UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995 Commission File Number 0-13030
------------------ -------
TRANS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1048868
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
The aggregate market value of the voting stock held by nonaffiliates of the
registrant on March 1, 1996: $159,883,000.
The number of shares outstanding of the issuer's class of common stock on
March 26 1996: 11,301,796 shares.
Document Incorporated By Reference
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 1996 are incorporated by reference into
Part III of this report.
The Exhibit Index is on page 58. This filing contains 71 pages (including this
facing sheet).
<PAGE>
TABLE OF CONTENTS
Item Page
Part I
1. Business..............................................................3
2. Properties............................................................6
3. Legal Proceedings.....................................................6
4. Submission of Matters to a Vote of Security Holders...................6
4a. Executive Officers of the Registrant..................................7
Part II
5. Market for the Registrant's Common Equity and Related Shareholder
Matters..............................................................9
6. Selected Financial Data..............................................9
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
8. Financial Statements and Supplementary Data..........................9
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................9
Part III
10. Directors and Executive Officers of the Registrant...................10
11. Executive Compensation...............................................10
12. Security Ownership of Certain Beneficial Owners and Management.......10
13. Certain Relationships and Related Transactions.......................10
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......10
Signatures...............................................................11
<PAGE>
Part I
Item 1. Business
The Company and the Banks
Trans Financial, Inc.("the company") is a bank and savings and loan
holding company registered under the Bank Holding Company Act of 1956 and the
Home Owners' Loan Act, which has two commercial bank subsidiaries -- Trans
Financial Bank, National Association ("TFB-KY") and Trans Financial Bank
Tennessee, National Association ("TFB-TN") -- and one thrift subsidiary
- -- Trans Financial Bank, F.S.B. ("TFB,FSB").
During 1995, three commercial bank subsidiaries were merged to form TFB-KY
and two thrift subsidiaries were merged to form TFB,FSB. TFB-KY is headquartered
in Bowling Green, Kentucky; and TFB-TN and TFB,FSB are both headquartered in
Nashville, Tennessee. Collectively, these three institutions are referred to in
this report as "the banks."
In addition, the company operates as subsidiaries of TFB-KY a full-service
securities broker/dealer, Trans Financial Investment Services, Inc.; a mortgage
banking company, Trans Financial Mortgage Company; and a full-service travel
agency, Trans Travel, Inc.
On December 31, 1995, the company had total consolidated assets of $1.796
billion, total loans of $1.259 billion, total deposits of $1.444 billion and
shareholders' equity of $129.8 million.
On July 6, 1993, in a transaction accounted for as a purchase, the company
acquired Trans Kentucky Bancorp, Pikeville, Kentucky, the holding company for
The Citizens Bank of Pikeville. At the acquisition date, TFB-Pikeville (the
former Citizens Bank of Pikeville) had total assets of $188.7 million, net loans
of $107.6 million and total deposits of $163.9 million. The aggregate cost,
including consideration and acquisition costs, totaled $18.8 million. On
February 1, 1995 TFB-Pikeville was converted to a national bank and its name was
changed to Trans Financial Bank of Pikeville, National Association. On March 24,
1995, TFB-Pikeville and TFB-KY were merged.
On February 15, 1994, the company merged with Kentucky Community Bancorp.
Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of
approximately $175 million. Under the terms of the merger the shares of KCB
common stock outstanding were converted into 1,374,962 shares of common stock of
the company. These three banks were consolidated into the operations of TFB-KY
on March 31, 1994.
On April 22, 1994, the company merged with Peoples Financial Services, Inc.
("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and Trust
of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank
("Citizens"), with combined assets of approximately $120 million. Under the
terms of the merger the shares of PFS common stock outstanding were converted
into 1,302,254 shares of common stock of the company. Peoples Bank became TFB-TN
and Citizens was consolidated into the operations of TFB,FSB on July 31, 1994.
On April 21, 1995, the company's savings bank subsidiary in Russellville,
Kentucky, was also merged into TFB,FSB.
On August 31, 1994, the company merged with FGC Holding Company ("FGC") of
Martin, Kentucky, the holding company for First Guaranty National Bank
("TFB-Martin"), with approximately $125 million in assets. Under the terms of
the merger, the shares of FGC common stock outstanding were converted into
1,050,000 shares of common stock of the company and the shares of FGC preferred
stock were retired. On March 24, 1995, TFB-Martin was merged with TFB-Pikevile
and TFB-KY.
The transactions described in the preceding three paragraphs have been
accounted for using the pooling of interests method of accounting and,
accordingly, all financial data has been restated as if the entities were
combined for all periods presented.
In January 1994, Trans Travel, Inc, a full-service travel agency, was
organized. Trans Financial Investment Services, Inc., a full-service securities
broker-dealer, began operations in August 1994. In the fourth quarter of 1994,
Trans Financial Mortgage Company, a mortgage banking company, was formed.
Substantially all mortgage banking activities of TFB,FSB were transferred to
Trans Financial Mortgage Company on April 1, 1995.
On February 21, 1995, TFB-KY assumed $41 million of deposits and acquired
three branch facilities and $360 thousand of consumer loans. These deposits and
assets were related to the Bowling Green and Scottsville, Kentucky branches of
Fifth Third Bank of Kentucky, Inc. The two offices located in Bowling Green,
Kentucky were consolidated into existing Trans Financial locations. TFB-KY's
existing location in Scottsville, Kentucky was consolidated into the other
purchased location. On September 1, 1995, the company acquired AirLanse Travel,
a Louisville, Kentucky, travel agency, for cash and stock of the company. On
November 6, 1995, the company acquired for cash the assets of Correspondents
Mortgage Company, L.P., located in Greensboro, North Carolina. AirLanse Travel
was consolidated into the operations of Trans Travel, Inc. and Correspondents
Mortgage Company was consolidated into the operations of Trans Financial
Mortgage Company. These three acquisitions have been accounted for using the
purchase method of accounting and, accordingly, their results of operations and
cash flows have been included in the consolidated financial statements since the
dates of acquisition. In addition to the deposits assumed, the company received
net cash of $36,815,000 and issued 25,000 shares of common stock in connection
with these acquisitions.
Interest on domestic, commercial and mortgage loans constitutes the
largest contribution to the operating revenues of the banks. TFB-KY, TFB-TN, and
TFB,FSB provide a full range of corporate and retail banking services, including
the acceptance of deposits for checking, savings and time deposit accounts;
making of secured and unsecured loans to corporations, individuals and others;
issuance of letters of credit; rental of safe deposit boxes; financial
counseling for individuals and institutions; and trust and brokerage services.
TFB-KY provides a wide variety of personal and corporate trust and
trust-related services, including serving as executor of estates; as trustee
under testamentary and inter-vivos trusts; as guardian of the estates of minors
and incompetents; as escrow agent under various agreements; and as financial
advisor to and custodian for individuals, corporations and others. Corporate
trust services include serving as registrar and transfer agent for corporate
securities and as corporate trustee under corporate trust indentures. At
December 31, 1995, approximately $358 million in assets were managed by the
trust department of TFB-KY.
Trans Financial Mortgage Company originates and purchases mortgage loans
for the purpose of constructing, financing or refinancing one- to four-family
dwellings. Generally, these mortgage loans are then sold in the secondary market
with servicing retained by Trans Financial Mortgage Company. Trans Financial
Mortgage Company also services mortgage loans for others and for subsidiaries of
the company. The portfolio of mortgage loans serviced for others totaled $2.2
billion at December 31, 1995.
Trans Financial Investment Services, Inc. offers a wide range of investment
products and services, including financial planning, mutual funds, annuities,
and individual stocks and bonds to customers of the banks and others. In October
of 1995, Trans Financial introduced its own family of proprietary mutual funds,
the Trans Adviser Funds, which added depth to its lineup of investment products.
Trans Travel offers travel services to customers of the banks and others.
Customers can make travel arrangements by visiting a bank branch office or by
using a tollfree number. In addition to making travel arrangements for
individual and corporate customers, Trans Travel is packaging its own domestic
and international tours.
TFB-KY has twenty-eight offices; six located in Bowling Green, Kentucky,
three located in Pikeville, Kentucky, two located in Glasgow, Kentucky, two
located in Scottsville, Kentucky, two located in Morehead, Kentucky, two located
in Maysville, Kentucky, and one located in each of Louisville, Augusta, Cave
City, Dawson Springs, Tompkinsville, Elkhorn City, Meta, Belfry, Virgie, Martin,
and Prestonsburg in Kentucky. TFB-FSB has eleven offices; two in Columbia,
Tennessee, and one each in the Tennessee communities of Tullahoma, Mt. Pleasant,
Manchester, Rockwood, Kingston, Shelbyville, and Winchester and one each in the
Kentucky communities of Russellville and Auburn. Trans Financial Mortgage
Company has a mortgage operations center in Tullahoma and loan production
offices in the Tennessee communities of Nashville, Chattanooga, Knoxville, and
Jackson, one in Greensboro, North Carolina, and one in Louisville, Kentucky.
TFB-TN has ten offices; two located in Cookeville, Tennessee, and one located in
each of Nashville, Clarksville, Crossville, Franklin, Lebanon, McMinnville,
Murfreesboro, and Sparta in Tennessee.
Competition
The deregulation of the banking industry and the enactment in Kentucky and
other states of legislation permitting multi-bank holding companies as well as
interstate banking has created a highly competitive environment for banking in
the company's market area.
As of June 30, 1995 (the latest date for which competitive information is
available), TFB-KY is the largest financial institution in the Bowling Green
area, with 35% of total deposits for all financial institutions. TFB-KY is also
the largest financial institution in Glasgow/Cave City with 40% of total
deposits for all financial institutions. In the Dawson Springs area, TFB-KY is
the fifth largest financial institution with 6% of total deposits for all
financial institutions. TFB-KY is the second largest financial institution in
the Scottsville area with 35% of total deposits for all financial institutions.
In the Tompkinsville area, TFB-KY is the third largest financial institution
with 18% of total deposits for all financial institutions. In the Maysville
area, TFB-KY is the largest financial institution with 37% of total deposits for
all financial institutions. In the Morehead area, TFB-KY ranks first with 33% of
total deposits for all financial institutions. In the Augusta area, TFB-KY is
the second largest financial institution with 30% of total deposits for all
financial institutions. TFB-KY is the third largest financial institution in
Pikeville as of June 30, 1995, with 19% of total deposits for all financial
institutions. TFB,FSB is the third largest financial institution in Russellville
with 16% of total deposits for all financial institutions. TFB-KY is the third
largest financial institution in Floyd County with 27% of total deposits for all
financial institutions. TFB-TN is the fifth largest financial institution in
Cookeville with 6% of total deposits for all financial institutions. TFB,FSB is
the second largest financial institution in Tullahoma with 13% of total deposits
for all financial institutions.
The company actively competes in its markets with other commercial banks
and financial institutions for all types of deposits, loans, trust accounts and
the provision of financial, trust, and other services. The company also competes
generally with insurance companies, savings and loan associations, credit
unions, brokerage firms, other financial institutions, and institutions which
have expanded into the financial market. Many of these competitors have
resources substantially in excess of those of the company, have broader
geographic markets and higher lending limits than the banks and, therefore, are
able to make larger loans, sell a broader product line, and make more effective
use of advertising than can the company or the banks.
Supervision and Regulation
Bank holding companies, commercial banks and savings banks are extensively
regulated under both federal and state law. Any change in applicable law or
regulation may have a material effect on the businesses and prospects of the
company and the banks.
The company, as a registered bank holding company, is subject to the
supervision of and regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956. Also, as a registered savings and loan holding
company, the company is subject to the supervision of and regulation by the
Office of Thrift Supervision ("OTS").
In addition, the company is subject to the provisions of Kentucky's and
Tennessee's banking laws regulating bank acquisitions and certain activities of
controlling bank shareholders.
TFB-KY and TFB-TN are subject to the supervision of, and regular
examination by, the Office of the Comptroller of the Currency. TFB,FSB is
subject to the supervision of, and regular examination by, the OTS. The Federal
Deposit Insurance Corporation insures the deposits of the banks to the current
maximum of $100,000 per depositor.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Act"), when fully phased in, will remove state law barriers to interstate
bank acquisitions and will permit the consolidation of interstate banking
operations. Under the Act, effective September 29, 1995, adequately capitalized
and managed bank holding companies may acquire banks in any state, subject to
(i) Community Reinvestment Act compliance, (ii) federal and state antitrust laws
and deposit concentration limits, and (iii) state laws restricting the
acquisition of a bank that has been in existence for less than a minimum period
of time (up to five years). The Act's interstate consolidation and branching
provisions will become operative on June 1, 1997, although any state can, prior
to that time, adopt legislation to accelerate interstate branching or prohibit
it completely. The Act's interstate consolidation and branching provisions will
permit banks to merge across state lines and, if state laws permit de novo
branching, to establish a new branch as its initial entry into a state.
Statistical Information
Certain statistical information is included in a separate section of this
report on pages 18 through 34 and on page 47, and those pages are incorporated
herein by reference.
Description of Statistical Information Page(s)
Average Consolidated Balance Sheets and Net Interest Analysis........18-19
Analysis of Year-to-Year Changes in Net Interest Income.................20
Loans Outstanding.......................................................23
Loan Maturities and Interest Rate Sensitivity...........................25
Nonperforming Assets (Including Potential Problem Loans)................26
Summary of Loan Loss Experience......................................27-28
Allocation of Allowance for Loan Losses.................................28
Allocation of Year-End Allowance for Loan Losses and Percentage
of Each Type of Loan to Total Loans..................................28
Carrying Value of Securities............................................29
Maturity Distribution of Securities Available for Sale..................29
Maturity of Time Deposits of $100,000 or More...........................30
Short-Term Borrowings...................................................31
Consolidated Statistical Information....................................34
Impact of Nonaccrual Loans on Interest Income(Footnote 7, paragraph 2)..47
Item 2. Properties
The main banking office of TFB-KY, which also serves as the principal
office of the company, is located at 500 East Main Street, Bowling Green,
Kentucky 42101. In addition, TFB-KY serves customer needs at twenty-eight other
locations. All locations, except for the Louisville office (which is a sales
center for trust and investment services, corporate banking, mortgage lending
and travel services) and the Nashville office (which provides trust services),
offer a full range of banking services and most are equipped with an automated
teller machine for 24-hour banking services. TFB-KY also operates a telephone
Customer Care Center and an operations center. TFB-KY owns all of the properties
at which it conducts its business except the Ashley Circle and Nashville Road
locations in Bowling Green, the Louisville sales center, the Nashville sales
center, the Virgie branch, and one of its Pikeville branches (the North Mayo
trail branch). TFB-KY also leases property in Bowling Green for its operations
center and owns the facility in which its Customer Care Center operates.
TFB,FSB owns all the properties at which it conducts business except the
Auburn office. Trans Financial Mortgage Company leases the property in
Tullahoma, Tennessee, which houses its operations center, with the right to
receive the deed to the propery upon completion of the lease, and also leases
space in Jackson, Chattanooga, Nashville, Knoxville, Louisville, and Greensboro
for its loan production offices.
TFB-TN owns all the properties at which it conducts business except
the Franklin and Nashville locations.
Note 8 to the company's consolidated financial statements included on page
47 of this report contains additional information relating to amounts invested
in premises and equipment.
Item 3. Legal Proceedings
In the ordinary course of operations, the banks are defendants in various
legal proceedings. In the opinion of management, there is no proceeding pending
or, to the knowledge of management, threatened in which an adverse decision
could result in a material adverse change in the business or consolidated
financial position of the company or the banks.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last
quarter of the period covered by this report.
<PAGE>
Item 4a. Executive Officers of the Registrant
The following table sets forth the name, age and position with the company
and the banks of the executive officers of the company as of December 31, 1995.
Officers of the company and the banks are elected annually.
Served as
an Executive Position with the
Name Officer Since Age Company and the Banks
Douglas M. Lester 1984 53 Chairman of the Board,President
and Chief Executive Officer of
the company; Chairman of the
Board and Chief Executive
Officer of TFB-KY; Director of
TFB-KY, Trans Financial Mortgage
Company, Trans Financial
Investment Services, Inc., and
Trans Travel, Inc.
Vince A. Berta 1993 37 Executive Vice President of the
company; Director of TFB,FSB
Barry D. Bray 1984 49 Executive Vice President, Chief
Credit Officer and Director of
the company; Chief Credit Officer
and Director of TFB-KY and TFB-
TN; Chief Credit Officer of TFB,
FSB
Ledean Hamilton 1995 63 President and director of Trans
Travel, Inc.
Roger E. Lundin 1987 51 Senior Vice President and
Director of Human Resources of
the company
Edward R. Matthews 1995 34 Chief Financial Officer and
Treasurer of the company;
Treasurer of TFB-KY, TFB-TN, and
TFB,FSB
Michael J. Moser 1994 49 Senior Vice President and
Director of Marketing for the
company
Susan Newkirk-Moore 1995 45 Executive Vice President of the
company
Michael L. Norris 1995 42 President and director of Trans
Financial Mortgage Company
Dena R. Schaaf 1992 39 Senior Vice President of Risk
Management and Compliance of the
company; Director of TFB-TN
Jay B. Simmons 1993 39 Senior Vice President, General
Counsel and Secretary of the
company; Director of TFB,FSB;
Senior Vice President of TFB-KY,
Ronald Szejner 1995 47 Executive Vice President and
Chief Trust Officer of the
company and of TFB-KY
All of the above-mentioned executive officers have been with the company
for more than five years, except for the following:
Mr. Berta joined the company in April 1993. Prior to that he was
Vice President and Manager of Functional Control with PNC Bank.
Mr. Matthews joined the company in January 1994. Prior to that, he was
Chief Financial Officer for First Union National Bank of Tennessee for eighteen
months. Prior to that he held positions in commercial lending and credit
administration for First Union National Bank of North Carolina.
Mr. Moser joined the company in July 1994. Prior to that, he was Senior
Vice President and Director of Corporate Marketing for West One Bancorp in
Boise, Idaho.
Ms. Newkirk-Moore joined the company in August, 1995. Prior to that, she
was an Assistant Professor at the University of Louisville College of Business
for three years. Prior to that, she was Vice President and Director of
Education for Kentucky Bankers Association.
Mr. Norris joined the company in July, 1993. Prior to that, he was
responsible for all mortgage servicing activities at PNC Mortgage Servicing
Company.
Ms. Schaaf joined the company in November 1992. Prior to that, she was
Examiner-In-Charge of Asset Quality for regional banks with the Office of
Comptroller of Currency.
Mr. Simmons joined the company in November 1993. Prior to that, he was
a partner in a Denver law firm, specializing in financial institutions law, and
was a vice president on the legal staff of Colorado National Bankshares, Inc.
Mr. Szejner joined the company in March 1995. Prior to that, he was
President and Chief Executive Officer of First Michigan Bank Brokerage Services
for eighteen months. He was Vice President and Director of Marketing for First
Michigan Bank Corporation from October 1991 until January 1994. From July 1991
until October 1991, he was Vice President of Mid America National Bank in
Chicago. He served as Vice President of American National Corporation in Chicago
from 1977 until July 1991.
None of the above officers is related to another and there are no
arrangements or understandings between them and any other person pursuant to
which any of them was elected as an officer, other than arrangements or
understandings with directors or officers of the company acting solely in their
capacities as such, and other than the employment agreement between Mr. Lester
and the company and TFB-KY, which became effective January 1, 1991.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The registrant's common stock is traded on the NASDAQ National Market
System under the symbol TRFI. As of December 31, 1995 there were 1,810
shareholders of record.
Following is a summary of market prices and dividends declared for the
registrant's common stock for the quarterly periods indicated:
Stock Price
High Low Dividend
First quarter, 1994 $17.25 $14.75 $.14
Second quarter, 1994 16.00 12.75 .14
Third quarter, 1994 16.25 15.25 .14
Fourth quarter, 1994 15.9375 12.75 .14
First quarter, 1995 15.25 12.75 .15
Second quarter, 1995 15.50 14.00 .15
Third quarter, 1995 17.875 15.00 .15
Fourth quarter, 1995 18.125 16.75 .15
Additional information for this item is included in Note 10 to the
consolidated financial statements on pages 49 and 50 of this report.
Item 6. Selected Financial Data
The information for this item is included in the section entitled
"Consolidated Statistical Information" on page 34 of this report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information for this item is included in the section entitled
"Management's Discussion and Analysis," on pages 15 through 34 of this report.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and
report of independent auditors are included in a separate section of this report
on pages 35 through 57:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994 and
1993
Consolidated Statements of Changes in Shareholders' Equity - Years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
Additional information for this item is included in the table entitled
"Quarterly Results of Operations" on page 33 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information set out in the sections entitled "Voting Securities and
Ownership Thereof" and "Election of Directors" of the registrant's Proxy
Statement on pages 2 through 7 and the information set out in the section
entitled "Executive Officers of the Registrant" on pages 7 and 8 of Part I of
this report are incorporated herein by reference.
Item 11. Executive Compensation
The information set out in the section entitled "Executive Compensation and
Other Information" of the registrant's Proxy Statement at pages 8 through 16 is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information setout in the section entitled "Voting Securities and
Ownership Thereof" of the registrant's Proxy Statement at pages 2 through 4 is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set out in the sections entitled "Transactions with
Management and Others" and "Compensation Committee Interlocks and Insider
Participation" of the registrant's Proxy Statement on pages 14 through 16 is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial statements filed
The list of consolidated financial statements together with the
report thereon of KPMG Peat Marwick LLP, as set forth in Part II,
Item 8 of this report is incorporated herein by reference.
(2) Financial statement schedules
Schedules to the consolidated financial statements are omitted, as
the required information is not applicable.
(3) List of exhibits
The list of exhibits listed on the Exhibit Index on pages 58 and 59
of this report is incorporated herein by reference. The management
contracts and compensatory plans or arrangements required to be filed
as exhibits to this Form 10-K pursuant to Item 14(c) are noted by
asterisk (*) in the Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits
The exhibits listed on the Exhibit Index on pages 58 and 59 of this Form
10-K are filed as a part of this report.
(d) Financial statement schedules
No financial statement schedules are required to be filed as a part of
this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Trans Financial, Inc..
(Registrant)
By: /s/ Douglas M. Lester
Douglas M. Lester
Chairman of the Board,
President and Chief Executive
Officer
Date: March 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 26, 1996, by the following persons on
behalf of the registrant and in the capacities indicated.
(a) Principal Executive Officer:
/s/ Douglas M. Lester
Douglas M. Lester
Chairman of the Board, President
and Chief Executive Officer
(b) Principal Financial Officer:
/s/ Edward R. Matthews
Edward R. Matthews
Chief Financial Officer and Treasurer
(c) Principal Accounting Officer:
/s/ Ronald B. Pigeon
Ronald B. Pigeon
Controller
<PAGE>
-15-
(d) Directors:
/s/ Barry D. Bray
Barry D. Bray
/s/ Mary D. Cohron
Mary D. Cohron
/s/ Floyd H. Ellis
Floyd H. Ellis
David B. Garvin
/s/ Wayne Gaunce
Wayne Gaunce
/s/ C.C. Howard Gray
C.C. Howard Gray
/s/ Charles A. Hardcastle
Charles A. Hardcastle
/s/ Carroll F. Knicely
Carroll F. Knicely
/s/ Douglas M. Lester
Douglas M. Lester
/s/ C. Cecil Martin
C. Cecil Martin
<PAGE>
/s/ Frank Mastrapasqua
Frank Mastrapasqua
/s/ James D. Scott
James D. Scott
/s/ William B. Van Meter
William B. Van Meter
/s/ Thomas R. Wallingford
Thomas R. Wallingford
<PAGE>
Trans Financial, Inc.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1995
Items 1, 2, 5, 6, 7, 8 and 14 (a)(1)
Financial Statements and Supplementary Data
Market for the Registrant's Common Equity and Related Shareholder Matters
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
Management's Discussion and Analysis
FINANCIAL OVERVIEW
Trans Financial, Inc. ("the company") is a bank and savings and loan
holding company registered under the Bank Holding Company Act of 1956 and
the Home Owners' Loan Act, which has two commercial bank subsidiaries --
Trans Financial Bank, National Association ("TFB-KY") and Trans Financial
Bank Tennessee, National Association ("TFB-TN") -- and one thrift subsidiary
- -- Trans Financial Bank, F.S.B. ("TFB,FSB").
During 1995, three commercial bank subsidiaries were merged to form TFB-KY
and two thrift subsidiaries were merged to form TFB,FSB. TFB-KY is headquartered
in Bowling Green, Kentucky; and TFB-TN and TFB,FSB are both headquartered in
Nashville, Tennessee. Collectively, these three institutions are referred to in
this report as "the banks."
In addition, the company operates as subsidiaries of TFB-KY a full-service
securities broker/dealer, Trans Financial Investment Services, Inc.; a mortgage
banking company, Trans Financial Mortgage Company; and a full-service travel
agency, Trans Travel, Inc.
At December 31, 1995, the company had total consolidated assets of $1.8
billion, total loans of $1.3 billion, total deposits of $1.4 billion and
shareholders' equity of $130 million. The company's net income increased 6.2% in
1995, to $15.3 million, from $14.4 million in 1994, and earnings per share
increased 5.5% to $1.35 per common share, from $1.28 in 1994.
Over the past several years, the company has expanded through mergers and
acquisitions. These mergers and acquisitions are more fully described below.
On February 21, 1995, the company assumed $41 million of deposits and
acquired three branch facilities and $360 thousand of consumer loans. These
deposits and assets were related to the Bowling Green and Scottsville, Kentucky
branches of Fifth Third Bank of Kentucky, Inc. The two offices located in
Bowling Green, Kentucky were consolidated into existing Trans Financial
locations. The company's existing location in Scottsville, Kentucky was
consolidated into the other purchased location. On September 1, 1995, the
company acquired AirLanse Travel, a Louisville, Kentucky, travel agency, for
cash and stock of the company. On November 15, 1995, the company acquired for
cash the assets of Correspondents Mortgage Company, L.P., located in Greensboro,
North Carolina. AirLanse Travel was consolidated into the operations of Trans
Travel, Inc. and Correspondents Mortgage Company was consolidated into the
operations of Trans Financial Mortgage Company. These three acquisitions have
been accounted for using the purchase method of accounting and, accordingly,
their results of operations and cash flows have been included in the
consolidated financial statements since the dates of acquisition. In addition to
the deposits assumed, the company received net cash of $36,815,000 and issued
25,000 shares of common stock in connection with these acquisitions.
The company merged with Kentucky Community Bancorp, Inc. ("KCB") on
February 15, 1994, with Peoples Financial Services, Inc. ("PFS") on
April 22, 1994, and with FGC Holding Company ("FGC") on August 31, 1994.
KCB, of Maysville, Kentucky, was the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of
approximately $175 million. These three banks were consolidated into the
operations of TFB-KY on March 31, 1994. Under the terms of the merger with KCB,
the shares of KCB common stock outstanding were converted into 1,374,962 shares
of common stock of the company.
PFS, of Cookeville, Tennessee, was the holding company for Peoples Bank and
Trust of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank
("Citizens"), with combined assets of approximately $123 million. Peoples Bank
became TFB-TN and Citizens was consolidated into the operations of TFB,FSB on
July 31, 1994. Under the terms of the merger with PFS, the shares of PFS common
stock were converted into 1,302,254 shares of common stock of the company.
FGC, of Martin, Kentucky, was the holding company for First Guaranty
National Bank ("TFB-Martin"), with approximately $127 million in assets.
TFB-Martin was consolidated into the operations of TFB-KY on March 24, 1995.
Under the terms of the merger with FGC, the shares of FGC common stock were
converted into 1,050,000 shares of common stock of the company and the shares of
FGC preferred stock were retired.
Each of these three mergers was accounted for using the
pooling-of-interests method of accounting and, accordingly, financial statements
for all periods were restated to reflect the results of operations of these
companies on a combined basis from the earliest period presented, except for
dividends per share.
On July 6, 1993, in a transaction accounted for using the purchase method
of accounting, the company acquired Trans Kentucky Bancorp, Pikeville, Kentucky,
the holding company for The Citizens Bank of Pikeville ("TFB-Pikeville"). At the
acquisition date, TFB-Pikeville (the former Citizens Bank of Pikeville) had
total assets of $207 million, net loans of $108 million and total deposits of
$164 million. The aggregate cost, including consideration and acquisition costs,
totaled $19 million. TFB-Pikeville was consolidated into the operations of
TFB-KY on March 24, 1995.
In recent years, the company has emphasized investments in staff and
infrastructure in order to control operating risks, support internal growth and
future acquisitions, and facilitate the introduction of new products.
Investments have been made in data processing hardware and software upgrades,
which enable the company to process transactions more efficiently, to realize
economies of scale and to maintain quality control. Management believes that
these expenditures have enhanced the company's franchise and competitively
positioned it for future growth and entry into new lines of business.
The discussion that follows is intended to provide insight into the
company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and
accompanying notes, which follow this discussion.
The company consummated several business acquisitions in 1993 and in prior
years which were accounted for using the purchase method of accounting.
Accordingly, the results of operations of those acquired entities prior to the
acquisition dates have not been included in the results of operations.
Therefore, ratios or analyses for periods before and after these purchase
acquisitions may not be comparable. The KCB, PFS and FGC mergers were accounted
for using the pooling-of-interests method of accounting and, accordingly, all
financial data for prior periods were restated as if the entities had been
combined for all periods presented. See note 4 to the consolidated financial
statements for additional information regarding business combinations.
All per share data in this report has been adjusted to give effect to stock
splits.
Income Statement Review
Net income was $15.3 million in 1995, compared with $14.4 million in 1994,
and $14.1 million in 1993. On a per share basis, net income was $1.35 in 1995,
$1.28 in 1994 and $1.24 in 1993. Following is a summary of the components of
income and expense and the changes in those components over the past three
years.
<TABLE>
Condensed Consolidated Statements of Income
For the years ended December 31
Dollars in thousands, except per share data
<CAPTION>
Change Change
1995 Amount % 1994 Amount % 1993
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ............... $ 134,228 $ 20,246 17.8 $ 113,982 $ 11,163 10.9 $ 102,819
Interest expense .............. 64,599 17,224 36.4 47,375 3,125 7.1 44,250
-------- ------ ------- ------- --------
Net interest income ........... 69,629 3,022 4.5 66,607 8,038 13.7 58,569
Provision for loan losses ..... 5,260 3,048 137.8 2,212 (582) 2,794
-------- ----- ------ ------ ------
Net interest income after
provision for loan losses ... 64,369 (26) -- 64,395 8,620 15.5 55,775
Non-interest income ........... 24,411 7,241 42.2 17,170 138 0.8 17,032
Non-interest expenses ......... 66,049 5,979 10.0 60,070 7,240 13.7 52,830
------ ----- ------ ------ ------
Income before income taxes and
cumulative effect of change
in accounting principle ..... 22,731 1,236 5.8 21,495 1,518 7.6 19,977
Income tax expense ............ 7,416 341 4.8 7,075 852 13.7 6,223
------- ----- ------ ----- ------
Income before cumulative effect
of change in accounting
principle ..................... 15,315 895 6.2 14,420 666 4.8 13,754
Cumulative effect of change in
accounting principle ........ ------ -- -- -- (296) (100.0) 296
------ ----- ---------
Net income .................... $ 15,315 $ 895 6.2 % $14,420 $370 2.6% $ 14,050
====== ==== ========
Earnings per common share ..... $ 1.35 $ 0.07 5.5 % $ 1.28 $0.04 3.2% $ 1.24
========== ====== ====== ===== ========
</TABLE>
Each of these components of income and expense is discussed separately in
the sections that follow.
<PAGE>
Net Interest Income
Net interest income totaled $69.6 million in 1995, a 4.5% increase over the
$66.6 million recorded in 1994. In 1994 net interest income was up 13.7% over
1993's $58.6 million. The increase in net interest income in both 1995 and 1994
was primarily a result of a higher level of interest-earning assets due to loan
growth, which was augmented in 1994 by a 25 basis-point increase in the net
interest margin.
The following table summarizes the changes in the company's net interest
margin over the past three years. Net interest margin is net interest income
divided by the average balance of interest-earning assets for the year.
<TABLE>
Net Interest Analysis Summary (1)
For the years ended December 31
Basis Point Basis Point
<CAPTION>
1995 Change 1994 Change 1993
<S> <C> <C> <C> <C> <C>
Average yield on interest-earning assets .................................. 8.78% 97 7.81% 22 7.59%
Average rate on interest-bearing liabilities .............................. 4.74 109 3.65 (3) 3.68
---- ---- ---- --- ----
Net interest-rate spread .................................................. 4.04 (12) 4.16 25 3.91
Impact of non-interest-bearing sources and other
changes in balance sheet composition ................................... 0.52 11 0.41 -- 0.41
---- ---- ---- --- ----
Net interest margin ....................................................... 4.56% (1) 4.57% 25 4.32%
==== ==== ==== ==== ====
<FN>
(1)Refer to the tables on pages 18 through 20 for additional data regarding net
interest income.
</FN>
</TABLE>
Although the net interest-rate spread fell by 12 basis points in 1995, the
net interest margin was virtually flat, due to a change in the composition of
the balance sheet. In 1994, loans accounted for 74% of earning assets, on
average, while securities represented 24%. In 1995, as the company utilized
maturing securities to fund growth in the loan portfolio, those ratios had
changed to 78% and 20%, respectively. The increased proportion of assets
invested in relatively higher-earning loans substantially offset the decrease in
the interest-rate spread. On November 30, 1995, the company reclassified all
securities to available for sale, as permitted by the Financial Accounting
Standards Board in a special one-time reassessment.
Average interest-earning assets for 1994 increased $104 million over 1993,
while the net interest margin increased 25 basis points. The increased margin in
1994 is a reflection of the positive impact of prime rate increases as well as a
more favorable mix of earning assets.
<PAGE>
================================================================================
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the years ended December 31
Dollars in thousands
<CAPTION>
1995 1994 1993
Average Interest Average Average Interest Average Average Interest Average
Balance(1) (2) Rate Balance(1) (2) Rate Balance(1) (2) Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Securities held
to maturity:
U.S. Treasury,
federal agencies,
and mortgage-backed $ 24,257 $ 1,686 6.95$ 69,766 $ 3,967 75.69$ 316,175 $ 19,060 6.03%
backed securities
State and municipal 46,674 2,550 5.46 50,111 2,770 5.53 36,343 2,211 6.08
obligations
Other securities 4,816 355 7.37 5,723 396 6.92 14,441 844 5.84
---------- -------- -------- ------- ------- -------
Total securities
held to maturity 75,747 4,591 6.06 125,600 7,133 5.68 366,959 22,115 6.03
Securities
avail. for sale:
U.S.Treasury,
federal agencies,
and mortgage-
backed securities 209,756 11,847 5.65 214,749 11,477 5.34 19,715 796 4.04
State and municipal
obligations 5,442 310 5.70 -- -- 0.00 -- -- 0.00
Other securities 13,727 901 6.56 13,526 708 5.23 -- -- 0.00
Total securities
available for sale 228,925 13,058 5.70 228,275 12,185 5.34 19,715 796 4.04
---------- -------- -------- ------- ------- -------
Total securities 304,672 17,649 5.79 353,875 19,318 5.46 386,674 22,911 5.93
Fed funds sold 13,652 804 5.89 13,424 540 4.02 36,334 976 2.69
Interest-bearing
deposits with banks 197 17 NM 235 104 NM 1,001 120 NM
Mortgage loans held
for sale 18,810 1,644 8.74 17,775 1,152 6.48 31,982 2,247 7.03
Loans, net of
unearned income(3) 1,190,727 114,114 9.58 1,073,718 92,868 8.65 898,834 76,565 8.52
---------- -------- -------- ------- ------- -------
Total interest-
earning assets/
interest income 1,528,058 134,228 8.78 1,459,027 113,982 7.81 1,354,825 102,819 7.59
---------- -------- -------- ------- ------- -------
Less allowance
for loan losses (13,239) (12,742) (11,181)
---------- --------- ---------
1,514,819 1,446,285 1,343,644
Non-interest-
earning assets:
Cash and due
from banks 63,726 65,788 55,359
Premises and
equipment 38,307 35,275 30,057
Other assets 56,080 40,712 34,774
---------- ---------- ----------
Total assets $1,672,932 $1,588,060 $1,463,834
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest-bearing
demand $137,496 3,545 2.58 $143,189 3,434 2.40 $118,939 2,870 2.41
Savings deposits 131,614 3,778 2.87 155,819 4,351 2.79 135,013 3,900 2.89
Money market
accounts 47,288 1,514 3.20 55,636 1,485 2.67 59,069 1,555 2.63
TransPlus
(SuperNOW) 93,728 2,602 2.78 100,638 2,462 2.45 97,960 2,463 2.51
Certificates of
deposit 729,269 40,240 5.52 633,608 26,040 4.11 624,638 25,934 4.15
Individual
Retirement Accounts 88,547 4,786 5.41 92,122 3,952 4.29 98,471 4,764 4.84
-------- ------- --------- ------- ------- ------
Total interest-
bearing deposits 1,227,942 56,465 4.60 1,181,012 41,724 3.53 1,134,090 41,486 3.66
Fed funds purchased
and repurchase
agreements 47,219 2,014 4.27 40,303 1,253 3.11 28,084 673 2.40
Other short-term
borrowings 40,652 2,983 7.34 36,669 1,715 4.68 6,624 238 3.59
Long-term debt 46,840 3,137 6.70 40,756 2,683 6.58 33,974 1,853 5.45
---------- ------ ------- ------- -------- ------ -----
Total borrowed funds 134,711 8,134 6.04 117,728 5,651 4.80 68,682 2,764 4.02
---------- ------ ------- ------ ------- ------
Total interest-
bearing liabilities/
interest expense 1,362,653 64,599 4.74 1,298,740 47,375 3.65 1,202,772 44,250 3.68
-------- ------ -------
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits 172,748 168,746 145,275
Other liabilities 15,485 8,687 9,686
--------- --------- --------
Total liabilities 1,550,886
1,476,173 1,357,733
Shareholders' equity 122,046 111,887 106,101
---------- --------- --------
Total liabilities
and shareholders'
equity $1,672,932 $1,588,060 $1,463,834
========== ========= ===========
spread(4) 4.04% 4.16% 3.91%
Impact of non-interest
bearing sources and
other changes in
balance sheet
composition 0.52 0.41 0.41
------ ----- ------
Net interest income /
margin on interest-
earning assets (5) $69,629 4.56% $66,607 4.57% $58,569 4.32%
======== ====== ======= ===== ======= =====
NM = not meaningful
<FN>
(1)Average balances are based on daily balances.
(2)Interest income on tax-exempt securities and loans has not been adjusted to
reflect fully-taxable-equivalent interest.
(3) For computational purposes, non-accrual loans are included in loans.
(4) Net interest spread is the difference between the average rate of interest
earned on interest-earning assets and the average rate of interest
expensed on interest-bearing liabilities.
(5)Net interest margin is net interest income divided by average
interest-earning assets.
</FN>
</TABLE>
<PAGE>
Analysis of Year-to-Year Changes in Net Interest Income
The following table shows changes in interest income and interest expense
resulting from changes in volume and interest rates for the years ended December
31, 1995 and 1994, as compared to the previous year. The change in interest
income and expense due to both rate and volume has been allocated to changes in
volume and rate in proportion to the relationship of the absolute dollar amounts
of the change in each.
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
-------------- -------------
Increase (decrease) Increase (decrease)
in interest income and expense in interest income and expense
In thousands due to changes in: due to changes in:
Rate Volume Total Rate Volume Total
Interest-earning assets:
Securities held to maturity:
U.S. Treasury, federal agencies, and
<S> <C> <C> <C> <C> <C> <C>
mortgage-backed securities $ 736 $ (3,017) $ (2,281) $(1,025) $(14,068) $(15,093)
State and municipal obligations (32) (188) (220) (217) 776 559
Other securities 25 (66) (41) 133 (581) (448)
-------- -------- -------- ------- -------- --------
Total securities held to maturity 729 (3,271) (2,542) (1,109) (13,873) (14,982)
Securities available for sale:
U.S. Treasury, federal agencies, and
mortgage-backed securities 641 (271) 370 338 10,343 10,681
State and municipal obligations -- 310 310 -- -- --
Other securities 182 11 193 -- 708 708
-------- -------- -------- ------- -------- --------
Total securities available for sale 823 50 873 338 11,051 11,389
-------- -------- -------- ------- -------- --------
Total securities 1,552 (3,221) (1,669) (771) (2,822) (3,593)
Federal funds sold 255 9 264 351 (787) (436)
Interest-bearing deposits with banks (72) (15) (87) 131 (147) (16)
Mortgage loans held for sale 422 70 492 (163) (932) (1,095)
Loans, net of unearned income 10,577 10,669 21,246 1,194 15,109 16,303
-------- -------- -------- ------- -------- --------
Total interest-earning assets 12,734 7,512 20,246 742 10,421 11,163
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand 251 (140) 111 (18) 582 564
Savings deposits 119 (692) (573) (134) 585 451
Money market accounts 271 (242) 29 21 (91) (70)
TransPlus (SuperNOW) 317 (177) 140 (67) 66 (1)
Certificates of deposit 9,857 4,343 14,200 (264) 370 106
Individual Retirement Accounts 993 (159) 834 (517) (295) (812)
-------- -------- -------- ------- -------- --------
Total interest-bearing deposits 11,808 2,933 14,741 (979) 1,217 238
Federal funds purchased
and repurchase agreements 521 240 761 235 345 580
Other short-term borrowings 1,065 203 1,268 92 1,385 1,477
Long-term debt 47 407 454 423 407 830
-------- -------- -------- ------- -------- --------
Total borrowed funds 1,633 850 2,483 750 2,137 2,887
-------- -------- -------- ------- -------- --------
Total interest-bearing liabilities 13,441 3,783 17,224 (229) 3,354 3,125
Increase (decrease) in net interest income $ (707) $ 3,729 $ 3,022 $ 971 $ 7,067 $ 8,038
</TABLE>
<PAGE>
Provision for Loan Losses
The provision for loan losses in 1995 was $5.3 million, or .44% of average
loans, an increase of $3.1 million from the $2.2 million, or .21% of average
loans, in 1994 and an increase of $2.5 million from the $2.8 million, or .31% of
average loans recorded in 1993. Net loan charge-offs were $2.0 million in 1995,
compared with $2.2 million in 1994 and $2.3 million in 1993. As a percentage of
average loans, net charge-offs were 0.17% in 1995, down from 0.20% in 1994 and
0.26% in 1993, and an average of 0.22% for the five year period 1991-1995. The
provision for loan losses and the level of the allowance for loan losses result
from management's evaluation of the risk in the loan portfolio. Growth in the
loan portfolio, combined with an increase in certain nonperforming loans, caused
management to increase the provision in 1995 over 1994. Of the $5.3 million
provision recorded in 1995, $3.2 million was recognized in the fourth quarter.
Nonperforming loans increased $4.2 million in that quarter, primarily attributed
to placing one large commercial loan in nonaccrual status. Further discussion on
loan quality and the allowance for loan losses is included later in this review
in the Asset Quality discussion.
Non-Interest Income
Non-interest income for 1995 increased 42% over 1994, after increasing
less than 1% from 1993 to 1994. The increases
in non-interest income were due to:
In thousands 1995 vs.1994 1994 vs.1993
------------ ------------
o Increase in service charges on deposit accounts $ 1,088 $ 1,033
o Decrease in gains on sales of securities (57) (892)
o Increase (decrease) in mortgage banking income due to:
Adoption of SFAS 122 1,243 --
Increased mortgage servicing fees 1,169 769
Increase (decrease) in gain on sale
of mortgage loans held for sale 845 (1,149)
Gain on sale of mortgage servicing rights 1,687 --
o Increase in trust service fees 145 114
o Increase in brokerage income 423 456
o Increase in travel agency fees 203 112
o Increase (decrease) in all other non-interest income . 495 (305)
------- -------
Total increase in non-interest income $ 7,241 $ 138
The 1995 increases reflect the company's expanding mortgage banking
business and continued improvement in the
brokerage and travel businesses, as well as its more traditional line of banking
products and services.
In early 1994, the company engaged an outside consulting firm to review
its products and services. As a result of this review, the company implemented
a new product and fee structure in April 1995, which resulted in additional
service charges on deposit accounts.
Effective January 1, 1995, the company adopted on a prospective basis
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"). SFAS 122 requires that rights to service mortgage
loans for others be recognized as assets, without regard to whether those assets
were acquired in purchase transactions or were acquired through loan
originations. In prior years only purchased mortgage servicing rights ("MSR's")
were recognized as assets. SFAS 122 also eliminates the previous requirement
that gains on the sale of mortgage loans be offset against the related servicing
right asset. As a result of SFAS 122, the company recognized an additional $1.2
million, before amortization, in noninterest income in 1995 compared with 1994.
The $1.7 million gain on the sale of mortgage servicing rights shown in the
table relates to a $168 million portfolio of mortgage loans serviced for others
which was sold during the second quarter of 1995. Notwithstanding this sale of
servicing rights, the portfolio has grown from $690 million at the end of 1993,
to $1.3 billion at December 31, 1994, and to $2.2 billion at year-end 1995,
primarily by acquiring servicing portfolios, but also through originations.
These acquisitions have resulted in a significant increase in mortgage servicing
fees.
<PAGE>
Non-Interest Expenses
Non-interest expenses for 1995 increased 10% over 1994, after increasing
14% from 1993 to 1994. The increases in non-interest expense were due to:
In thousands 1995 vs. 1994 1994 vs. 1993
------------- -------------
o Increase in compensation and employee benefits $ 4,258 $ 3,112
o Increase in occupancy and equipment expense 1,106 1,542
o Increase in communications expense 476 107
o Increase (decrease) in deposit insurance premiums (1,088) 405
o Increase in advertising and public relations expense 724 182
o Increase (decrease) in professional fees (318) 1,324
o Increase in postage, printing and supplies 127 559
o Increase (decrease) in educational expense 424 (50)
o Increase in foreclosed asset expense 315 243
o Decrease in other non-interest expenses (45) (184)
------- -------
Total increase in non-interest expenses $ 5,979 $ 7,240
The increases in non-interest expenses over the past two years reflect
the company's continued investment in new
technology, product lines, distribution channels and people, to provide enhanced
customer service and support future growth.
Compensation and benefits increased $4.3 million in 1995 as compared to
1994, and increased $3.1 million in 1994 versus 1993 -- the result of an
expansion of the professional staff. Of the increase in compensation and
benefits in 1995, $0.8 million represents increased payments associated with the
company's implementation of an incentive-based compensation system.
Advertising and public relations expense increased $0.7 million in 1995, as
the company expanded its promotion of the new products and services added during
the year, and an intensified sales training program in 1995 resulted in a $0.4
million increase in educational expense.
Professional fees declined $0.3 million in 1995, after increasing $1.3
million from 1993 to 1994. These expenses were principally related to mergers
and acquisitions and the development of new lines of business. In general, the
remaining increases in both 1995 and 1994 were related to an ongoing effort to
build the company's infrastructure to accommodate future growth, requiring
investments in staff as well as in buildings, equipment and information systems.
Occupancy and furniture and equipment costs increased $1.1 million in 1995 and
$1.5 million in 1994.
The $1.1 million decrease in deposit insurance expense in 1995 as compared
to 1994 was due to a reduction from $0.23 to $0.04 per $100 of deposits insured
through the Federal Deposit Insurance Corporation's ("FDIC") Bank Insurance Fund
("BIF"), effective June 1, 1995. Approximately 69% of the company's deposits are
insured through the BIF. The remaining 31% of the company's deposits are insured
through the FDIC's Savings Association Insurance Fund ("SAIF"). Insurance
premiums on those deposits remain at $0.23. The FDIC and other banking
regulatory authorities have proposed a plan to strengthen the deposit insurance
system and eliminate the substantial deposit premium disparity between BIF- and
SAIF-insured institutions. This plan includes a one-time assessment of $0.75 to
$0.85 per $100 of SAIF-insured deposits. If such a plan were enacted into law,
the company would pay a one-time assessment of up to $3.5 million on its
SAIF-insured deposits and would realize a subsequent reduction in deposit
insurance premiums of approximately $0.8 million per year.
Income Taxes
The company had income tax expense of $7.4 million in 1995, compared with
$7.1 million in 1994, and $6.2 million in 1993. These represent effective tax
rates of 32.6%, 32.9% and 31.2%, respectively. Effective January 1, 1993, the
company adopted Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, resulting in a $296 thousand increase in net income. Further
information on the company's income taxes can be found in note 12 to the
consolidated financial statements.
Balance Sheet Review
Assets at year-end 1995 totaled $1.8 billion, compared with $1.6 billion
at December 31, 1994. Average total assets increased $85 million in 1995 to
$1.7 billion, after increasing $124 million in 1994. Average interest-
earning assets increased $69 million in 1995, after increasing $104 million in
1994.
Loans
Total loans, net of unearned income, averaged $1.19 billion in 1995,
compared with $1.07 billion in 1994 and $0.90 billion in 1993. At year-end 1995,
loans totaled $1.26 billion, compared with $1.14 billion at December 31, 1994
and $1.01 billion at the end of 1993.
The company continues to experience strong loan growth throughout its
markets, with particular strength in middle market commercial and commercial
real estate lending products. The following table presents a summary of the loan
portfolio by category for each of the last five years.
<TABLE>
Loans Outstanding
December 31
<CAPTION>
In thousands
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Commercial $ 372,822 $ 318,970 $ 320,952 $ 235,922 $ 200,020
Commercial real estate 397,741 334,567 234,308 140,554 114,218
Residential real estate 358,257 339,488 304,990 293,393 171,643
Consumer 132,401 153,754 150,202 114,820 87,105
----------- ----------- ----------- --------- ---------
Total loans 1,261,221 1,146,779 1,010,452 784,689 572,986
Less unearned income (2,150) (3,063) (3,656) (3,843) (5,032)
----------- ----------- ----------- --------- ---------
Loans net of unearned income $ 1,259,071 $ 1,143,716 $ 1,006,796 $ 780,846 $ 567,954
=========== =========== =========== ========= =========
</TABLE>
Loan Concentrations
Much of the increase in commercial and commercial real estate loans
represents loans to finance the operations of corporate customers. While many of
these loans are structured as mortgages, the company is relying on the
borrower's cash flow to service the loan and not the sale of the collateral.
Commercial real estate loans include financing for industrial parks, residential
developments, retail strip shopping centers, multi-family apartment complexes,
industrial buildings, fast food and midscale restaurants, and hotels and motels.
The primary source of repayment cannot be traced to any narrow industry group.
Substantially all of the company's loans are to customers located in
Kentucky and Tennessee, in the immediate market areas of the banks. None of the
company's loans is considered to be a highly leveraged transaction. As of
December 31, 1995, the company had outstanding loans and commitments to extend
credit ranging from $5 million to $19.5 million to 37 commercial customers. The
aggregate amount of these credit relationships was $348 million, of which $5.6
million was classified to nonaccrual during the fourth quarter of 1995.
The distribution of the company's loans, by industry, is shown in the
following table.
Loans by Industry
December 31, 1995
As a percentage of total loans
Agriculture ............................................................ 4.4 %
Apartment buildings .................................................... 2.8
Construction and land development ...................................... 6.9
Finance and insurance .................................................. 2.1
Manufacturing:
Durable goods ....................................................... 6.3
Nondurable goods .................................................... 3.4
Mining ................................................................. 2.6
Services:
Health .............................................................. 3.2
Hotels and motels .................................................. 2.7
Other than health and hotels ........................................ 4.6
Wholesale and retail trade:
Restaurants ......................................................... 4.6
Other ............................................................... 7.7
Other commercial real estate ........................................... 8.5
All other commercial loans ............................................. 1.4
----
Total commercial and commercial real estate loans 61.2
Residential real estate loans .......................................... 28.5
Consumer loans ......................................................... 10.3
----
Total loans, net of unearned income 100.0 %
====
<PAGE>
The following table sets forth the maturity distribution and interest rate
sensitivity of selected loan categories at December 31, 1995. Maturities are
based upon contractual terms. The company's policy is to specifically review and
approve all loans renewed; loans are not automatically rolled over. The table
excludes residential real estate and consumer loans.
Loan Maturities and Rate Sensitivity
December 31, 1995
In thousands One Year One Through Over Total
or Less Five Years Five Years Loans
By maturity date:
Commercial ........... $152,188 $101,761 $118,873 $372,822
Commercial real estate 67,644 78,472 251,625 397,741
-------- -------- -------- --------
Total .............. $219,832 $180,233 $370,498 $770,563
======== ======== ======== ========
Fixed rate loans ..... $ 63,260 $ 79,521 $ 69,508 $212,289
Floating rate loans .. 156,572 100,712 300,990 558,274
-------- -------- -------- --------
Total .............. $219,832 $180,233 $370,498 $770,563
======== ======== ======== ========
By next repricing opportunity:
Commercial ........... $296,214 $ 47,476 $ 29,132 $372,822
Commercial real estate 307,608 43,657 46,476 397,741
-------- -------- -------- --------
Total .............. $603,822 $ 91,133 $ 75,608 $770,563
======== ======== ======== ========
Fixed rate loans ..... $ 63,260 $ 79,521 $ 69,508 $212,289
Floating rate loans .. 540,562 11,612 6,100 558,274
-------- -------- -------- --------
Total .............. $603,822 $ 91,133 $ 75,608 $770,563
======== ======== ======== ========
Asset Quality
With respect to asset quality, management considers three categories of
assets to warrant constant scrutiny. These categories include (a) loans which
are currently nonperforming, (b) foreclosed real estate, and (c) loans which are
currently performing but which management believes require special attention.
Nonperforming loans, which include nonaccrual loans, accruing loans past
due over 90 days and restructured loans, totaled $17.3 million at the end of
1995, an increase of $9.4 million from 1994. The ratio of nonperforming loans to
year-end loans was 1.38%, compared with 0.69% at year-end 1994 and 0.98% at
December 31, 1993. As mentioned previously, nonperforming loans increased $4.2
million in the fourth quarter of 1995, primarily due to placing one large
commercial loan in nonaccrual status. Nonperforming assets, which include
nonperforming loans, foreclosed real estate and other foreclosed property,
totaled $22.3 million at year-end 1995, and the ratio of total nonperforming
assets to total assets increased to 1.24% at year-end 1995, from 0.81% at
December 31, 1994.
The following table presents information concerning nonperforming assets,
including nonaccrual and restructured loans. Management classifies a loan as
nonaccrual when principal or interest is past due 90 days or more and the loan
is not adequately collateralized and in the process of collection, or when, in
the opinion of management, principal or interest is not likely to be paid in
accordance with the terms of the obligation. Consumer installment loans are
charged off after 120 days of delinquency unless adequately secured and in the
process of collection. Loans are not reclassified as accruing until principal
and interest payments are brought current and future payments appear reasonably
certain. Loans are categorized as restructured if the original interest rate,
repayment terms, or both were restructured due to a deterioration in the
financial condition of the borrower. However, restructured loans that
demonstrate performance under the restructured terms and that yield a market
rate of interest may be removed from restructured status in the year following
the restructure.
<TABLE>
Nonperforming Assets
December 31
Dollars in thousands
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ................................ $12,708 $ 4,375 $ 5,926 $ 3,986 $ 2,770
Accruing loans which are contractually
past due 90 days or more ...................... 4,617 3,514 2,377 4,262 2,255
Restructured loans .............................. 14 30 1,591 718 5,587
------- ------- ------- ------- -------
Total nonperforming and restructured loans .... 17,339 7,919 9,894 8,966 10,612
Foreclosed real estate .......................... 4,329 4,998 5,869 9,036 6,455
Other foreclosed property ....................... 677 199 113 -- --
------- ------- ------- ------- -------
Total nonperforming and restructured loans
and foreclosed property ..................... $22,345 $13,116 $15,876 $18,002 $17,067
======= ======= ======= ======= =======
Nonperforming and restructured loans
as a percentage of loans net of unearned income 1.38% 0.69% 0.98% 1.15% 1.87%
Nonperforming and restructured loans and other
real estate as a percentage of total assets ... 1.24% 0.81% 0.99% 1.30% 1.75%
</TABLE>
Three commercial credit relationships account for $10.8 million, or 85%, of
the company's nonaccrual loans at December 31, 1995, and 62% of total
nonperforming and restructured loans. The largest of these credits is to a
manufacturer of metal products used primarily in the automotive industry.
Another of these credits is to a specialty apparel manufacturer, and the third
is to a company in the coal mining industry. An allowance for loan losses in the
amount of $4.8 million has been established for these credits in accordance with
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
the Impairment of a Loan. The remaining nonaccrual balance consists of various
commercial and consumer loans, with no single loan exceeding $800,000. The
increase from December 31, 1994, to December 31, 1995, in accruing loans past
due 90 days or more is principally residential real estate loans.
Foreclosed real estate at December 31, 1995, includes two properties with
an aggregate book value of $1.9 million, or 45% of the outstanding balance. The
first property was acquired through foreclosure in 1986, with an unsatisfied
loan balance at the time of $1.8 million. In order to facilitate the disposal of
the property, the company entered into a joint venture with a real estate
developer and developed the land for industrial and other commercial use.
Subsequently, the company dissolved the joint venture and retained title to the
property. Several parcels have been sold to date. Based on an appraisal of the
property and previous sales experience, management does not anticipate any
significant loss to be incurred on disposition. The second property included in
foreclosed real estate is a manufacturing facility which was acquired in the
fourth quarter of 1995. The property is listed for sale and management does not
anticipate any significant loss on the sale of the property. The remaining
balance of foreclosed real estate consists of several properties, with no single
property exceeding $500,000.
As of December 31, 1995, the company had $7.2 million of loans which were
not included in the past due, nonaccrual or restructured categories, but for
which known information about possible credit problems caused management to have
serious doubts as to the ability of the borrowers to comply with the present
loan repayment terms. Based on management's evaluation, including current market
conditions, cash flow generated and recent appraisals, no significant losses are
anticipated in connection with these loans. These loans are subject to
continuing management attention and are considered in determining the level of
the allowance for loan losses.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance represents an amount which, in
management's judgment, will be adequate to absorb probable losses on existing
loans. At December 31, 1995, the allowance was $15.8 million, compared with
$12.5 million at both December 31, 1994 and December 31, 1993. The allowance as
a percentage of nonperforming loans was 91% at December 31, 1995, as compared to
158% at year-end 1994 and 126% at December 31, 1993. The ratio of the allowance
for loan losses to total loans (excluding mortgage loans held for sale) at
December 31, 1995, was 1.25%, compared with 1.10% at December 31, 1994, and
1.24% at the end of 1993.
Thirty percent of the allowance at December 31, 1995, was allocated for the
three large nonaccrual credits mentioned above, which covers 44% of the balance
of those credits. The remaining $11.0 million of the allowance, therefore, is
available for the balance of the portfolio, resulting in a coverage ratio of
168% for the remaining nonperforming and restructured loans.
Following is a summary of the changes in the allowance for loan losses for
each of the past five years.
<TABLE>
Summary of Loan Loss Experience
For the years ended December 31
Dollars in thousands
<CAPTION>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ................. $ 12,529 $ 12,505 $ 9,596 $ 7,700 $ 7,183
Provision for loan losses .................... 5,260 2,212 2,794 2,618 2,242
Balance of allowance for loan losses
of acquired subsidiaries at acquisition date -- -- 2,433 1,016 --
Amounts charged off:
Commercial and commercial real estate ...... 993 1,873 2,195 1,623 1,322
Residential real estate .................... 106 80 315 138 119
Consumer ................................... 1,426 838 936 738 996
---------- ---------- ---------- ---------- ----------
Total loans charged off .................... 2,525 2,791 3,446 2,499 2,437
Recoveries of amounts previously charged off:
Commercial and commercial real estate ...... 228 232 615 323 364
Residential real estate .................... 8 41 115 106 21
Consumer ................................... 279 330 398 332 327
---------- ---------- ---------- ---------- ----------
Total recoveries ........................... 515 603 1,128 761 712
---------- ---------- ---------- ---------- ----------
Net charge-offs ............................ 2,010 2,188 2,318 1,738 1,725
---------- ---------- ---------- ---------- ----------
Balance at end of year ....................... $ 15,779 $ 12,529 $ 12,505 $ 9,596 $ 7,700
========== ========== ========== ========== ==========
Total loans, net of unearned income:
Average .................................... $1,190,727 $1,073,718 $ 898,834 $ 719,184 $ 553,549
At December 31 ............................. 1,259,071 1,143,716 1,006,796 780,846 567,954
As a percentage of average loans:
Net charge-offs ............................ 0.17 % 0.20 % 0.26 % 0.24 % 0.31 %
Provision for loan losses .................. 0.44 % 0.21 % 0.31 % 0.36 % 0.41 %
Allowance as a percentage of year-end loans .. 1.25 % 1.10 % 1.24 % 1.23 % 1.36 %
Allowance as a percentage of nonperforming
and restructured loans ..................... 91.0 % 158.2 % 126.4 % 107.0 % 72.6 %
</TABLE>
The adequacy of the allowance for loan losses is determined on an ongoing
basis through analysis of the overall quality of the loan portfolio, historical
loan loss experience, loan delinquency trends, and current and projected
economic conditions. Additional allocations of the allowance are based on
specifically identified potential loss situations. These potential loss
situations are identified by account officers' evaluation of their own
portfolios as well as by an independent loan review function. Management
believes that the allowance for loan losses at December 31, 1995, is adequate to
absorb losses inherent in the loan portfolio as of that date. That determination
is based on the best information available to management, but necessarily
involves uncertainties and matters of judgment and, therefore, cannot be
determined with precision and could be susceptible to significant change in the
future. In addition, bank and thrift regulatory authorities, as a part of their
periodic examinations of the banks, may reach different conclusions regarding
the quality of the loan portfolio and the level of the allowance, which could
result in additional provisions being made in future periods.
The tables below set forth an allocation of the allowance for loan losses
by category of loan and a percentage distribution of the allowance allocation.
In making the allocation, consideration was given to such factors as
management's evaluation of risk in each category, current economic conditions
and charge-off experience. An allocation of the allowance for loan losses is an
estimate of the portion of the allowance which will be used to cover future
charge-offs in each loan category, but it does not preclude any portion of the
allowance allocated to one type of loan from being used to absorb losses of
another loan type.
Allocation of Allowance for Loan Losses
December 31
In thousands
1995 1994 1993 1992 1991
Commercial ............ $ 9,133 $ 7,529 $ 6,870 $ 4,813 $ 3,856
Commercial real estate 4,089 1,883 1,718 1,203 964
Residential real estate 640 977 1,358 1,720 1,318
Consumer .............. 1,917 2,140 2,559 1,860 1,562
------- ------- ------- ------- -------
Total .............. $15,779 $12,529 $12,505 $ 9,596 $ 7,700
======= ======= ======= ======= =======
<TABLE>
Allocation of Year-End Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans
December 31
<CAPTION>
1995 1994 1993 1992 1991
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ........... 57.9% 29.6% 60.1% 27.8% 54.9% 31.7% 50.2% 30.1% 50.1% 34.9%
Commercial real estate 25.9 31.5 15.0 29.2 13.7 23.2 12.5 17.9 12.5 19.9
Residential real ..... 4.1 28.4 7.8 29.6 10.9 30.2 17.9 37.4 17.1 30.0
estate
Consumer ............. 12.1 10.5 17.1 13.4 20.5 14.9 19.4 14.6 20.3 15.2
---- ---- ---- ----- ------ ---- ---- ---- ---- ----
Total ............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Securities, Federal Funds Sold and Resale Agreements
Securities, including those classified as held to maturity and available
for sale, decreased from $386 million at December 31, 1993, to $314 million at
year-end 1994, and to $298 million at December 31, 1995. The decline in the
securities portfolio in both 1995 and 1994 was substantially the result of
maturities, prepayments and calls. Funds provided by the reduction in securities
were utilized to fund growth in the loan portfolio.
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, all debt securities in which the company does
not have the ability or management does not have the positive intent to hold to
maturity are classified as securities available for sale and are carried at
market value, as are all equity securities. Beginning December 31, 1993,
unrealized gains and losses on securities available for sale are reported as a
separate component of shareholders' equity, net of tax. As mentioned previously,
the company reclassified all securities to available for sale on November 30,
1995.
The percentage of collateralized mortgage obligations ("CMO's") and
mortgage-backed securities to total securities declined to 27% at December 31,
1995, from 31% at December 31, 1994, and 39% at December 31, 1993. This decline
was due to the significant refinancing of residential mortgages and the
resulting prepayment of mortgage-related securities coupled with management's
desire to decrease the company's exposure to mortgage-related securities. Due to
the unpredictable nature of residential mortgage prepayments, the average and
final maturities of the related securities vary. In a rising rate environment
these securities have a longer expected life, while in a declining rate
environment they have a shorter expected life. Management limits this prepayment
and payment extension risk principally by investing in planned amortization
class CMO's, which have less volatility than other mortgage-backed securities
and have an average life of three to five years.
The tables below present the carrying value of securities for each of the
past three years and the maturities and yield characteristics of securities as
of December 31, 1995.
<TABLE>
Carrying Value of Securities
December 31
In thousands
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
U.S. Treasury and federal agencies:
Available for sale .............................................. $142,199 $146,484 $123,677
Held to maturity ................................................ -- 3,081 51,759
Collateralized mortgage obligations and mortgage-backed securities:
Available for sale .............................................. 81,900 70,895 105,273
Held to maturity ................................................ -- 26,372 45,660
State and municipal obligations:
Available for sale .............................................. 55,552 -- --
Held to maturity ................................................ -- 49,752 42,162
Other securities:
Available for sale .............................................. 18,571 12,264 11,086
Held to maturity ................................................ -- 5,553 6,031
-------- -------- --------
Total securities:
Available for sale .............................................. 298,222 229,643 240,036
Held to maturity ................................................ -- 84,758 145,612
-------- -------- --------
Total securities ............................................... $298,222 $314,401 $385,648
======== ======== ========
</TABLE>
<TABLE>
Maturity Distribution of Securities Available for Sale
December 31, 1995
<CAPTION>
Over Over Five
One Year Years
In thousands One Year Through Through Over Equity Total Market
or Less Five Years Ten Years Ten Years Securities Maturities Value
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and federal agencies .. $46,553 $ 74,325 $22,884 $- $- $143,762 $142,199
Collateralized mortgage obligations
and mortgage-backed .................. 1,889 49,129 10,561 20,590 -- 82,169 81,900
securities:(1)
State and municipal obligations ..... 4,134 13,391 23,428 13,266 -- 54,219 55,552
Other securities .................... 608 1,823 2,473 219 13,525 18,648 18,571
------- -------- ------- ------- --------- -------- --------
Total securities available for sale $53,184 $138,668 $59,346 $34,075 $ 13,525 $298,798 $298,222
======= ======== ======= ======= ========= ======== ========
Percent of total .................... 17.80 % 46.41 % 19.86 % 11.41 % 4.52 % 100.00 %
Weighted average yield(2) ........... 5.40 % 5.11 % 5.44 % 6.47 % 6.37 % 5.44 %
<FN>
(1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 1995 prepayment projections.
(2) The weighted average yields are based on amortized cost.
</FN>
</TABLE>
Other Assets
The company adopted on a prospective basis effective January 1, 1995,
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"). SFAS 122 requires that rights to service mortgage
loans for others be recognized as assets, without regard to whether those assets
were acquired in purchase transactions or were acquired through loan
originations. In prior years only purchased mortgage servicing rights ("MSR's")
were recognized as assets. As a result of SFAS 122 and purchases of servicing
portfolios, the company recognized in the consolidated balance sheet MSR's of
$28.3 million at December 31, 1995, compared with $9.2 million at year-end 1994.
Servicing portfolios purchased during 1995 totaled $1.2 billion of mortgage
loans and represented $20.1 million of the mortgage servicing rights asset at
year-end 1995.
The carrying value of MSR's and the related amortization are evaluated
quarterly in relation to their fair values. The company evaluates the carrying
value of the MSR's by estimating the present value of the future net servicing
income of the rights, using a discounted valuation method and based on
management's best estimate of remaining loan lives. Serviced loans are
stratified into four interest rate groups and two loan types. Approximately 77%
of the loans have contractual interest rates from 7% to 9%. Impairment and
subsequent adjustments in each stratum, if any, are recognized by a valuation
allowance and a charge against servicing income. Prepayments of mortgage loans
can have a considerable impact on the value of the MSR portfolio. Prepayments
result from a variety of factors, but a declining mortgage loan interest rate
environment is generally considered to be the most significant of these.
Therefore, the carrying value of the MSR's could become impaired in future
periods if mortgage rates should decline substantially. Deposits and Borrowed
Funds
Total deposits averaged $1.40 billion in 1995, a 4% increase over 1994. In
order to fund growth in the loan portfolio, the company issued in the first
quarter of 1995 $30 million of 24-month brokered certificates of deposit and
purchased $41 million of deposits from Fifth Third Bank of Kentucky, Inc.
Excluding these transactions, average deposits would have grown approximately
$10 million from 1994 to 1995.
In 1994, total deposits averaged $1.35 billion, a 6% increase over 1993.
Most of this increase was in interest-bearing deposits, which increased $47
million, or 4%. However, excluding TFB-Pikeville from both years,
interest-bearing deposits decreased $20 million, or 2%. Non-interest-bearing
accounts increased $23 million, or 16%, year-to-year.
Time deposits of $100,000 or more totaled $206.9 million at December 31,
1995, and $163.6 million at December 31, 1994. Interest expense on time deposits
of $100,000 or more was $11.8 million in 1995, $6.3 million in 1994 and $6.7
million in 1993. The table below provides information on the maturities of time
deposits of $100,000 or more at December 31, 1995.
Maturity of Time Deposits of $100,000 or More
December 31, 1995
In thousands
Three months or less $48,764
Over three through six months 34,916
Over six through twelve months 57,652
Over twelve months 65,535
------------------
Total $206,867
Information regarding short-term borrowings is presented below.
Short-term Borrowings
Dollars in thousands
1995 1994 1993
Federal funds purchased and repurchase agreements:
Balance at year end ............................ $ 75,594 $ 74,553 $29,704
Weighted average rate at year end .............. 4.83 % 3.50 % 2.38 %
Average balance during the year ................ 47,219 40,303 28,084
Weighted average rate during the year .......... 4.27 % 3.11 % 2.40 %
Maximum month-end balance ...................... 82,607 74,553 35,784
Other short-term borrowings:
Balance at year end ............................ 45,014 48,033 15,000
Weighted average rate at year end .............. 6.67 % 6.36 % 3.45 %
Average balance during the year ................ 40,652 36,669 6,624
Weighted average rate during the year .......... 7.34 % 4.68 % 3.59 %
Maximum month-end balance ...................... 61,831 48,840 15,000
Total short-term borrowings:
Balance at year end ............................ 120,608 122,586 44,704
Weighted average rate at year end .............. 5.52 % 4.62 % 2.74 %
Average balance during the year ................ 87,871 76,972 34,708
Weighted average rate during the year .......... 5.69 % 3.86 % 2.63 %
Maximum month-end balance ...................... 120,608 122,586 50,784
Substantially all federal funds purchased and repurchase agreements mature
in one business day. Other short-term borrowings principally represent Federal
Home Loan Bank ("FHLB") advances to TFB,FSB and TFB-KY (with varying maturity
dates), which are funding residential mortgage and commercial loans.
The company has a $5 million unsecured operating line of credit with an
unaffiliated commercial bank that is used from time-to-time to supplement the
company's cash requirements. The line was not in use at December 31, 1995 or
1994.
Long-term debt averaged $46.8 million in 1995, compared with $40.8 million
in 1994 and $34.0 million in 1993. The increase in 1995 as compared to 1994 is
due to the issuance in the fourth quarter of $50 million of senior bank notes.
That program is described in the Capital Resources and Liquidity discussion,
which follows. The 1994 increase is due to an FHLB advance to TFB-KY which had
an original maturity exceeding one year. The advance, which was drawn upon in
order to fund fixed-rate commercial loans, was rewritten during 1994 and
classified as a short-term borrowing.
Long-term debt also includes financing from an unaffiliated commercial bank
for the company's leveraged ESOP. Total ESOP debt was $3.0 million at December
31, 1995, and $3.7 million at December 31, 1994.
See note 9 to the consolidated financial statements for a further
description of the terms of these borrowings.
Capital Resources and Liquidity
The company's capital ratios at December 31, 1995 and 1994 (calculated in
accordance with regulatory guidelines) were as follows:
December 31 1995 1994
Tier 1 risk based ... 8.64% 9.47%
Regulatory minimum 4.00 4.00
Total risk based .... 12.15 13.31
Regulatory minimum 8.00 8.00
Leverage 6.70 6.95
Regulatory minimum 3.00 3.00
The decrease in these capital ratios over the past year is primarily due to
growth in the balance sheet -- particularly commercial and commercial real
estate loans. Capital ratios of all of the company's subsidiaries are in excess
of applicable minimum regulatory capital ratio requirements at December 31,
1995.
Approximately half of the $18.1 million increase in equity capital during
1995 was provided by retained earnings. Most of the remaining portion was due to
a $7.7 million decline in the unrealized net loss on securities available for
sale. In 1994, retained earnings provided $8.6 million in equity, however this
was offset by an $8.8 million increase in the unrealized net loss on the
portfolio of securities available for sale.
Generally speaking, the company relies upon net inflows of cash from
financing activities, supplemented by net inflows of cash from operating
activities, to provide cash used in its investing activities. As is typical of
most banking companies, significant financing activities include issuance of
common stock and long-term debt, deposit gathering, and the use of short-term
borrowing facilities, such as federal funds purchased, repurchase agreements,
FHLB advances and lines of credit. The company's primary investing activities
include purchases of securities and loan
originations, offset by maturities, prepayments and sales of securities, and
loan payments. At December 31, 1995, the aggregate retained earnings of the
banks was $67.2 million, of which $25.5 million was available for the payment of
dividends to the parent company.
In order to support internally-generated growth in the loan portfolio,
TFB-KY issued in the fourth quarter of 1995, $20 million of two-year notes and
$30 million of three-year notes under a $250 million senior bank note program.
The notes issued to date bear interest at fixed rates of 6.32% and 6.48%,
respectively, and have been effectively converted to floating rate instruments
through the use of interest rate swap transactions. Interest rate swaps are
discussed more fully in the Asset/Liability Management section which follows and
in note 14 to the consolidated financial statements. An additional $200 million
of bank notes may be issued from time to time under this book-entry program in
maturities of from 30 days to 30 years.
Asset/Liability Management
Managing interest rate risk is fundamental to the financial services
industry. The company manages the inherently different maturity and repricing
characteristics of the lending and deposit-acquisition lines of business to
achieve a desired interest-sensitivity position and to limit exposure to
interest rate risk. The maturity and repricing characteristics of the company's
lending and deposit activities create a naturally asset-sensitive structure. By
using a combination of on- and off-balance-sheet financial instruments, the
company manages interest rate sensitivity within established policy guidelines.
The company's Asset/Liability Committee approves policy guidelines,
provides oversight to the asset/liability management process, and monitors and
adjusts exposure to interest rates in response to loan and deposit flows.
Asset/liability activity is reviewed monthly by the company's board of
directors.
An earnings simulation model is used to monitor and evaluate the exposure
and impact of changing interest rates on earnings. The simulation model used by
the company reflects the dynamics of all interest-earning assets,
interest-bearing liabilities and off-balance-sheet financial instruments. It
combines the various factors affecting rate sensitivity into a two-year earnings
outlook that incorporates management's view of the most likely interest rate
environment. The model is updated at least monthly for multiple interest rate
scenarios, projected changes in balance sheet categories and other relevant
assumptions. In developing multiple rate scenarios, an econometric model is
employed to forecast key rates, based on the cyclical nature of those rates,
with a probability assigned to potential future events which might affect those
rates.
Among the factors the model utilizes are rate-of-change differentials, such
as federal funds rates versus savings account rates; maturity effects, such as
calls on securities; and rate barrier effects, such as caps or floors on loans.
It also captures changing balance sheet levels, such as loans and investment
securities, and floating-rate loans that may be tied or related to prime,
treasury notes, CD rates or other rate indices, which do not necessarily move
identically as rates change. In addition, it captures leads and lags that occur
as rates move away from current levels, and the effects of prepayments on
various assets, such as residential mortgages, mortgage-backed securities and
consumer loans. These, and certain other effects, are evaluated to develop
multiple scenarios from which the sensitivity of earnings to changes in interest
rates is determined.
The following illustrates the effects on net interest income of multiple
rate environments compared to the rate environment of December 1995 (the "flat"
scenario). For example, in the scenario considered "most likely" the company
assumed that the federal funds rate and prime rate would be 5.00% and 8.00%,
respectively, at the end of 1996, and would be slightly higher for seven of the
twelve months from December 31, 1995 to December 31, 1996.
<PAGE>
Most
Flat Likely Rising Declining
Assumptions:
Prime rate ......... 8.50% 8.00% 11.50% 5.75%
Federal funds rate . 5.50% 5.00% 8.50% 3.00%
Increase (decrease) in
net interest income - % (0.24)% (0.07)% (2.14)%
The company's simulation model shows that under each of the three
scenarios, net interest income would be lower than if rates remained constant,
with a declining rate environment having the greatest negative impact. Due to
the recent restructuring of the balance sheet, along with off-balance-sheet
transactions, management believes that the company's rate sensitivity position
is essentially balanced at December 31, 1995, indicating that net interest
income would not be impacted significantly under a reasonably foreseeable rising
or falling interest rate scenario. It should be noted that the results of the
simulation model do not take into account any future actions which could be
undertaken to reduce an adverse impact if there were a change in interest rate
expectations or in the actual level of interest rates.
To assist in achieving a desired level of interest rate sensitivity the
company has entered into off-balance-sheet interest rate swap transactions which
effectively neutralize the asset sensitive position which is inherent in the
balance sheet. The company pays a variable interest rate on each swap and
receives a fixed rate. In a higher interest-rate environment, the increased
contribution to net interest income from on-balance-sheet assets will
substantially offset any negative impact on net interest income from interest
rate swap transactions. Conversely, if interest rates decline, the swaps will
mitigate the company's exposure to reduced net interest income.
These swap transactions are described more fully in note 14 to the
consolidated financial statements.
<TABLE>
Quarterly Results of Operations
In thousands, except per share data
<CAPTION>
1995 1994
4th Qtr 3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income .............................. $35,097 $34,222 $33,236 $31,673 $30,294 $28,926 $28,137 $26,625
Interest expense ............................. 17,244 16,686 16,039 14,630 12,703 11,972 11,467 11,233
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .......................... 17,853 17,536 17,197 17,043 17,591 16,954 16,670 15,392
Provision for loan losses .................... 3,180 780 780 520 645 555 574 438
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after .................... 14,673 16,756 16,417 16,523 16,946 16,399 16,096 14,954
provision
Non-interest income .......................... 7,062 5,764 6,925 4,660 4,941 4,274 3,867 4,088
Non-interest expenses ........................ 17,500 15,801 17,185 15,563 15,873 14,996 14,900 14,301
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ................... 4,235 6,719 6,157 5,620 6,014 5,677 5,063 4,741
Income tax expense ........................... 1,378 2,175 2,038 1,825 1,963 1,870 1,638 1,604
------- ------- ------- ------- ------- ------- ------- -------
Net income ................................... $ 2,857 $ 4,544 $ 4,119 $ 3,795 $ 4,051 $ 3,807 $ 3,425 $ 3,137
======= ======= ======= ======= ======= ======= ======= =======
Net income applicable to common stock ........ $ 2,857 $ 4,544 $ 4,119 $ 3,795 $ 4,051 $ 3,793 $ 3,405 $ 3,117
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share .................... $ 0.25 $ 0.40 $ 0.36 $ 0.34 $ 0.36 $ 0.34 $ 0.30 $ 0.28
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
Consolidated Statistical Information (1)(2)
For the years ended December 31
Dollars in thousands, except per share data
<CAPTION>
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
Interest income ...................................... $ 134,228 $ 113,982 $ 102,819 $ 95,343 $ 79,727
Interest expense ..................................... 64,599 47,375 44,250 46,763 46,819
---------- ---------- ---------- ---------- --------
Net interest income .................................. 69,629 66,607 58,569 48,580 32,908
Provision for loan losses ............................ 5,260 2,212 2,794 2,618 2,242
---------- ---------- ---------- ---------- --------
Net interest income after provision for loan losses .. 64,369 64,395 55,775 45,962 30,666
Non-interest income .................................. 24,411 17,170 17,032 13,793 9,237
Non-interest expenses ................................ 66,049 60,070 52,830 39,890 29,228
- ------------------------------------------------------ ---------- ---------- ---------- ---------- --------
Income before income taxes and cumulative
effect of change in accounting principle ........... 22,731 21,495 19,977 19,865 10,675
Income tax expense ................................... 7,416 7,075 6,223 6,400 3,083
- ------------------------------------------------------ ---------- ---------- ---------- ---------- --------
Income before cumulative effect
of change in accounting principle .................. 15,315 14,420 13,754 13,465 7,592
Cumulative effect of change in accounting principle .. -- -- 296 -- --
- ------------------------------------------------------ ---------- ---------- ---------- ---------- --------
Net income ........................................... $ 15,315 $ 14,420 $ 14,050 $ 13,465 $ 7,592
========== ========== ========== ========== ========
Net income applicable to common stock ................ $ 15,315 $ 14,366 $ 13,969 $ 13,328 $ 7,198
========== ========== ========== ========== ========
Per common share:(3)
Primary earnings per share ......................... $ 1.35 $ 1.28 $ 1.24 $ 1.25 $ 1.03
Fully-diluted earnings per share ................... 1.34 1.28 1.24 1.25 0.99
Common shareholders' equity at year end ............ 11.49 9.96 9.96 9.01 7.78
Cash dividends declared ............................ 0.60 0.56 0.51 0.44 0.36
Year-end stock price ............................... 17.88 13.00 16.50 15.19 12.00
At year end:
Total assets ....................................... 1,795,649 1,617,835 1,597,453 1,380,626 976,405
Total loans, net of unearned income ................ 1,259,071 1,143,716 1,006,796 780,846 567,954
Total deposits ..................................... 1,444,483 1,335,509 1,376,227 1,222,050 857,663
Long-term debt ..................................... 86,605 37,334 54,217 21,957 18,958
Total shareholders' equity ......................... 129,767 111,632 112,036 99,406 66,172
Common shareholders' equity ........................ 129,767 111,632 111,026 98,396 62,877
Allowance for loan losses .......................... 15,779 12,529 12,505 9,596 7,700
Selected ratios:
Return on average assets ........................... 0.92 % 0.91 % 0.96 % 1.10 % 0.86 %
Return on average shareholders' equity ............. 12.55 12.89 13.24 14.56 13.65
Return on average common shareholders' equity ...... 12.55 12.92 13.29 14.57 14.64
Average shareholders' equity to average total assets 7.30 7.05 7.25 7.58 6.31
Leverage ratio ..................................... 6.70 6.95 6.47 6.57 5.99
Tier 1 risk-based capital ratio .................... 8.64 9.47 9.36 11.05 9.21
Total risk-based capital ratio ..................... 12.15 13.31 13.50 12.51 11.58
Common dividend payout ratio ....................... 44.49 43.88 41.05 35.10 35.03
Allowance for loan losses as a percentage
of year-end loans ................................ 1.25 1.10 1.24 1.23 1.36
Nonperforming loans as a percentage
of year-end loans ................................ 1.38 0.69 0.98 1.15 1.87
Net charge-offs as a percentage of average loans ... 0.17 0.20 0.26 0.24 0.31
Net interest margin ................................ 4.56 4.57 4.32 4.31 4.04
Other data:
Number of full-time-equivalent employees at year end 932 836 829 672 473
<FN>
(1) During 1995, 1993, 1992 and 1991, the company acquired one commercial bank,
three thrift institutions and certain branches of two other thrift institutions
in transactions accounted for using the purchase method of accounting. Financial
data pertaining to the acquired entities since the acquisition dates has been
included in the consolidated financial statements. See note 4 to the
consolidated financial statements. (2) In 1994 and 1992, the company merged with
four bank holding companies in transactions accounted for using the
pooling-of-interests method of accounting. Accordingly, all financial data has
been restated as if the entities were combined for all periods presented. See
note 4 to the consolidated financial statements. (3) All per common share data
has been adjusted to reflect the 4-for-3 stock splits effected December 18,
1992, and December 16, 1991.
</FN>
</TABLE>
<PAGE>
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Trans
Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. 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 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 Trans
Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 2 to the consolidated financial statements, in 1995
the company adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 122, Accounting for
Mortgage Servicing Rights, and in 1993 it adopted Statements of Financial
Accounting Standards No. 109, Accounting for Income Taxes, and No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Louisville, Kentucky
January 15, 1996
<PAGE>
Consolidated Balance Sheets
December 31 - In thousands, except share data
1995 1994
Assets
Cash and due from banks (note 5) .............. $ 81,703 $ 80,828
Interest-bearing deposits with banks .......... 197 197
Mortgage loans held for sale (note 2) ......... 45,751 6,541
Securities available for sale (amortized cost
of $298,798 as of December 31, 1995, and
$242,079 as of December 31, 1994) (note 6) . 298,222 229,643
Securities held to maturity (market value of
$81,209 as of December 31, 1994) (note 6) .. -- 84,758
Loans, net of unearned income (notes 7 and 9) . 1,259,071 1,143,716
Less allowance for loan losses ................ 15,779 12,529
----------- -----------
Net loans .................................. 1,243,292 1,131,187
Premises and equipment, net (note 8) .......... 41,458 36,440
Mortgage servicing rights (note 2) ............ 28,284 9,166
Other assets (note 4) ......................... 56,742 39,075
----------- -----------
Total assets ............................... $ 1,795,649 $ 1,617,835
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing ....................... $ 206,725 $ 192,433
Interest bearing ........................... 1,237,758 1,143,076
----------- -----------
Total deposits ............................. 1,444,483 1,335,509
Federal funds purchased and
repurchase agreements ...................... 75,594 74,553
Other short-term borrowings (note 9) .......... 45,014 48,033
Long-term debt (note 9) ....................... 86,605 37,334
Other liabilities ............................. 14,186 10,774
----------- -----------
Total liabilities .......................... 1,665,882 1,506,203
Commitments and contingencies (notes 13 and 14)
Shareholders' equity:
Preferred stock (note 10) .................. -- --
Common stock, no par value. Authorized
50,000,000 shares; issued and
outstanding 11,293,291 and
11,203,247 shares, respectively ......... 21,175 21,006
Additional paid-in capital ................. 43,872 42,810
Retained earnings (note 11) ................ 68,152 59,587
Unrealized net loss on
securities available for sale,
net of tax (note 6) ..................... (403) (8,073)
Employee Stock Ownership Plan shares
purchased with debt (notes 9 and 13) .... (3,029) (3,698)
----------- -----------
Total shareholders' equity ................. 129,767 111,632
----------- -----------
Total liabilities and shareholders' equity . $ 1,795,649 $ 1,617,835
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Income
Years Ended December 31
In thousands, except per share data
Interest income 1995 1994 1993
Loans, including fees .................... $115,757 $ 94,020 $ 78,812
Federal funds sold and resale
agreements ............................. 804 540 976
U.S. Treasury and federal agency securities 13,532 15,444 19,856
State and municipal obligations .......... 2,861 2,770 2,211
Other securities ......................... 1,257 1,104 844
Interest-bearing deposits with banks ..... 17 104 120
-------- -------- --------
Total interest income .................... 134,228 113,982 102,819
Interest expense
Deposits ................................. 56,465 41,724 41,486
Federal funds purchased
and repurchase agreements .............. 2,014 1,253 673
Other short-term borrowings (note 9) ..... 2,983 1,715 238
Long-term debt (note 9) .................. 3,137 2,683 1,853
- --------------------------------------------- -------- -------- --------
Total interest expense ................... 64,599 47,375 44,250
-------- -------- --------
Net interest income ........................ 69,629 66,607 58,569
Provision for loan losses (note 7) ....... 5,260 2,212 2,794
-------- -------- --------
Net interest income after
provision for loan losses ................ 64,369 64,395 55,775
Non-interest income
Service charges on deposit accounts ...... 8,472 7,384 6,351
Mortgage banking income .................. 6,009 2,752 3,132
Gain on sale of mortgage servicing rights 1,687 -- --
Gain on sale of securities, net (note 6) . 200 257 1,149
Trust services ........................... 1,392 1,247 1,133
Brokerage income ......................... 1,728 1,305 849
Other .................................... 4,923 4,225 4,418
-------- -------- --------
Total non-interest income ................ 24,411 17,170 17,032
Non-interest expenses
Compensation and benefits (note 13) ...... 30,588 26,330 23,218
Net occupancy expense .................... 4,836 4,572 4,071
Furniture and equipment expense .......... 6,126 5,284 4,243
Deposit insurance ........................ 2,095 3,183 2,778
Professional fees ........................ 3,424 3,742 2,418
Postage, printing & supplies ............. 3,643 3,516 2,957
Communications ........................... 1,607 1,131 1,024
Other .................................... 13,730 12,312 12,121
-------- -------- --------
Total non-interest expenses .............. 66,049 60,070 52,830
-------- -------- --------
Income before income taxes and
cumulative effect of change
in accounting principle .................. 22,731 21,495 19,977
Income tax expense (note 12) ............... 7,416 7,075 6,223
-------- -------- --------
Income before cumulative effect
of change in accounting principle ........ 15,315 14,420 13,754
Cumulative effect of change in
accounting principle (note 12) ........... -- -- 296
-------- -------- --------
Net income ................................. $ 15,315 $ 14,420 $ 14,050
======== ======== ========
Net income applicable
to common stock .......................... $ 15,315 $ 14,366 $ 13,969
======== ======== ========
Primary earnings per common share (note 2):
Before cumulative effect of change
in accounting principle ................ $ 1.35 $ 1.28 $ 1.22
Based on net income ...................... 1.35 1.28 1.24
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
In thousands, except share and per share data
Preferred Stock Common Stock
Number Number Addtl
of of Paid-in
shares Amount shares Amount Capital
------- ------ ---------- ------ -------
Balance 12/31/92 1,010 $1,010 8,191,520 $20,479 $40,913
Net income for the year
Cash dividends declared:
Common stock, $.51 per
share
Preferred stock
Stock options exercised 8,577 16 36
Common stock issued in
connection
with dividend
reinvestment and stock
purchase plans and other 47,613 89 738
issuances
Four-for-three stock split 2,730,025
Common stock issued in 171,738 322 572
public offering
Decrease in unrealized loss
on marketable equity
securities
Net unrealized gain on
securities
available for sale, net
of tax
ESOP debt reduction, net
Reissue treasury stock 249 3
------ ------ ---------- ------- -------
Balance 12/31/93 1,010 $1,010 11,149,722 $20,906 $42,256
Net income for the year
Cash dividends declared:
Common stock, $.56 per
share
Preferred stock
Redemption of preferred
stock (note 10) (1,010) (1010)
Stock options exercised 22,018 41 178
Common stock issued in
connection
with dividend
reinvestment and stock
purchase plan and other 31,507 59 376
issuances
Net unrealized loss on
securities
available for sale, net
of tax
ESOP debt reduction, net
------- ------ ---------- ------- --------
Balance 12/31/94 -- $- 11,203,247 $21,006 $42,810
Net income for the year
Cash dividends declared:
Common stock, $.60 per
share
Common stock issued in
connection
with business combination
accounted
for as a purchase 25,000 47 384
(note4)
Stock options exercised,
net of
shares redeemed 30,887 58 205
Common stock issued in
connection
with dividend
reinvestment and stock
purchase plan 34,157 64 473
Decrease in net
unrealized loss on
securities available
for sale, net of tax
ESOP debt reduction, net
------- ------ ----------- -------- ------
Balance 12/31/95 -- $- 11,293,291 $21,175 $43,872
======= ====== ========== ======= =======
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
In thousands, except share and per share data
Unrealized Employee
Unrealized Net Gain Stock
Loss on (Loss) on Ownership
Marketable Securities Plan Shares
Retained Equity Available Purchased Total
Earnings Securities for Sale With Debt
------- ---------- -------- --------- -------
Balance 12/31/92 $41,039 $(163) $- $(3,872) $99,406
Net income for the year 14,050 14,050
Cash dividends declared:
Common stock, $.51 per (4,002) (4,002)
share
Preferred stock (81) (81)
Stock options exercised 52
Common stock issued in
connection
with dividend
reinvestment and stock
purchase plans and other 827
issuances
Four-for-three stock spli (6) (6)
Common stock issued in 894
public offering
Decrease in unrealized lo
on marketable equity 163 163
securities
Net unrealized gain on
securities
available for sale, net 719 719
of tax
ESOP debt reduction, net 11 11
Reissue treasury stock
------- ----- ----- ------- -------
Balance 12/31/93 $51,006 $- $719 $(3,861) $112,036
Net income for the year 14,420 14,420
Cash dividends declared:
Common stock, $.56 per (5,785) (5,785)
share
Preferred stock (54) (54)
Redemption of preferred (1,010)
stock (note 10)
Stock options exercised 219
Common stock issued in
connection
with dividend 8
reinvestment and stock
purchase plan and other 435
issuances
Net unrealized loss on
securities 6
available for sale, net (8,792) (8,792)
of tax
ESOP debt reduction, net 163 163
------- ----- -------- ------- -------
Balance 12/31/94 $59,587 $- $(8,073) $(3,698) $111,632
Net income for the year 15,315 15,315
Cash dividends declared:
Common stock, $.60 per (6,750) (6,750)
share
Common stock issued in
connection
with business combination
accounted
for as a purchase 431
(note4)
Stock options exercised,
net of
shares redeemed 263
Common stock issued in
connection
with dividend
reinvestment and stock
purchase plan 537
Decrease in net
unrealized loss on
securities available 7,670 7,670
for sale, net of tax
ESOP debt reduction, net 669 669
------- ----- ------ -------- --------
Balance 12/31/95 $68,152 $- $(403) $(3,029) $129,767
======= ===== ====== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31
In thousands, except per share data
<CAPTION>
Cash flows from operating activities: 1995 1994 1993
<S> <C> <C> <C>
Net income ............................................ $ 15,315 $ 14,420 $ 14,050
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses ......................... 5,260 2,212 2,794
Deferred tax expense .............................. (2,387) (882) (522)
Gain on sale of securities ........................ (200) (257) (1,149)
Loss (gain) on sale of mortgage loans held for sale (1,888) 200 (949)
Loss (gain) on sale of premises and equipment ..... (174) (231) 14
Gain on sale of mortgage servicing rights ......... (1,687) -- --
Depreciation and amortization of fixed assets ..... 5,473 5,032 3,466
Amortization of intangible assets ................. 1,394 1,087 1,085
Amortization of premium on securities
and loans, net .................................. 1,077 2,094 2,090
Amortization of mortgage servicing rights ......... 2,720 1,013 389
Increase in accrued interest receivable ............... (1,736) (1,593) (1,370)
Decrease (increase) in other assets ................... (10,759) (3,159) 2,912
Increase (decrease) in accrued interest payable ....... 3,588 114 (449)
Increase (decrease) in other liabilities .............. (4,993) 4,197 (2,331)
Sale of mortgage loans held for sale .................. 150,359 133,598 201,840
Originations of mortgage loans held for sale .......... (187,681) (95,161) (221,072)
--------- --------- ---------
Net cash provided by (used in) operating activities . (26,319) 62,684 798
Cash flows from investing activities:
Net decrease in interest-bearing deposits
with banks .......................................... -- 250 8,460
Net decrease in federal funds sold
and resale agreements ............................... -- 32,778 36,888
Proceeds from sale of securities:
Available for sale .................................. 33,247 5,183 23,787
Held to maturity (note 6) ........................... 2,486 -- --
Proceeds from prepayment and call of securities:
Available for sale .................................. 22,940 50,975 3,872
Held to maturity .................................... 4,758 12,363 111,270
Proceeds from maturities of securities:
Available for sale .................................. 33,726 20,412 12,920
Held to maturity .................................... 3,140 9,492 44,854
Purchase of securities:
Available for sale .................................. (70,136) (21,566) (49,965)
Held to maturity .................................... (3,000) (20,047) (94,514)
Net increase in loans ................................. (118,498) (140,434) (117,798)
Purchase and origination of mortgage servicing rights . (22,331) (7,778) (1,131)
Proceeds from sale of mortgage servicing rights ....... 2,180 -- --
Proceeds from sale of foreclosed assets ............... 1,705 1,950 2,949
Purchases of premises and equipment ................... (10,555) (9,785) (5,423)
Proceeds from disposal of premises and equipment ...... 836 1,569 112
Net cash and cash equivalents inflow (outflow)
from acquisitions (note 4) .......................... 36,815 -- (7,996)
--------- --------- ---------
Net cash used in investing activities ............... (82,687) (64,638) (31,715)
Cash flows from financing activities:
Net increase (decrease) in deposits ................... 67,869 (40,718) (9,707)
Net increase (decrease) in federal funds purchased
and repurchase agreements ........................... 1,041 44,849 (431)
Net increase (decrease) in other short-term borrowings (3,019) 23,033 14,400
Proceeds from issuance of long-term debt .............. 50,000 -- 36,603
Repayment of long-term debt ........................... (60) (6,720) (4,332)
Proceeds from issuance of common stock ................ 800 654 1,770
Redemption of preferred stock ......................... -- (1,010) --
Dividends paid ........................................ (6,750) (5,839) (4,083)
--------- --------- ---------
Net cash provided by financing activities ........... 109,881 14,249 34,220
--------- --------- ---------
Net increase in cash and cash equivalents ............. 875 12,295 3,303
Cash and cash equivalents at beginning of year ........ 80,828 68,533 65,230
--------- --------- ---------
Cash and cash equivalents at end of year (note 3) ..... $ 81,703 $ 80,828 $ 68,533
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Nature of Operations
Trans Financial, Inc. ("the company") is a bank and savings and loan
holding company registered under the Bank Holding Company Act of 1956 and the
Home Owners' Loan Act. The company's principal subsidiaries are: Trans Financial
Bank, National Association, headquartered in Bowling Green, Kentucky; and Trans
Financial Bank Tennessee, National Association, and Trans Financial Bank,
F.S.B., both headquartered in Nashville, Tennessee. Collectively, these three
subsidiaries are referred to in this report as "the banks." In addition, Trans
Financial Bank, National Association has three operating subsidiaries: Trans
Financial Investment Services, Inc., a securities broker/dealer; Trans Financial
Mortgage Company, a mortgage banking company; and Trans Travel, Inc., a travel
agency.
The company's financial services network is comprised of 56 office
locations serving 38 communities in Kentucky and Tennessee by offering
commercial and consumer banking, brokerage, mortgage, trust and travel services.
As of December 31, 1995, the company employed 988 employees and serviced more
than 140 thousand customer households.
The company actively competes in its markets with other commercial banks,
savings and loan associations, credit unions, brokerage firms, insurance
companies, other financial institutions and institutions which have expanded
into the financial market.
Bank holding companies, commercial banks and savings institutions are
extensively regulated under both federal and state law. Changes in applicable
laws or regulations may have a material effect on the businesses and prospects
of the company and the banks.
(2) Summary of Significant Accounting Policies
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect both the reported amounts of assets and
liabilities at the date of the financial statements, and also the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Generally accepted accounting principles also
require disclosure of contingent assets and liabilities at the date of the
financial statements.
A description of the more significant accounting policies follows.
Principles of Consolidation
The consolidated financial statements include the accounts of Trans
Financial, Inc. (parent company) and its subsidiaries, all of which are wholly
owned. All significant intercompany transactions and accounts have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with 1995 presentations.
Securities
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Accordingly, all debt securities in which the company does
not have the ability or management does not have the positive intent to hold to
maturity are classified as securities available for sale and are carried at
market value. All equity securities are classified as available for sale.
Unrealized gains and losses on securities available for sale are reported as a
separate component of shareholders' equity (net of income taxes). Securities
classified as held to maturity are carried at amortized cost. The company has no
securities classified as trading securities.
Amortization of premiums and accretion of discounts are recorded by a
method which approximates a level yield and which, in the case of
mortgage-backed securities, considers prepayment risk. The specific
identification method is used to determine the cost of securities sold.
Loans and Allowance for Loan Losses
Loans are stated at the unpaid principal balance. Interest income on loans
is recorded on the accrual basis except for those loans in a nonaccrual income
status. Loans are placed in nonaccrual status when principal or interest is past
due 90 days or more and the loan is not adequately collateralized and in the
process of collection, or when, in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the
obligation. Loans are not reclassified as accruing until principal and interest
payments are brought current and future payments appear reasonably certain.
Unearned income, arising principally from consumer installment loans or the
deferral of certain loan fees, is recognized as income using a method that
approximates the interest method.
The allowance for loan losses is maintained at a level that adequately
provides for estimated losses in the loan portfolio. The level of the allowance
is based on management's evaluation of the loan portfolio, which includes the
review of individual credits, consideration of past loan loss experience, loan
delinquency trends, changes in the composition of the loan portfolio and the
impact of current and projected economic conditions. The allowance for loan
losses is increased by the provision for loan losses and reduced by net
charge-offs. The level of the allowance and the amount of the provision for loan
losses involve uncertainties and matters of judgment and, therefore, cannot be
determined with precision.
The company adopted on a prospective basis effective January 1, 1995,
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). SFAS 114 requires that impaired loans be
measured at the present value of expected future cash flows, discounted at the
loan's effective interest rate, at the loan's observable market price, or at the
fair value of the collateral if the loan is collateral dependent. Generally,
impaired loans are also in nonaccrual status, however, in certain circumstances
the company may continue to accrue interest on an impaired loan. Such interest
income on accruing impaired loans is accrued daily. Cash receipts on impaired
loans are applied to the recorded investment in the loan, including any accrued
interest receivable. The adoption of SFAS 114 did not have a material effect on
the company's consolidated financial statements.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value, as determined by outstanding loan commitments from investors or
current yield requirements. Gain or loss is recorded at the time of sale in an
amount reflecting the difference between the contractual interest rates of the
loans sold and the current market rate.
Mortgage Servicing Portfolio
The company adopted on a prospective basis effective January 1, 1995,
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"). SFAS 122 requires that rights to service mortgage
loans for others be recognized as assets, without regard to whether those assets
were acquired in purchase transactions or were acquired through loan
originations. SFAS 122 also eliminates the previous requirement that gains on
mortgage loan sales be offset against the related mortgage servicing right
asset. The adoption of this statement resulted in a $1,243,000 increase in
mortgage banking income in 1995, which is included in the gain on sale of
mortgage loans held for sale shown on the consolidated statement of cash flows.
At December 31, 1995, the portfolio of mortgage loans serviced for others
totaled $2.2 billion, as compared with $1.3 billion at December 31, 1994. The
cost of mortgage servicing rights ("MSR's") associated with that portfolio
($28,284,000 and $9,166,000 at December 31, 1995 and 1994, respectively, net of
accumulated amortization), is amortized against service fee income in proportion
to, and over the period of, estimated net servicing revenues. During 1995, MSR's
totaling $1,243,000 were recognized on mortgage loans originated, and
$21,088,000 was recognized on servicing portfolios purchased.
The carrying value of MSR's and the related amortization are evaluated
quarterly in relation to estimated future net servicing revenues. The company
evaluates the carrying value of the MSR's by estimating the future net servicing
income of the rights, stratified by interest rate and loan type, using a
discounted valuation method and based on management's best estimate of remaining
loan lives. Impairment and subsequent adjustments in each stratum, if any, is
recognized by a valuation allowance and a charge against servicing income.
The normal agency (GNMA, FNMA or FHLMC) servicing fee was used in the
capitalization of any excess service fees. When participating interests in loans
sold had an average contractual interest rate, as adjusted for normal servicing
costs, which differed from the agreed yield to the purchaser, gains or losses
were recognized equal to the present value of such differential over the
estimated remaining life of such loans. Amortization of capitalized excess
servicing fees was reflected as a reduction of loan servicing income using the
interest method over the estimated remaining life of such loans, adjusted for
actual prepayments.
Interest Rate Swaps
The company uses interest rate swaps to manage its sensitivity to interest
rate risk. Interest income and expense is accrued over the terms of the
agreements, and transaction fees are deferred and amortized through interest
income and expense over the terms of the agreements. The fair market value of
these instruments is not included in the financial statements.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation of premises and equipment is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on the straight-line method over the term of the
related lease or over the useful life of the improvements, whichever is shorter.
Leasing commitments are insignificant.
Other Assets
Included in other assets is real estate acquired in settlement of loans,
which is carried at the lower of cost or fair value less estimated selling
costs. The excess of cost over fair value less estimated costs to sell at the
time of foreclosure is charged to the allowance for loan losses. Provisions for
subsequent declines in fair value are included in other non-interest expense.
Other costs relating to holding real estate acquired in settlement of loans are
charged to other non-interest expense as incurred. Costs related to real estate
in the process of development are capitalized to the extent that total carrying
value does not exceed fair value less costs to sell.
Income Taxes
The company adopted as of January 1, 1993, Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under this statement,
a current or deferred income tax liability is recognized, subject to certain
limitations, for the current or deferred tax consequences of all events that
have been recognized in the financial statements. The deferred income tax
liability or asset is measured by the provisions of enacted tax laws. Income
taxes for prior years were determined in accordance with Accounting Principles
Board Opinion No. 11. The cumulative effect of this change in accounting
principle, determined as of January 1, 1993, is reported separately in the
consolidated statement of income for the year ended December 31, 1993.
Stock Options
The company accounts for employee stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). Under APB 25, no compensation cost is recognized
on stock options granted to employees if the exercise price is at least equal to
the fair market value of the underlying stock at the date of grant.
Earnings Per Common Share
Primary earnings per share is computed by dividing net income applicable to
common stock by the weighted average number of shares of common stock and common
stock equivalents outstanding during the period. Net income applicable to common
stock is net income reduced by dividends on preferred stock.
The weighted average number of shares outstanding used in the calculation
of primary earnings per share follows:
In thousands 1995 1994 1993
11,353 11,258 11,245
(3) Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and amounts due from banks. The following summarizes supplemental cash
flow data for the years ended December 31, 1995, 1994 and 1993:
In thousands 1995 1994 1993
Cash paid for interest ... $60,366 $47,261 $44,309
Cash paid for income taxes 10,323 8,537 7,163
Certain non-cash investing and financing transactions are summarized as
follows:
1995 1994 1993
Issuance of stock in business combination ........... 431 -- --
Change in unrealized gain (loss) on
securities available for sale, net of tax ........... 7,670 (8,792) 882
Effect on shareholders' equity of reductions
in Employee Stock Ownership Plan debt (net) ......... 669 163 11
Loans transferred to foreclosed real estate
and other foreclosed assets ......................... 1,493 1,326 1,019
Other assets transferred to loans ................... -- -- 274
Securities transferred from held-to-maturity
to securities available for sale:
Upon adoption of SFAS No. 115 ....................... -- -- 171,530
Related to business combinations .................... -- 58,641 --
Under special one-time reassessment guidance
issued by the Financial Accounting
Standards Board ..................................... 76,921 -- --
Other transfers ..................................... -- -- 7,359
Reclassification of debt from long-term to short-term -- 10,000 --
<PAGE>
(4) Business Combinations
On February 21, 1995, the company assumed $41 million of deposits and
acquired three branch facilities and $360 thousand of consumer loans. These
deposits and assets were related to the Bowling Green and Scottsville, Kentucky
branches of Fifth Third Bank of Kentucky, Inc. The two offices located in
Bowling Green, Kentucky were consolidated into existing Trans Financial
locations. The company's existing location in Scottsville, Kentucky was
consolidated into the other purchased location. On September 1, 1995, the
company acquired AirLanse Travel, a Louisville, Kentucky, travel agency, for
cash and stock of the company. On November 15, 1995, the company acquired for
cash the assets of Correspondents Mortgage Company, L.P., located in Greensboro,
North Carolina.
These three acquisitions have been accounted for using the purchase method of
accounting and, accordingly, their results of operations and cash flows have
been included in the consolidated financial statements since the dates of
acquisition. The company received $36,815,000 of cash and issued 25,000 shares
of common stock in connection with these acquisitions.
Following is a summary of the assets acquired and liabilities assumed in
these transactions:
In thousands
Cash and due from banks ................... $ 36,815
Loans, net of unearned income ............. 360
Premises and equipment .................... 598
Other assets .............................. 154
Deposits .................................. (41,105)
Other liabilities ......................... (628)
Common stock issued ....................... (431)
Excess of costs over net assets acquired 4,237
The excess of the costs over the value of net assets acquired was recorded as
goodwill.
Following is a presentation of pro forma financial information of the company
for the years ended December 31, 1995 and 1994, assuming these acquisitions had
occurred on January 1, 1994. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
entities been combined throughout those periods.
In thousands, except per share data
1995 1994
Net interest income after provision for loan losses $69,781 $67,942
Net income ........................................ 15,590 14,778
Primary earnings per common share ................. $ 1.37 $ 1.31
On February 15, 1994, Trans Financial merged with Kentucky Community Bancorp,
Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National
Bank, Peoples First Bank, and Farmers Liberty Bank. As of the date of
consummation, KCB had consolidated assets of approximately $175 million,
year-to-date net interest income of approximately $915 thousand, and
year-to-date net income of approximately $325 thousand. Under the terms of the
merger, the shares of KCB common stock outstanding were converted into 1,374,962
shares of common stock of the company.
On April 22, 1994, Trans Financial merged with Peoples Financial Services,
Inc. ("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and
Trust of the Cumberlands and Citizens Federal Savings Bank. As of the date of
consummation, PFS had consolidated assets of approximately $123 million,
year-to-date net interest income of approximately $1,520 thousand, and
year-to-date net income of approximately $330 thousand. Under the terms of the
merger, the shares of PFS common stock were converted into 1,302,254 shares of
common stock of the company.
On August 31, 1994, Trans Financial merged with FGC Holding Company ("FGC"),
of Martin, Kentucky, the holding company for First Guaranty National Bank. As of
the date of consummation, FGC had consolidated assets of approximately $127
million, year-to-date net interest income of approximately $3,420 thousand, and
year-to-date net income of approximately $1,290 thousand. Under the terms of the
merger, the shares of FGC common stock were converted into 1,050,000 shares of
common stock of the company and the shares of FGC preferred stock were retired.
The consolidated financial statements of the company give effect to these
three mergers, each of which was accounted for as a pooling of interests.
Accordingly, financial statements for all periods were restated to reflect the
results of operations of these companies on a combined basis from the earliest
period presented.
On July 6, 1993, Trans Financial acquired all of the outstanding stock of
Trans Kentucky Bancorp, Inc., the holding company for The Citizens Bank of
Pikeville. The aggregate costs, including consideration and acquisition costs
were approximately $19 million. The excess of the costs over the fair value of
net assets acquired of $117,000 was recorded as goodwill. This acquisition was
accounted for using the purchase method of accounting and, accordingly, the
results of operations and cash flows of this entity have been included in the
consolidated financial statements since the date of acquisition.
On February 1, 1993, PFS sold 31,225 shares (equivalent to 171,738 shares of
common stock of the company, based on the exchange ratio of 5.5 shares of common
stock of the company for each share of PFS common stock) of newly-issued common
stock in connection with its acquisition of Citizens Federal Savings Bank,
Rockwood, Tennessee, ("Citizens") pursuant to a definitive agreement entered
into by PFS and Citizens in May, 1992. In connection with the acquisition, PFS
and Citizens adopted a Plan of Conversion/Acquisition ("Plan") whereby Citizens
was converted from a federally-chartered mutual institution to a
federally-chartered stock institution. Pursuant to the Plan, shares of capital
stock of PFS were offered initially for subscriptions to eligible members of
Citizens and to certain other persons as of specified dates and subject to
various subscription priorities as provided by the Plan. The capital stock was
offered at a price determined by PFS'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 Citizens. PFS incurred costs of $511,000 associated with the offering. All
costs incurred associated with the sale of stock and acquisition were deducted
from the proceeds of the sale of stock. The transaction was accounted for as a
pooling of interests and, accordingly, all financial data was restated as if the
entities were combined for all periods presented.
Goodwill and deposit base premium from the above transactions, as well as
acquisitions consummated in prior years, are being amortized over periods
ranging from five to twenty years using straight-line and accelerated methods
and had a combined unamortized balance of $10,409,000 and $7,409,000 at December
31, 1995 and 1994, respectively. These intangible assets are reviewed for
possible impairment when events or changed circumstances may affect the
underlying basis of the asset. (5) Cash and Due from Banks
Regulatory authorities require the banks to maintain reserve balances on
customer deposits. The amounts of required reserves totaled approximately
$27,706,000 at December 31, 1995, and $21,911,000 at December 31, 1994.
(6) Securities
Effective December 31, 1993, the company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"). Accordingly, all debt securities in which the
company does not have the ability or management does not have the positive
intent to hold to maturity are classified as securities available for sale and
are carried at market value. All equity securities are classified as available
for sale beginning December 31, 1993. In conjunction with the adoption of SFAS
115, the company transferred $171.5 million of investment securities to
securities available for sale. Unrealized gains and losses on securities
available for sale are reported as a separate component of shareholders' equity
(net of tax) beginning December 31, 1993. Securities available for sale prior to
December 31, 1993, were carried at the lower of aggregate cost or market value.
On November 30, 1995, $76,921,000 of held-to-maturity securities were
reclassified to available for sale as permitted by the Financial Accounting
Standards Board in a special one-time reassessment.
The following summarizes securities available for sale at December 31, 1995
and 1994.
<TABLE>
December 31, 1995 (In thousands)
<CAPTION>
Amortized Unrealized Market
Cost Gains Losses Value
--------- ------ ------- --------
<S> <C> <C> <C> <C>
U.S.Treasury and federal agency securities ............................... $143,762 $ 116 $ 1,679 $142,199
Collateralized mortgage obligations
and mortgage-backed securities ......................................... 82,169 481 750 81,900
State and municipal obligations .......................................... 54,219 1,588 255 55,552
Corporate debt securities ................................................ 5,123 67 10 5,180
Equity securities ........................................................ 13,525 98 232 13,391
-------- ------ ------- --------
Total securities available for sale ...................................... $298,798 $2,350 $ 2,926 $298,222
======== ====== ======= ========
December 31, 1994 (In thousands)
U.S.Treasury and federal agency securities ............................... $153,535 $- $ 7,051 $146,484
Collateralized mortgage obligations
and mortgage-backed securities ......................................... 75,855 -- 4,960 70,895
Equity securities ........................................................ 12,689 27 452 12,264
-------- ------ ------- --------
Total securities available for sale ...................................... $242,079 $ 27 $12,463 $229,643
======== ====== ======= ========
</TABLE>
The amortized cost and approximate market values of securities held to
maturity as of December 31, 1994, follows:
<TABLE>
December 31, 1994 (In thousands)
<CAPTION>
Amortized Unrealized Market
Cost Gains Losses Value
------- ------ ------ -------
<S> <C> <C> <C> <C>
U.S.Treasury and federal agency securities ............................ $ 3,081 $- $ 356 $ 2,725
Collateralized mortgage obligations
and mortgage-backed securities ...................................... 26,372 -- 954 25,418
State and municipal obligations ....................................... 49,752 254 2,130 47,876
Corporate debt securities ............................................. 5,553 -- 363 5,190
------- ------ ------ -------
Total securities held to maturity ..................................... $84,758 $ 254 $3,803 $81,209
======= ====== ====== =======
</TABLE>
Included in equity securities at December 31, 1995, are Federal Home Loan
Bank and Federal Reserve Bank stock of $6,009,300 and $1,976,800 respectively.
At December 31, 1994, these stock investments were $5,617,000 and $1,533,000,
respectively.
The amortized cost and approximate market value of debt securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed obligations generally have contractual maturities in excess of
ten years, but shorter expected maturities as a result of prepayments.
In thousands
Amortized Market
Cost Value
--------- ---------
Due in one year or less .............. $ 51,295 $ 51,300
Due after one year through five years 89,539 88,504
Due after five years through ten years 48,785 49,168
Due after ten years .................. 13,485 13,959
-------- --------
203,104 202,931
Collateralized mortgage obligations
and mortgage-backed securities ..... 82,169 81,900
-------- --------
$285,273 $284,831
======== ========
Securities with a carrying value of approximately $162,779,000 and
$148,348,000 at December 31, 1995 and 1994, respectively, were pledged to secure
public funds, trust funds and for other purposes.
Gross gains of $293,000; $257,000; and $1,236,000; and gross losses of
$93,000; $-0-; and $87,000 were realized on sales of securities in 1995, 1994,
and 1993, respectively. In 1995, the company sold mortgage-backed securities
with a carrying value of $2,568,000 from the held to maturity portfolio. A net
loss of $82,000 was recognized on these sales, which is included in the gross
realized gains and losses shown above for 1995. These sales qualified under the
requirements of SFAS 115, as the outstanding principal balances at the time of
sale were less than 15% of the outstanding principal balances at the time the
securities were acquired.
<PAGE>
(7) Loans
The company extends credit in the form of commercial loans, commercial and
residential real estate loans and consumer loans to customers primarily in the
immediate market areas of its subsidiaries. The composition of loans at December
31, 1995 and 1994, follows:
In thousands 1995 1994
Commercial .................... $ 372,822 $ 318,970
Commercial real estate ........ 397,741 334,567
Residential real estate ....... 358,257 339,488
Consumer ...................... 132,401 153,754
Unearned income ............... (2,150) (3,063)
----------- -----------
Loans net of unearned income $ 1,259,071 $ 1,143,716
=========== ===========
The principal balance of nonaccrual and restructured loans at December 31,
1995 and 1994, was $12,722,000 and $4,405,000, respectively. The interest that
would have been recorded if all those loans were in an accrual status in
accordance with their original terms was approximately $1,441,000 in 1995,
$519,000 in 1994, and $452,000 in 1993. The amount of interest income that was
actually recorded for those loans was approximately $490,000 in 1995, $81,000 in
1994, and $37,000 in 1993.
The company adopted on a prospective basis effective January 1, 1995,
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"). The company's recorded investment in impaired
loans was $12,444,000 at December 31, 1995. Of that amount, $11,130,000
represents loans for which an allowance for loan losses, in the amount of
$4,912,000, has been established under SFAS 114. For the year ended December 31,
1995, the recorded investment of impaired loans averaged $7,491,000. Interest
income recognized on impaired loans totaled $57,000 for 1995.
An analysis of the changes in the allowance for loan losses follows:
In thousands 1995 1994 1993
Balance at January 1 ..................... $ 12,529 $ 12,505 $ 9,596
Provision for loan losses ................ 5,260 2,212 2,794
Balance of allowance for loan losses
of acquired subsidiaries ................. -- -- 2,433
Loans charged off ........................ (2,525) (2,791) (3,446)
Recoveries of loans previously charged off 515 603 1,128
-------- -------- --------
Net charge-offs .......................... (2,010) (2,188) (2,318)
-------- -------- --------
Balance at December 31 ................... $ 15,779 $ 12,529 $ 12,505
======== ======== ========
Loans to executive officers and directors and their associates, including
loans to affiliated companies for which these individuals are principal owners,
amounted to approximately $52,832,000 at December 31, 1995 and $42,127,000 at
December 31, 1994. During 1995, new loans of $50,671,000 were made and
repayments of $32,169,000 were received. Other changes include net decreases for
changes in executive officers and directors of $7,797,000. These loans were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for other customers.
(8) Premises and Equipment
A summary of premises and equipment at December 31, 1995 and 1994, follows:
In thousands
1995 1994
Land and improvements ........................ $ 7,017 $ 5,827
Buildings and improvements ................... 34,249 30,561
Furniture and equipment ...................... 36,743 31,714
------- -------
78,009 68,102
Less accumulated depreciation and amortization 36,551 31,662
------- -------
Total premises and equipment .............. $41,458 $36,440
======= =======
<PAGE>
(9) Long-Term Debt and Other Short-Term Borrowings
Long-term debt consisted of the following at December 31, 1995 and 1994:
In thousands
1995 1994
7.25% Subordinated Notes; due September 15,
2003; interest payable quarterly .................. $32,870 $32,930
Senior bank notes; due October 23, 1998; interest
at 6.48%; interest payable semi-annually .......... 30,000 --
Senior bank notes; due October 17, 1997; interest
at 6.32%, interest payable semi-annually .......... 20,000 --
Employee Stock Ownership Plan (ESOP) note payable
to bank; due September 30, 2000; interest at the
prime rate; principal and interest payable quarterly 2,854 3,223
Employee Stock Ownership Plan (ESOP) note
payable to bank; due July 31, 1996; interest at
82.5% of the prime rate, principal and interest
payable quarterly .................................. 175 475
Unsecured demand notes; interest at the
prime rate, payable quarterly ..................... 706 706
------- -------
Total long-term debt ............................. $86,605 $37,334
======= =======
Other short-term borrowings consisted of the following at December 31, 1995
and 1994:
In thousands
1995 1994
Advance from the Federal Home Loan Bank,
due January 12, 1996; interest at 7.45%
payable monthly ........................ $25,000 $-
Advance from the Federal Home Loan Bank,
due January 12, 1996; interest at 5.70%,
payable monthly ....................... 20,000 --
Advance from the Federal Home Loan Bank;
due March 27,1995; interest at 6.45%,
payable monthly .......................... -- 15,000
Advance from the Federal Home Loan Bank;
due December 27,1995; interest at 7.7%,
payable monthly .......................... -- 3,000
Advance from the Federal Home Loan Bank;
due January 13, 1995; interest at 5.6%,
payable monthly .......................... -- 20,000
Advance from the Federal Home Loan Bank;
due December 1, 1995; interest at 7.35%,
payable monthly .......................... -- 10,000
All other short-term borrowings ............ 14 33
------- -------
Total other short-term borrowings ....... $45,014 $48,033
======= =======
The prime interest rate associated with certain of the above obligations was
8.5% at December 31, 1995, and 1994.
The company has a $5,000,000 unsecured operating line of credit with an
unaffiliated bank. This obligation has substantially the same restrictive
covenants as the ESOP loan due September 30, 2000, as described below. The line
was not in use at December 31, 1995 or 1994.
The advances from the Federal Home Loan Bank are collateralized by the
company's Federal Home Loan Bank stock and certain first mortgage loans in the
approximate amount of 150% of the debt.
The ESOP note payable due September 30, 2000, is guaranteed by the company.
The related loan agreement has a number of restrictive covenants, including
maintaining capital levels of the company and the banks at least at the minimum
levels required by applicable regulatory agencies; maintaining the company's
risk-weighted capital ratio, as defined, at not less than 9.25%; maintaining the
company's leverage ratio, as defined, at not less than 5.25%; maintaining the
company's annualized return on assets at the date of financial reports required
by regulations at no less than .50%; maintaining nonperforming loans, as
defined, at less than 2.50% of gross loans at the date of required financial
reports; and maintaining on a consolidated basis an allowance for loan losses of
at least .75% of gross loans.
The ESOP note payable due July 31, 1996, is also guaranteed by the company.
The loan obligations of the ESOP are recorded on the consolidated balance sheet
with a corresponding amount recorded as a reduction of the company's
shareholders' equity. Both the loan obligation and the reduction of
shareholders' equity are reduced by the amount of any loan repayments made by
the ESOP. The company's Employee Stock Ownership Plan is described in note 13 to
the consolidated financial statements.
Principal payments required on long-term debt as of December 31, 1995, are as
follows:
In thousands
Year ended December 31
1996 $ 578
1997 20,604
1998 30,672
1999 671
2000 504
Later years 33,576
(10) Shareholders' Equity
Common Stock
The company has incentive stock option plans which permit options to be
granted for a maximum of 857,888 shares of common stock of the company. Under
the terms of the plans, options with ten-year terms may be granted to certain
key employees to purchase common stock at not less than fair value of the common
stock at the date of grant. A summary of share data related to the option plan,
adjusted for stock splits, follows:
Number Option price
shares per share
Options outstanding December 31, 1992 214,255 $4.55-$11.53
Granted ............................. 79,673 $ 16.00
Exercised ........................... (8,577) $ 6.13-$8.16
Terminated or canceled .............. (28,374)
-----------
Options outstanding December 31, 1993 256,977 4.55-$16.00
Granted ............................. 141,550 $15.25-$16.50
Exercised ........................... (18,018) $ 6.13-$11.53
Terminated or canceled .............. (32,852)
------------
Options outstanding December 31, 1994 347,657 $ 4.55-$16.50
Granted ............................. 233,350 $13.00-$17.50
Exercised ........................... (29,807) $4.55-$11.531
Terminated or canceled .............. (56,273)
------------
Options outstanding December 31, 1995 494,927 $8.156-$17.50
======== ==============
Of the options outstanding, 128,484 were exercisable as of December 31, 1995.
The company adopted in 1995 a non-qualified stock option plan which permits
options to purchase up to 313,000 shares of common stock to be granted to
certain executive officers of the company at 120% of fair market value at the
date of grant. Options granted under the plan have ten-year terms and become
exercisable three years after the date of grant. During 1995, options for
165,000 shares were granted at $17.85 per share and 37,000 at $16.875 per share.
All 202,000 options were outstanding at December 31, 1995, and none was
exercisable on that date.
In addition, an executive officer of the company is granted each year under
an employment agreement an option to purchase 4,000 shares of common stock at
$5.625 per share, exercisable only in the year of grant.
Preferred Stock and Rights Plan
The company's Articles of Incorporation authorize 5,000,000 shares of Class B
Preferred Stock, Series 1992, to be issued in connection with the Shareholder
Rights Plan. These shares carry the right to cumulative annual dividends of
$6.00 per share or 133 times dividends per common share (subject to adjustment),
whichever is greater.
On January 20, 1992, the company's Board of Directors adopted a Shareholder
Rights Plan. Under the plan, the Board declared a dividend of one right for each
outstanding share of common stock. In addition, the company will issue one right
with respect to each share of common stock issued subsequent to that date. Each
right, when and if it becomes exercisable, will entitle the registered holder to
purchase from the company 1/100 of a share of Series 1992 Class B Preferred
Stock, subject to adjustment, at an exercise price of $45. The description and
terms of the rights are set forth in a Rights Agreement, dated as of January 20,
1992, between the company and First Union National Bank, as Rights Agent. The
Board may redeem the rights in whole, but not in part, at a price of $.01 per
right.
The rights become exercisable only if a person or group acquires, or obtains
the right to acquire, beneficial ownership of 15% or more of the company's
outstanding common stock, the Board determines that a beneficial owner of at
least 10% of the company's outstanding common stock has a detrimental effect on
the company or its shareholders, or a tender or exchange offer is commenced for
25% or more of the outstanding common stock.
After the rights become exercisable, if any person becomes the beneficial
owner of more than 15% of the outstanding common stock, or the Board determines
that a beneficial owner of at least 10% of the company's outstanding common
stock has a detrimental effect on the company or its shareholders, then the
rights will entitle each holder of a right to purchase, for the exercise price,
the number of shares of preferred stock which at the time of the transaction
would have a market value twice the exercise price.
FGC had authorized, issued and outstanding two classes of preferred stock,
Class A and Class B, which were redeemed on September 1, 1994.
(11) Dividend Restrictions
Payment of dividends by the company's subsidiaries is restricted by national
banking and thrift laws and regulations. Also, certain notes payable described
in note 9 include restrictive covenants related to the maintenance of minimum
capital ratios by the banks, which effectively restrict the payment of
dividends. At December 31, 1995, the aggregate retained earnings of the banks
was approximately $67.2 million, of which approximately $25.5 million is
available as of January 1, 1996, for the payment of dividends under the
most restrictive of the above restrictions.
State law restricts the payment of dividends by the company. Also, certain
notes payable described in note 9 include restrictive covenants related to the
maintenance of minimum capital ratios, and regulatory capital requirements of
the banks and of the company effectively restrict the company's ability to pay
dividends to its shareholders. At December 31, 1995, the most restrictive of the
covenants limited the payment of dividends by the company to approximately $26.0
million.
(12) Income Taxes
As discussed in note 2, the company adopted in 1993 Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect
of this change in accounting for income taxes, determined as of January 1, 1993,
was an increase in net income of $296,000 and is reported separately in the
consolidated statement of income for 1993.
Total income tax expense (benefit) for the years ended December 31, 1995,
1994 and 1993 was allocated as follows:
In thousands 1995 1994 1993
Income from operations ....................... $ 7,416 $ 7,075 $6,223
Shareholders' equity, for unrealized net
gain (loss) on securities available for sale 4,188 (4,818) 455
------- ------- ------
$11,604 $ 2,257 $6,678
======= ======= ======
The components of income tax expense (benefit) were as follows:
In thousands
1995 1994 1993
Current federal tax . $ 9,303 $ 7,574 $ 6,580
Current state tax ... 500 383 165
Deferred income taxes (2,387) (882) (522)
------- ------- -------
$ 7,416 $ 7,075 $ 6,223
======= ======= =======
<PAGE>
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
1995 1994 1993
U.S. federal income tax rate ................ 35.0% 35.0% 35.0%
Changes from the statutory rate:
Tax exempt investment income .............. (4.4) (5.1) (4.5)
Amortization of goodwill .................. 0.8 0.8 0.8
Acquisition costs ......................... -- 1.2 --
State income taxes, net federal tax benefit 1.3 1.2 1.0
Surtax exemption .......................... -- -- (0.5)
Other, net ................................ (0.1) (0.2) (0.6)
------ ------ ------
32.6% 32.9% 31.2%
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994, are presented below:
In thousands
1995 1994
Deferred tax assets:
Allowance for loan losses ........... $ 5,463 $ 3,200
Deferred compensation ............... 285 293
Investment securities ............... 302 4,480
Purchase accounting adjustments ..... 667 745
------- -------
Total gross deferred tax assets 6,717 8,718
Less valuation allowance ...... (108) (108)
------- -------
Total deferred tax assets ..... 6,609 8,610
Deferred tax liabilities:
Purchase accounting adjustments ..... 1,681 1,734
Deferred loan fees .................. 110 239
Depreciation ........................ 206 228
FHLB stock .......................... 209 178
Other ............................... 52 79
------- -------
Total deferred tax liabilities 2,258 2,458
------- -------
Net deferred tax asset ........ $ 4,351 $ 6,152
======= =======
The valuation allowance for deferred tax assets as of January 1, 1993, was
$108,000. There was no change in the total valuation allowance for the years
ended December 31, 1995, 1994 and 1993. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
company will realize the benefits of these deductible differences, net of the
existing valuation allowance at December 31, 1995.
Shareholder's equity of Trans Financial Bank, F.S.B., at December 31, 1995,
includes $5,101,000 for which no deferred federal income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses or adjustments arising from carrying back net
operating losses to prior years may create income for tax purposes only, which
would be subject to the then current corporate income tax rate.
<PAGE>
(13) Employee Benefit Plans
The company has an employee stock ownership plan ("ESOP") under which the
company and its subsidiaries contribute to the ESOP an amount determined by the
respective Boards of Directors at their discretion. In November 1993 Statement
of Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership
Plans, was issued by the American Institute of Certified Public Accountants. The
SOP prescribes changes in the accounting for the company's ESOP once all
unallocated shares held by the ESOP on December 31, 1992, are exhausted. Shares
acquired after December 31, 1992, are subject to the accounting prescribed in
the SOP. The changes include recognition of compensation cost, accounting for
dividends on allocated and unallocated shares and the inclusion in earnings per
share calculations of shares committed to be released from the ESOP. As debt is
repaid, shares are released from collateral and allocated to active employees
based on total debt service for the year. At December 31, 1995, the ESOP owned
300,836 allocated and 262,283 unallocated shares. The company recognized
expenses related to the ESOP based on cash contributions, with such amounts
exceeding the amount computed under the shares allocated method. The interest
incurred on the ESOP note payable, the amount contributed by the company to the
ESOP, and the amount of dividends on ESOP shares used for debt service by the
ESOP for 1995, 1994, and 1993 were as follows:
In thousands
1995 1994 1993
Interest incurred ............. $290 $263 $236
Contributions ................. 839 894 597
Dividends used for debt service 155 118 6
The company has a profit sharing plan qualified under Section 401(k) of the
Internal Revenue Code. Under the amended profit sharing plan, the company and
its subsidiaries provide funds to match the contribution made by the
participating employee up to a maximum of 4% of the employee's salary.
Contributions in accordance with the profit sharing plan were approximately
$668,000 in 1995, $509,000 in 1994, and $360,000 in 1993.
KCB was the sponsor of a profit-sharing plan qualified under Section 401(k)
of the Internal Revenue Code. Under the profit sharing plan, KCB provided funds
to match the contributions made by the participating employees up to a maximum
of 6% of the employee's salary. Contributions in accordance with the
profit-sharing plan were $-0- in 1995, and approximately $9,000 in 1994, and
$31,000 in 1993.
Former full-time employees of Kentucky State Bank who meet certain
requirements as to age and length of service are covered by a defined benefit
pension plan. Pension expense for this plan was $-0- in 1995, $5,000 in 1994,
and $2,000 in 1993. The plan's funded status at December 31, 1995, was composed
of plan assets of $510,000 and a projected benefit obligation of approximately
$585,000.
Full-time employees of KCB who meet certain requirements as to age and length
of service were covered by a defined benefit pension plan. On May 31, 1993, KCB
froze the plan, thereby eliminating the accrual of benefits for participants
after that date. The consolidated financial statements for 1993 include the
recognition of the cost of curtailment of the plan for the freezing in 1993
($45,000) and recognition of prior unrecognized loss in anticipation of plan
termination ($309,000). Net pension expense for this plan was $-0- in 1995 and
1994, and $367,000 in 1993. The plan was terminated in 1994 and final
distributions totaling $1,180,455 were made in 1995.
Former full-time employees of PFS who meet certain requirements as to age and
length of service are covered by a defined benefit pension plan. PFS was 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 1995, 1994, or 1993.
The company has no significant commitments to pay post-retirement or
post-employment benefits other than as described above.
Stock options granted to key employees are described in note 10 to the
consolidated financial statements.
<PAGE>
(14) Commitments and Contingent Liabilities
Off-Balance-Sheet Financial Instruments
The company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business to meet the financing needs of customers. These include commitments to
extend credit, standby letters of credit, and derivative financial instruments.
These instruments involve, to varying degrees, elements of credit, interest rate
and liquidity risk in excess of the amount recognized in the consolidated
balance sheets. The extent of the company's involvement in various commitments
is expressed by the contract amount of such instruments.
Commitments to extend credit, which amounted to $286,673,000 at December
31, 1995, and $247,621,000 at December 31, 1994, are agreements to lend to a
customer, provided all conditions established in the contract are fulfilled.
Commitments generally have fixed expiration dates or other termination clauses
and generally require payment of a fee. Market risk arises on fixed rate
commitments if interest rates rise subsequent to the date the fixed rate is
determined. Management believes that market risk related to these commitments
is not significant. Since many of the commitments are expected to expire
without being drawn upon, the total commitments do not necessarily represent
future cash requirements. The company evaluates each customer's creditworthi-
ness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based upon management's credit evaluation
of the customer. Collateral varies, but may include accounts receivable,
inventory, property, plant and equipment, residential properties, income-
producing commercial properties, marketable securities and interest-bearing time
deposits.
Standby letters of credit are conditional commitments issued by the company
guaranteeing the performance of a customer to a third party. Those guarantees
primarily consist of performance assurances made on behalf of customers who have
a contractual commitment to produce or deliver goods or services. Most
guarantees are for one year or less. The company had standby letters of credit
outstanding totaling $36,816,000 and $35,759,000 at December 31, 1995 and 1994,
respectively. The risk to the company arises from its obligation to make payment
in the event of the customer's contractual default and is essentially the same
as that involved in extending loan commitments to customers. The amount of
collateral obtained, if deemed necessary, is based upon management's credit
evaluation of the customer. Collateral held varies. Management believes that
market risk related to the standby letters of credit is not significant.
Commercial letters of credit are short-term commitments generally used to
finance a commercial contract for the shipment of goods from seller to buyer. At
December 31, 1995 and 1994, the company had no commercial letters of credit
outstanding.
Derivative financial instruments are financial instruments whose values and
characteristics are derived from those of other financial instruments or
indices. Derivatives can be a cost- and capital-efficient method of modifying
the repricing or maturity characteristics of on-balance-sheet assets and
liabilities -- a necessary component of the company's strategy for managing its
overall interest rate risk. Off-balance-sheet derivative transactions used for
interest rate sensitivity management could include interest rate swaps,
forwards, futures and options with indices that directly relate to the pricing
of specific assets and liabilities of the company. Management believes there is
minimal risk that the derivatives used for rate sensitivity management will have
any significant unintended effect on the company's financial condition or
results of operations.
The company enters into forward contracts to sell residential mortgage
loans in order to hedge the interest rate risk in its portfolio of mortgage
loans held for sale and its residential mortgage loan commitments. At December
31, 1995 and 1994, the company had forward contracts outstanding totaling
$32,330,000 and $11,680,000, respectively.
As of December 31, 1995 and 1994, the company's balance sheet was in an
asset sensitive position, as the repricing characteristics of the asset and
liability portfolios were such that an increase in interest rates would have a
positive effect on earnings and a decrease in interest rates would have a
negative effect on earnings. To assist in achieving a desired level of interest
rate sensitivity the company has entered into off-balance-sheet interest rate
swap transactions, which effectively convert the bank notes (described in note
9) and certain certificates of deposit from fixed interest rates to floating
rates and certain commercial loans from floating rates to fixed rates. The
result is that the asset-sensitive position which is inherent in the balance
sheet is largely neutralized.
Off-balance-sheet derivative instruments do not expose the company to
credit risk equal to the notional amount, although the company is exposed to
credit risk equal to the aggregate of the positive fair values of the swaps,
plus any accrued interest receivable due from all counterparties. Fair values
are determined by discounting to present value the future cash flows which would
result from the difference between current market rates and the actual swap
rates. The company minimizes the credit risk in these instruments by dealing
only with high quality counterparties and each transaction is specifically
approved for applicable credit exposure. The credit exposure of each outstanding
off-balance-sheet derivative instrument is either collateralized with U.S.
Government or agency securities or is with a counterparty who has credit ratings
of investment grade or better from one of the major rating agencies. Further,
the company's policy is to require all transactions be governed by an
international Swap Dealers Association Master Agreement and be subject to
bilateral collateral arrangements.
The company pays a variable interest rate on each swap and receives a fixed
rate. Interest income and expense is accrued over the terms of the agreements.
Interest rate swap transactions as of December 31, 1995, are shown below:
<TABLE>
Dollars in thousands
<CAPTION>
Notional Fixed Rate Floating Rate Fair Credit
Amount (Receiving) (Paying) Maturity Value Exposure
-------- --------- -------------- -------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Swap No. 1 $ 20,000 4.380% 5.875% (LIBOR) May, 1996 $ (78) $-
Swap No. 2 50,000 9.58% 8.50% (Prime) August, 1996 384 384
Swap No. 3 50,000 9.25% 8.50% (Prime) November, 1996 413 446
Swap No. 4 30,000 10.40% 8.50% (Prime) January, 1997 666 763
Swap No. 5 50,000 8.33% 8.50% (Prime) June, 1997 155 155
Swap No. 6 50,000 8.50% 8.50% (Prime) July, 1997 295 295
Swap No. 7 20,000 8.60% 8.50% (Prime) October, 1997 163 163
Swap No. 8 30,000 8.60% 8.50% (Prime) October, 1998 343 343
------ ------ ----- -------------- ------- ------
Total/
weighted average $300,000 8.71% 8.33% April, 1997 $ 2,341 $2,549
======== ====== ====== ============= ======= =======
</TABLE>
At December 31, 1994, the company's only interest rate swap transaction was
the $20 million LIBOR-based swap shown in the table above. The floating rate
associated with this swap was 5.64% on that date, and its fair value was
$(880,000).
In a higher interest rate environment, the increased contribution to net
interest income from on-balance-sheet assets will substantially offset any
negative impact on net interest income from these swap transactions. Conversely,
if interest rates decline, these off-balance-sheet transactions will mitigate
the company's exposure to reduced net interest income.
The company requires all off-balance-sheet transactions be employed solely
with respect to asset/liability management or for hedging specific transactions
or positions, rather than for speculative trading activity.
Other Off-Balance-Sheet Risks
With respect to mortgage loans sold to investors, such loans are generally
sold with servicing rights retained, with only the normal legal representations
and warranties regarding recourse to the company. Management believes that any
liabilities which may result from such recourse provisions are not significant.
Legal Proceedings
As of December 31, 1995, there were various pending legal actions and
proceedings against the company in which claims for damages are asserted.
Management, after discussion with legal counsel, believes that the ultimate
result of these legal actions and proceedings will not have a material adverse
effect upon the consolidated financial statements of the company.
Regulatory Risk
The company is subject to regulation by bank and thrift regulatory
authorities, including the Federal Reserve Board, the Office of the Comptroller
of the Currency, the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation ("FDIC"). The FDIC is authorized to establish separate
deposit insurance premium rates for members insured through its Bank Insurance
Fund ("BIF") and its Savings Association Insurance Fund ("SAIF"). Approximately
69% of the company's deposits are insured through the BIF and the remaining 31%
are insured through the SAIF. Insurance premiums on BIF-insured deposits were
reduced from $0.23 per $100 of insured deposits to $0.04, effective June 1,
1995, and to zero effective January 1, 1996. Insurance premiums on SAIF-insured
deposits, however, remain at $0.23. The FDIC and the other bank and thrift
regulatory authorities have proposed a plan to strengthen the deposit insurance
system and eliminate the substantial deposit premium disparity between BIF- and
SAIF-insured institutions. This plan includes a one-time assessment of $0.75 to
$0.85 per $100 of SAIF-insured deposits. If such a plan were enacted into law,
the company would pay a one-time assessment of up to $3.5 million on its
SAIF-insured deposits.
<PAGE>
(15) Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments are as follows:
<TABLE>
In thousands
<CAPTION>
December 31, 1995 December 31, 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- -----------
Financial assets:
<S> <C> <C> <C> <C>
Cash and short-term investments $ 81,900 $ 81,900 $ 81,025 $ 81,025
Securities .................... 298,222 298,222 314,401 310,852
Loans ......................... 1,289,043 1,287,873 1,137,728 1,126,713
Financial liabilities:
Deposits ...................... 1,444,483 1,446,836 1,335,509 1,328,893
Federal funds purchased
and repurchases ............... 75,594 75,594 74,553 74,553
Short-term borrowings ......... 45,014 45,052 48,033 47,890
Long-term debt ................ 86,605 89,388 37,334 34,723
Interest rate swaps ........... -- 2,341 -- (880)
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash, Short-Term Investments, Federal Funds Purchased and Repurchases
For these short-term instruments, the financial statement carrying amount
approximates fair value.
Securities
The fair value of securities is based on quoted market prices or, if market
prices are not available, is estimated by discounting future cash flows using
current rates at which investments would be made in similar instruments with
similar credit ratings and equivalent remaining maturities.
Loans
The fair value of loans is estimated by discounting the future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
Long-term Debt and Other Short-term Borrowings
Rates currently available to the company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
Off-Balance-Sheet Financial Instruments
The fair value of interest rate swap agreements is based on quoted market
prices or, if market prices are not available, is estimated by discounting
future cash flows using prevailing market rates for instruments of a similar
type. The fair values of loan commitments and letters of credit are estimated
using the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present creditworthiness
of the counterparties. The value of these financial instruments was not material
at December 31, 1995 and 1994. Limitations on Fair Value Reporting
The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instruments.
Because no market exists for a significant portion of the company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
The fair value estimates are based on financial instruments only. The company
has not attempted to estimate the value of assets and liabilities not considered
to be financial instruments, such as premises and equipment, the mortgage
banking operation and the intangible value of its core deposits and branch
system. Accordingly, the fair value estimates do not represent a fair value for
the company as a whole.
(16) Parent Company Financial Statements
Condensed financial data for Trans Financial, Inc. (parent company only)
as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994
and 1993 are as follows:
Condensed Balance Sheets
December 31 - In thousands 1995 1994
Assets
Cash on deposit with subsidiaries ........... $ 1,608 $ 2,507
Investment in subsidiaries .................. 161,142 143,303
Other investments ........................... 130 74
Other assets ................................ 5,527 4,346
-------- --------
Total assets ............................. $168,407 $150,230
======== ========
Liabilities and Shareholders' Equity
Long-term debt and other notes payable ...... $ 36,605 $ 37,334
Other liabilities ........................... 2,035 1,264
Shareholders' equity ........................ 129,767 111,632
-------- --------
Total liabilities and shareholders' equity $168,407 $150,230
======== ========
Condensed Statements of Income
Years Ended December 31
In thousands 1995 1994 1993
Income
Dividends from subsidiaries ....... $10,000 $15,860 $12,675
Other interest and dividends ...... 180 285 146
Management fees from subsidiaries
and other income ................ 5,317 3,732 4,620
------- ------- -------
Total income ...................... 15,497 19,877 17,441
Expenses
Interest on long-term debt
and other notes payable ......... 2,462 2,657 1,400
Other expenses .................... 9,819 10,071 8,478
------- ------- -------
Total expenses .................... 12,281 12,728 9,878
------- ------- -------
Income before income tax benefit
and equity in undistributed
earnings of subsidiaries .......... 3,216 7,149 7,563
Federal income tax benefit .......... 2,083 2,621 1,661
------- ------- -------
Income before equity in undistributed
earnings of subsidiaries .......... 5,299 9,770 9,224
Equity in undistributed
earnings of subsidiaries .......... 10,016 4,650 4,826
------- ------- -------
Net income .......................... $15,315 $14,420 $14,050
======= ======= =======
<PAGE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31
<CAPTION>
In thousands 1995 1994 1993
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ......................................... $ 15,315 $ 14,420 $ 14,050
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization ................................... 680 932 526
Equity in undistributed
earnings of subsidiaries ..................... (10,016) (4,650) (4,826)
Increase in other assets ........................... (1,639) (986) (2,351)
Increase (decrease) in other liabilities ........... 771 143 (102)
-------- -------- --------
Net cash provided by operating activities ........ 5,111 9,859 7,297
Cash flows from investing activities:
Investments in and acquisitions of subsidiaries .... -- (10,440) (22,716)
-------- -------- --------
Net cash used in investing activities ............ -- (10,440) (22,716)
Cash flows from financing activities:
Proceeds from issuance of long-term debt ........... -- -- 36,129
Repayment of long-term debt and other notes payable (60) (6,694) (4,542)
Proceeds from issuance of common stock ............. 800 654 1,770
Redemption of preferred stock ...................... -- (1,010) --
Dividends paid ..................................... (6,750) (5,839) (4,083)
-------- -------- --------
Net cash provided by (used in) financing activities (6,010) (12,889) 29,274
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (899) (13,470) 13,855
Cash and cash equivalents at beginning of year ..... 2,507 15,977 2,122
-------- -------- --------
Cash and cash equivalents at end of year ........... $ 1,608 $ 2,507 $ 15,977
======== ======== ========
Supplemental information:
Cash paid for interest ........................... $ 1,866 $ 2,710 $ 1,402
Non-cash transactions (note 3) ................... 8,770 (8,629) 893
</TABLE>
<PAGE>
Exhibits
Sequentially
Numbered Pages
3(a) Restated Articles of Incorporation of the registrant
are incorporated by reference to Exhibit 4(a) of the
registrant's report on Form 10-Q for the quarter
ended March 31, 1995.
3(b) Articles of Amendment to the Restated Articles of
Incorporation of the registrant are incorporated
by reference to Exhibit 4(b) of the registrant's
report on Form 10-Q for the quarter ended
March 31, 1995.
3(c) Restated Bylaws of the registrant are incorporated
by reference to Exhibit 4(b) of the registrant's
report on Form 10-K for the year ended December
31, 1993.
4(a) Rights Agreement dated January 20, 1992 between
Manufacturers Hanover Trust Company and Trans
Financial, Inc. is incorporated by reference
to Exhibit 1 to the registrant's report on Form
8-K dated January 24, 1992.
4(b) Form of Indenture (including Form of Subordinated
Note) dated as of September 1, 1993, between the
registrant and First Tennessee Bank National
Association as Trustee, relating to the issuance
of 7.25% Subordinated Notes due 2003, is incorporated
by reference to Exhibit 4 of Registration Statement
on Form S-2 of the registrant (File No.33-67686).
4(c) Subordinated Note dated as of September 16, 1993,
by Trans Financial, Inc. is incorporated by
reference to Exhibit 1 to Registration Statement
on Form S-2 of the registrant (File No. 33-67686).
10(a) Trans Financial, Inc. 1987 Stock Option Plan is
incorporated by reference to Exhibit 4(a) of
Registration Statement on Form S-8 of the
registrant (File No. 33-43046).*
10(b) Trans Financial, Inc. 1990 Stock Option Plan is
incorporated by reference to Exhibit 10(d) of
the registrant's Report on Form 10-K for the year
ended December 31, 1990.*
10(c) Trans Financial, Inc. 1992 Stock Option Plan is
incorporated by reference to Exhibit 28 of the
registrant's Report on Form 10-Q for the quarter
ended March 31, 1992.*
10(d) Trans Financial, Inc. 1994 Stock Option Plan is
incorporated by reference to the registrant's
Proxy Statement dated March 18, 1994, for the
April 25, 1994 Annual Meeting of Shareholders.*
10(e) Employment Agreement between Douglas M. Lester
and Trans Financial, Inc........................................63-71
10(f) Description of the registrant's Performance
Incentive Plan is incorporated by reference to
Exhibit 10(g) of the regristrant's Report on
Form 10-K for the year ended December 31, 1994.*
10(g) Form of Deferred Compensation Agreement between
registrant and certain officers of the registrant
is incorporated by reference to Exhibit 10(g) of
the registrant's Report on Form 10-K for the year
ended December 31, 1992.*
10(h) Trans Financial, Inc. Dividend Reinvestment and
Stock Purchase Plan is incorporated by reference
to Registration Statement on Form S-3 of the
registrant dated May 15, 1991 (File No. 33-40606).
<PAGE>
Sequentially
Numbered Pages
10(i) Warrant dated as of February 13, 1992 between
Morgan Keegan & Company, Inc.and Trans Financial,
Inc. incorporated by reference to Exhibit 10(m)
of Registration Statement on Form S-2 of the
registrant (File No. 33-45483).
10(j) Loan Agreement dated as of July 6, 1993 between
First Tennessee Bank National Association and
Trans Financial, Inc. is incorporated by reference
to Exhibit 10(p) to the Registration Statement
on Form S-2 of the registrant (File No. 33-67686).
10(k) Distribution Agreement dated September 28, 1995
between Registrant, Trans Financial Bank, N.A.
and Donaldson, Lufkin & Jenrette Securities
Corporation is incorporated by reference to
Exhibit 10(a)of the registrant's report on Form
10-Q for the quarter ended September 30,1995.
10(l) Fiscal and Paying Agency Agreement dated September
28, 1995 between Trans Financial Bank, N.A. and
First Fidelity Bank, N.A. is incorporated by
reference to Exhibit 10(b) of the registrant's report
on Form 10-Q for the quarter ended September 30, 1995.
10(m) 1995 Executive Stock Option Plan is incorporated by
reference to the registrant's Proxy Statement dated
March 9, 1995, for the April 24, 1995, Annual Meeting
of Shareholders.*
11 Statement of Computation of Per Share Earnings.....................60
21 List of Subsidiaries of the Registrant.............................61
23 Consent of Independent Auditors....................................62
27 Financial Data Schedule(for SEC use only).........................---
* Denotes a management contract or compensatory plan or arrangement of
the registrant required to be filed as an exhibit pursuant to Item 601(10)(iii)
of Regulation S-K.
<PAGE>
Exhibit 11
Statement Regarding Computation of Per Share Earnings
Years ended December 31 1995 1994 1993
---- ---- ----
In thousands, except per share data
Primary earnings per common share:
Average common shares outstanding ... 11,246 11,175 11,124
Common stock equivalents ............ 107 83 121
-------- -------- --------
Average shares and share ........ 11,353 11,258 11,245
equivalents
Income before cumulative effect of .. $ 15,315 $ 14,420 $ 13,754
change in accounting principle
Primary earnings per common share
before cumulative effect of change
in accounting principle ........... $ 1.35 $ 1.28 $ 1.22
======== ======== ========
Net income .......................... $ 15,315 $ 14,420 $ 14,050
Less preferred stock dividends ...... 0 (54) (81)
-------- -------- --------
Income available for common stock ... $ 15,315 $ 14,366 $ 13,969
Primary net income per share ........ $ 1.35 $ 1.28 $ 1.24
======== ======== ========
Fully-diluted earnings per common share:
Average common shares outstanding ... 11,246 11,175 11,124
Common stock equivalents ............ 156 83 121
-------- -------- --------
Average equivalents ............. 11,402 11,258 11,245
Income before cumulative effect of .. $ 15,315 $ 14,420 $ 13,754
change in accounting principle
Fully-diluted earnings per common
share before cumulative effect of
change in accounting principle .. $ 1.34 $ 1.28 $ 1.22
======== ======== ========
Net income .......................... $ 15,315 $ 14,420 $ 14,050
Less preferred stock dividends ...... 0 (54) (81)
-------- -------- --------
Income available for common stock ... $ 15,315 $ 14,366 $ 13,969
Fully-diluted net income per share .. $ 1.34 $ 1.28 $ 1.24
======== ======== ========
<PAGE>
Exhibit 21
List of Subsidiaries of the Registrant
Trans Financial Bank, National Association
Real Estate Holding Company
Trans Financial Mortgage Company
Trans Financial Investment Services, Inc.
Trans Travel, Inc.
Trans Financial Bank, Federal Savings Bank
General Service Corporation
Trans Financial Bank Tennessee, National Association
Cracker Jack Aviation, Inc.
<PAGE>
Exhibit 23
Consent of Independent Auditors
The Board of Directors
Trans Financial, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
33-40606, 33-60844, 33-56761, and 33-64601 on Form S-3, and Registration
Statement Nos. 33-21517, 33-43046, 33-53960, 33-72492, 33-65347, and 33-65349 on
Form S-8 of Trans Financial, Inc. of our report dated January 15, 1996,
relating to the consolidated balance sheets of Trans Financial, Inc. and
subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1995, which report appears
in the December 31, 1995 annual report on Form 10-K of Trans Financial, Inc.
Our report refers to changes in the methods of accounting for mortgage
servicing rights in 1995 and income taxes and certain investments in debt and
equity securities in 1993.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Louisville, Kentucky
March 29, 1996
<PAGE>
Exhibit 10(e)
EMPLOYMENT AGREEMENT
This Agreement made and entered into as of this 1st day of
January, 1991, by and among TRANS FINANCIAL BANCORP, INC., a Kentucky
corporation having its principal place of business located in Bowling Green,
Kentucky ("Holding Company"), TRANS FINANCIAL BANK, N.A., a banking association
organized under the laws of the United States and headquartered in Bowling
Green, Kentucky ("Bank"), and DOUGLAS M. LESTER, an individual ("Lester").
W I T N E S S E T H :
WHEREAS, Holding Company is a registered bank holding company under the
Bank Holding Company Act of 1956, as amended, and owns 100% of the outstanding
stock of Bank and Trans Financial Savings Bank, F.S.B., a federal savings bank
headquartered in Russellville, Kentucky ("Savings Bank"). Bank, Savings Bank and
any other corporations or entities substantially owned by them or Holding
Company are referred to collectively as ("Subsidiaries"); and
WHEREAS, Lester presently is employed as the Chairman of the Board of
Directors, President and Chief Executive Officer of Holding Company and of Bank
pursuant to the terms of an Employment Agreement dated as of April 1, 1984, as
amended, between Lester and Bank (then known as The Citizens National Bank of
Bowling Green), and joined in by Holding Company (the "1984 Employment
Agreement"); and
WHEREAS, Lester, Holding Company and Bank desire to enter into this
Agreement to set out the terms and conditions of Lester's continued employment
by Holding Company and Bank and to supersede and replace the 1984 Employment
Agreement;
NOW, THEREFORE, for and in consideration of the previous promises,
covenants, undertakings and agreements of Holding Company, Bank and Lester
(which are formalized hereby), and for and in consideration of the mutual
promises, covenants and undertakings of Holding Company, Bank and Lester as
hereinafter set forth, it is hereby mutually agreed as follows:
1. Employment. Holding Company and Bank hereby employ Lester, and Lester
hereby accepts employment with Holding Company and Bank, as the Chairman of the
Board of Directors, President and Chief Executive Officer of each of Holding
Company and Bank. Such positions are hereinafter collectively referred to as
"the Position."
2. Term of Employment.
A. This Agreement and Lester's employment hereunder shall commence on and
be effective as of January 1, 1991 (the "Commencement Date"), and continue
through 12:00 midnight on December 31, 1993, subject to renewal and to
termination in accordance with the terms of this Agreement. On January 1 of
each year (the "Anniversary Date"), commencing with January 1, 1992, this
Agreement will be automatically renewed for a new three-year term, subject to
renewal and to termination in accordance with the terms of this Agreement,
unless either Holding Company or Bank, by action of its Board of Directors,
or Lester gives written notice to the other parties hereto at least 90 days
prior to the Anniversary Date that it does not intend to renew this Agreement.
(Lester's initial term of employment and anyv subsequent renewal thereof shall
hereinafter be referred to as the "Term.)
The delivery of notice of intent not to renew by Holding Company or
Bank shall, for purpose of this Agreement, be deemed to be delivery of notice of
termination of Lester's employment without cause pursuant to Paragraph 17.
3. Responsibilities in Position. During the Term, except for illness, and
reasonable vacation periods as hereinafter provided and reasonable involvement
in civic affairs and in organizations which benefit, promote or complement the
interests of Holding Company and the Subsidiaries, and except as otherwise
provided in this Agreement, or as approved by the Board of Directors of either
Holding Company or Bank, Lester shall devote substantially all of his business
time, attention, skill and efforts to the faithful performance of his duties
hereunder and in the Position, and shall use his best efforts, skill and
experience to promote the business, interests and welfare of Holding Company and
the Subsidiaries. Lester shall not, during the Term, without the consent of the
Board of Directors of either Holding Company or Bank, be engaged in any other
business activity, whether or not such activity is pursued for gain, profit or
pecuniary advantage; provided, however, that he may do the following:
A. Own interests in other companies, corporations and profit-making
entities;
B. Provide advice for such companies, corporations or entities, provided,
however, that he shall not assume any active part in the operation of the
business or enterprises of such companies, corporations or entities;
and,
C. Invest his assets, from time to time, in such form or manner as will
not require any substantial services on his part in the operation of the affairs
of the companies, businesses or enterprises in which he makes investments.
4. Specific Description of Authority. Lester is hereby employed
in the Position, and he shall have, exercise and carry out the authorities
powers, duties and responsibilities conferred upon persons occupying each of the
capacities contained in the Position by the Bylaws of Holding Company and Bank,
as such Bylaws are from time to time in effect, and shall exercise and carry out
such duties and responsibilities, and shall observe such directions and
restrictions, as the Board of Directors of Holding Company or Bank may from time
to time confer or impose upon him. In the absence of specific directions, Lester
shall have the following duties, responsibilities and authorities with respect
to each of Holding Company and Bank:
A. He shall act as the Chairman of its Board of Directors, and shall
chair all meetings of the Board of Directors;
B. He shall have complete charge of the day to day management,
operation and supervision of its business, and shall be in charge of all of its
officers and employees;
C. He shall discharge all of those duties and responsibilities
customarily discharged by a President and Chief Executive Officer of a banking
institution and its holding company, and shall have all of the powers and
authorities customarily conferred upon an individual holding such offices,
including, without limitation, the authority to formulate policies and
administer its business, subject to the policies and directions from time to
time adopted or given by its Board of Directors;
D. He shall have the general management and control of its business
activity;
E. He and those working under his supervision, acting with his
authority, shall have the responsibility and authority to hire, appoint,
discipline and dismiss all of its employees and shall have the general
supervision of all of its employees and officers;
F. He shall be responsible for supervising the day to day conduct of the
business of Holding Company and the Subsidiaries;
G. He shall be responsible for carrying out such other acts and duties,
not otherwise specified herein, as shall be necessary for the management of its
business, as its Board of Directors shall from time to time direct.
5. Compensation. For all services rendered or to be rendered by
Lester for Holding Company and the Subsidiaries, for the benefit of Holding
Company, during the Term, Holding Company shall pay, and Lester hereby agrees to
accept, compensation as follows:
A. Base Salary. Lester shall receive a Base Salary as follows:
(1) 1991. Beginning with the Commencement Date, and ending
December 31, 1991, Lester shall receive a Base Salary at an
an annualized rate of $155,000.00 per year, payable in
consecutive equal monthly installments.
(2) Years after 1991. Lester's Base Salary for any calendar year
after 1991 shall be at the annualized rate established by Holding
Company's Board of Directors at the commencement of each such year;
provided that the Base Salary for any calendar year shall never be less
than the Base Salary for the preceding calendar year.
All base Salary shall be paid in consecutive equal monthly
installments, as described above or in other installments mutually
convenient to Holding Company and Lester. All deductions required by
law, and voluntary deductions consented to by Lester, shall be deducted
from each installment of Base Salary.
B. Board of Directors. In addition to Lester's Base Salary,
Lester shall receive a fee for serving as a member of the Board of Directors of
each of Holding Company and the Subsidiaries as established by such Board of
Directors for compensation of its members, provided the fee paid to Lester shall
in no event be less than the compensation paid to any other director for his
services on such Board.
C. Performance Incentives. In addition to the Base Salary and
director's fees described above, Lester shall receive performance incentive
bonuses for each year during the Term in accordance with the Performance
Incentive Plan of Holding Company, and Bank, as such Plan is now in effect or as
hereafter amended, provided no such amendment shall decrease the bonuses payable
to Lester pursuant to such Plan.
6. Stock Options. In addition to Lester's compensation
hereinabove provided for in Paragraph 5 of this Agreement, on the first day
following the close of each calendar year which expires during the Term, Lester
shall have an option to purchase from Holding Company, at any time during the
immediately following calendar month of July, up to 2,250 shares of Holding
Company's common stock, for the price of Ten Dollars ($10.00) per share;
provided, however, that in order to exercise any such right and option, Lester
must be employed by Holding Company and/or Bank at the time of exercise. Such
option and right to purchase granted following the close of each calendar year
can be exercised in whole or in part by Lester's giving to Holding Company,
during the immediately following calendar month of July, written notice of
Lester's intention to exercise the right and option. The purchase and sale of
the shares pursuant to Lester's exercise of such right and option granted after
the end of each Fiscal Year shall be closed within thirty (30) days after Lester
gives to Holding Company written notice of Lester's intention to exercise the
right and option. At the time of closing, Lester shall pay the entire purchase
price for the number of shares to be purchased, in cash, and Holding Company
shall transfer to Lester the number of shares to be purchased and shall cause
the certificates for such shares to be reissued in Lester's name. The right to
purchase, at the conclusion of any calendar year during the Term, that number of
shares of common stock of Holding Company hereinabove described, shall not be
cumulative from year to year, and Lester shall, therefore, lose the right and
option to purchase any shares, to the extent he does not exercise such right and
option to purchase such shares during the calendar month of July following the
end of such calendar year. In the event the outstanding shares of Holding
Company's common stock are changed into or are exchanged for a different number
or kind of shares or other securities of Holding Company, or of another
corporation by reason of merger, consolidation, or other reorganization,
recapitalization, reclassification, combination of shares, stock split-ups, or
stock dividends:
A. The aggregate number and kind of shares subject to Lester's
right and option shall be adjusted appropriately;
B. The rights under outstanding options granted hereunder both as
to the numberof subject shares, and the option price, shall be adjusted
appropriately;
C. Where dissolution or liquidation of Holding Company or any
merger or combination in which Holding Company is not a surviving corporation is
involved, each outstanding option granted pursuant to this Paragraph 6 shall
terminate, but Lester shall have the right, immediately prior to such
dissolution, liquidation, merger or combination, to exercise his option, in
whole or in part, to the extent that he shall not have exercised same, without
regard to any installment exercise provisions, meaning that he may exercise his
option to purchase that total number of shares, as to which he has not
previously forfeited options, for which he would otherwise have had options in
accordance with the above provisions of this Paragraph 6, if each year during
the Term were to then end immediately; and
D. Such new or additional or different shares or securities which
are distributed to Lester, shall be considered to be restricted stock and shall
be subject to all of the conditions and restrictions provided for by this
Paragraph 6.
The above provisions of this Paragraph 6 to the contrary
notwithstanding, Lester shall not have a right or option, pursuant to this
Paragraph 6, to purchase such number of shares of Holding Company common stock
as would cause, immediately after the exercise of the right and option, the
total number of shares of Holding Company's common stock owned by Lester, or
subject to options exercisable by Lester as held by Lester, to exceed five
percent (5%) of the total combined voting power of all classes of Holding
Company's common stock. No right or option possessed by Lester pursuant to this
Paragraph 6 shall be transferred by Lester in any manner whatsoever, and all
such rights and options shall be nontransferable. There shall be no voluntary or
involuntary lifetime transfer, or transfer by reason of death, of any rights or
options, including, but not limited to, transfers by will or by laws of descent
and distribution. The option and right of Lester to purchase shares of Holding
Company's common stock shall be personal to him and shall be exercisable only by
him, and by no other person under any circumstances. Lester shall have no rights
as a shareholder with respect to any shares subject to a right and option to
purchase until he has acquired such shares by exercise of such option, and by
payment of the purchase price, as hereinabove provided. The death of Lester, or
the termination of Lester's employment under this Agreement, whether voluntary
or involuntary, and whether with or without cause, and whether justified or
unjustified, for any reason whatsoever, shall terminate all rights and options
which he has not previously exercised.
7. Automobile. ln recognition of Lester's need for an automobile for
business purposes in order to facilitate his transaction of the business of
Holding Company and Bank, Holding Company, shall, during the Term, provide
Lester, for business purposes, with a late model, luxury automobile and shall
provide all maintenance, repairs, insurance and all costs incidental thereto.
All Lester's rights with respect to such automobile shall expire at the end of
the Term.
8. Country Club Membership. In recognition of the requirements
which will be imposed upon Lester to entertain customers, clients and employees
of Holding Company and the Subsidiaries, and to maintain those social contacts
required of a person in the Position for purposes of generating additional
business for Holding Company and the Subsidiaries, and in order to provide to
Lester (and maintain for Lester) those contacts with persons of the community
which are required for maintaining and improving the business of Holding Company
and the Subsidiaries, Holding Company shall provide for Lester, during the
entire Term, a full membership at Bowling Green Country Club. Holding Company
shall pay all initiation fees and initial purchase costs required for the
acquisition of such membership, all monthly or other periodic dues required to
maintain "such membership in full force and effect and any special assessments
required to maintain such membership in full force and effect. Lester shall,
however, personally pay for all food, drink and other items purchased by him
from such Country Club, except to the extent that he is entitled to
reimbursement therefor in accordance with the following provisions of this
Agreement. Ownership of all stock in such Country Club shall remain with Holding
Company; provided, that Lester shall be permitted to vote all such stock during
the Term of this Agreement.
9. Reimbursement. Holding Company will reimburse Lester for all
reasonable and necessary expenses incurred by him in carrying out his duties
under this Agreement; provided that such expenses shall be incurred by him only
pursuant to the policies and procedures of Holding Company's Board of Directors,
from time to time in effect, and that all such expenses must be reasonable and
necessary expenses incurred by him solely for the purpose of carrying out his
duties under this Agreement. Lester shall present to Holding Company from time
to time an itemized account of such expenses in such form as may be required by
Holding Company's Board of Directors. Any such itemized account shall be subject
to approval by Holding Company Board of Directors.
10. Vacation. Lester shall be entitled to have four (4) full calendar
weeks of paid vacation during each calendar year during the Term. Such
number of weeks of paid vacation shall be prorated to the last day of the Term,
for that calendar year which includes the ending date of the Term. Lester shall
be responsible for arranging to have other officers of Holding Company and Bank
discharge his duties and responsibilities during any vacation period. Vacation
shall be taken only at those times during which such vacation will be calculated
to cause a minimum of disruption in the business of Holding and Bank.
Notwithstanding the foregoing, if the paid vacation period provided during each
such calendar year for other executive officers of Holding Company or Bank is
increased to more than four (4) weeks, Lester's paid vacation period shall be
increased accordingly.
11. Sick Leave. Lester shall be entitled to have, during each
calendar year during the Term, a period of paid sick leave equivalent to that
period of time during which Lester must be "disabled" in order to qualify for
disability insurance payments under the disability insurance provided in
accordance with Paragraph 15 of this Agreement; provided, however, that such
sick leave shall be taken only if Lester is incapacitated by illness or injury
from performing his duties in the Position, and that such sick leave shall not
be taken if not required by Lester by reason of such incapacitating illness or
injury. Such sick leave shall not, in any event, become additional vacation
time. If Lester becomes Disabled, as hereinafter defined in this Agreement, or
if Lester becomes entitled to receive benefits under the disability policy
described in Paragraph 15 of this Agreement, then all rights to sick leave
compensation shall end. All rights to unused sick leave shall end at the end of
the Term.
12. Accrual. Vacation time and sick leave shall not be accrued from
calendar year to calendar year.
13. Deferred Compensation. Lester shall be entitled to receive
deferred compensation but only as set forth in a Deferred Compensation Agreement
entered into on March 8, 1988 by and between Lester and Holding Company.
14. Other Employee Benefits. Lester shall be entitled to such
additional employee benefits as are not herein specifically described as are
conferred by Holding Company or Bank, from time to time, upon its other
executive officers, including the following:
A. The right to participate in any profit sharing plan, pension
plan, or other incentive program, retirement benefit plan or similar program
established by Holding Company or Bank; provided, that Lester must be a
"qualified" participant, as defined in the legal documentation establishing such
plans;
B. Such medical and hospitalization insurance as is provided by Holding
Company or Bank for such personnel, from time to time (provided, however, that
Holding Company represents to Lester that Holding Company will provide for
Lester and his immediate family a reasonably sufficient policy of medical and
hospitalization insurance coverage).
15. Disability Insurance. Holding Company shall obtain for Lester, and
shall pay for, a policy of disability insurance which will provide to Lester
(and will pay to Lester), in the event he becomes "disabled," as defined in
such policy, a monthly benefitin a sum not less than sixty percent (60%) of the
monthly installments of Lester's Base Salary, which Lester is entitled to
receive, from time to time, as provided by Subparagraph A of Paragraph 5 of this
Agreement. Said policy shall be obtained from a substantial insurance company
which is reasonably acceptable to Lester and shall be subject to Lester's
reasonable approval, and must contain reasonable definitions of "disability"
and provisions for a waiting period which does not extend beyond the date of
termination of Lester's rights to his Base Salary. Holding Company shall pay
for the insurance provided for by such policy during the entire Term.
16. Termination. Lester's employment under the terms of this Agreement
may be terminated by the Board of Directors of either Holding Company or Bank
(and, if Lester is a member of such Board of Directors, he shall not be
permitted to vote on such issue, or to attend without invitation by a majority
of the other Board member, the meeting of such Board of Directors at which such
issue is being considered) at any time during the Term, if such Board of
Directors reasonably, properly, and in good faith determines by majority vote of
those members present and voting at any meeting at which a quorum is present,
that any of the following causes for terminating Lester's employment exist
(provided that Lester shall be entitled to arbitration, as described below):
A. Lester has appropriated to his personal use funds, rights or property
of Holding Company or Bank or of any of the customers of Holding Company or
Bank;
B. Lester has engaged in any other act of substantial dishonesty in the
performance of his duties or responsibilities;
C. Lester has, in any substantial respects, failed to discharge his
duties and responsibilities in the Position, and fails or refuses to correct
such failings within thirty (30) days of receipt of written notice to him from
the Board of Directors of Holding Company or Bank of the failings, which such
notice shall specifically describe Lester's failings and the steps required to
remedy same;
D. Lester is engaging in competition with Holding Company or the
Subsidiaries in any manner or in activities substantially harmful to the
business of Holding Company or the Subsidiaries;
E. Lester is regularly making a frequent, substantial abusive use of
alcohol, drugs or similar substances, and such abuse has affected his ability to
conduct the business of Holding Company or Bank in a proper and prudent manner;
F. Lester has become "disabled" or "incompetent," as hereinafter defined
in this Agreement;
G. Lester is convicted of a felony, or of a substantial misdemeanor
involving moral turpitude;
H. For any reason, Bank is unable to procure upon Lester a substantial
fidelity bond, or bonding company refuses to issue a bond to Bank if Lester is
employed in the Position;
I. Lester is guilty of gross professional misconduct, or of a gross
breach of this Agreement of such a serious nature as would reasonably render his
service entirely unacceptable to reasonable persons in the position of the Board
of Directors of Holding Company or Bank.
If its Board of Directors reasonably, properly, and in good faith
determines that any one or more of the above causes for terminating Lester's
employment exists, then Holding Company or Bank may, by giving Lester
ninety (90) days written notice of its intention to terminate Lester's
employment, terminate this Agreement, the Term, and Lester's employment, and all
rights, duties and obligations of the parties under this Agreement. Lester shall
be entitled to receive all compensation and fringe benefits, hereinabove
provided for, for such period of ninety (90) days, plus any accrued vacation
time (prorated to the end of such ninety (90) day period), plus any rights to
any fringe benefits or other compensation hereinabove described in this
Agreement which accrue during such period of 90 days. Nevertheless, although
Lester shall be entitled to his compensation and fringe benefits for such
period, such Board of Directors may, if it, in its discretion deems it prudent
to do so, terminate Lester's employment, effective on the date when such notice
is given, although Lester will be entitled to receive his compensation and other
fringe benefits hereinabove described during such period of 90 days, and all
rights to compensation and fringe benefits which accrue during such period of 90
days. Any of the following provisions of this Agreement to the contrary
notwithstanding (including those dealing with termination pay), Lester shall not
be entitled to any further compensation of any kind or nature whatsoever from
Holding Company or Bank following such termination.
17. All determinations by the Board of Directors of Holding
Company or Bank that sufficient grounds exist for the termination of Lester's
employment under the above provisions of this Paragraph 16 must be made
reasonably, properly and in good faith.
Termination Otherwise. The above provisions of this Agreement to the
contrary notwithstanding, Lester's employment may be terminated, upon delivery
to Lester of thirty (30) days notice of termination, at any time during the
Term, for any reason whatsoever, with or without cause, if the Board of
Directors of either Holding Company or Bank, for any reason whatsoever,
determines that such employment should be terminated. It is understood that
Lester has no continuing right to employment by Holding Company and Bank, and
that Holding Company or Bank may, therefore, terminate Lester's employment at
any time of its choosing, and for any reasons which are satisfactory to it.
If notice is delivered pursuant to this Paragraph 17 that Lester's
employment is terminated, or if Holding Company or Bank timely delivers
notice to Lester that it does not intend to renew this Agreement pursuant to
Paragraph 2 above, then Lester shall be entitled to receive all compensation and
fringe benefits to which he is otherwise entitled (and which would otherwise
accrue) under this Agreement during the period of 30 days following delivery of
such notice. At the conclusion of such period of 30 days, Lester's employment in
the Position shall be terminated and the only rights to compensation and fringe
benefits which Lester shall thereafter have under this Agreement shall be: (a)
the right to receive from Holding Company, on the next scheduled salary payment
date, the value of fringe benefits accruing to Lester under this Agreement as of
the effective date of the termination (subject to the terms and conditions of
any plan or agreement pursuant to which such benefits are made available); and
(b) the right to receive from Holding Company the total amount of the Base
Salary, at the annual rate then in effect, that would be due Lester over the
then remaining term of this Agreement (disregarding the termination) (such total
amount being referred to as "Severance Pay"). In December of each year during
the Term, Lester shall have the right, by delivery of written notice to Holding
Company, to require that, if Holding Company should deliver notice to terminate
(or fail to renew) this Agreement during the following calendar year, the
Severance Pay due him from Holding Company upon termination shall be paid by
Holding Company in equal installments on each scheduled salary payment date
during the remaining term of this Agreement, as if there had been no
termination. In the absence of such a notice by Lester, Holding Company shall
pay to Lester, on the next scheduled salary payment date following termination
of his employment in the Position, the present value of the Severance Pay
(calculated by using the U.S. Treasury rate then in effect) and, upon such
payment, Lester shall be entitled to no further compensation hereunder.
18. Voluntary Termination. Lester may terminate his employment in the
Position, and this Agreement, at any time during the Term, provided that he
shall give to the Board of Directors of each of Holding Company and Bank at
least sixty (60) days written notice of such termination. Any of the above
provisions of this Agreement to the contrary notwithstanding, if Lester shall
voluntarily terminate his employment in the Position and this Agreement at any
time during the Term, then all rights to compensation and fringe benefits shall
terminate as of the effective date of such termination; provided, however, that
Lester shall be entitled to receive payment for any accrued vacation, prorated
as of the date of such termination.
19. Accrued Vacation Pay. If Lester's employment is terminated,
at any time during the Term, then Lester shall be entitled to receive, as
additional compensation, payment (at the rate of Lester's Base Salary then in
effect) for any unused vacation which Lester may elect in writing receive from
Holding Company has accrued to Lester during the calendar year of his
employment, but which has been unused. All accrued vacation time, for the
calendar year within which Lester's employment is terminated, shall be prorated
as of the date of the termination of such employment.
20. Death of Lester. Lester's death shall terminate the Term and
Lester's employment and shall terminate all of Lester's right to all salary,
compensation and fringe benefits effective as of the date of such death;
provided, however, that Holding Company shall maintain that policy of life
insurance hereinabove described in full force and effect until such death, and
that Holding Company shall pay to Lester's lawful spouse at the time of his
death or his designee, or to Lester's estate, as designated by Lester (or if not
so designated then to his spouse, if any, or his estate, if there is no such
spouse) those installments of Lester's Base Salary, which would otherwise be
due, for a term of 120 days following the date of Lester's death, and shall pay
all accrued vacation time of Lester (which shall be prorated as of the date of
death) and any sum otherwise due Lester, as of the date of his death, for
incentive bonuses earned for the immediately preceding calendar year. If such
death occurs less than 90 days prior to the close of any calendar year, then the
persons entitled to receive payment in accordance with the above provisions of
this Paragraph 20 shall be entitled to receive any incentive bonuses which
Lester would have received by reason of the performance of Holding Company and
Bank during "such calendar year, had he been living at the end of such calendar
year.
21. Disability. Lester shall be deemed to be "disabled" or shall
be deemed to be suffering from a "disability" under the provisions of this
Agreement if a competent physician, acceptable to Lester and Holding Company,
states in writing that it is such physician's opinion that Lester will be
permanently (or for a continuous period of four (4) calendar months) unable to
perform a substantial number of the usual and customary duties of Lester's
employment. In the event Lester and Holding Company are unable to agree upon
such a suitable physician for the purposes of making such a determination, then
each of Lester and Holding Company shall select a physician, and such two
physicians as selected by Holding Company and Lester shall select a third
physician who shall make the determination, and the determination made by such
third physician shall be binding upon Lester and Holding Company. It is further
agreed that if a guardian is appointed for Lester's person, or a conservator or
curator is appointed for Lester's estate, or he is adjudicated "incompetent" or
as suffering or operating under a mental "disability" by a court of appropriate
jurisdiction, then Lester shall be deemed to be "disabled" for all purposes
under this Agreement. In the event Lester becomes "disabled," as defined in this
Paragraph 21, then his employment shall terminate, effective as of the date of
such disability; provided that Lester shall, nevertheless, be entitled to
receive those sums which would otherwise have been paid had he died on the
effective date of such disability.
Such sums, as determined in accordance with Paragraph 20, shall be paid to
Lester.
22. Faithfulness. Lester shall diligently employ himself in the
Position and in the business of Holding Company and Bank and shall be faithful
to Holding Company and the Subsidiaries in all transactions relating to them and
their business and shall give, whenever required, a true account to the Boards
of Directors Holding Company and Bank of all business transactions arising out
of or connected with Holding Company and Bank or their business, and shall not,
without first obtaining the consent of the Boards of Directors, employ either
his interest in Holding Company or Bank, or his interests in this Agreement or
the capital or credit of Holding Company or Bank for any purposes other than
those of Holding Company and Bank. Lester shall keep the Boards of Directors of
Holding Company and Bank fully informed of all work for and transactions on
behalf of Holding Company and Bank. He shall not, except in accordance with
regular policies of the Boards of Directors from time to time in effect, borrow
money in the name Holding Company or Bank, use collateral owned by Holding
Company or Bank as security for loans or lease or dispose of or in any way deal
with any of the property, assets or interests Holding Company or Bank other than
in connection with the proper conduct of the business Holding Company and Bank.
23. Nonassignability. Neither this Agreement, nor any rights or
interests hereunder, shall be assignable by Holding Company or Bank, or by
Lester, his beneficiaries or legal representatives, without the prior written
consent of the other parties hereto. All services to be performed hereunder by
Lester must be personally performed by him.
24. Consolidation. Merger or Sale of Asset. Nothing in this Agreement
shall preclude Holding Company or Bank from consolidating or merging into or
with, or transferring all or substantially all of its assets to another
bank or corporation which assumes this Agreement and all obligations and
undertakings of it hereunder. Upon such a consolidation, merger or transfer of
assets and assumption, "Holding Company" or "Bank," as used herein, shall mean
such other bank or corporation, as the case may be, and this Agreement shall
continue in full force and effect.
25. Binding Effect. This Agreement shall be binding upon, and
shall inure to the benefit of Holding Company and Bank and their successors and
assigns, and Lester and his heirs, executors, administrators and personal
representatives.
26. Amendment of Agreement. This Agreement may not be amended or
modified except by an instrument in writing signed by the parties hereto.
Although Lester's compensation may be increased, from time to time, by Holding
Company's Board of Directors, in order for any purported agreement to increase
Lester's compensation to be enforceable by Lester, the provisions for increased
compensation must be set forth in a resolution of Holding Company's Board of
Directors, duly adopted by such Board of Directors, and properly reflected in
the minutes of such Board of Directors. Any purported agreement for additional
compensation or for an adjustment in compensation which is not so evidenced by a
written resolution of Holding Company's Board of Directors shall not be
enforceable, and shall be of no force or effect whatsoever.
27. Waiver. No term or condition of this Agreement shall be deemed to
have been waived, nor shall there be any estoppel against the enforcement of any
provisions of this Agreement, except by written instrument of the party charged
with such waiver or estoppel. No such written waiver shall be deemed to be a
continuing waiver unless specifically stated therein, and each such waiver shall
operate only as to the specific term or condition waived, and shall not
constitute a waiver of such term or condition in the future or as to any act
other than that specifically waived.
28. Severability. If for any reason any provision of this Agreement is
held invalid, such invalidity shall not affect any other provision of this
Agreement not held invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any
provisions of this Agreement shall be invalid in part, such partial invalidity
shall in no way affect the rest of such provision not held invalid, and the rest
of such provision, together with all other provisions of this Agreement, shall,
to the extent consistent with law, continue in full force and effect.
29. Trade Secrets. Lester shall not, at any time or in any manner,
either directly or indirectly, divulge, disclose or communicate to any person,
firm or corporation, in any manner whatsoever, any information concerning any
matters affecting or relating to Holding Company, the Subsidiaries or their
respective businesses, including, without limiting the generality of the
foregoing, any information concerning any of their customers, or any other
information concerning any of them or any of their businesses, its manner of
operation, its plans, process or other data, without regard to whether all or
any part of the foregoing matters will be deemed confidential, material
or important, as the parties hereto stipulate that as between them, the same are
important, material and confidential and gravely affect the effective and
successful conduct of the business and goodwill of Holding Company and the
Subsidiaries, and that any breach of the terms of this Paragraph 29 shall be a
substantial and material breach of this Agreement. All terms of this Paragraph
29 shall remain in full force and effect after the termination of Lester's
employment and of this Agreement. Lester acknowledges that it is necessary and
proper that Holding Company and the Subsidiaries preserve and protect their
proprietary rights and unique, confidential and special information and
goodwill, and the confidential nature of their respective businesses and of the
affairs of their customers, and that it is therefore appropriate that Holding
Company prevent Lester from engaging in any breach of the provisions of this
Paragraph 29. Lester, therefore, agrees that a violation by Lester of the terms
of this Paragraph 29 would result in irreparable and continuing injury to
Holding Company, for which there might well be no adequate remedy at law.
Therefore in the event Lester shall fail to comply with the provisions of this
Paragraph 29, Holding Company shall be entitled to such injunctive and other
relief as may be necessary or appropriate to cause Lester to comply with the
provisions of this Paragraph 29, and to recover, in addition to such relief, its
reasonable costs and attorney's fees incurred in obtaining same. Such right to
injunctive relief shall be in addition to, and not in lieu of, such rights to
damages or other remedies as Holding Company shall be entitled to receive.
30. Attorney's Fees. If either party to this Agreement shall seek
to enforce any of the provisions of this Agreement or any rights, duties or
obligations provided for herein, against the other party to this Agreement, by
legal or equitable proceedings, then the a party in such legal or equitable
proceedings shall be entitled to receive from the other party to such legal or
equitable proceedings, in addition to all other rights and remedies to which
such prevailing party shall be entitled, such prevailing party's reasonable
costs and expenses incurred in such proceedings and in the preparation for such
proceedings, including such prevailing party's reasonable attorney's fees. Such
prevailing party shall be entitled to judgment for said costs, expenses and
attorney's fees in addition to judgment for such other sums and remedies to
which such prevailing party shall be entitled.
31. Interest. If any party to this Agreement shall be entitled to
receive any sums from the other parties to this Agreement by reason of the
provisions of this Agreement or any breach of the provisions of this. Agreement,
then all such sums to which such party shall be entitled shall, to the extent
permitted by law, bear interest at Bank's prime interest rate then in effect
plus one percent (1%); provided that such rate shall never be less than the rate
of thirteen percent (13%) per annum. Interest shall be earned from a date which
follows the date when such sums are due by fifteen (15) days, until the date
when such sums are paid.
32. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered, shall constitute an
original, but all such counterparts shall constitute one and the same
instrument.
33. Entire Agreement. The parties acknowledge and agree that, under
Paragraph 6 of the 1984 Employment Agreement, Lester has the option to
purchase as many as 2,250 shares of common stock of Holding Company at a price
of $10.00 per share, exercisable on or before April 30, 1991, and nothing in
this Agreement shall impair, alter or otherwise affect such right and option to
purchase. This Agreement, together with the Agreements and/or plans referred to
herein, contains the entirety of the agreements between Holding Company, Bank
and Lester with respect to Lester's employment by Holding Company and Bank on
and after the Commencement Date. Each of the parties acknowledges that the other
parties have made no agreements or representations with respect to the subject
matter of this Agreement other than those hereinabove specifically set forth in
this Agreement. Any prior agreements, undertakings or understandings of the
parties with respect to Lester's employment by Holding Company and Bank
(including, without limitation, the 1984 Employment Agreement)shall, except to
the extent specifically set forth herein be (and they are hereby) rendered null
and void.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HOLDING COMPANY:
TRANS FINANCIAL BANCORP, INC.
By s/FLOYD H. ELLIS
Title Director
BANK:
TRANS FINANCIAL BANK, N.A.
By s/FLOYD H. ELLIS
Title Director
LESTER:
s/DOUGLAS M. LESTER
DOUGLAS M. LESTER
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