and reporting policies of Peoples Financial
Services, Inc. and subsidiary conform to generally accepted
accounting principles. The following is a description of the
more significant of those policies which the Company follows in
preparing and presenting its consolidated financial statements.
(a) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include
the accounts of Peoples Financial Services, Inc. and
Peoples Bank and Trust of the Cumberlands, its
wholly-owned subsidiary. All significant intercompany
transactions and balances are eliminated in
consolidation.
(b) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash, interest-bearing deposits in
other banks, and federal funds sold. Generally federal
funds are sold for one-day periods.
Cash and due from banks include legal reserve requirements
which must be maintained on an average basis in the form
of cash and balances due from the Federal Reserve Bank
and other banks in the amount of $204,000 and $67,000 at
December 31, 1992 and 1991, respectively.
(c) SECURITIES
Securities are classified as investment securities or
securities available for sale and primarily consist of
U.S. Treasury securities, obligations of U.S. Government
agencies and mortgage-backed securities. Mortgage-
backed securities are comprised substantially of
participating interests in pools of long-term first
mortgage loans originated and serviced by the issuers of
the securities.
Management determines the appropriate classification of
securities at the time of purchase. If management has
the intent and the Company has the ability at the time
of purchase to hold securities until maturity, they are
classified as investments and carried at amortized
historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity
are classified as available for sale and carried at the
lower of cost or market value. Securities held for
indefinite periods of time include securities that
management intends to use as part of its asset/liability
management strategy and that may be sold in response to
changes in interest rates, resultant prepayment risk and
other factors related to interest rate and resultant
prepayment risk changes.
Premiums and discounts are amortized using the
straight-line method, which approximates the interest
method, over the remaining period to contractual
maturity, adjusted for prepayments. Gains and losses on
the sale of securities available for sale are determined
using the specific identification method and are
included in other operating income, including
adjustments to lower of aggregate cost or market.
(Continued)
F-8
<PAGE> 13
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(d) LOANS RECEIVABLE
Loans receivable are recorded at the unpaid principal
balance owed by borrowers less deferrals, unearned
interest, the allowance for loan losses and purchase
discounts. Discounts on loans purchased are accreted to
interest income using the interest method over the
remaining period to contractual maturity, adjusted for
prepayments. Unearned income on consumer loans is
recognized over the lives of the loans using the
interest method.
The allowance for loan losses is based upon analyses of the
loans receivable portfolio and is maintained at a level
considered adequate by management to provide for
probable loan losses. The analyses include management's
consideration of such factors as economic conditions,
loan portfolio characteristics, prior loan loss
experiences, and results of reviews of the portfolio.
The allowance is increased by provisions charged against
income and reduced by net charge-offs. While management
believes it has established the allowance for possible
loan losses in accordance with generally accepted
accounting principles and has taken into account the
views of its regulators and the current economic
environment, there can be no assurance that in the
future the Bank's regulators or its economic environment
will not require further increases in the allowance.
Loans which management has doubts as to the borrower's
ability to repay principal or interest are placed on
nonaccrual status. Interest payments received on
nonaccrual loans are recognized as income on a cash
basis.
(e) LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized in
income using the interest method, over the contractual
lives of the loans, adjusted for estimated prepayments
based on the Bank's historical prepayment experience.
Commitment fees and costs relating to commitments whose
likelihood of exercise is remote are recognized over the
commitment period on a straight-line basis. If the
commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment
fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield. Deferred fees
relating to loans on nonaccrual status are not
amortized.
(f) INCOME TAXES
Deferred income taxes are recognized for income and expense
items that are reported in different years for financial
reporting purposes and income tax purposes using the tax
rate applicable to the year of the calculation.
In February 1992, the Financial Accounting Standards Board
(FASB) issued SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires a change from the deferred method
to the asset and liability method of accounting for
income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years
to differences between the financial statement carrying
amounts and the tax basis of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred
taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. If
necessary, deferred tax assets are reduced by a
valuation allowance to an amount that is more likely
than not to be realized.
(Continued)
F-9
<PAGE> 14
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company will adopt SFAS No. 109 in the first quarter of
1993. Upon adoption, the principles of this statement
may be applied retroactively through restatement of
previously issued statements, or on prospective basis
through a cumulative effect of change in accounting
principle. It is estimated that adoption of SFAS No.
109 will result in an incremental increase in the net
deferred tax asset of approximately $80,000, subject to
any valuation allowance, the precise amount of which has
not been determined. It is expected that this amount
will be reported separately as the cumulative effect of
a change in accounting principle in the consolidated
statement of earnings and will result in an increase in
net earnings for the year ending December 31, 1993.
(G) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less
accumulated depreciation and amortization. These assets
are depreciated using accelerated methods under the
guidelines of the Internal Revenue Service. The
difference between depreciation calculated using the
accelerated method and that under generally accepted
accounting principles is insignificant.
(2) SECURITIES
THE AMORTIZED COST AND ESTIMATED MARKET VALUES OF INVESTMENT SECURITIES ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
DECEMBER 31, 1992
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 152,935 - (1,935) 151,000
U.S. Government agency securities 10,385,725 412,900 (70,625) 10,728,000
Mortgage-backed securities 3,417,236 48,225 (3,461) 3,462,000
Other securities 90,000 11,000 - 101,000
---------- -------- --------- ----------
Total investment securities $ 14,045,896 472,125 (76,021) 14,442,000
========== ======== ======== ==========
DECEMBER 31, 1991
----------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
U.S. Government agency securities $ 7,858,762 484,238 - 8,343,000
Mortgage-backed securities 1,890,850 100,150 - 1,991,000
Other securities 90,000 6,000 - 96,000
---------- -------- --------- ----------
Total investment securities $ 9,839,612 590,388 - 10,430,000
========== ======== ========= ==========
</TABLE>
(Continued)
F-10
<PAGE> 15
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The carrying values and estimated market values of securities available for
sale are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1991
--------------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Government agency securities
available for sale $ 1,500,000 33,000 - 1,533,000
========= ====== ======== =========
</TABLE>
The amortized cost and estimated market value of investment debt securities at
December 31, 1992, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--- ----
<S> <C> <C>
U.S. Treasury, government agency and other securities:
Maturing within one to five years 2,804,430 2,896,000
Maturing within five to ten years 7,824,230 8,084,000
---------- ----------
10,628,660 10,980,000
---------- ----------
Mortgage-backed securities 3,417,236 3,462,000
---------- ----------
Totals $ 14,045,896 14,442,000
========== ==========
</TABLE>
Proceeds from sales of debt securities during 1992 were $4,536,809.
Gross gains of $28,868 were realized on those sales. Proceeds from sales of
debt securities during 1991 were $3,145,159. Gross losses of $985 and gross
gains of $18,793 were realized on those sales. Proceeds from sales of debt
securities during 1990 were $4,032,107. Gross losses of $14,876 and gross gains
of $18,250 were realized on those sales.
Certain securities with an amortized cost of approximately $3,000,000
at December 31, 1992 and $2,750,000 at December 31, 1991, were pledged to
secure certain savings deposits.
(Continued)
F-11
<PAGE> 16
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(3) LOANS RECEIVABLE
Loans receivable at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Commercial $ 21,403,108 16,026,858
Real estate mortgage 8,287,117 11,118,296
Consumer 14,257,831 13,060,674
------------ ------------
43,948,056 40,205,828
Less:
Allowance for loan losses (573,128) (453,121)
Discount on loans purchased (1,425,908) (1,880,735)
Unearned discounts (297,594) (347,820)
Net deferred loan origination fees (15,702) (33,949)
----------- -----------
$ 41,635,724 37,490,203
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1992 1991 1990
------ ------- -------
<S> <C> <C> <C>
Balance at beginning of period $ 453,121 245,000 157,500
Provision charged to income 240,000 311,000 123,296
Loan losses, net:
Loans charged off (129,575) (106,790) (37,484)
Recoveries 9,582 3,911 1,688
--------- -------- -------
Net loan losses (119,993) (102,879) (35,796)
--------- -------- -------
Balance at end of period $ 573,128 453,121 245,000
========= ======== =======
</TABLE>
At December 31, 1992 and 1991, loans on which the accrual of interest had been
discontinued totaled $98,000 and $71,074, respectively. During the
years ended December 31, 1992 and 1991, gross interest income that would have
been recorded on loans accounted for on a nonaccrual basis if the loans had
been current throughout the periods, and the amount of interest income that
was recorded for such loans during these periods was not material. There
were no commitments to lend additional funds to borrowers on nonaccrual
status.
In the ordinary course of business, the Bank makes loans
to directors and executive officers and their related interests. Such
loans were made on substantially the same terms, including interest and
collateral, as those prevailing at the time for comparable transactions with
other borrowers and did not involve more than the normal risk of
collectibility or present other unfavorable features. Loans to directors and
executive officers and their related interests are as follows:
<TABLE>
<S> <C>
Balance at December 31, 1990 $ 2,451,604
Advances 1,861,509
Repayments (2,094,133)
Decrease due to resignation of director (452,959)
---------
Balance at December 31, 1991 1,766,021
Advances 2,426,617
Repayments (2,319,318)
---------
Balance at December 31, 1992 $ 1,873,320
=========
</TABLE>
(Continued)
F-12
<PAGE> 17
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
AND SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include
commitments to extend credit and standby letters of
credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated
balance sheets. The contractual notional amounts of
those instruments reflect the extent of involvement
the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and
standby letters of credit is represented by the
contractual notional amount of those instruments.
The Company uses the same credit policies in making
these commitments and conditional obligations as it
does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any
condition established in the contract. Commitments
generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since some commitments are expected to expire without
being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The
Company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Company upon
extension of credit is based on management's credit
evaluation of the borrower. Collateral held varies
but may include property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of
a customer to a third party. The credit risk
involved in issuing letters of credit is essentially
the same as that involved in extending loan
facilities to customers.
Outstanding standby letters of credit as of December 31,
1992 and 1991, amounted to $142,000 and $190,000,
respectively. Outstanding commitments to lend at
fixed and variable rates were $530,000 and $623,000
at December 31, 1992. Outstanding commitments to
lend at variable rates were $1,600,000 at December
31, 1991. The fixed-rate commitments at December 31,
1992 ranged from 6.5% To 9.0%. Undisbursed advances
on customer lines of credit were $4,275,000 at
December 31, 1992 and $3,700,000 at December 31,
1991. The outstanding standby letters of credit,
commitments and undisbursed customer lines of credit
generally have terms of one year or less. The Bank
does not anticipate any losses as a result of these
transactions.
Most of the Company's business activity is with customers
located within the state of Tennessee. A majority of
the loans are secured by residential or commercial
real estate or other personal property. The loans
are expected to be repaid from cash flow or proceeds
from the sale of selected assets of the borrowers.
The Company grants residential, consumer, and
commercial loans to customers primarily throughout
east Tennessee.
(CONTINUED)
F-13
<PAGE> 18
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) PREMISES AND EQUIPMENT
Premises and equipment, less accumulated depreciation at December
31, are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Land $ 592,233 452,233
Buildings 859,734 605,109
Land improvements 58,836 56,186
Furniture, fixtures, and equipment 597,091 435,116
Automobile 5,000 -
--------- ---------
2,112,894 1,548,644
Less accumulated depreciation 420,696 303,565
--------- ---------
$1,692,198 1,245,079
========= =========
</TABLE>
(6) ACQUISITIONS
On February 1, 1993, the Company sold 31,225 shares of
newly-issued common stock in connection with the
acquisition of Citizens Federal Savings Bank, Rockwood,
Tennessee, (CFSB) pursuant to a definitive agreement
entered into by the Company and CFSB in May, 1992. In
connection with the acquisition, the Company and CFSB
adopted a Plan of Conversion/Acquisition (Plan) whereby
CFSB was converted from a federally-chartered mutual
institution to a federally-chartered stock institution.
Pursuant to the Plan, shares of capital stock of the
Company were offered initially for subscription to
eligible members of CFSB and to certain other persons as
of specified dates and subject to various subscription
priorities as provided in the Plan. The capital stock was
offered at a price determined by the Company's Board of
Directors based upon an appraisal made by an independent
appraisal firm. The offering raised gross proceeds of
approximately $1,405,000, all of which was used in the
acquisition of CFSB. This business combination will be
accounted for as a pooling-of-interests and, accordingly, the
Company's historical financial statements presented in future
reports will be restated to include the accounts and results
of operations of CFSB.
In connection with the offering the Company filed a registration
statement with the Securities and Exchange Commission. As
of December 31, 1992, the Company had incurred costs of
$96,856 associated with the offering, which are included
in other assets. All costs incurred associated with the
sale of stock and acquisition were deferred and deducted
from the proceeds of the sale of stock.
The following unaudited pro forma data summarizes the combined
results of operations of the Company and CFSB as if the
combination had been consummated on December 31, 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Net interest income $ 4,793,760 3,437,359 2,424,185
Net interest income after provision
for loan losses 4,455,324 2,967,850 2,149,560
Net earnings 1,228,461 577,349 409,925
Earnings per share $ 4.69 2.28 1.64
========= ======== ========
</TABLE>
Earnings per share is based upon the number of shares of the Company's stock
outstanding for each period and the earnings of the Company. Earnings per
share will include the earnings from CFSB beginning from February 1, 1993, the
date of conversion of CFSB to a stock institution.
(Continued)
F-14
<PAGE> 19
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
On May 31, 1991, the Company's Bank subsidiary acquired and assumed
from the Resolution Trust Corporation (RTC) certain assets and
liabilities of the former Tennessee Federal Savings Bank, Bartlett,
Tennessee (TFSB). The Bank paid to the RTC $414,000 for the right to
acquire and assume certain assets and liabilities of TFSB. The
aggregate amount of liabilities assumed approximated $18,788,000 and
the assets acquired approximated $15,886,000, including $11,450,000
of net loans. Also acquired was $2,829,000 in cash equivalents and
$1,575,000 in federal funds sold. As part of the purchase and
assumption agreement with the RTC, the Bank's excess in the fair
value of liabilities assumed from the RTC over the fair value of
assets acquired is funded by the RTC. The Bank has recorded a
receivable of $2,507,853 at December 31, 1991 due from the RTC to
recognize the net liabilities assumed and other miscellaneous items
due from the RTC. Since the RTC paid cash to the Bank for the
difference between the fair value of liabilities and assets, no
goodwill was recorded in connection with this acquisition. Discount
recorded on loans amounted to $2,053,000. The discount is being
accreted to yield a constant rate over the expected life of the loans
acquired. The amount due from the RTC was received in 1992 and
included $400,000 paid by the RTC to the Bank as consideration for a
settlement and release agreement between the RTC and the Bank with
respect to the purchase and assumption agreement.
The transaction was accounted for as a purchase whereby assets
acquired and liabilities assumed were recorded at their
estimated fair market value as of the acquisition date. Results
of operations of the acquired assets and liabilities have been
included in the Company's consolidated statements of earnings since
acquisition.
(7) DEPOSITS
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Noninterest bearing demand $ 8,245,238 4,236,509
NOW accounts 6,515,722 5,030,690
Money Market accounts 3,417,311 3,292,310
Regular savings 7,530,218 5,178,973
Certificates of deposit of $100,000 or more 5,651,855 5,732,998
Other certificates of deposit 25,080,777 27,719,512
---------- ----------
$56,441,121 51,190,992
=========== ==========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
NOW $ 171,156 144,906 89,652
Money market 165,076 94,878 42,273
Regular savings 354,481 285,040 195,817
Certificates of deposit of
$100,000 or more 215,000 421,384 553,092
Other certificates of deposit 1,239,411 1,600,781 904,574
--------- --------- ---------
$2,145,124 2,546,989 1,785,408
========= ========= =========
</TABLE>
F-15
<PAGE> 20
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $ 590,750 289,151 219,592
Deferred (17,201) (10,887) (19,972)
-------- -------- -------
573,549 278,264 199,620
State current 111,443 58,421 38,463
-------- -------- -------
Total $ 684,992 336,685 238,083
======== ======== =======
</TABLE>
Deferred income taxes included in other assets result from
timing differences in the recognition of income and expense for
tax and financial statement purposes. Included in other assets
are deferred income tax benefits of $48,060, $30,859 and $19,972
at December 31, 1992, 1991 and 1990, respectively. The
sources of these timing differences and their tax effects are
as follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Loan loss provision in excess of amount allowed
for tax purposes $ (22,109) (13,151) (36,986)
Other, net 4,908 2,264 17,014
-------- -------- -------
Deferred income tax benefit $ (17,201) (10,887) (19,972)
======== ======= ========
</TABLE>
The actual income tax expense amounts differ from the "expected"
tax expense as follows:
<TABLE>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax expense $ 610,681 298,150 212,791
Increases (reductions) in taxes resulting from:
State income tax, net of Federal income tax effect 73,552 38,558 25,386
Other, net 759 (23) (94)
-------- ------- -------
Total income tax expense $ 684,992 336,685 238,083
======== ======== =======
</TABLE>
(9) RESTRICTIONS ON DIVIDENDS
Dividends paid by the Bank are the primary source of funds
available for payment of normal operating expenses of
the Company. Applicable Tennessee statutes and regulations
impose restrictions on the amounts that may be declared by a
subsidiary bank. Under the most restrictive of the statutes
and regulations, the subsidiary bank could declare dividends up
to approximately $3,700,000 and $2,900,000 at December 31, 1992
and 1991, respectively.
(Continued)
F-16
<PAGE> 21
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(10) CAPITAL REQUIREMENTS
Regulatory capital guidelines of the Federal Reserve Board for
bank holding companies which were in effect at December
31, 1992, required a minimum of 5.5 percent for a primary
capital ratio (essentially equity plus the allowance for
loan losses), 6.0 percent for a total capital ratio
(primary capital plus qualifying debt), and 8.0 percent
risk-based capital. The risk-based guideline is based on
the assignment of risk weights to assets and off-balance
sheet items depending on the level of credit risk
associated with them. The Company's capital ratios were
in excess of the minimum regulatory requirements at
December 31, 1992.
(11) STOCK OPTIONS
A senior officer of the Company, as part of his employment
contract, has the option to purchase 2,000 shares of
common stock at the original issue price of $25 per share.
This option may be exercised after the officer completes
ten years of continuous service with the Company. The
option may not be exercised before 1998.
(12) PARENT COMPANY ONLY FINANCIAL INFORMATION
Condensed financial information of Peoples Financial Services,
Inc. (Parent Company organized in March, 1990) is as
follows:
<TABLE>
<CAPTION>
BALANCE SHEETS
ASSETS 1992 1991
--------- -------- ---------
<S> <C> <C>
Cash $ 2,266 11,488
Investment in bank subsidiary 7,222,766 6,097,828
Other assets 9,846 14,433
--------- ---------
Total assets $ 7,234,878 6,123,749
========= =========
STOCKHOLDERS' EQUITY
--------------------
Common stock $ 2,055,520 2,055,520
Capital surplus 3,083,280 3,083,280
Retained earnings 2,096,078 984,949
--------- ---------
Total stockholders' equity $ 7,234,878 6,123,749
========= =========
</TABLE>
F-17
<PAGE> 22
PEOPLES FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS 1992 1991 1990
---------------------- ---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from subsidiary $ - 10,000 25,000
--------- -------- --------
Expenses:
Miscellaneous operating expenses 13,809 5,984 3,096
--------- -------- --------
Income (loss) before equity in undistributed
earnings of subsidiary (13,809) 4,016 21,904
Equity in undistributed earnings of subsidiary 1,124,938 536,212 365,870
--------- --------- ---------
Net earnings $ 1,111,129 540,228 387,774
========= ========= =========
STATEMENTS OF CASH FLOWS 1992 1991 1990
------------------------ ---- ---- ----
Cash flows from operating activities:
Net earnings $ 1,111,129 540,228 387,774
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Undistributed earnings of subsidiary (1,124,938) (536,212) (365,870)
Decrease in other assets - 1,238 (22,932)
Amortization of deferred organization
cost 4,587 4,587 2,675
--------- -------- --------
Net cash (used) provided by
operating activities (9,222) 9,841 1,647
--------- -------- --------
Net (decrease) increase in cash
and cash equivalents (9,222) 9,841 1,647
Cash and cash equivalents at
beginning of period 11,488 1,647 -
--------- --------- ---------
Cash and cash equivalents at end of period $ 2,266 11,488 1,647
========= ========= =========
</TABLE>
F-18
<PAGE> 23
PEOPLES FINANCIAL SERVICES, INC.
Consolidated Balance Sheets at September 30, 1993 and December 31, 1992
(unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1993 1992
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 4,530,703 $ 5,364,730
Interest-earning deposits 988,908 2,863,642
Federal funds sold 5,011,028 1,480,282
------------ ------------
Total cash and cash equivalents 10,530,639 9,708,654
Securities:
Investments (approximate market value
of $33,522,423 at Sept. 30, 1993;
$32,314,000 at Dec. 31, 1992 32,805,163 31,420,127
Investments available for sale
(market value of $3,911,943
at September 30, 1993) 3,778,440 -
------------ ------------
Total securities 36,583,603 31,420,127
Loans receivable, net 66,085,352 65,321,045
Loans held for sale, at book value
which approximates market value 1,868,297 758,935
Accrued interest receivable 1,027,326 923,341
FHLB - Cincinnati stock 244,000 268,600
Real estate owned, net 875,082 892,535
Premises and equipment, net 2,331,263 2,355,461
Other assets 372,698 561,160
------------ ------------
TOTAL ASSETS $119,918,260 $112,209,858
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $107,521,482 $102,124,650
Advance payments by borrowers for
property taxes and insurance 402,132 107,447
Accrued interest payable 331,920 239,579
Accrued income taxes payable 148,540 344,168
Accrued expenses and other liabilities 278,300 247,995
------------ ------------
TOTAL LIABILITIES 108,682,374 103,063,839
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, par value $10, authorized 1,000,000
shares; issued 236,777 at September 30, 1993
and 205,552 shares at December 31, 1992 2,367,770 2,055,520
Capital Surplus 3,665,315 3,083,280
Retained earnings 5,202,801 4,007,219
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,235,886 9,146,019
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $119,918,260 $112,209,858
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 24
PEOPLES FINANCIAL SERVICES, INC.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1993 1992 1993 1992
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $1,689,363 $1,627,791 $5,010,825 $5,076,213
Interest on mortgage-backed
securities 162,983 178,216 539,929 429,462
Interest on deposits
with banks 7,214 11,636 24,937 30,106
Interest on securities
and federal funds sold 443,590 405,658 1,243,119 1,164,438
--------- ---------- ---------- ----------
Total interest income 2,303,150 2,223,301 6,818,810 6,700,219
Interest expense 969,195 1,092,944 2,954,935 3,405,135
--------- ---------- ---------- ----------
Net interest income 1,333,955 1,130,357 3,863,875 3,295,084
Provision for loan losses 6,666 123,420 157,166 284,233
--------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,327,289 1,006,937 3,706,709 3,010,851
--------- --------- ---------- ----------
Non-interest income:
Service charges on deposits 135,189 113,653 388,666 311,123
Gain on sale
of loans receivable 89,603 79,423 153,638 61,093
Gain (loss) on call and sale
of investment securities 25,875 (96,286) 53,451 (48,561)
Other loan fees 48,714 42,104 132,270 131,983
Other operating income 29,404 25,547 130,854 70,640
--------- ---------- ---------- ----------
Total non-interest income 328,785 164,441 858,879 526,278
--------- --------- ---------- ----------
Non-interest expenses:
Compensation and benefits 395,334 305,319 1,130,859 877,100
Occupancy and equipment 130,019 123,309 363,507 291,327
Federal deposit
insurance premiums 76,184 61,223 213,648 182,771
Data processing
servicing fees 79,678 70,213 217,787 212,170
Professional fees 22,142 9,316 111,886 82,729
Stationery and supplies 45,028 37,636 138,120 98,385
Provision for loss on
investments held for sale - - - 166,270
Other 180,580 (39,768) 441,673 135,872
--------- ---------- ---------- ----------
Total non-interest expenses 928,965 567,248 2,617,480 2,046,624
--------- ---------- ---------- ----------
Earnings before income taxes 727,108 604,130 1,948,108 1,490,505
--------- --------- ---------- ---------
Income tax expense 299,025 203,937 779,850 562,540
--------- ---------- ---------- ----------
Earnings before cumulative
effect of change in
accounting principle 428,083 400,193 1,168,258 927,965
Cumulative effect of change
in accounting principle - - 27,324 -
--------- ---------- ---------- ----------
Net earnings $ 428,083 $ 400,193 $1,195,582 $ 927,965
========== ========== ========== ==========
Per share data:
Weighted average shares
outstanding 233,308 205,552 233,308 205,552
Net earnings per share (1) $1.83 $1.95 $5.01 $4.51
- ------------------
</TABLE>
(1) Earnings per share includes the earnings of Citizens Federal beginning
February 1, 1993, the date of the conversion of Citizens
Federal to a stock institution.
See accompanying notes to consolidated financial statements.
F-20
<PAGE> 25
Peoples Financial Services, Inc.
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1993 and 1992
(unaudited)
<TABLE>
<CAPTION>
- Common Stock- Capital Retained
Shares Amount Surplus Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at
December 31,1992 205,552 $2,055,520 $3,083,280 $4,007,219 $9,146,019
Net income for the
nine months ended
September 30, 1993 - - - 1,195,582 1,195,582
Shares issued in
connection with
acquisition 31,225 312,250 582,035 - 894,285
------ -------- ------- ---------- -------
Balance at
September 30, 1993 236,777 $2,367,770 $3,665,315 $5,202,801 $11,235,886
======= ========== ========== ========== ==========
Balance at
December 31,1991 205,552 $2,055,520 $3,083,280 $2,779,832 $7,918,632
Net income for the
nine months ended
September 30,1992 - - - 927,965 927,965
--------- --------- --------- ---------- ---------
Balance at
September 30, 1992 205,552 $2,055,520 $3,083,280 $3,707,797 $8,846,597
======= ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE> 26
PEOPLES FINANCIAL SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
Increase (decrease) in cash and due from banks 1993 1992
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $1,195,582 927,965
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization - premises and equipment 228,409 129,228
Amortization of deferred loan origination points (8,694) 33,187
Amortization (accretion) of premiums or discounts on securities (147,311) (34,623)
Accretion of discount on loans acquired (527,901) (464,221)
Provision for loan losses 157,166 284,233
Mortagage loans originated for resale (8,270,676) (8,379,440)
Proceeds from sale of loans 7,314,952 8,379,440
(Gain) loss on sale of securities 53,451 (48,561)
Gain on sale of loans (153,638) (61,093)
Proceeds from sale of real estate owned 17,453 -
Purchases of securities available for sale (5,535,489) (3,925,344)
Principal payments and disposals of securities available for sale 1,703,598 4,548,070
Provision for loss on securities available for sale - 166,270
Repayment of amount due from Resolution Trust Corporation - 2,507,853
Decrease in other assets 84,477 283,360
Increase in other liabilities 221,703 97,564
---------- ----------
Net cash provided (used) by operating activities (3,666,918) 4,443,888
---------- ----------
Cash flows from investing activities:
Increase in federal funds sold (3,530,746) (4,104,758)
(Increase) decrease in interest-bearing deposits in financial institutions 1,874,734 (969,867)
Proceeds from maturities and redemptions of investment securites 10,737,080 3,786,058
Proceeds form sale of investment securities 1,799,675 9,070,572
Purchases of investment securities (13,774,480) (16,047,214)
Redemptions of Federal Home Loan Bank stock 24,600 8,400
Net increase in portfolio loans (384,878) 191,301
Purchases of premises and equipment (204,211) (560,723)
---------- ----------
Net cash used by investing activities (3,458,226) (8,626,231)
---------- ----------
Cash flows from financing activities:
Proceeds form sale of common stock 894,285 -
Increase in deposits 5,396,832 6,919,491
Principal payments on bonds payable - (1,368,000)
---------- ----------
Net cash provided by financing activities 6,291,117 5,551,491
---------- ----------
Net increase (decrease) in cash (834,027) 1,369,148
Cash and due from banks at beginning of period 5,364,730 2,803,660
---------- ----------
Cash and due from banks at end of period $4,530,703 4,172,808
========== ==========
Cash paid during period for:
Interest $2,862,594 3,399,798
Income taxes 1,481,650 489,419
========== =========
Non-cash activities:
Real estate acquired in settlement of loans $ 75,201 -
========== =========
</TABLE>
F-22
<PAGE> 27
Notes to Unaudited Consolidated Financial Statements
(1.) Peoples Financial Services, Inc.
Peoples Financial Services, Inc. (the Company), chartered by the state
of Tennessee, was formed in 1989 for the purpose of becoming a holding company
for Peoples Bank & Trust of the Cumberlands (Peoples). Peoples is a state
chartered bank organized in June, 1988. On February 1, 1993, the Company
consummated the acquisition of Citizens Federal Savings Bank (CFSB) of
Rockwood, Tennessee, upon its conversion from a federal mutual to a federal
stock savings bank, resulting in CFSB being held as a wholly owned subsidiary
of the Company. The acquisition of CFSB was accounted for as a pooling of
interest. See note 4.
(2.) Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation of financial
condition, results of operations, and statement of cash flows in conformity
with generally accepted accounting principles. However, all adjustments which
are, in the opinion of management, necessary for the fair presentation of the
interim financial statements have been included. All such adjustments are of a
normal and recurring nature. The results of operations for the interim periods
are not necessarily indicative of the results which may be expected for the
entire year.
(3.) Earnings per Share
Earnings per share is calculated by dividing earnings of the company
by the weighted-average common shares outstanding of the company's stock.
Earnings per share includes the earnings from CFSB beginning February 1, 1993,
the date of conversion of CFSB to a stock institution.
The following is a calculation of weighted-average shares:
<TABLE>
<CAPTION>
<S> <C>
Shares outstanding at December 31, 1992 205,552
Weighted-average common shares
issued February 1, 1993 27,756
Weighted-average common shares 233,308
</TABLE>
F-23
<PAGE> 28
(4.) Acquisition
On February 1, 1993, the Company sold 31,225 shares of newly-issued
common stock at $45 per share in connection with the acquisition of CFSB
pursuant to a definitive agreement entered into by the Company and CFSB in May,
1992. In connection with the acquisition, the Company and CFSB adopted a Plan
of Conversion/Acquisition (Plan) whereby CFSB was converted from a federally-
chartered mutual institution to a federally-chartered stock institution.
Pursuant to the Plan, shares of capital stock of the Company were offered
initially for subscription to eligible members of CFSB and to certain other
persons as of specified dates and subject to various subscription priorities as
provided in the Plan. The capital stock was offered at a price determined by
the Company's Board of Directors based upon an appraisal made by an independent
appraisal firm. All of the gross proceeds raised in the offering were used in
the acquisition of CFSB. This business combination has been accounted for as a
pooling-of-interests and, accordingly, the Company's historical consolidated
financial statements for the periods prior to the combination have been
restated to include the accounts and results of operations of CFSB.
In connection with the offering, the Company filed a registration
statement with the Securities and Exchange Commission. The offering raised
gross proceeds of $1,405,125. All costs incurred associated with the sale of
stock were deferred and deducted from the proceeds of the sale of the stock and
totalled $510,840. Costs associated with the acquisition in the amount of
$30,248 were charged to operations during the year ended December 31, 1992.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying consolidated
financial statements are summarized below.
<TABLE>
<CAPTION>
One Month Years ended
Ended December 31,
--------------------------------
January 31, 1993 1992 1991
---------------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Net interest income:
Peoples Financial $277,494 $3,454,422 $2,272,703
CFSB 124,437 1,279,117 1,164,656
-------- ---------- ----------
Combined 401,931 4,733,539 3,437,359
======== ========== ==========
Net interest income after
provision for loan losses:
</TABLE>
F-24
<PAGE> 29
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Peoples Financial 257,494 3,214,422 1,961,703
C F S B 116,937 1,255,681 1,006,147
------- --------- ---------
Combined 374,431 4,470,103 2,967,850
======= ========= =========
Net earnings:
Peoples Financial 81,162 1,111,129 540,228
C F S B 26,235 117,332 37,121
------- --------- ---------
Combined 107,397 1,228,461 577,349
======= ========= =========
</TABLE>
For the purpose of granting eligible members of CFSB a priority in the
unlikely event of future liquidation, CFSB at the time of conversion
established a liquidation account equal to its retained earnings as of the date
of the latest consolidated balance sheet used in the Company's final conversion
prospectus. In the event of future liquidation of the converted CFSB (and only
in such event), an eligible deposit account holder who continues to maintain
his deposit account shall be entitled to receive a distribution from the
liquidation account in the proportionate amount of the adjusted balance of
deposit accounts held at that time before any liquidation distributions may be
made with respect to capital stock. After the conversion, no dividends may be
paid to the stockholder of CFSB (Peoples Financial) if such dividends reduce
retained earnings of CFSB below the amount required for the liquidation
account.
(5.) Loans Receivable
Loans receivable at September 30, 1993 and December 31, 1992 are
summarized as follows:
<TABLE>
<CAPTION> <S> <C> <C>
Sept. 30, Dec. 31,
1993 1992
--------- ---------
Commercial 21,362,000 $21,766,000
Real estate mortgage 40,148,000 26,871,000
Consumer 8,909,000 20,194,000
---------- ----------
Sub-total 70,419,000 $68,831,000
</TABLE>
F-25
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
Less:
Allowance for loan losses $1,075,000 $ 922,000
Discount on loans purchased 1,059,000 1,425,000
Unearned discounts 304,000 373,000
Net deferred loan
origination fees 27,000 31,000
----------- -----------
Loans receivable, net $67,954,000 $66,080,000
=========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1993 1992
--------- --------
<S> <C> <C>
Balance at beginning of period
$ 922,000 $835,000
Provision charged to income 157,000 263,000
Loan losses, net:
Loans charged off -21,000 -190,000
Recoveries 17,000 14,000
Net loan losses -4,000 -176,000
---------- --------
Balance at end of period $1,075,000 $922,000
========== ========
</TABLE>
At September 30, 1993 and December 31, 1992, loans on which the
accrual of interest had been discontinued totaled $160,718 and $161,429,
respectively. During the nine months ended September 30, 1993 and the fiscal
year ended December 31, 1992, gross interest income that would have been
recorded on loans accounted for on a nonaccrual basis if the loans had been
current throughout the periods, and the amount of interest income that was
recorded for such loans during these periods, was not material. There were no
commitments to lend additional funds to borrowers on nonaccrual status.
(6.) Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes,"
which requires a change from the deferred method of accounting for income taxes
of Accounting Principles Board Opinion No. 11, to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between
F-26
<PAGE> 31
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
The cumulative amount, net of a valuation allowance in the amount of
$44,489, is $27,324, or $.12 per share, and is shown as the cumulative effect
of change in accounting principle in the consolidated income statements. Prior
years' financial statements have not been restated to apply the provisions of
SFAS No. 109.
At September 30, 1993, deferred tax assets, net of a valuation
allowance of $44,489, were $175,086, and deferred tax liabilities were $9,164.
The Company believes that the deferred tax assets, net of the valuation
allowance, will be realized.
F-27
<PAGE> 32
CITIZENS FEDERAL SAVINGS BANK
AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Financial Statements
December 31, 1992 and 1991
(With Independent Auditors' Report Thereon)
F-28
<PAGE> 33
Independent Auditors' Report
The Board of Directors
Citizens Federal Savings Bank
Rockwood, Tennessee
We have audited the accompanying consolidated Balance Sheets Of Citizens
Federal Savings Bank and subsidiaries (the Bank) as of December 31,
1992 and 1991, and the related consolidated statements of operations, retained
earnings, and cash flows for each of the years in the three-year period then
ended. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the overall 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.
As discussed in note 16, the Bank entered into a supervisory agreement with the
Office of Thrift Supervision in 1991. To comply with the agreement's
requirement to increase regulatory capital ratios, the Bank entered into an
acquisition agreement under which the Bank would convert from mutual to stock
form and be acquired by Peoples Financial Services, Inc., as discussed in note
15. The conversion and acquisition was consummated on February 1, 1993, and
resulted in an increase of capital above the requirement set forth in the
supervisory agreement. Failure to comply with the remaining provisions of the
agreement could expose the Bank to possible further regulatory sanctions and
enforcement actions.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Citizens
Federal Savings Bank and subsidiaries at December 31, 1992 and 1991, and the
results of their operations and their cash flows for each of the years in
the three-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick
February 26, 1993
F-29
<PAGE> 34
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Balance Sheets
December 31, 1992 and 1991
<TABLE>
<CAPTION>
ASSETS 1992 1991
------ ---- ----
<S> <C> <C>
Cash $ 580,972 474,707
Interest bearing deposits in other banks 2,993,924 1,022,373
Investments held for sale (note 17) - 2,232,661
Investment securities (note 2):
U.S. Government and agency obligations, at amortized cost
(approximate market value of $11,148,000 in 1992 and
$6,219,000 in 1991) 11,012,304 6,164,660
Mortgage-backed securities (estimated market value of
$6,724,000 in 1992 and $9,138,000 in 1991) (notes 3 and 9) 6,361,927 8,800,812
Loans held for sale (note 4) 758,935 -
Loans receivable, net (note 4) 23,685,321 23,748,624
Accrued interest receivable, net:
Loans 141,311 215,512
Investments 149,510 71,630
Mortgage-backed securities 48,336 38,864
Funds held by trustee (note 9) - 614,510
Real estate owned, net (note 5) 892,535 952,297
Office properties and equipment (note 7) 663,263 678,444
Investment in Federal Home Loan Bank stock, at cost 268,600 271,200
Other assets 379,930 186,468
---------- -----------
$47,936,868 45,472,762
=========== ===========
LIABILITIES AND RETAINED EARNINGS
---------------------------------
Liabilities:
Savings deposits (note 8) 45,683,529 41,686,576
Bonds payable (note 9) - 1,368,000
Accrued interest payable 33,617 130,194
Advance payments by borrowers for property taxes and insurance 107,447 58,456
Accrued expenses and other liabilities 201,134 435,727
---------- ----------
Total liabilities 46,025,727 43,678,953
Retained earnings - restricted (notes 10, 12, 13, 15 and 16) 1,911,141 1,793,809
---------- ----------
Commitments (notes 11, 14, 15, and 16)
$47,936,868 45,472,762
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 35
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Statements of Operations
Years ended December 31, 1992, 1991 and 1990
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Interest income:
First mortgage loans $ 1,637,361 1,840,722 1,901,419
Consumer and other loans 686,374 852,093 1,149,458
Investments 602,307 600,682 580,540
Mortgage-backed securities 648,956 754,237 796,921
Other interest-bearing assets 48,502 120,268 93,160
------------ --------- ---------
Total interest income 3,623,500 4,168,002 4,521,498
------------ --------- ---------
Interest expense:
Deposits (note 8) 2,281,026 2,805,030 3,210,980
Other borrowed money 63,357 198,316 305,438
------------ ---------- ----------
Total interest expense 2,344,383 3,003,346 3,516,418
Net interest income 1,279,117 1,164,656 1,005,080
Provision for loan losses (note 4) 23,436 158,509 151,329
------------ ---------- ----------
Net interest income after provision for loan losses 1,255,681 1,006,147 853,751
------------ ---------- ----------
Non-interest income:
Loan fees and service charges 132,508 129,432 128,264
Income from real estate operations, net 1,754 128,484 236,512
Deposit servicing fees 107,785 92,784 104,585
Gain on sale of loans 81,371 26,349 -
Gain on sale of office properties and equipment 750 25,581 -
Gain (loss) on sale of real estate owned - (582) (65,559)
Gain (loss) on sale of investments and
mortgage-backed securities (51,896) - 10,928
Other operating income 24,237 24,104 31,877
------------ ---------- ----------
Total non-interest income 296,509 426,152 446,607
------------ ---------- ----------
Non-interest expense:
Compensation and benefits 473,722 495,786 480,526
Occupancy and equipment 172,644 174,406 205,644
Supplies, communications, and other office expenses 80,957 56,184 60,528
Federal deposit insurance premiums 117,239 118,214 103,364
Data processing 127,399 121,521 133,745
Provision for losses on real estate owned (note 5) 75,000 46,191 97,000
Other operating expenses 281,104 284,914 263,809
------------ ---------- ----------
Total non-interest expense 1,328,065 1,297,216 1,344,616
Earnings (loss) before income tax expense 224,125 135,083 (44,258)
Income tax expense (benefit) (note 10) 106,793 97,962 (66,409)
------------ ---------- ----------
Net earnings (note 12) $ 117,332 37,121 22,151
============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 36
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Statements of Retained Earnings
Years ended December 31, 1992, 1991, and 1990
<TABLE>
<S> <C>
Balance at January 1, 1990 $ 1,734,537
Net earnings for 1990 22,151
---------
Balance at December 31, 1990 1,756,688
Net earnings for 1991 37,121
---------
Balance at December 31, 1991 1,793,809
Net earnings for 1992 117,332
---------
Balance at December 31, 1992 $1,911,141
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 37
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Statements of Cash Flows
Years ended December 31, 1992, 1991, and 1990
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 117,332 37,121 22,151
--------- --------- ---------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of deferred loan origination fees (2,160) (3,509) (19,457)
Premiums and discounts on loans, mortgage-backed
securities and investment securities, net 99,992 (224,730) (179,049)
Accretion of discount on loans to
facilitate sales of real estate owned (15,569) (17,784) (26,365)
Provision for loan losses and losses on real estate 98,436 204,700 248,329
Loans originated for sale (11,849,151) (2,366,182) (1,994,431)
Proceeds from sale of loans 11,171,587 2,392,531 1,994,431
Gain on sale of loans (81,371) (26,349) -
Dividends on Federal Home Loan Bank stock (11,700) (16,800) (28,300)
Loss on sale of real estate owned - 582 65,559
Purchases of mortgage-backed securities - - (880,763)
Proceeds from sales of mortgage-backed securities - - 973,188
Net (gain) loss on sales of securities 51,896 - (10,928)
Net gain on sale of office properties and equipment (750) (25,581) -
Depreciation of office properties and equipment 59,167 64,780 83,031
Deferred income taxes 56,938 (15,408) -
(Decrease) increase in accrued expenses and other liabilities (291,531) 235,741 (53,638)
Decrease in accrued interest payable (96,577) (87,305) (62,545)
(Increase) decrease in:
Accrued interest receivable (13,151) 60,346 52,160
Funds held by trustee 614,510 56,765 27,451
Other assets (193,462) 48,189 60,797
Refundable federal income taxes - 20,128 78,814
---------- --------- ---------
Total adjustments (402,896) 300,114 328,284
---------- --------- ---------
Net cash and cash equivalents provided (used) by
operating activities (285,564) 337,235 350,435
---------- --------- ---------
Cash flows from investing activities:
Net repayments of loans 42,027 2,358,882 1,572,930
Purchases of office properties and equipment (43,986) (20,988) (500)
Purchases of investment securities (7,126,212) (2,675,000) -
Proceeds from sales of investment securities 3,060,700 - -
Proceeds from maturities of investment securities 1,300,000 2,000,000 -
Proceeds from sales of real estate owned - 31,985 796,901
Purchases of mortgage-backed securities (250,319) (1,155,816) -
Proceeds from sales of mortgage - backed securities 614,329 - -
Principal receipts on mortgage-backed securities 2,073,516 971,209 1,043,482
Principal receipts on loans to facilitate sales of real estate 331 3,766 -
Redemption of Federal Home Loan Bank stock 14,300 38,000 55,800
Proceeds from sale of office properties and equipment 750 288,356 -
---------- --------- ---------
Net cash and cash equivalents
provided (used) by investing activities (314,564) 1,840,394 3,468,613
---------- --------- ---------
</TABLE>
F-33
<PAGE> 38
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in savings deposits $ 3,996,953 (1,302,217) (2,217,328)
Net increase (decrease) in advance payments by borrowers 48,991 (58,336) (11,264)
Repayments of bonds (1,368,000) (976,000) (986,000)
---------- --------- ---------
Net cash and cash equivalents provided
(used) by financing activities 2,677,944 (2,336,553) (3,214,592)
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,077,816 (158,924) 604,456
Cash and cash equivalents at beginning of period 1,497,080 1,656,004 1,051,548
---------- --------- ---------
Cash and cash equivalents at end of period $ 3,574,896 1,497,080 1,656,004
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 710,080 1,049,415 1,258,680
Cash paid for income taxes 122,405 66,000 12,500
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
Transfer of investment securities to investments held for sale $ 879,938 - -
Transfer of mortgage-backed securities to investments held
for sale 588,514
Real estate acquired in settlement of loans - - 36,492
Loans to facilitate sales of real estate owned:
Qualifying for recognition of sale - - 549,113
Not qualifying for recognition as a sale - - 1,135,572
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 39
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
December 31, 1992 and 1991
(1) Summary of Significant Accounting Policies
The accounting and reporting policies of Citizens Federal Savings Bank
and its subsidiaries (the Bank) conform to generally accepted
accounting principles and to general practice within the thrift
industry, where applicable, and to accounting rules prescribed by the
Office of Thrift Supervision. The following is a description of the
more significant of those policies which the Bank follows in
preparing and presenting its consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Citizens Federal Savings Bank and its wholly-owned subsidiaries,
Citizens Capital Corporation and Citizens Service Corporation. All
significant intercompany balances are eliminated in consolidation.
During 1992 and 1990, respectively, Citizens Capital Corporation and
Citizens Service Corporation, formerly wholly-owned subsidiaries,
were merged into Citizens Federal Savings Bank. Citizens Capital
Corporation and Citizens Service Corporation have been included in
the consolidated financial statements since their incorporation,
and the mergers do not affect the comparability of the accompanying
consolidated financial statements.
(B) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
consist of cash on hand and interest-bearing deposits with banks,
with original maturities of less than ninety days.
(C) INVESTMENT SECURITIES AND INVESTMENTS HELD FOR SALE
Investments consist of U.S. Government and agency obligations.
Management determines the appropriate classification of investments
at the time of purchase. If management has the intent and the Bank
has the ability at the time of purchase to hold securities until
maturity, they are classified as investment securities and carried
at amortized historical cost. Securities to be held for indefinite
periods of time and not intended to be held to maturity are
classified as held for sale and carried at the lower of cost or
market value. Securities held for indefinite periods of time
include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in
response to changes in interest rates, the need to increase
regulatory capital, and other similar factors.
Discounts are accreted and premiums are amortized into interest
income by a method which approximates the interest method over the
remaining contractual terms of the respective securities. Gains
and losses from the sale of investments are determined using the
specific identification method.
(D) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by the
issuers of the securities. These securities are carried at cost,
adjusted for accretion of discounts and amortization of premiums,
since it is management's intention and the Bank has the ability to
hold them to maturity. Discounts are accreted and premiums are
amortized into interest income by a method which approximates the
interest method over the remaining contractual terms of the
respective securities adjusted for actual prepayments. Gains and
losses from the sale of mortgage-backed securities are determined
using the specific identification method.
(Continued)
F-35
<PAGE> 40
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(E) LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable are stated at unpaid principal balances, net of
discounts, deferred loan origination fees, and the allowance for
loan losses. Loans held for sale are carried at the lower of cost
or fair value. Management determines the appropriate
classification at the date of origination.
Unamortized discounts on consumer loans are recognized over the
contractual lives of the loans using a method which approximates
the interest method.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off or an allowance is established. The
allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic
interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
(F) LOAN ORIGINATION FEES AND RELATED COSTS
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is recognized in income using the
interest method over the contractual lives of the loans, adjusted
for expected prepayments and loan sales. If deferred fees are
associated with a loan placed on nonaccrual status, amortization of
the fees is ceased.
(G) LOAN SERVICING FEES
Fees arising from servicing loans for others are recognized as earned.
(H) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on a
straight-line basis over the estimated useful lives of the related
assets.
(I) REAL ESTATE OWNED
Real estate acquired either through loan foreclosure or in-substance
foreclosure is initially recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the
date of foreclosure. Costs relating to developing and improving
property are capitalized, whereas costs relating to holding
property are expensed.
Valuations are periodically performed by management. If the carrying
value of a property exceeds its fair value, an allowance is
established through a provision for losses charged to earnings.
(J) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE OWNED
Provisions for losses on loans and accrued interest are charged to
earnings when it is determined that the investment in such assets
is greater than their fair value.
(Continued)
F-36
<PAGE> 41
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
The allowance for estimated loan losses is based upon analyses of the
loan receivable portfolio and is maintained at a level considered
adequate by management to provide for potential loan losses. The
analyses include management's consideration of such factors as
economic conditions, loan portfolio characteristics, prior loan
loss experiences, and results of reviews of the portfolio.
Management believes that the allowances for losses on loans and real
estate owned are adequate. While management uses available
information to recognize losses on loans and real estate owned,
future additions to the allowances may be necessary based on
changes in future economic conditions. In addition, various
regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on
loans and real estate owned. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments of
information available to them at the time of their examination.
(K) INVESTMENTS REQUIRED BY LAW
The Bank, as a member of the Federal Home Loan Bank system, is
required to acquire and hold shares of stock in the Federal Home
Loan Bank, subject to certain minimum levels. The stock is carried
at cost and dividends are recognized as income when received.
(L) TAXES ON INCOME
Deferred income taxes are provided on items which are reported in
different years for tax purposes than for financial statement
purposes.
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, was issued by the Financial Accounting Standards
Board in February 1992. Statement 109 requires a change from the
deferred method to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities. Under Statement 109, the effect on deferred taxes of
a change in tax rates is recognized in income in the period that
includes the enactment date.
Statement 109 must be adopted in 1993. Upon adoption, the provisions
of the Statement may be applied without restating prior years'
financial statements or may be applied retroactively by restating
any number of consecutive prior years' financial statements. The
Bank has not determined the impact that Statement 109 will have on
its consolidated financial statements or the method that it will
use to initially apply the Statement.
(M) DEFERRED EXPENSES
Deferred debt issuance costs, adjusted for amortization, are
classified as other assets. These costs are recognized on a
straight-line method over the contractual term of the related debt.
As early retirement of the debt occurs, the amortization period is
adjusted to coincide with the expected term of the debt.
(Continued)
F-37
<PAGE> 42
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(2) INVESTMENT SECURITIES
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1992
--------------------------------------------------
APPROXIMATE GROSS GROSS
BOOK MARKET UNREALIZED UNREALIZED
VALUE VALUE GAINS LOSSES
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 9,052,840 9,210,000 174,358 17,198
Obligations of other U. S. government
agencies and corporations 1,959,464 1,938,000 3,627 25,091
----------- ---------- ---------- ----------
$11,012,304 11,148,000 177,985 42,289
=========== ========== ========== ==========
December 31, 1991
--------------------------------------------------
APPROXIMATE GROSS GROSS
BOOK MARKET UNREALIZED UNREALIZED
VALUE VALUE GAINS LOSSES
----------- ---------- ---------- ----------
U. S. Treasury securities $ 5,489,660 5,526,000 155,676 119,336
Obligations of other U. S. government
agencies and corporations 675,000 693,000 18,000 -
----------- ---------- ---------- ----------
6,164,660 6,219,000 173,676 119,336
=========== ========== ========== ==========
</TABLE>
Management expects to recover the full book value of these investment
securities upon their maturities.
Investment securities held at December 31, 1992, mature on the following
schedule:
APPROXIMATE
BOOK MARKET
VALUE VALUE
---------- ----------
Within 1 year $ 1,777,721 1,799,000
After 1 year through 5 years 8,468,613 8,585,000
After 5 years through 10 years 765,970 764,000
---------- ----------
$ 11,012,304 11,148,000
========== ==========
At December 31, 1992 and 1991, certain investment securities with par
values totaling $1,000,000 were pledged to secure savings deposits.
In addition, certain investments with par values totaling $1,500,000
at December 31, 1992, and $500,000 at December 31, 1991, were pledged
to secure a commitment of funds from the Federal Home Loan Bank.
(Continued)
F-38
<PAGE> 43
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1992
---------------------------------------------------
Estimated Gross Gross
Book market unrealized unrealized
value value gains losses
------- ---------- --------- ---------
<S> <C> <C> <C> <C>
GNMA certificates $1,877,366 1,942,000 70,896 6,262
FHLMC certificates 971,034 1,064,000 92,966 -
FNMA certificates (note 9) 3,513,527 3,718,000 204,473 -
--------- --------- ------- ------
Total mortgage-backed securities $6,361,927 6,724,000 368,335 6,262
========= ========= ======= ======
DECEMBER 31, 1991
---------------------------------------------------
Estimated Gross Gross
Book market unrealized unrealized
value value gains losses
---------- --------- ----------- ----------
GNMA certificates $2,643,587 2,809,000 165,413 -
FHLMC certificates 1,153,003 1,197,000 43,997 -
FNMA certificates (notes 9 and 14) 5,004,222 5,132,000 138,854 11,076
--------- --------- ------- ------
Total mortgage-backed securities $8,800,812 9,138,000 348,264 11,076
========= ========= ======= ======
</TABLE>
The book value and approximate market value of mortgage-backed securities
by contractual maturity as of December 31, 1992 are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Approximate
Book market
value value
------- -------
<S> <C> <C>
Maturing within five years $367,126 442,000
Maturing within five to ten years 56,356 57,000
Maturing after ten years 5,938,445 6,225,000
--------- ---------
$6,361,927 6,724,000
========== ==========
</TABLE>
Proceeds from the sales of mortgage-backed securities during the year
ended December 31, 1990 were $973,188. There were no sales in
1991. Gross gains recognized for 1990 were $10,928. No gross losses were
recognized in 1990.
(Continued)
F-39
<PAGE> 44
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(4) LOANS RECEIVABLE AND LOANS HELD FOR SALE
Loans receivable at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
----- -----
<S> <C> <C>
Loans secured by first mortgages on real estate:
Principal balances:
Secured by one-to-four family residences $ 15,318,049 14,627,301
Secured by other properties 936,193 1,405,062
Construction loans 1,867,000 858,918
Partially guaranteed by VA or insured by FHA - -
Commercial participation 1,274,918 1,280,865
---------- ----------
19,396,160 18,172,146
Less:
Loans held for sale 758,935 -
Loans in process 811,850 319,002
Net deferred loan origination fees 15,077 17,237
---------- ----------
Total first mortgage loans 17,810,298 17,835,907
---------- ----------
Consumer and other loans:
Consumer 5,411,573 5,703,038
Commercial 362,978 163,536
Loans on savings deposits 385,092 381,432
Signature 139,140 243,722
---------- ----------
6,298,783 6,491,728
Less:
Unearned income 75,035 196,535
---------- ----------
Total consumer and other loans 6,223,748 6,295,193
---------- ----------
Less allowance for loan losses 348,725 382,476
---------- ----------
$ 23,685,321 23,748,624
========== ==========
</TABLE>
Loans held for sale at December 31, 1992 are carried at book value, which
approximates market value.
(Continued)
F-40
<PAGE> 45
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
Activity in the allowance for loan losses at December 31, is summarized as
follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 382,476 309,846 323,437
Provisions charged against income 23,436 158,509 151,329
Chargeoffs (96,814) (159,877) (219,091)
Recoveries 39,627 73,998 54,171
------- ------- -------
Balance at end of period $ 348,725 382,476 309,846
======= ======= =======
</TABLE>
The following is a summary of the principal balances of loans on nonaccrual
status at December 31:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Loans contractually past due 90 days or
more and/or on nonaccrual status:
Residential $ 153,000 123,000 221,000
Consumer and commercial 42,000 20,000 89,000
------- ------- -------
$ 195,000 143,000 310,000
======= ======= =======
</TABLE>
During the years ended December 31, 1992, 1991, and 1990, interest income of
approximately $10,365, $13,826, and $31,636, respectively, was not recorded
related to loans accounted for on a nonaccrual basis. No income was
recorded on loans in nonaccrual status during 1992, 1991, and 1990. As of
December 31, 1992, there were no commitments to extend additional credit to
borrowers who had loans in nonaccrual status.
In the ordinary course of business, the Bank makes loans to directors and
executive officers and their related interests. Such loans were made on
substantially the same terms, including interest and collateral, as those
prevailing at the time for comparable transactions with other borrowers and
did not involve more than the normal risk of collectibility or present other
unfavorable features. Loans to directors and executive officers and their
related interests are as follows:
<TABLE>
<S> <C>
Balance at December 31, 1990 $ 239,067
Repayments (64,388)
-------
Balance at December 31, 1991 174,679
Advances 150,819
Repayments (149,826)
-------
Balance at December 31, 1992 $ 175,672
=======
</TABLE>
(Continued)
F-41
<PAGE> 46
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(5) REAL ESTATE OWNED
Real estate owned at December 31, consists of the following:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Foreclosed real estate $ 638,704 -
Loans to facilitate the sale of foreclosed real estate 550,831 1,174,297
Less allowance for losses (297,000) (222,000)
-------- --------
$ 892,535 952,297
======== ========
</TABLE>
Loans to facilitate the sale of foreclosed real estate are accounted for
under the deposit method, as these sales did not meet the minimum down
payment requirements necessary for sales recognition.
The activity in the allowance for estimated losses on real estate owned
consists of the following:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Allowance at beginning of year $ 222,000 175,809 78,809
Provision for estimated losses 75,000 46,191 97,000
------- ------- ------
Allowance at end of year $ 297,000 222,000 175,809
======= ======= =======
</TABLE>
(6) LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these
loans are $17,242,761 and $11,962,090 at December 31, 1992 and 1991,
respectively.
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment, less accumulated depreciation, consist of
the following at December 31:
<TABLE>
<CAPTION>
1992 1991
---- ----
<S> <C> <C>
Land $ 105,500 105,500
Office buildings and improvements 982,613 973,291
Furniture, fixtures, and equipment 505,214 470,550
Automobiles 10,184 16,884
--------- ---------
1,603,511 1,566,225
Less accumulated depreciation 940,248 887,781
--------- ---------
$ 663,263 678,444
========= =========
</TABLE>
(Continued)
F-42
<PAGE> 47
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(8) SAVINGS DEPOSITS
Savings deposit balances at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1992 1991
-------------------- -------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 127,709 0.3% 113,492 0.3%
N.O.W. accounts and Super N.O.W. accounts at 3.0% 3,687,614 8.1 2,893,897 6.9
Passbook savings at 3.75% 10,447,197 22.8 6,815,703 16.4
---------- ----- ---------- -----
14,262,520 31.2 9,823,092 23.6
---------- ----- ---------- -----
Certificates
3.0% to 3.9% 8,654,240 18.9 - -
4.0% to 4.9% 7,832,565 17.1 1,149,347 2.8
5.0% to 5.9% 3,960,991 8.7 10,990,229 26.4
6.0% to 6.9% 4,004,177 8.8 7,183,394 17.2
7.0% to 7.9% 2,852,780 6.2 6,420,260 15.4
8.0% to 8.9% 2,949,518 6.5 4,683,893 11.2
9.0% to 9.9% 993,181 2.2 1,262,804 3.0
10.0% to 10.9% 173,557 0.4 173,557 0.4
---------- ----- ---------- -----
Total Certificates 31,421,009 68.8% 31,863,484 76.4
---------- ----- ---------- -----
$45,683,529 100.0% 41,686,576 100.0%
========== ===== ========== =====
Weighted average cost
of savings deposits 5.21% 6.66%
==== ====
</TABLE>
Scheduled maturities of certificates are as follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
1 month to 12 months $ 18,711,645 24,665,676 24,923,718
12 months to 24 months 5,885,905 3,721,646 4,545,742
24 months to 36 months 2,514,144 1,299,986 1,759,708
Over 36 months 4,309,315 2,176,176 2,015,884
----------- ----------- -----------
$ 31,421,009 31,863,484 33,245,052
=========== =========== ===========
</TABLE>
Certificates with face values greater than or equal to $100,000 were
$3,690,694 and $5,199,097 at December 31, 1992 and 1991, respectively.
(Continued)
F-43
<PAGE> 48
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended December 31, 1992, 1991, and
1990, is summarized as follows:
<TABLE>
<CAPTION>
1992 1991 1990
------ ----- -----
<S> <C> <C> <C>
N.O.W. accounts and Super N.O.W. accounts $ 113,272 133,946 153,066
Passbook savings 342,693 337,408 338,522
Certificates of deposit 1,825,061 2,333,676 2,719,392
--------- --------- ---------
$ 2,281,026 2,805,030 3,210,980
========= ========= =========
</TABLE>
(9) BONDS PAYABLE
During 1985, the Bank initiated a long-range restructuring
program which resulted in the formation of
Citizens Capital Corporation, a wholly-owned
subsidiary. In conjunction with the
restructuring, the Bank exchanged approximately
$12.8 million in first mortgage loans for
guaranteed mortgage pass- through certificates
issued by the Federal National Mortgage
Association (FNMA certificates) with an effective
yield of approximately 8.8 percent. The FNMA
certificates were transferred to Citizens Capital
Corporation, which issued approximately $9.6
million in bonds payable, secured by the FNMA
certificates. The bonds bore interest at 11.375
percent, and were scheduled to mature on February
1, 2003.
During 1992, the Bank paid in full its obligation under the
bonds prior to the merger of Citizens Capital
Corporation into the Bank. The FNMA certificates
held by Citizens Capital Corporation were
transferred to the Bank.
(10) INCOME TAXES
Components of income tax expense (benefit) for the years
ended December 31, 1992, 1991, and 1990, are as
follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Current $ 49,861 113,370 (66,409)
Deferred 56,932 (15,408) -
------ ------- -------
$ 106,793 97,962 (66,409)
======= ====== ========
</TABLE>
Net operating loss carryforwards available to offset
taxable income for state tax purposes in future years
amounted to approximately $946,000 at December 31,
1992. These carryforwards expire as follows:
<TABLE>
<S> <C>
Tax year ended December 31,
2003 $ 156,000
2004 725,000
2005 65,000
-----------
$ 946,000
===========
</TABLE>
(Continued)
F-44
<PAGE> 49
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
Deferred income taxes result from timing differences in
the recognition of income and expenses for tax and
financial statement purposes. The sources of these
timing differences and their tax effects are as
follows:
<TABLE>
<CAPTION>
1992 1991 1990
----- ---- ----
<S> <C> <C> <C>
Deferred compensation $ 55,018 (18,572) (7,389)
Difference in recognition of loan fees 736 1,369 7,588
Interest income reported in different periods
for tax and financial statement purposes - - (10,513)
FHLB stock dividend not currently
recognized for tax purposes 2,958 6,600 11,037
Gain on FHLB stock redeemed (1,780) (4,805) (4,178)
Other, net - - 3,455
-------- ------- --------
Deferred income tax expense (benefit) $ 56,932 (15,408) -
======== ======= ========
</TABLE>
The reasons for the differences between actual income tax expense
(benefit) and the amounts computed by applying the U.S. Federal income tax rate
to the earnings (loss) before income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1992 1991 1990
---- ---- ----
<S> <C> <C> <C>
Computed "expected" federal income tax expense (benefit) $ 76,202 45,931 (15,048)
Increase (reduction) in taxes resulting from:
Tax bad debt deduction (greater) less than
financial statements 30,591 52,031 (51,361)
-------- ------- --------
Actual income tax expense (benefit) $ 106,793 97,962 (66,409)
======== ======= ========
</TABLE>
The Bank is allowed a special bad debt deduction for tax
purposes limited generally to the greater of 8%
of otherwise taxable income or actual loss experience.
The Bank used the experience method in 1992, 1991, and
1990. If the amounts that qualify as deductions for
Federal income tax purposes under the percentage method
are later used for purposes other than for bad debt
losses, they will be subject to Federal income tax at
the then current corporate rate. Retained earnings at
December 31, 1992 and 1991, includes approximately
$550,000 and $475,000, respectively, for which federal
income tax has not been provided.
(11) EMPLOYEE BENEFITS AND DEFERRED COMPENSATION
The Bank has a noncontributory, defined-benefit retirement
plan for substantially all eligible employees. The
Bank is a member of the Financial Institutions
Retirement Fund, which is a nonprofit pension trust
through which the Federal Home Loan Bank, savings banks
and similar institutions may cooperate in providing for
the retirement of their employees. No contributions
were required in 1992, 1991, and 1990. The Bank's
policy is to fund pension costs as accrued.
As of December 31, 1991 the Bank had recorded a liability
for deferred directors' compensation of $161,820. In
January 1992, the Bank paid its deferred compensation
obligation to its directors and terminated all deferred
compensation agreements. Deferred compensation expense
amounted to $0, $61,679 and $28,563 for the years ended
December 31, 1992, 1991 and 1990, respectively.
(Continued)
F-45
<PAGE> 50
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(12) RECONCILIATION OF RETAINED EARNINGS AND NET EARNINGS (LOSS)
To fairly state the accompanying consolidated financial
statements in accordance with generally accepted
accounting principles, certain adjustments are
reflected which had not been made in the Bank's books
and reports filed with the Office of Thrift
Supervision. The following reconciliation provides
details of the nature and amount of such adjustments.
<TABLE>
<CAPTION>
RETAINED NET EARNINGS FOR
EARINGS YEAR ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31,
1992 1992 1991 1990
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per reports submitted to the Office of Thrift
Supervision $ 1,911,141 117,332 37,121 85,652
Adjustment of tax accounts - - - 69,038
To adjust provision for possible losses on loans
and real estate owned - - - (97,000)
To adjust deferred compensation liabilities - - - (10,943)
To record net loss on sale of real estate owned - - - (65,213)
To record accretion of discount on loans to
facilitate sales of real estate - - - 26,365
To reverse accrual of supervisory examination fee - - - 18,000
Other adjustments - - - (3,748)
---------- --------- ---------- ---------
Balance in accordance with generally accepted
accounting principles $ 1,911,141 117,332 37,121 22,151
========== ========= ========== =========
</TABLE>
(13) FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
The Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA) was signed into law on December 19,
1991. FDICIA includes provisions requiring "prompt
corrective action" for insured depository institutions
that do not meet certain capitalization criteria.
Regulations implementing the prompt corrective action
provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action
requirements, FDICIA includes significant changes to
the legal and regulatory environment for insured
institutions, including reductions in insurance
coverage for certain kinds of deposits, increased
supervision by the federal regulatory agencies,
increased reporting requirements for insured
institutions, and new regulations concerning internal
controls, accounting, and operations.
The prompt corrective action regulations define specific
capital categories based on an institution's capital
ratios. The capital categories, in declining order,
are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." To be considered
"adequately capitalize," an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-
based capital ratio of at least 4%, and a total
risked-based capital ratio of at least 8%. An
institution is deemed to be "critically
undercapitalized" if it has a tangible equity ratio of
2% or less.
After consideration of the capital infusion received on
February 1, 1993, as discussed in note 15, the Bank
meets the criteria for "adequately capitalized" as
defined by FDICIA and the minimum capital level
required by the supervisory agreement discussed in note
16.
(Continued)
F-46
<PAGE> 51
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business
to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest
rates. These financial instruments consist of
commitments to extend credit and undisbursed lines of
credit. The commitments involve elements of credit and
interest rate risk in excess of the amount recognized
in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the
extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and unused
lines of credit is represented by the contractual
notional amount of those instruments. The Bank uses
the same credit policies in making these commitments
and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any
condition established in the contract. Commitments
generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on
a case-by-case basis. The amount of collateral
obtained if deemed necessary by the Bank upon extension
of credit is based on management's credit evaluation of
the borrower. Collateral held varies but may include
property, plant, or equipment.
The Bank had outstanding commitments to originate loans of
approximately $633,000 at December 31, 1992. The
commitments were composed entirely of fixed rate loans
with interest rates ranging from 7.5% to 8.875%. The
Bank had undisbursed advances on customer lines of
credit of approximately $594,000 and $215,000 at
December 31, 1992 and 1991, respectively. There were
no commitments to purchase or sell loans at December
31, 1992.
Most of the Bank's business activity is with customers
located within Roane County and adjacent counties in
East Tennessee. A majority of the loans are secured by
residential or commercial real estate or other
commercial property. The loans are expected to be
repaid from cash flow or proceeds from the sale of
selected assets of the borrower. The Bank grants
residential, consumer, and commercial loans to
customers in Roane County and adjacent counties.
The Bank has four loans with an aggregate net carrying
value of $2,122,771 at December 31, 1992 that are
secured by commercial real estate located in Texas,
Mississippi, Virginia, and Florida.
(continued)
F-47
<PAGE> 52
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(15) CONVERSION/ACQUISITION
In order to increase its regulatory capital levels to
comply with the supervisory agreement described in note
16, on May 20, 1992, the Bank entered into an
acquisition agreement under which the Bank would
convert from mutual to stock form and be acquired by
Peoples Financial Services, Inc. (Peoples).
Previously, in April 1992, the Bank filed an
application with the OTS to convert from mutual to
stock form under the modified conversion regulations,
but the OTS determined that the Bank could not utilize
the modified conversion regulations. Under the terms
of the agreement with Peoples, shares of Peoples common
stock were offered to eligible members of Citizens
Federal. Any shares not purchased by eligible members
of Citizens Federal were sold through a direct
community offering by Peoples. At the time of the
acquisition by Peoples, Citizens Federal converted from
a Federally-chartered mutual savings bank to a
Federally-chartered stock savings bank. The
acquisition by Peoples received approval from all
required regulatory authorities and was consummated on
February 1, 1993. As a result of the stock offering,
gross proceeds of approximately $1,405,000 were
generated.
As of December 31, 1992, the Bank had incurred $367,567 of
costs associated with the conversion / acquisition, of
which $30,248 was charged to operations and $337,219
had been deferred. All deferred conversion costs have
been netted against the proceeds of the stock offering
by Peoples subsequent to the conversion / acquisition.
After netting deferred conversion costs against the
proceeds of the stock offering, the Bank increased its
capital by approximately $896,000. As a result of the
capital infusion, the Bank increased its tangible
capital above the level required by the supervisory
agreement.
For the purpose of granting eligible members of the Bank a
priority in the event of future liquidation, the Bank
at the time of conversion established a liquidation
account equal to its retained earnings as of the date
of the latest consolidated balance sheet used in the
final conversion offering circular. In the event of
future liquidation of the converted bank (and only in
such event), an eligible deposit account holder who
continues to maintain his deposit account shall be
entitled to receive a distribution from the liquidation
account, in the proportionate amount of the adjusted
balance from deposit accounts held at that time, before
any liquidation distributions may be made with respect
to capital stock. After the conversion, no dividends
may be paid to stockholders if such dividends reduce
retained earnings of the Bank below the amount required
for the liquidation account.
(16) SUPERVISORY AGREEMENT
The Bank entered into a supervisory agreement with the
Office of Thrift Supervision in September 1991. The
agreement requires the Bank to:
o Plan for an increase in tangible capital to at least
five percent of total assets by December 31, 1992.
o Plan for the reduction of classified assets, which are
principally comprised of loans secured by commercial
real estate located outside Tennessee (note 14), to
less than 100% of tangible capital plus general
valuation allowances by December 31, 1992.
o Modify certain lending and operating practices. None
of the required modifications is expected to
significantly impact operations or earnings.
Management has taken substantive steps to comply with each
of the requirements discussed above.
(Continued)
F-48
<PAGE> 53
CITIZENS FEDERAL SAVINGS BANK AND SUBSIDIARIES
ROCKWOOD, TENNESSEE
Notes to Consolidated Financial Statements
(17) INVESTMENTS HELD FOR SALE
At December 31, 1991, investments held for sale were
carried at their cost of $2,232,661, which approximated
their market value. These securities were sold in
January, 1992; gross proceeds from these sales were
$2,243,922, and gross gains of $11,261 were recognized.
Proceeds from the sale of securities during the year ended
December 31, 1992 were $3,060,700. Gross gains of
$37,076 and gross losses of $88,972 were recognized on
such sales. There were no sales of investments during
1991 or 1990.
F-49
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED PAGE
EXHIBIT
<S> <C>
2(a) Agreement and Plan of Reorganization between Trans Financial
Bancorp, Inc. and Peoples Financial Services, Inc. dated as of
December 27, 1993.
2(b) Plan of Merger between Trans Financial Bancorp, Inc. and
Peoples Financial Services, Inc. dated as of December 27,
1993.
</TABLE>
<PAGE> 1
Exhibit 2(a)
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is
made and entered into as of this 27th day of December,
1993 between TRANS FINANCIAL BANCORP, INC., a Kentucky corporation
("Corporation"), and PEOPLES FINANCIAL SERVICES, INC., a
Tennessee corporation ("PFS").
W I T N E S S E T H :
The Boards of Directors of Corporation and PFS have approved,
and deem it advisable and in their respective shareholders' best interests to
consummate, the business combination transaction (the "Merger") provided for
herein and in the Plan of Merger between Corporation and PFS executed of even
date herewith and incorporated by reference herein as if fully set out herein
(the "Plan of Merger" or the "Plan");
Corporation and PFS are willing to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger.
For federal income tax purposes, it is intended that the
Merger qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, in consideration of the premises and of the
respective representations, warranties, agreements and undertakings herein
contained, the parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
"BHCA" shall mean the Bank Holding Company Act of 1956, as
amended.
"Closing" shall mean the closing of the transactions
contemplated herein and in the Plan of Merger, and "Closing Date" shall mean
the date and time specified pursuant to Section 2.2 hereof as the date of the
Closing.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Commission" shall mean the Securities and Exchange Commission.
<PAGE> 2
"Corporation Common Stock" shall mean the common stock, no
par value, of Corporation.
"Corporation Financial Statements" shall mean (i) the audited
consolidated balance sheets (including related notes) of Corporation as of
December 31, 1992, 1991 and 1990 and the related audited consolidated
statements of income, changes in shareholders' equity and cash flows (including
related notes) for the years ended December 31, 1992, 1991 and 1990, and the
unaudited consolidated balance sheet as of September 30, 1993 and the related
unaudited consolidated statements of income, changes in shareholders' equity
and cash flows (including related notes) of Corporation for the nine months
ended September 30, 1993, and (ii) the consolidated balance sheets and related
consolidated statements of income, changes in shareholders' equity and cash
flows (including related notes) of Corporation with respect to periods ending
subsequent to September 30, 1993.
"Corporation Subsidiary" shall mean each company or other
organization of which at least a majority of the securities or other interests
is directly or indirectly owned or controlled by Corporation.
"Effective Time" is defined at Section 2.1.
"Federal Reserve" shall mean the Board of Governors of the
Federal Reserve System.
"KCBA" shall mean the Kentucky Business Corporation Act.
"KDFI" shall mean the Kentucky Department of Financial
Institutions.
"OTS" shall mean the Office of Thrift Supervision.
"PFS Common Stock" is defined at Section 4.1.B.
"PFS Financial Statements" shall mean (i) the audited
consolidated balance sheets (including related notes) of PFS as of December 31,
1992, 1991 and 1990, the related audited consolidated statements of income,
changes in shareholders' equity, and statements of cash flows (including
related notes) for the years ended December 31, 1992, 1991 and 1990, and the
unaudited balance sheet as of September 30, 1993 and the consolidated
statements of income, changes in shareholders' equity and cash flows (including
related notes) of PFS for the nine months ended September 30, 1993, (ii) the
audited balance sheets (including related notes) of Citizens Federal Savings
Bank as of December 31, 1992, 1991 and 1990, the related audited statements of
income, changes in retained earnings, and the statements of cash flows
(including related notes) for the years ended December 31, 1992, 1991 and 1990,
and (iii) the consolidated balance sheet and related consolidated
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statements of income, changes in shareholders' equity and cash flows (including
related notes) of PFS with respect to periods ending subsequent to September
30, 1993.
"PFS Subsidiary" is defined at Section 4.1C.
"Previously Disclosed" shall mean disclosed prior to the
execution hereof in the letter dated of even date herewith from the party
making such disclosure and delivered to the other party contemporaneously with
the execution hereof.
"Proxy Statement/Prospectus" shall mean the proxy
statement/prospectus together with any supplements thereto sent to the
shareholders of PFS to solicit their votes in connection with this Agreement
and the Plan of Merger.
"Registration Statement" shall mean the registration statement
with respect to the Corporation Common Stock to be issued in connection with
the Merger as declared effective by the Commission under the Securities Act of
1933, as amended.
"Securities Laws" shall mean [i] the Securities Act of 1933,
as amended (the "Securities Act"); the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); the Investment Company Act of 1940, as amended;
the Trust Indenture Act of 1939, as amended; and the rules and regulations of
the Commission promulgated thereunder, and [ii] all applicable state securities
laws.
"TBCA" shall mean the Tennessee Business Corporation Act.
"TDFI" shall mean the Tennessee Department of Financial
Institutions.
ARTICLE 2
THE MERGER
2.1 Effective Time of Merger. Upon the terms and conditions set
forth in this Agreement and the Plan of Merger, Articles of Merger (the
"Articles of Merger") shall be duly prepared and executed by Corporation and
PFS, and thereafter delivered to the Secretary of State of the Commonwealth of
Kentucky and the Secretary of State of the State of Tennessee for filing, as
provided in the KCBA and the TBCA, on the Closing Date. The Merger shall
become effective upon the filing with the Kentucky Secretary of State and with
the Tennessee Secretary of State, or at such time and date thereafter as is
provided in the Articles of Merger (the "Effective Time").
2.2 Closing. The closing of the Merger (the "Closing") will take
place at 10:00 a.m. on a date to be specified by Corporation
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(the "Closing Date"), which shall be no later than the fifth business day
following the last to occur of [i] the effective date of the last order,
approval, or exemption of any federal or state regulatory agency approving or
exempting the Merger if such action is required, and [ii] the expiration of all
required waiting periods after the filing of all notices to all federal or
state regulatory agencies required for consummation of the Merger, at the
offices of Wyatt, Tarrant & Combs, 2800 Citizens Plaza, Louisville, Kentucky,
or at such other date and time, and at such other place, as may be mutually
agreed upon by Corporation and PFS.
ARTICLE 3
COVENANTS
3.1 Shareholders' Meeting. This Agreement and the Plan of Merger
shall be submitted for approval to the shareholders of PFS at a meeting to be
called and held in accordance with the applicable provisions of law and the
Articles of Incorporation and Bylaws of PFS (the "Meeting"). PFS shall cause
the Meeting to be held as promptly as practicable and shall disseminate to its
shareholders all materials required of it under law to be disseminated in
connection with the consideration by the shareholders of this Agreement and the
Plan. The Board of Directors of PFS shall recommend that its shareholders
adopt and approve this Agreement and the Plan of Merger at the Meeting and
shall take all action necessary or helpful to secure a vote of shareholders in
favor of the Merger. Immediately after the Meeting, PFS shall notify
Corporation of the results of the Meeting.
3.2 Proxy Statement/Prospectus. As promptly as practicable after
the date hereof, Corporation and PFS shall prepare the Proxy
Statement/Prospectus to be mailed to the shareholders of PFS in connection with
the Merger and to be filed by Corporation as part of the Registration
Statement. Corporation and PFS shall cooperate with each other in order to
facilitate the preparation, filing and clearance of the Registration Statement
and the Proxy Statement/Prospectus under the Securities Laws. Each of
Corporation and PFS will promptly advise the other if it determines that any
information furnished by it to the other specifically for use in the
Registration Statement, including the Proxy Statement/Prospectus included
therein, is or becomes false or misleading in any material respect. In no
event shall either party hereto be liable for, and each party shall indemnify
and hold the other harmless from, any untrue statement of a material fact or
omission to state a material fact in the Registration Statement made in
reliance upon, and in conformity with, written information concerning the other
party furnished by such other party specifically for use in the Registration
Statement. Corporation will advise PFS, promptly after it receives notice
thereof, of the time when the Registration Statement or any post-effective
amendment
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thereto has become effective or any supplement or amendment has been filed, of
the issuance of any stop order, of the suspension of the qualification of the
Corporation Common Stock issuable in connection with the Merger or offering or
sale in any jurisdiction, or the initiation or threat of any proceeding for any
such purpose, or of any request by the Commission for the amendment or
supplement of the Registration Statement or for any additional information.
Corporation shall take all actions necessary to register or qualify the shares
of Corporation Common Stock to be issued in the Merger pursuant to all
applicable state "blue sky" or securities laws and shall maintain such
registrations or qualifications in effect for all purposes hereof.
3.3 Cooperation. PFS and Corporation shall proceed expeditiously
and cooperate fully in making application for all necessary regulatory
approvals, in the procurement of any other consents and approvals, and in the
taking of any other action and the satisfaction of all other requirements
prescribed by law or otherwise, necessary for consummation of the Merger on the
terms provided herein and in the Plan of Merger. Corporation shall, and PFS
shall, and shall cause each PFS Subsidiary to, use all reasonable efforts (i)
to take, or cause to be taken, all actions necessary to comply promptly with
all legal requirements which may be imposed on such party with respect to the
Merger and to consummate the transactions contemplated by this Agreement and
the Plan of Merger, and (ii) to obtain (and to cooperate with the other party
to obtain) any consent, authorization, order or approval of, or any exemption
by, any governmental entity or any other public or private third party which is
required to be obtained or made by such party in connection with the Merger and
the transactions contemplated by this Agreement and the Plan of Merger. Each of
PFS and Corporation shall cooperate fully with, and provide true, complete and
accurate information to, the other in connection with their requests and
applications for consents and governmental clearance, approvals, licenses or
permits, if any, which are necessary for the Merger and Corporation's ownership
and operation of PFS's business following the Merger.
3.4 Conduct of Business Prior to Closing. Except with the prior
written consent of Corporation or as expressly contemplated or permitted by
this Agreement, during the period from the date of this Agreement and
continuing until the earlier of the Effective Time or the date this Agreement
is terminated, neither PFS nor any PFS Subsidiary shall:
A. conduct its business other than in the usual, regular
and ordinary course or fail to use its best efforts to preserve its business
organization intact or to keep available to Corporation the services of its
present officers and employees or to preserve the good will of its customers
and others having business relations with it;
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B. fail to comply in all material respects with all
applicable laws and regulations which relate to the conduct of its business;
C. amend its articles of incorporation or association or
bylaws;
D. except upon the exercise of outstanding options to
purchase 3,111 shares of PFS Common Stock, issue any shares of authorized
capital stock or securities convertible into such shares, or purchase, redeem,
retire or otherwise acquire any of its outstanding shares, or sell or give any
option or right to purchase, hypothecate, pledge or otherwise encumber or
dispose of any such shares or any shares held in treasury, if any, make or
effect any other change in the structure or composition of its capital stock or
agree to do any of the foregoing;
E. in the case of PFS only, declare or pay any dividends
or otherwise make distributions with respect to its capital stock;
F. except as Previously Disclosed, enter into, adopt,
amend or terminate any employee benefit plan, except as required by law, or
enter into any employment agreement with any person or, except in a manner
consistent with past practices, grant any increase in the compensation
(including bonus and benefit plans and all other non-cash compensation) of any
of its employees;
G. solicit or encourage (including by way of furnishing
nonpublic information) inquiries, or authorize or permit any of its officers,
directors, employees, advisors or representatives to solicit or encourage, or
take any other action to facilitate any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any takeover
proposal (as defined below) or agree to or endorse any takeover proposal, or
participate in an discussions or negotiations, or provide third parties with
any nonpublic information, relating to any such inquiry or proposal. As used
in this Agreement, "takeover proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
PFS or any PFS Subsidiary or any proposal or offer to acquire in any manner a
substantial equity interest in, or a substantial portion of the assets of, PFS
or any PFS Subsidiary other than the transactions contemplated by this
Agreement;
H. borrow or agree to borrow any amount of funds or
incur any obligation or liability except in the ordinary course of business
consistent with prior practice, or guarantee or agree to guarantee any material
obligations of others except for letters of credit and guaranties of signatures
in the ordinary course of business;
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I. except in the ordinary course of business, cancel any
indebtedness owing to it or any claims that it might have possessed, waive any
material rights of substantial value or sell, lease, encumber, otherwise
dispose of, or agree to sell, lease, encumber or otherwise dispose of any of
its assets;
J. except as Previously Disclosed, amend, modify or
terminate any material agreement or contract other than in the ordinary course
of business or commit any act or omit to do any act that would cause a breach
of any lease, contract or commitment to which it is a party or by which its
property or business is bound or affected, or which would have a material
adverse effect on its financial condition, operations or assets; or
K. enter into or agree to enter into any agreement or
contract that would have been required to be Previously Disclosed pursuant to
this Agreement, other than such contracts and agreements entered into in the
ordinary course of business.
3.5 Access to Information. Upon reasonable notice, Corporation
and PFS shall each (and shall cause each of their respective subsidiaries to)
afford to the officers, employees, accountants, counsel and other
representatives of the other, access, during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records and, during such period, each of Corporation and PFS
shall (and shall cause each of their respective subsidiaries to) make available
to the other (i) a copy of each report, schedule, registration statement and
other document filed or received by it during such period pursuant to the
requirements of the Securities Laws or federal or state banking laws (other
than reports or documents that such party is not permitted to disclose under
applicable law) and (ii) all other information concerning its business,
properties and personnel as such other party may reasonably request.
Corporation and PFS shall each, and each shall cause its directors, officers,
attorneys and advisors to, maintain the confidentiality of all information
obtained in such investigation (including information obtained prior to the
date hereof) which is not otherwise publicly disclosed, other than as a result
of a disclosure by the other party or the other party's representatives (unless
such information (i) thereafter becomes lawfully obtainable from other sources
or (ii) is required to be disclosed in any application required to be filed
hereunder with any governmental agency or authority and confidential treatment
of such information is requested), and to return all such information, and not
retain any copies, extracts, or other reproductions in whole or in part, if
this Agreement is terminated pursuant to Article 6, said undertakings to
survive any termination of this Agreement pursuant to Article 6. No
investigation by either Corporation or PFS shall affect the representations and
warranties to the other except to the extent such representations and
warranties are by their terms qualified by disclosures made to the other party.
The
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undertakings in this Section 3.5 shall survive any termination of this
Agreement.
3.6 Press Releases. All parties to this Agreement agree that any
press release or other public announcement by either party pertaining to the
Merger shall be coordinated with the other parties hereto; provided, however,
that nothing contained herein shall prohibit either party from making any
disclosure required by law which its counsel deems necessary, provided the
other party is given written notice thereof.
3.7 Updating of Information by PFS. PFS will furnish Corporation
with all reports and statements filed by it or any PFS Subsidiary with any
regulatory authority and the PFS Financial Statements, such reports and
statements to be furnished promptly after their filing or the preparation
thereof. Each such report and statement shall have been prepared in accordance
with and shall comply in all material respects with applicable law and the
regulations governing its preparation.
3.8 Accounting Treatment. PFS shall not intentionally take or
cause to be taken any action, whether before or after the Effective Time, that
would disqualify the Merger as a "pooling of interests" for accounting purposes
and neither Corporation nor PFS shall intentionally take or cause to be taken
any action, whether before or after the Effective Time, that would disqualify
the Merger as a "reorganization" within the meaning of Section 368(a) of the
Code.
3.9 PFS Affiliates. PFS shall, prior to the Closing Date, cause
to be delivered to Corporation a list, reviewed by PFS's counsel, identifying
all affiliates of PFS (as such term is used in Rules 144 and 145 promulgated by
the Commission under the Securities Laws). PFS shall furnish such information
and documents as Corporation may reasonably request for the purpose of
reviewing such list. PFS shall cause each person who is identified as an
"affiliate" in the list furnished pursuant to this Section and who is to
receive any shares of Corporation Common Stock pursuant to the Merger to
execute a written agreement on or before the Closing Date, in substantially the
form attached hereto as Exhibit 3.9 (collectively, the "Affiliate Agreements"),
that such person will not dispose of any shares of Corporation Common Stock
received in the Merger until such time as financial results covering at least
30 days of combined operations of Corporation and PFS shall be published and
that such person, for a period of two years (or three years if that person
becomes an affiliate of Corporation) following the Effective Time, (i) will not
offer to sell or otherwise dispose of any of the shares of Corporation Common
Stock received pursuant to the Merger in violation of the Securities Laws, (ii)
will acknowledge the placement of a legend on the certificate(s) representing
the "affiliate's" shares of Corporation Common Stock referring to the issuance
of such shares in a transaction to which
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said Rule 145 is applicable, and (iii) will acknowledge the giving of
stop-transfer instructions to Corporation's transfer agent with respect to the
"affiliate's" certificates evidencing Corporation Common Stock received in the
Merger, which shall be effective absent evidence of compliance with said Rule
145. Corporation shall during the period any "affiliates" hold shares of
Corporation Common Stock so restricted comply with the requirements of Rule
144(c) under the Securities Act of 1933 to allow such shares of Corporation
Common Stock held by such "affiliates" to be transferrable by the "affiliates"
in compliance with paragraphs (c), (e), (f) and (g) of Rule 144.
3.10 Employee Benefits. At, or as soon as administratively
feasible after, the Effective Time, employees and officers of PFS and each PFS
Subsidiary shall be provided with such employee benefits as Corporation from
time to time generally provides to employees and officers of a Corporation
Subsidiary, including, but not limited to, participation in Corporation's
Employee Stock Ownership Plan, Savings Investment Plan, life, medical and
hospitalization and disability insurance, and sick pay, vacation, personal
leave and severance benefits, on a non-discriminatory and substantially similar
basis. For purposes of providing such benefits to employees and officers of
PFS or any PFS Subsidiary after the Effective Time, the Corporation shall
credit such employees and officers for years of service at PFS or any PFS
Subsidiary prior to the Effective Time for purposes of eligibility, vesting,
and benefit amounts paid or privileges provided.
3.11 Dividends. Beginning with the second calendar
quarter of 1994 and for each succeeding calendar quarter thereafter prior to
the calendar quarter in which the Effective Time shall occur, PFS may declare
and pay dividends on shares of PFS Common Stock in an amount not to exceed $.72
per share of PFS Common Stock; provided, however, except as hereinbelow
provided, PFS shall not declare or pay any dividends or make any distributions
in any amount on PFS Common Stock in the quarter in which the Effective Time
shall occur and in which the shareholders of PFS Common Stock are entitled to
receive regular quarterly dividends on the shares of Corporation Common Stock
into which the shares of PFS Common Stock have been converted. It is the
intent of this Section 3.11 to provide that the holders of PFS Common Stock
will receive either the payment of cash dividends on their shares of PFS Common
Stock or the payment of cash dividends as the holders of shares of Corporation
Common Stock received in the Exchange for the calendar quarter in which the
Effective Time shall occur, but will not receive and will not become entitled
to receive for the same calendar quarter both the payment of a cash dividend as
a holder of PFS Common Stock and the payment of a cash dividend as a holder of
Corporation Common Stock.
3.12 Additional Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to
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carry out the purposes of this Agreement and the Plan of Merger, each party to
this Agreement shall take all such necessary action.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO PFS AND CORPORATION
4.1 PFS's Representations and Warranties. PFS hereby represents
and warrants to Corporation as follows:
A. Corporate Standing; Authorization.
[i] PFS is a bank holding company registered
under the BHCA and a savings and loan holding company registered under
the Savings and Loan Holding Company Act. PFS and each PFS Subsidiary
is a Tennessee corporation or banking corporation, duly organized,
validly existing under the laws of the State of Tennessee, or federal
savings bank, duly organized, validly existing and in good standing
under the laws of the United States of America. PFS and each PFS
Subsidiary organized under the laws of the State of Tennessee has paid
all fees due and owing to the Office of the Tennessee Secretary of
State, has delivered to that office its most recent annual report as
required by the Act, and has never filed articles of dissolution with
the Tennessee Secretary of State or the TDFI. PFS has delivered to
Corporation true and correct copies of the Charter and Bylaws of PFS
and all amendments thereto through the date hereof. PFS and each PFS
Subsidiary has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being
conducted and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership
or leasing of its properties makes such qualification necessary.
[ii] The execution and delivery of this Agreement
and the Plan of Merger do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with,
or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a
material benefit under, or the creation of a lien, pledge, security
interest, charge or other encumbrance on assets (any such conflict,
violation, default, right of termination, cancellation or
acceleration, loss or creation, shall be deemed hereunder a
"Violation") pursuant to, any provision of the articles of
incorporation or articles of association or bylaws of PFS or any PFS
Subsidiary, or, subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declaration
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and filings referred to in paragraph [iii] below, or result in any Violation of
any loan or credit agreement, note, mortgage, indenture, lease, Benefit Plan
(as defined in Section 4.1L) or other agreement, obligation, instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to PFS or any PFS Subsidiary or their
respective properties or assets.
[iii] Except (a) for consents, approvals, orders, and
authorizations from the Federal Reserve, the OTS and the TDFI, and (b)
for the filing of Articles of Merger with the Kentucky Secretary of
State and the Tennessee Secretary of State, no consent, approval,
order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, is
required by or with respect to PFS or any PFS Subsidiary in connection
with the execution and delivery of this Agreement and the Plan of
Merger, or the consummation by PFS of the transactions contemplated
hereby and thereby.
[iv] PFS has all requisite corporate power and
authority to enter into and, subject to the approval of its
shareholders, to consummate the transactions contemplated by this
Agreement and the Plan of Merger. 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 authorized
by all necessary corporate action on the part of PFS, subject to the
approval of this Agreement and the Plan of Merger by the shareholders
of PFS. This Agreement and the Plan of Merger have been duly executed
and delivered by PFS, and constitute the legal, valid and binding
obligations of PFS enforceable against it in accordance with their
terms.
B. Capital Structure of PFS. The authorized capital
stock of PFS consists of 100 shares of organizational common stock with $10.00
par value per share ("PFS Organizational Common Stock") and 1,000,000 shares of
common stock without par value ("PFS Common Stock"). At the date hereof, (i)
no shares of PFS Organizational Common Stock are issued or outstanding, and
(ii) 236,777 shares of PFS Common Stock are validly issued and outstanding and
fully paid and nonassessable, no shares are held by PFS in treasury, and 3,111
shares are reserved for issuance upon the exercise of outstanding options.
There is outstanding no subscription, option, warrant, call or commitment of
any character relating to shares of PFS's capital stock or any instruments that
can be converted into shares of PFS's capital stock. None of the shares of PFS
Common Stock have been issued in violation of any preemptive right. There are
no outstanding contractual obligations of PFS or any PFS Subsidiary to
repurchase, redeem or otherwise acquire any shares of capital stock of PFS. No
bonds, debentures, notes or other indebtedness
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having the right to vote (or convertible into or exercisable for securities
having the right to vote) on any matters on which stockholders of PFS may vote
are issued or outstanding.
C. Subsidiaries. PFS has Previously Disclosed each
company or other organization, whether incorporated or unincorporated, of which
PFS is a general partner or at least a majority of the securities or other
interests is directly or indirectly owned or controlled by PFS (each such
company or other organization Previously Disclosed by PFS is referred to in
this Agreement as a "PFS Subsidiary"). PFS has delivered to Corporation true
and correct copies of the Articles of Incorporation or Charter and Bylaws of
each PFS Subsidiary, as amended through the date hereof, and has Previously
Disclosed the authorized, issued and outstanding capital stock of each PFS
Subsidiary. No shares of capital stock of any PFS Subsidiary are held in
treasury. All of the outstanding shares of capital stock of each PFS
Subsidiary are validly issued and outstanding and are fully paid and
nonassessable and such shares are wholly owned by PFS directly, free and clear
of all liens, claims and encumbrances. There is outstanding no subscription,
option, warrant, call or commitment of any character relating to or any
instruments that can be converted into shares of the capital stock of any PFS
Subsidiary. No bonds, debentures, notes or other indebtedness having the right
to vote (or convertible into or exercisable for securities having the right to
vote) of any PFS Subsidiary are issued or outstanding.
D. SEC Documents. PFS has made available to Corporation
a true and complete copy of each report, schedule, and registration statement
filed by PFS with the Commission since January 1, 1993 through the date hereof
(as such documents have since the time of their filing been amended, the "PFS
SEC Documents"), which are all the documents that PFS was or will be required
to file with the Commission since such date. As of their respective dates, the
PFS SEC Documents complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such PFS SEC Documents,
and none of the PFS SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of PFS included
in the PFS SEC Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the Commission with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be indicated in the notes thereto or, in
the case of the unaudited statements, as permitted by Form 10-Q of the
Commission) and fairly present the consolidated financial position of PFS and
its consolidated subsidiaries as at the dates thereof
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and the consolidated results of their operations and cash flows for the periods
then ended. All material agreements, contracts or other documents required to
be filed as exhibits to any of the PFS SEC Documents have been or will be so
filed. All reports, schedules and statements hereafter filed by PFS with the
Commission which PFS shall deliver to Corporation pursuant to Section 3.5
hereof will comply in all material respects with the requirements of the
Securities Laws, and none of such reports, schedules or statements will contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of PFS included in such reports, schedules and statements
will comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto, will be prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the Commission) and will
fairly present the consolidated financial position of PFS and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended.
E. Information Supplied. None of the information
supplied or to be supplied by PFS for inclusion in (i) the Registration
Statement to be filed with the Commission by the Corporation in connection with
the issuance of shares of Corporation Common Stock in the Merger will, at the
time the Registration Statement is filed with the Commission and at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the Proxy
Statement/Prospectus will, at the date of mailing to shareholders of PFS and at
the time of the meeting of such shareholders to be held in connection with the
Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Proxy Statement/Prospectus will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
F. PFS Financial Statements. The PFS Financial
Statements were and will be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and fairly present and
will fairly present the financial condition of PFS and the PFS Subsidiaries at
the respective dates indicated therein, the results of operation of PFS and the
PFS Subsidiaries for the periods covered thereby and the other financial
information
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purported to be shown thereon. The business of PFS has been conducted only in
the ordinary course of business since December 31, 1992.
G. Absence of Undisclosed Liabilities. Except as
disclosed in the PFS Financial Statements or the PFS SEC Documents, neither PFS
nor any PFS Subsidiary has any obligations or liabilities (contingent or
otherwise) that might reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business, assets, results of
operations or financial condition of PFS and the PFS Subsidiaries taken as a
whole.
H. Loans and Allowance for Credit Losses. All loans
reflected on the books and records of each PFS Subsidiary have been [i] made
for good, valuable and adequate consideration in the ordinary course of
business and [ii] evidenced by notes or other evidences of indebtedness that
are true and genuine. The allowance for credit losses ("Allowance") shown on
the consolidated balance sheet of PFS as of September 30, 1993 included in the
PFS Financial Statements was, and the Allowance shown on the consolidated
balance sheets of PFS as of dates subsequent to the execution of this Agreement
included in the PFS Financial Statements will be, in each case as of the dates
thereof, adequate to provide for losses relating to or inherent in the loan and
lease portfolios of, and other extensions of credit (including letters of
credit and commitments to make loans or extend credit) made by, PFS and each
PFS Subsidiary.
I. Legal Proceedings. There are no claims of any kind
or any actions, suits, proceedings, arbitrations or investigations pending or,
to the best knowledge of PFS, threatened against PFS or any PFS Subsidiary or
against any asset, interest or right of any such company that might,
individually or in the aggregate, have a material adverse effect on the
financial condition, results of operation or business of PFS or any PFS
Subsidiary, nor is there any judgment, decree, injunction, rule or order of any
governmental entity or arbitrator outstanding against PFS or any PFS Subsidiary
having or which, insofar as reasonably can be foreseen, in the future could
have any such effect.
J. Agreements with Regulators. Except as Previously
Disclosed, neither PFS, any PFS Subsidiary, nor any officer or director of PFS
or any PFS Subsidiary, is a party to any written agreement or memorandum of
understanding with, or a party to any commitment letter or similar undertaking
to, or is subject to any order or directive by, or is a recipient of any
extraordinary supervisory letters from, any banking regulator, nor has PFS or
any PFS Subsidiary been advised by any banking regulator that it is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any such order, decree, agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter or similar
submission. No investigation
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by any governmental entity with respect to PFS or any PFS Subsidiary is pending
or, to the best knowledge of PFS, threatened and neither PFS nor any PFS
Subsidiary has knowledge of any basis for the commencement of any regulatory or
enforcement action against PFS or any PFS Subsidiary by any governmental or
regulatory authority.
K. Compliance with Laws. PFS and each PFS Subsidiary
holds all permits, licenses, variances, exemptions, orders and approvals of all
governmental entities which are material to the operation of the businesses of
PFS and each PFS Subsidiary and is in compliance in all material respects with
the terms thereof. PFS and each PFS Subsidiary has complied with in all
material respects and is not in any default under (and has not been charged
with or received notice with respect to nor are threatened with or under
investigation with respect to, any charge concerning any violation of any
provision of) any federal, state or local law, regulation, ordinance, rule or
order (whether executive, judicial, legislative or administrative) or any
order, writ, injunction or decree of any court, agency or instrumentality,
except for possible violations or defaults that, individually or in the
aggregate, would not have a material adverse effect on PFS and its Subsidiaries
taken as a whole. There are no uncured violations or violations with respect
to which refunds or restitution may be required cited in any report concerning
PFS or any PFS Subsidiary as a result of examination by any regulatory
authority and neither PFS nor any PFS Subsidiary has knowledge of any basis on
which refunds or restitution may be required by any regulatory authority.
L. Employee Benefit Plans.
[i] Since the date of the most recent PFS Financial
Statements, there has not been any adoption or amendment in any
material respect by PFS or any PFS Subsidiary of any collective
bargaining agreement, or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding (whether or not legally binding)
providing benefits to any current or former employee or director of
PFS or any PFS Subsidiary (collectively, "Benefit Plans"). Except as
Previously Disclosed, there exist no employment, consulting,
severance, termination or indemnification agreements, arrangements or
understandings between PFS or any PFS Subsidiary and any officer,
director or key employee of PFS or any PFS Subsidiary.
[ii] PFS has Previously Disclosed a list and brief
description of all "employee pension benefit plans" (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")) (sometimes
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referred to herein as "Pension Plans"), all "employee welfare benefit
plans"(as defined in Section 3(1) of ERISA) and all other Benefit
Plans maintained, or contributed to, by PFS or any PFS Subsidiary for
the benefit of any officers or employees of PFS or any PFS Subsidiary.
PFS has delivered to Corporation true, complete and correct copies of
(1) each Benefit Plan (or, in the case of any unwritten Benefit Plans,
descriptions thereof), (2) the most recent annual report on Form 5500
filed with the Internal Revenue Service with respect to each Benefit
Plan, (if any such report was required), (3) the most recent summary
plan description for each Benefit Plan for which such summary plan
description is required, and (4) each trust agreement and group annuity
contract relating to any Benefit Plan. No Benefit Plan provides
medical or hospitalization benefits to retirees or other former
employees, other than medical benefits required to be provided to
qualified beneficiaries under the provisions of Section 4980B(f) of
the Code and paid for entirely by the individual electing such
coverage under Section 4980B(f) of the Code.
[iii] Each Benefit Plan has been administered in all
material respects in accordance with its terms. Except as Previously
Disclosed, PFS, each PFS Subsidiary and all the Benefit Plans are in
compliance with the applicable provisions of ERISA and the Code. All
reports, returns and similar documents with respect to the Benefit
Plans required to be filed with any governmental agency or distributed
to any Benefit Plan participant have been duly and timely filed or
distributed. There are no investigations by any governmental agency,
termination proceedings or other claims (except claims for benefits
payable in the normal operation of the Benefit Plans), suits or
proceedings against or involving any Benefit Plan or asserting any
rights or claims to benefits under any Benefit Plan that could give
rise to any liability, and, to the best knowledge of PFS, there are
not any facts that could give rise to any liability in the event of
any such investigation, claim, suit or proceeding.
[iv] All Pension Plans have been the subject of
determination letters from the Internal Revenue Service to the effect
that such Pension Plans are qualified and exempt from Federal income
taxes under Sections 401(a) and 501(a), respectively, of the Code. No
such determination letter has been revoked nor, to the best knowledge
of PFS, has revocation been threatened, nor has any such Pension Plan
been amended since the date of its most recent determination letter or
application therefor in any respect that would adversely affect its
qualification or materially increase its costs.
[v] No Pension Plan that PFS, any PFS Subsidiary
or any other company under common control with PFS (within the meaning
of Section 4001(a)(14) of ERISA) maintains, or to
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which PFS, any PFS Subsidiary or any other company under common control
with PFS (within the meaning of Section 4001(a)(14) of ERISA) is
obligated to contribute, other than any Pension Plan that is a
"multiemployer plan" (as such term is defined in Section 4001(a)(3) of
ERISA) (collectively, the "Multiemployer Pension Plans"), had, as of the
respective last annual valuation date for each such Pension Plan, an
"unfunded benefit liability" (as such term is defined in Section
4001(a)(18) of ERISA). Except as Previously Disclosed, PFS is not aware
of any facts or circumstances that would change the funded status of any
such Pension Plan. None of the Pension Plans has an "accumulated
funding deficiency" (as such term is defined in Section 302 of ERISA or
Section 412 of the Code), whether or not waived. All contributions to,
and payments from, the Benefit Plans required to be made in accordance
with the Benefit Plans and, when applicable, Section 302 of ERISA or
Section 412 of the Code, have been timely made, and there has been no
application for or waiver of the minimum funding standards imposed by
Section 412 of the Code with respect to any Pension Plan. All such
contributions to, and payments from, the Benefit Plans (except those
payments to be made from a trust qualified under Section 401(a) of the
Code), for any period ending before the Effective Time that are not yet,
but will be, required to be made, will be properly accrued and reflected
in the proper books and records of PFS at the Effective Time. None of
PFS, any PFS Subsidiary or any officer of PFS or any PFS Subsidiary or
any of the Benefit Plans of PFS and any PFS Subsidiary which are subject
to ERISA, including the Pension Plans, or any trusts created thereunder,
any administrator or, to the best knowledge of PFS, any trustee thereof,
has engaged in a "prohibited transaction" (as such term is defined in
Section 406 of ERISA or Section 4975 of the Code) or any other breach of
fiduciary responsibility under Part 4, Subtitle B, Title I of ERISA that
could subject PFS, any PFS Subsidiary or any officer of PFS or any PFS
Subsidiary to the tax or penalty on prohibited transactions imposed by
such Section 4975 or to any liability under Section 502(i) or (1) of
ERISA. Neither any of such plans nor any of such trusts have been
terminated, nor has there been any "reportable event" (as that term is
defined in Section 4043 of ERISA) with respect thereto during the last
five years. Neither PFS, any PFS Subsidiary, any administrator, nor, to
the best knowledge of PFS, any trustee or other fiduciary, of any
Benefit Plan nor any agent of any of the foregoing has engaged in any
transaction or acted or failed to act in a manner that could subject PFS
or any PFS Subsidiary to any material liability for breach of fiduciary
duty under ERISA or any other applicable law. Neither PFS nor any PFS
Subsidiary (or any other employer that since September 2, 1974 has ever
been treated as a "single employer" under Section 414(b)(c) or (m) of the
Code with PFS or any PFS
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Subsidiary) has ever been required to contribute to any Multiemployer
Pension Plans.
[vi] With respect to any Pension Plan subject to
Title IV of ERISA (including for purposes of clause (1) below, any
Pension Plan maintained or contributed to by PFS or any other company
under common control with PFS within the meaning of Section 414 of the
Code and, for purposes of clause (2) below, any Pension Plan
maintained or contributed to by PFS or any other company under common
control with PFS within the meaning of Section 4001(a)(14) of ERISA):
PFS has not incurred any material liability on or prior to the date
hereof (1) to such Pension Plan or (2) to the Pension Benefit Guaranty
Corporation other than for the payment of premiums, all of which have
been paid when due. PFS has furnished to Corporation the most recent
actuarial report or valuation with respect to each Pension Plan that
is a "defined benefit pension plan" (as defined in Section 3(35) of
ERISA). The information supplied to the actuary by PFS for use in
preparing those reports or valuations was complete and accurate and
PFS has no reason to believe that the conclusions expressed in those
reports or valuations are incorrect.
[vii] With respect to any Benefit Plan that is an employee
welfare benefit plan: (1) no such Benefit Plan is unfunded or funded
through a welfare benefits fund, as such term is defined in Section
419(e) of the Code, (2) each such Benefit Plan that is a group health
plan, as such term is defined in Section 5000(b)(1) of the Code,
complies with the applicable requirements of Section 4980B(f) of the
Code and (3) each such Benefit Plan (including any such Plan covering
retirees or other former employees) may be prospectively amended or
terminated without material liability to PFS or any PFS Subsidiary on
or at any time after the Effective Time.
[viii] Each employee bonus or profit sharing plan
providing benefits to any current or former officer, director or
employee of PFS or any PFS Subsidiary is terminable by PFS or such PFS
Subsidiary without notice at any time.
M. Labor Matters.
[i] PFS and each PFS Subsidiary is in compliance in
all material respects with all applicable laws respecting employment
and employment practices, terms and conditions of employment and wages
and hours and occupational safety and health;
[ii] There is no unfair labor practice charge or
complaint or any other matter against or involving PFS or any PFS
Subsidiary pending or, to the knowledge of PFS, threatened
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before the National Labor Relations Board or any court of law;
[iii] Neither PFS nor any PFS Subsidiary is a party
to or bound by any collective bargaining agreement or any similar
labor union arrangement;
[iv] There are no charges, investigations,
administrative proceedings or formal complaints of discrimination
(including discrimination based upon sex, age, marital status, race,
color, religion, national origin, sexual preference, disability,
handicap or veteran status) pending or, to the knowledge of PFS
threatened, before the Equal Employment Opportunity Commission or any
federal, state or local agency or court against PFS or any PFS
Subsidiary;
[v] There have been no governmental audits of the
equal employment opportunity practices of PFS or any PFS Subsidiary
and, to the knowledge of PFS, no basis for any such claim exists; and
[vi] PFS and each PFS Subsidiary is in compliance in
all material respects with the requirements of the Americans With
Disabilities Act.
N. Brokers. Neither PFS, any PFS Subsidiary, nor any of
their respective officers, directors or employees, has employed any broker,
finder or financial advisor or incurred any liability for fees or commissions
payable to any broker, finder or financial advisor in connection with the
negotiations relating to or the transactions contemplated by this Agreement.
O. Assets. PFS and each PFS Subsidiary has good and
marketable title to all of the properties and assets, real and personal,
tangible and intangible, reflected on the PFS Financial Statements or acquired
after the dates thereof, free and clear of all liens, charges, security
interests, encumbrances and claims, except for [i] liens for current taxes not
yet due and payable, [ii] pledges to secure deposits and other liens incurred
in the ordinary course of its business, and [iii] such imperfections or
irregularities of title, easements, claims, liens, charges, security interests
and encumbrances, if any, as do not materially affect the use of the properties
or assets subject thereto or affected thereby or otherwise materially impair
business operations at such properties. All leases by which either of PFS or
any PFS Subsidiary leases real or personal property as lessee (other than
leases that are the equivalent of extensions of credit) are valid without
default in any material respect thereunder by the lessee or, to the best
knowledge of PFS, the lessor, and are in full force and effect in accordance
with their respective terms.
P. Material Contracts. Except as Previously Disclosed,
neither PFS nor any PFS Subsidiary is a party to any:
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[i] agreement, arrangement or commitment not made
in the ordinary course of business consistent with past practices;
[ii] employment agreement or any bonus, incentive,
deferred compensation, severance pay, profit sharing, retirement,
stock purchase, stock option agreement or arrangement or employee
benefit plan for or in respect of any employee or former employee;
[iii] collective bargaining agreement or other
agreement with any labor union or labor organization;
[iv] material agreement, indenture or other
instrument relating to the borrowing of money, or the guaranty of any
obligation for the borrowing of money or any agreement that involves a
potential material liability (other than in the ordinary course of its
business);
[v] any agreement, contract or commitment
containing any covenant materially limiting the freedom of PFS or any
PFS Subsidiary to engage in any line of business in any geographic
area or to compete with any person; or
[vi] agreement for loans or the provision,
purchase or sale of goods, services or property, or other contract or
commitment with any director or officer.
Q. Good Standing of Contracts. No event or condition has
occurred or exists, or, to the best knowledge of PFS, is alleged by any of the
other parties thereto to have occurred or existed, which constitutes, or with
lapse of time or giving of notice or both might constitute, a default or breach
under any of the leases, contracts or agreements to which PFS or any PFS
Subsidiary is a party, which default is reasonably likely to result in a
material adverse change in the financial condition, results of operation or
business of PFS or any PFS Subsidiary.
R. Insurance. PFS has Previously Disclosed true and
complete copies of all policies of fire, theft, liability and other insurance
and bonds maintained with respect to the assets or businesses of PFS and each
PFS Subsidiary, the effective dates thereof and the premiums payable with
respect thereto. All such policies and bonds are valid and enforceable and in
full force and effect and neither PFS nor any PFS Subsidiary has received any
notice of premium increases or cancellations with respect to any of such
policies and bonds. To the best knowledge of PFS, neither PFS nor any PFS
Subsidiary is liable for any material retroactive premium adjustments with
respect to any of its insurance policies or bonds.
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S. Tax Matters. Each member of the consolidated group
of which PFS is a member or has ever been a member (the "Group") has timely
filed or caused to be filed all federal, state, foreign and local income,
franchise, gross receipts, payroll, sales, use, withholding, occupancy, excise,
real and personal property, employment and other tax returns, tax information
returns and reports required to be filed, and has paid, or made adequate
provisions for the payment of, all taxes, duties or assessments of any nature
whatsoever, interest payments, penalties and additions (whether or not
reflected in its returns as filed) due and payable (and/or properly accruable
for all periods ending on or before the date of this Agreement) to any city,
county, state, foreign country, the United States or any other taxing
authority. The most recent PFS Financial Statements reflect an adequate
reserve for all taxes payable by PFS and each PFS Subsidiary accrued through
the date of such Financial Statements. No material deficiencies for any taxes
have been proposed, asserted or assessed against PFS or any PFS Subsidiary that
are not adequately reserved for. Except with respect to claims for refund, the
federal income tax returns of PFS and each PFS Subsidiary consolidated in such
returns have been examined by and settled with the United States Internal
Revenue Service (the "IRS"), or the statute of limitations with respect to such
years has expired (and no waiver extending the statute of limitations has been
requested or granted) for all years through 1989. The consolidated federal
income tax returns of the Group have not been audited during the last five (5)
fiscal years of PFS. No audit, examination or investigation is presently being
conducted or, to the best knowledge of PFS, threatened by any taxing authority;
no unpaid tax deficiencies or additional liabilities of any sort have been
proposed by any governmental representative; and no agreements for the
extension of time for the assessment of any amounts of tax have been entered
into by or on behalf of any member of the Group.
T. Fiduciary Activities. Each PFS Subsidiary's
fiduciary and custodial activities have been and are being conducted in all
material respects in accordance with all applicable law.
U. Environmental Matters.
[i] PFS and each PFS Subsidiary is in substantial compliance
with all applicable federal, state and local laws, rules, regulations,
ordinances and requirements relating to the environment
("Environmental Laws");
[ii] No "Hazardous Wastes" (as hereinafter defined) have ever
been generated, transported, treated, stored, released or disposed of
on any real property owned or leased by PFS or PFS Subsidiary;
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[iii] Neither PFS nor any PFS Subsidiary has transported or
disposed or caused or permitted any person to transport or dispose of
any Hazardous Wastes other than in accordance with all Environmental
Laws;
[iv] Neither PFS nor any PFS Subsidiary has ever violated any
of the Environmental Laws;
[v] No asbestos, PCBs or other Hazardous Wastes or any
petroleum product or constituents thereof is present on, in or under
any of the property owned by PFS or any PFS Subsidiary, whether owned
or leased or held as OREO (as such term is customarily used) or in
which PFS or any PFS Subsidiary has any legal or equitable interest;
[vi] There are no loans or other credits included in the loan
portfolio of any PFS Subsidiary with respect to which PFS or any PFS
Subsidiary is or could incur or become responsible for liability under
the Environmental Laws; and
[vii] No Hazardous Wastes have ever been utilized on any of
the property now held or previously held by PFS or any PFS Subsidiary
as collateral or otherwise securing any loan made by PFS or any PFS
Subsidiary.
Hazardous Wastes" for purposes of this Agreement shall include,
without limitation: [i] hazardous substances or hazardous wastes, as those
terms are defined by the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq., and any other applicable federal,
state or local law, rule, regulation, ordinance or requirement, all as amended
or hereafter amended; [ii] petroleum, including without limitation crude oil
or any fraction thereof which is liquid at standard conditions of temperature
and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute);
[iii] any radioactive material , including without limitation any source,
special nuclear, or by-product material as defined in 42 U.S.C. Section 2011 et
seq.; and [iv] asbestos or any asbestiform minerals in any form or condition.
V. Insider Loans. All loans, loan commitments and any
other extensions of credit and commitments to extend credit that are currently
outstanding by PFS or any PFS Subsidiary to directors, officers, or principal
shareholders of PFS or any PFS Subsidiary or any of their related interests,
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and substantially comply with all applicable provisions of
federal and state law. Such loans, extensions and commitments do not involve
more than a normal risk of collectability.
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W. Adjustable Rate Mortgages. Each PFS Subsidiary has
properly calculated, in accordance with the contractual terms thereof and all
applicable law, all adjustments required in its portfolio of adjustable rate
mortgage notes.
X. Regulatory Matters. Neither PFS nor any PFS
Subsidiary has, through the date hereof, taken or agreed to take any action or
has knowledge of any fact or circumstance that would materially impede or delay
receipt of any approval referred to in Section 5.2E hereof.
Y. Absence of Certain Changes or Events. Except as
disclosed in the PFS SEC Documents or Previously Disclosed, since December 31,
1992, PFS and the PFS Subsidiaries have not incurred any material liability,
except in the ordinary course of their business consistent with their past
practices, nor has there been any change, or any event involving a prospective
change, in the business, assets, financial condition or results of operations
of PFS or any of its PFS Subsidiaries that has had, or is reasonably likely to
have, a material adverse effect on PFS and PFS's Subsidiaries taken as a whole.
Z. Full Disclosure. No representation or warranty of
PFS contained in this Agreement and no statement contained in this Agreement or
in any certificate or other instrument furnished to Corporation hereunder
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact necessary to make the statements contained
herein or therein not misleading.
4.2 Corporation's Representations and Warranties. Except as
Previously Disclosed, Corporation hereby represents and warrants to PFS that:
A. Corporate Standing; Authorization.
[i] Corporation is a bank holding company
registered under the BHCA and a savings and loan holding company
registered under the Savings and Loan Holding Company Act.
Corporation and each Corporation Subsidiary is a Kentucky corporation
or national bank or savings association duly organized, validly
existing, and in good standing under applicable laws. Corporation and
each Corporation Subsidiary have all requisite power and authority to
own, lease and operate its properties and to carry on its business as
now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification
necessary.
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[ii] The execution and delivery of this Agreement
and the Plan of Merger do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with,
or result in any Violation pursuant to, any provision of the articles
of incorporation or association or charter or bylaws of Corporation or
any Corporation Subsidiary or, subject to obtaining or making the
consents, approvals, orders, authorizations, registrations,
declarations and filings referred to in paragraph [iii] below, result
in any Violation of any loan or credit agreement, note, mortgage,
indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to
Corporation or any Corporation Subsidiary or their respective
properties or assets.
[iii] Except (a) for consents, approvals, orders,
and authorizations from the Federal Reserve, the OTS, the KDFI, and
the TDFI, (b) for the filing of Articles of Merger with the Kentucky
Secretary of State and the Tennessee Secretary of State, and (c) in
connection with compliance with the provisions of the Securities Laws
and applicable state corporate and securities laws, no consent,
approval, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, is
required by or with respect to Corporation or any Corporation
Subsidiary in connection with the execution and delivery of this
Agreement and the Plan of Merger, or the consummation by Corporation
of the transactions contemplated hereby and thereby.
[iv] Corporation has all requisite corporate power
and authority to enter into and to consummate the transactions
contemplated by this Agreement and the Plan of Merger. 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 authorized by all necessary corporate action on the part of
Corporation. This Agreement and the Plan of Merger have been duly
executed and delivered by Corporation and constitute the legal, valid
and binding obligations of Corporation enforceable against it in
accordance with their terms.
B. SEC Documents. Corporation has made available to PFS
a true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by Corporation with the Commission since
January 1, 1991 (as such documents have since the time of their filing been
amended, the "Corporation SEC Documents"), which are all the documents that
Corporation was required to file with the Commission since such date. As of
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their respective dates, the Corporation SEC documents complied in all material
respects with the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the Commission thereunder applicable to such
Corporation SEC Documents, and none of the Corporation SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
financial statements of Corporation included in the Corporation SEC Documents
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission
with respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of the
unaudited statements, as permitted by Form 10-Q of the Commission) and fairly
present the consolidated financial position of Corporation and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended. All material agreements,
contracts and other documents required to be filed as exhibits to any of the
Corporation SEC Documents have been so filed. All reports, schedules and
statements hereafter filed by Corporation with the Commission which Corporation
shall deliver to Corporation pursuant to Section 3.5 hereof will comply in all
material respects with the requirements of the Securities Laws, and none of such
reports, schedules or statements will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The financial statements of Corporation
included in such reports, schedules and statements will comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto, will be
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted by
Form 10-Q of the Commission) and will fairly present the consolidated financial
position of Corporation and its consolidated subsidiaries as at the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended.
C. Absence of Certain Changes or Events. Except as
disclosed in the Corporation SEC Documents, since December 31, 1992,
Corporation and the Corporation Subsidiaries have not incurred any material
liability, except in the ordinary course of their business consistent with
their past practices, nor has there been any change, or any event involving a
prospective change, in the business, assets, financial condition or results of
operations of Corporation or any of its Corporation Subsidiaries that has had,
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or is reasonably likely to have, a material adverse effect on Corporation and
the Corporation Subsidiaries taken as a whole.
D. Brokers. Neither Corporation nor any Corporation
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or incurred any liability for
fees or commissions in connection with the negotiations relating to or the
transactions contemplated by this Agreement.
E. Legal Proceedings. There are no claims of any kind
or any actions, suits, proceedings, arbitrations or investigations pending or,
to the best knowledge of Corporation, threatened against Corporation or any
Corporation Subsidiary or against any asset, interest or right of any such
company that might, individually or in the aggregate, have a material adverse
effect on the financial condition, results of operation or business of
Corporation or any Corporation Subsidiary, nor is there any judgment, decree,
injunction, rule or order of any governmental entity or arbitrator outstanding
against Corporation or any Corporation Subsidiary having or which, insofar as
reasonably can be foreseen, in the future could have any such effect.
F. Employee Benefit Plans. Each bonus, pension, profit
sharing, deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other plan, arrangement
or understanding (whether or not legally binding) providing benefits to any
current or former employee or director of Corporation or any Corporation
Subsidiary has been administered in all material respects in accordance with
its terms and is in compliance in all material respects with the applicable
provisions of ERISA and the Code.
4.3 Non-Survival of Representations and Warranties. All
representations and warranties contained in this Agreement by any party hereto
or set forth in any certificate or other instrument delivered by or on behalf
of the parties pursuant to this Agreement shall expire at the Effective Time.
ARTICLE 5
CONDITIONS PRECEDENT
5.1 Conditions to Obligations of PFS. The obligation of PFS to
consummate the transactions contemplated by this Agreement and the Plan of
Merger, including the Merger, is subject to the satisfaction of the following
conditions precedent on or before the Closing Date, any of which may be waived
by PFS:
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A. Approval of this Agreement and the Plan of Merger by
the shareholders of PFS at the Meeting.
B. There shall not be threatened, instituted or pending
any action or proceeding before any domestic or foreign court or governmental
agency or other regulatory or administrative agency or commission, or by any
other person [i] challenging the Merger or the other transactions contemplated
by this Agreement or the terms thereof, or [ii] seeking to prohibit the Merger
or the other transactions contemplated by this Agreement, which, in the opinion
of PFS's counsel, has a reasonable probability of success.
C. The representations and warranties of Corporation set
forth in Section 4.2 of this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date
as if made on the Closing Date, and Corporation shall have furnished to PFS a
certificate of an executive officer of Corporation to that effect.
D. Corporation in all material respects shall have
performed and observed its obligations and covenants as set forth in this
Agreement prior to or on the Closing Date and shall have delivered to PFS a
certificate of an executive officer of Corporation to that effect and evidence,
in form and substance satisfactory to counsel for PFS, that the transactions
contemplated by this Agreement and the Plan of Merger were duly authorized by
all necessary corporate action of Corporation.
E. There shall not have been any material adverse change
in the business, financial condition, prospects or operations of Corporation
since December 31, 1992.
F. Receipt of all permits, consents, approvals and
authorizations from federal and state governmental authorities and regulatory
agencies necessary to effect the Merger (including the expiration of all
applicable waiting periods) and the other transactions contemplated herein, and
the satisfaction of all other requirements prescribed by law which are
necessary to the carrying out of the Merger.
G. PFS shall have received an opinion of counsel of
Corporation dated as of the Closing Date, in substantially the form attached
hereto as Exhibit 5.1G.
H. PFS shall have received the opinion of Corporation's
counsel in form and substance reasonably satisfactory to PFS and its counsel,
dated the Closing Date, to the effect that the Merger will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368 of the Code and that, except with respect to the payment of cash for
fractional shares or in connection with the exercise of appraisal rights, the
conversion of PFS Common Stock into Corporation Common Stock will not give rise
27
<PAGE> 28
to the recognition of gain or loss for federal income tax purposes to the
shareholders of PFS.
I. PFS shall have received an opinion from its financial
advisor to the effect that, as of the date the Proxy Statement/Prospectus was
mailed to shareholders of PFS, the Merger is fair to the shareholders of PFS
from a financial viewpoint.
J. The Registration Statement (including any post
effective amendments thereto) shall be effective under the Securities Act of
1933, as amended, and no proceedings shall be pending or to the knowledge of
PFS threatened by the Commission to suspend the effectiveness of such
Registration Statement.
5.2 Conditions to Obligations of Corporation. The obligation of
Corporation to consummate the transactions contemplated by this Agreement and
the Plan of Merger, including the Merger, is subject to the satisfaction of the
following conditions precedent on or before the Closing Date, any of which may
be waived by Corporation:
A. Approval of this Agreement and the Plan of Merger by
the shareholders of PFS at the Meeting.
B. There shall not be threatened, instituted or pending
any action or proceeding before any domestic or foreign court or governmental
agency or other regulatory or administrative agency or commission, or by any
other person [i] challenging the Merger or the other transactions contemplated
by this Agreement or the terms thereof, or [ii] seeking to prohibit the Merger
or the other transactions contemplated by this Agreement, which, in the opinion
of Corporation's counsel, has a reasonable probability of success.
C. The representations and warranties of PFS set forth
in Section 4.1 of this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as if made
on the Closing Date, and PFS shall have furnished to Corporation a certificate
executed by the Chief Executive Officer of PFS to that effect.
D. PFS in all material respects shall have performed and
observed its obligations and covenants as set forth in this Agreement prior to
or on the Closing Date and shall have delivered to Corporation a certificate of
the Chief Executive Officer of PFS to that effect and evidence, in form and
substance satisfactory to counsel for Corporation, that the transactions
contemplated by this Agreement and the Plan of Merger were duly authorized by
all necessary corporate action of PFS.
E. Receipt of all permits, consents, approvals and
authorizations from federal and state governmental authorities and regulatory
agencies necessary to effect the Merger (including the expiration of all
applicable waiting periods) and the other
28
<PAGE> 29
transactions contemplated herein, on terms and conditions satisfactory to
Corporation (other than standard terms and conditions), and the satisfaction of
all other requirements prescribed by law which are necessary to the carrying
out of the Merger.
F. There shall not have been any material adverse change
in the business, financial condition, prospects or operations of PFS or any PFS
Subsidiary since December 31, 1992.
G. Corporation shall have received an opinion of counsel
for PFS dated as of the Closing Date, in substantially the form attached hereto
as Exhibit 5.2G.
H. Corporation shall have received a written release
from each of the executive officers and directors of PFS and each PFS
Subsidiary which releases Corporation, PFS and each PFS Subsidiary from any and
all claims, known or unknown, contingent or direct, which he or she may have
against Corporation, PFS or any PFS Subsidiary as of the Closing Date, other
than [i] claims arising under this Agreement and the transactions contemplated
hereby, or [ii] claims arising out of moneys on deposit or property held in
trust or as a custodian by a PFS Subsidiary or compensation accrued but not yet
payable or in payment for services rendered to PFS or any PFS Subsidiary as
reflected on the books and records of PFS or any PFS Subsidiary or [iii] claims
under PFS's articles of incorporation, bylaws, or under statutory or common law
for indemnification against liabilities or claims made against them resulting
from their service as an executive officer or director of PFS before the
Effective Time, including, without limitation, the advancement or reimbursement
of expenses and costs.
I. Corporation shall have received a letter from KPMG
Peat Marwick to the effect that the Merger qualifies for "pooling of interests"
accounting treatment if consummated in accordance with this Agreement and the
Plan of Merger.
J. The Registration Statement (including any post
effective amendments thereto) shall be effective under the Securities Act of
1933, as amended, and no proceedings shall be pending or to the knowledge of
Corporation threatened by the Commission to suspend the effectiveness of such
Registration Statement.
K. Corporation shall have received all state securities
or "blue sky" permits and other authorizations necessary to consummate the
Merger.
L. The "affiliates" of PFS shall have executed and
delivered the Affiliate Agreements.
M. Each of Barry T. Buckley, Fred H. Brown, M. Dale
Bruner, Walter W. Carlen, Steve D. Cihat, Michael Evans, Paul R.
29
<PAGE> 30
Gaw, Thomas D. Gentry, Billy C. Hall, James N. Hall and James B. McWilliams
shall have executed and delivered to Corporation a noncompetition agreement in
the form attached hereto as Exhibit 5.2.M.
ARTICLE 6
TERMINATION
6.1 Dissenting Shares. Prior to the Effective Time, this
Agreement and the Plan of Merger may be declared void and of no effect by
Corporation if the number of Dissenting Shares is greater than 9% of the issued
and outstanding shares of PFS.
6.2 Termination. This Agreement and the Plan of Merger may be
terminated: (i) by the mutual agreement of Corporation and PFS; (ii) by
Corporation, upon prior written notice, if PFS materially breaches any
representation or warranty set out in Section 4.1 of this Agreement or
materially breaches any covenant in this Agreement, or upon the failure and
nonwaiver of any condition precedent set out in Section 5.2 unless, in the case
of a material breach of a covenant or failure of a condition, within thirty
(30) days after written notice from Corporation, PFS shall have cured such
breach or failure; (iii) by PFS, upon prior written notice, if Corporation
materially breaches any representation or warranty set out in Section 4.2 of
this Agreement or materially breaches any covenant in this Agreement or upon
the failure and nonwaiver of any condition precedent set out in Section 5.1
unless, in the case of a material breach of a covenant or failure of a
condition, within thirty (30) days after written notice from PFS, Corporation
shall have cured such breach or failure; or (iv) by PFS or Corporation if the
Effective Time shall not have occurred on or before August 31, 1994.
6.3 Declaration. Any declaration of termination under this
Article 6 by Corporation or PFS shall be pursuant to resolution of its Board of
Directors or by executive officers thereof duly authorized by its Board of
Directors to make such a declaration; shall be made by written notice given to
the other parties setting forth the grounds for the termination, including, if
applicable, the alleged material misrepresentation, breach or failure, and,
unless, in the case of a material breach of a covenant or a failure of a
condition, such material breach or failure is timely cured, shall have the
effect of terminating this Agreement and the Plan of Merger effective upon the
delivery of such written notice or the expiration of any applicable cure
period, whichever is later, whereupon the same shall have no further effect and
the Merger provided for herein and therein shall not be effected.
Notwithstanding the foregoing, no termination of this Agreement shall affect
the covenants set forth in Section 3.5 relating to confidentiality or the
provisions set forth in Section 8.5 relating to
30
<PAGE> 31
expenses, which shall survive any such termination. Except as otherwise
expressly provided herein, no termination of this Agreement on the grounds of a
material misrepresentation or uncured material breach of any covenant contained
herein shall relieve the breaching party from any liability for such uncured
material misrepresentation or uncured material breach of any covenant or
agreement contained herein giving rise to such termination.
ARTICLE 7
INDEMNIFICATION
Except with respect to an unintentional breach of the
representations and warranties of PFS contained in Section 4.1U [v], [vi], or
[vii] of this Agreement (for which PFS shall not be liable hereunder), PFS
shall indemnify, defend and hold Corporation harmless, and Corporation shall
indemnify, defend and hold PFS harmless, against and in respect of any material
nonfulfillment of any covenant or agreement or the material breach of any
representation or warranty on the part of the indemnifying party under this
Agreement and any claim, action, suit, proceeding, demand, judgment,
assessment, cost and expense, including reasonable counsel fees, incident to
the foregoing. Except with respect to a party's intentional breach of any
covenant, agreement, representation or warranty under this Agreement, the
liability of either party hereto under this Article 7 shall be limited to the
actual costs and expenses incurred by the party to be indemnified in connection
with its investigation of the other party and the transactions contemplated by
this Agreement. A party seeking indemnification hereunder shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, cost and expenses in respect of which indemnity is sought
hereunder.
ARTICLE 8
GENERAL PROVISIONS
8.1 Law and Section Headings. This Agreement shall be construed
and interpreted in accordance with the laws of the Commonwealth of Kentucky.
Section headings are used in this Agreement for convenience only and are to be
ignored in the construction of the terms of this Agreement.
8.2 Modifications. The parties hereto may amend, modify or
supplement this Agreement, before or after approval thereof by the shareholders
of PFS, in such manner as may be agreed by them in writing.
31
<PAGE> 32
8.3 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
the remaining provisions.
8.4 Notices. All notices hereunder shall be in writing and shall
be deemed to have been given or made when delivered or mailed, first class,
registered or certified mail, postage prepaid, addressed as follows, until
notice of another address or additional addresses have been received by the
other parties:
If to Corporation to:
Trans Financial Bancorp, Inc.
500 East Main Street
Bowling Green, Kentucky 42101
Attention: Douglas M. Lester, President and Chief
Executive Officer
With a copy to:
Stewart E. Conner, Esq.
WYATT, TARRANT & COMBS
2800 Citizens Plaza
Louisville, Kentucky 40202
If to PFS, to:
Peoples Financial Services, Inc.
Two West Jackson
P. O. Box 130
Cookeville, Tennessee 38501-0130
Attention: Barry Buckley, President
and Chief Executive Officer
With a copy to:
Steven Eisen, Esq.
Baker, Worthington, Crossley, Stansberry
& Woolf
1700 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
8.5 Expenses; Risk of Loss. Whether or not the Merger is
consummated, each of the parties hereto will pay its own fees and expenses
incurred in connection with the Merger and the other transactions contemplated
by this Agreement and the Plan of Merger; provided, however, that if the
transactions contemplated hereby are
32
<PAGE> 33
consummated, then the out-of-pocket fees and expenses incurred or paid by or on
behalf of PFS in connection with the Merger or the consummation of any of the
transactions contemplated by this Agreement and the Plan of Merger, including
all fees and expenses of investment banking firms, financial advisors,
attorneys, accountants, experts and consultants, shall not exceed $50,000
(excluding the costs of printing and mailing to shareholders of PFS the Proxy
Statement/Prospectus). Corporation and PFS shall share equally the cost
incurred in printing and mailing to shareholders of PFS the Proxy
Statement/Prospectus. Until the Effective Time, the risk of loss to the assets
of PFS shall remain with PFS.
8.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
8.7 Time of Essence; Best Efforts. Time is of the essence to the
performance of the obligations set forth in this Agreement. PFS and
Corporation each agree to use their respective best efforts to obtain the
satisfaction of the conditions to their respective obligations specified
herein, and to advise the other parties hereto in writing as to any unusual
delays or impediments in obtaining the same.
8.8 Closing. At the Closing, each party shall execute and deliver
all documents required by this Agreement, and such further documents as the
other party shall reasonably request in order to satisfy the fulfillment of
each party's agreements and undertakings hereunder.
8.9 Records and Further Assurances. After the Closing, each party
shall make available to the other on reasonable request such books and records
of that party as may be appropriate for use in connection with their respective
tax returns, including any review thereof, and for any other reasonable
purpose.
8.10 Parties in Interest; Third Party Rights. All covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of their respective successors and
permitted assigns. No party to this Agreement may however, assign its rights
hereunder or delegate its obligations hereunder to any other person or entity
without the express prior written consent of the other parties hereto. It is
the intention of the parties that nothing in this Agreement or the Plan of
Merger shall be deemed to create any right with respect to any person or entity
not a party to this Agreement or the Plan of Merger.
8.11 Entire Agreement; Waiver. This Agreement, including all
information Previously Disclosed, the Exhibits hereto and the Plan of Merger,
constitute and contain the entire agreement of PFS and
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<PAGE> 34
Corporation with respect to the Merger and supersede any prior agreement by the
parties, whether written or oral. The waiver of a breach of any term or
condition of this Agreement must be in writing signed by the party sought to be
charged with such waiver and such waiver shall not be deemed to constitute the
waiver of any other breach of the same or of any other term or condition of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers as of the date first
above written.
TRANS FINANCIAL BANCORP, INC.
By /s/ Douglas M. Lester
--------------------------------
Douglas M. Lester, President and
Chief Executive Officer
PEOPLES FINANCIAL SERVICES, INC.
By /s/ Barry Buckley
---------------------------------
Barry Buckley, President and
Chief Executive Officer
34
<PAGE> 1
Exhibit 2(b)
PLAN OF MERGER
THIS PLAN OF MERGER ("Plan") is made and entered into as of
this 27th day of December, 1993, by and between TRANS FINANCIAL BANCORP, INC.,
a Kentucky corporation ("Corporation") and PEOPLES FINANCIAL SERVICES INC., a
Tennessee corporation ("PFS").
W I T N E S S E T H :
PFS is a corporation organized and existing under the laws of
the State of Tennessee, the authorized capital stock of which consists of [i]
100 shares of organizational common stock with $10.00 par value per share ("PFS
Organizational Common Stock") of which at the date hereof no shares are issued
and outstanding and [ii] 1,000,000 shares of common stock without par value
("PFS Common Stock"), of which at the date hereof 236,777 shares are issued and
outstanding and fully paid and nonassessable, and 3,111 shares are reserved for
issuance upon the exercise of outstanding options.
The respective Boards of Directors of Corporation and PFS have
determined that it is desirable to effect a Plan and Agreement of
Reorganization (the "Agreement"), for the general welfare and advantage of
Corporation and PFS and their respective shareholders, under which plan PFS
would be merged into Corporation, in accordance with the terms of the Agreement
and this Plan.
The respective Boards of Directors of PFS and Corporation have
approved and adopted the Agreement and this Plan and have authorized the
execution hereof.
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements and undertakings herein contained, the parties hereby agree
as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Upon the terms and conditions set forth in this Plan
and the Agreement, at the Effective Time (as hereinafter defined), PFS shall be
merged with and into Corporation (the "Merger") in accordance with the
provisions of and with the effect provided in the Kentucky Business Corporation
Act (the "KBCA") and the Tennessee Business Corporation Act ("TBCA"). The
terms of the Merger shall be as set forth in the Agreement and in this Plan.
<PAGE> 2
1.2 Articles of Merger. Upon the terms and conditions set forth in
the Agreement and this Plan, Articles of Merger (the "Articles of Merger")
shall be duly prepared and executed by Corporation and PFS, and thereafter
delivered to the Secretary of States of the Commonwealth of Kentucky and the
State of Tennessee for filing, as provided in the KBCA and the TBCA on the
Closing Date, as defined in the Agreement. The Merger shall become effective
upon filing with the Kentucky Secretary of State and the Tennessee Secretary of
State or at such time and date thereafter as is provided in the Articles of
Merger (the "Effective Time").
1.3 Effect of Filing.
A. At the Effective Time, [i] the separate existence of
PFS shall cease and PFS shall be merged with and into Corporation (sometimes
herein referred to as the "Surviving Corporation") and [ii] the Articles of
Incorporation and Bylaws of Corporation as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation.
B. At the Effective Time, the officers and Board of
Directors of the Surviving Corporation shall consist of those persons serving
as the officers and directors of Corporation immediately prior to the Effective
Time.
C. At and after the Effective Time, the Merger will have
the effects set forth in Section 271B.11-060 of the KBCA and Section 48-21-107
of the TBCA and as otherwise provided by law.
ARTICLE 2
CONVERSION OF SHARES
2.1 Conversion of PFS Capital Stock.
A. Conversion of PFS Common Stock. Each share of PFS
Common Stock issued and outstanding immediately prior to the Effective Time
shall, automatically, by virtue of the Merger and at the Effective Time, be
exchanged for and converted, without any further notice to or on the part of
the holder thereof, into 5.5 shares of Corporation Common Stock, subject to
Sections 2.1.B and 2.1.C hereof (the "Exchange Ratio"). All shares of PFS
Common Stock shall automatically be canceled and shall cease to exist and each
certificate previously representing any such shares shall thereafter represent
the right to receive the Corporation Common Stock into which such PFS Common
Stock has been converted. Certificates previously representing shares of PFS
Common Stock shall be exchanged for Corporation Common Stock issued in
consideration therefor upon the surrender of such certificates in accordance
with Section 2.2.
B. Reclassifications. If prior to the Effective Time
the outstanding shares of Corporation Common Stock shall have been
<PAGE> 3
increased, decreased or changed into or exchanged for a different
number or kind of shares or securities by reorganization, recapitalization,
reclassification, stock dividend, stock split or other like changes in
Corporation's capitalization, all without Corporation receiving consideration
therefor, then an appropriate and proportionate adjustment shall be made in the
number and kind of shares of Corporation Common Stock to be thereafter
delivered pursuant to this Plan of Merger.
C. No Fractional Shares. No certificate or scrip of any
kind will be issued by Corporation to any shareholder of PFS in respect of any
fractional interest in Corporation Common Stock arising out of the conversion
of PFS Common Stock into Corporation Common Stock in the Merger and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a shareholder of the Corporation. No holder of PFS Common Stock will
have any rights in respect of a fractional interest in Corporation Common Stock
arising out of the Merger except the right to receive in lieu thereof a cash
payment in a dollar amount equal to such fractional interest multiplied by the
average of the bid and asked price per share, as quoted by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), for
Corporation Common Stock on the trading day which occurs immediately prior to
the Closing Date. For purposes of this Agreement, "trading day" shall mean any
day on which securities are traded on the New York Stock Exchange.
2.2 Exchange of Certificates.
A. As of the Effective Time, the Corporation shall
deposit, or cause to be deposited, with Peoples Bank & Trust of the
Cumberlands, Cookeville, Tennessee (the "Exchange Agent"), for the benefit of
the holders of PFS Common Stock, for exchange in accordance with this Section
2.2, through the Exchange Agent, certificates representing the shares of
Corporation Common Stock (such certificates for shares of Corporation Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
2.1 in exchange for outstanding shares of PFS Common Stock.
B. At and after the Effective Time, each person (other
than Corporation) who immediately prior to the Effective Time held of record
shares of PFS Common Stock shall be entitled to receive, upon the surrender of
the certificate(s) which represented such shares (individually a "Certificate"
and collectively the "Certificates") to Corporation, together with a letter of
transmittal (in the form contemplated by Section 2.2.C) duly executed, the
consideration specified in Section 2.1.
C. On, or within seven (7) days after the Effective
Time, the Exchange Agent shall mail or deliver to each holder
3
<PAGE> 4
(other than Corporation), who immediately prior to the Effective Time held of
record shares of PFS Common Stock, a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of the
Certificates or payment therefor. No interest will be paid or accrue on any
consideration payable on the surrender of such Certificate. If delivery of
certificates of Corporation Common Stock is to be made to a person other than
the person in whose name the Certificate surrendered is registered, it shall be
a condition of payment that the Certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the
Certificate surrendered or establish to the satisfaction of Corporation that
such tax has been paid or is not applicable.
D. At and after the Effective Time, holders of
Certificates shall cease to have any rights as shareholders of PFS except for
the right to receive upon such surrender the consideration specified in Section
2.1.
E. No dividends or other distributions declared or made
after the Effective Time with respect to Corporation Common Stock with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Corporation Common Stock represented
thereby, and no cash payment in lieu of fractional shares shall be paid to any
such holder pursuant to Section 2.1.C until the holder of such Certificate
shall surrender such Certificate. Subject to the effect of applicable laws,
following the surrender of any such Certificate, there shall be paid to the
holder of such Certificate(s) representing whole shares of Corporation Common
Stock issued in exchange therefor, without interest, (i) at the time of such
surrender the amount of any cash payable with respect to a fractional share of
Corporation Common Stock to which such holder is entitled pursuant to Section
2.1.C and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Corporation Common Stock, 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 subsequent to surrender payable with
respect to such whole shares of Corporation Common Stock.
F. After the Effective Time, except to the extent
necessary to issue replacement Certificates for any Certificates which may have
been lost or stolen or to comply with the payment instructions contained in a
letter of transmittal contemplated by Section 2.2.C., there shall be no further
registration of transfers on the stock transfer books of PFS of any
Certificates formerly
4
<PAGE> 5
evidencing the shares of PFS Common Stock which were outstanding immediately
prior to the Effective Time.
G. Any portion of the Exchange Fund that remains
undistributed to the shareholders of PFS for six months after the Effective
Time shall be delivered to the Corporation, upon demand, and any shareholders
of PFS who have not theretofore complied with this Article 2 shall thereafter
look only to the Corporation for payment of their claim for Corporation Common
Stock, any cash in lieu of fractional shares of Corporation Common Stock and
any dividends or distributions with respect to Corporation Common Stock.
H. Neither PFS nor the Corporation shall be liable to
any holder of shares of PFS Common Stock for such shares or Corporation Common
Stock into which they are converted (or dividends or distributions with respect
thereto) or cash in lieu of fractional shares delivered to a public official
pursuant to any abandoned property, escheat or similar law.
2.3 Dissenting Shareholders. If any holder of shares of PFS
Common Stock shall, in accordance with the provisions of applicable law, seek
appraisal and perfect dissenting shareholder rights to be paid the fair value
of his or her shares ("Dissenting Shares"), then such holder shall be entitled
to receive such value as may be established pursuant to such provisions. PFS
shall give Corporation prompt notice of any written objections or demands
received from any shareholder pursuant to such provisions, and shall give
Corporation the opportunity to participate in all proceedings with respect to
any such objections or demands. PFS will pay its dissenting shareholders the
value of their stock out of its own funds. No funds will be supplied for that
purchase, directly or indirectly, by Corporation, nor will Corporation directly
or indirectly reimburse PFS for any payments to dissenters.
2.4 Corporation Common Stock. The shares of capital stock
of Corporation issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding at the Effective Time and shall not be
effected by the Merger.
ARTICLE 3
TERMINATION
Anything contained in this Plan notwithstanding and
notwithstanding adoption hereof by the shareholders of PFS, this Plan may be
terminated and the Merger abandoned as provided in the Agreement.
5
<PAGE> 6
ARTICLE 4
CONDITIONS PRECEDENT
The obligations of Corporation and PFS to effect the Merger as
herein provided shall be subject to satisfaction, unless duly waived, of the
conditions set forth in the Agreement.
ARTICLE 5
GENERAL PROVISIONS
5.1 Law and Section Headings. This Plan shall be construed and
interpreted in accordance with the laws of the Commonwealth of Kentucky.
Section headings are used in this Plan for convenience only and are to be
ignored in the construction of the terms of this Plan.
5.2 Modifications. The parties hereto may amend, modify or
supplement this Plan, before or after approval thereof by the shareholders of
PFS, in such manner as may be agreed by them in writing.
IN WITNESS WHEREOF, the parties hereto have caused this Plan
to be executed by their duly authorized officers as of the date first above
written.
TRANS FINANCIAL BANCORP, INC.
By /s/ Douglas M. Lester
-------------------------
Douglas M. Lester, President
PEOPLES FINANCIAL SERVICES, INC.
By /s/ Barry Buckley
--------------------
Barry Buckley, President
6
