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
For the fiscal year ended December 31, 1996 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: (800)739-6790
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 whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. _
The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 18, 1997: $240,138,000.
The number of shares outstanding of the issuer's class of common stock on
February 18, 1997: 11,399,494 shares.
Document Incorporated By Reference
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 28, 1997, are incorporated by reference into
Part III of this report.
<PAGE>
TABLE OF CONTENTS
Item Page
Part I
1. Business..............................................................2
2. Properties............................................................4
3. Legal Proceedings.....................................................5
4. Submission of Matters to a Vote of Security Holders...................5
4a. Executive Officers of the Registrant................................6-7
Part II
5. Market for the Registrant's Common Equity and
Related Shareholder Matters...........................................8
6. Selected Financial Data...............................................8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9-29
8. Financial Statements and Supplementary Data.......................30-54
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...............................54
Part III
10. Directors and Executive Officers of the Registrant...................55
11. Executive Compensation...............................................55
12. Security Ownership of Certain Beneficial Owners and Management.......55
13. Certain Relationships and Related Transactions.......................55
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......56
Signatures.............................................................57-58
Exhibit Index..........................................................59-60
<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"). In addition, the company operates as
subsidiaries of TFB-KY a full-service securities broker/dealer--Trans Financial
Investment Services, Inc. ("TFIS")--and a mortgage banking company--Trans
Financial Mortgage Company ("TFMC").
During 1995, three commercial bank subsidiaries were merged to form TFB-KY
and two thrift subsidiaries were merged to form TFB-FSB. Collectively, TFB-KY,
TFB-TN and TFB-FSB are referred to in this report as "the banks."
On December 31, 1996, the company had total consolidated assets of
$2.0 billion, total loans of $1.5 billion, total deposits of $1.6 billion and
shareholders' equity of $131 million.
The portion of Management's Discussion and Analysis of Financial Condition
and Results of Operations entitled "Mergers and Acquisitions" included in Item 7
is incorporated herein by reference.
The banks provide a full range of corporate and retail banking services,
including checking, savings and time deposit accounts; secured and unsecured
loans to corporations, individuals and others; letters of credit; rental of safe
deposit boxes; financial counseling for individuals and institutions; and trust
and brokerage services. Interest on domestic commercial, consumer and mortgage
loans constitutes the largest contribution to the operating revenues of the
company and the banks.
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, transfer agent, and paying agent
for corporate securities and as corporate trustee under corporate trust
indentures. At December 31, 1996, approximately $421 million in assets were
managed by the trust department of TFB-KY.
TFMC originates and purchases mortgage loans for the purpose of
constructing, financing or refinancing one- to four-family dwellings. TFMC also
services mortgage loans for the banks and for others. Generally, residential
mortgage loans originated or purchased are then sold in the secondary market.
When sold, servicing may be retained by TFMC or released to the purchaser. The
portfolio of mortgage loans serviced for others totaled $3.3 billion at December
31, 1996.
TFIS offers to customers of the banks and to others a wide range of
investment products and services, including financial planning, mutual funds,
annuities, and individual stocks and bonds. In October of 1995, TFB-KY
introduced its own family of proprietary mutual funds, the Trans Adviser Funds,
which added depth to its lineup of investment products.
TFB-KY has twenty-seven offices in Kentucky: six located in Bowling Green;
three located in Pikeville; two located in each of Glasgow, Scottsville,
Morehead and Maysville; and one located in each of Augusta, Cave City, Dawson
Springs, Tompkinsville, Elkhorn City, Meta, Belfry, Virgie, Martin, and
Prestonsburg. TFB-FSB has twelve 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 Franklin, Russellville and Auburn. TFMC has a mortgage operations
center in Tullahoma, Tennessee, and a loan production office in Greensboro,
North Carolina. TFB-TN has ten offices in Tennessee: two located in Cookeville;
and one located in each of Nashville, Clarksville, Crossville, Franklin,
Lebanon, McMinnville, Murfreesboro, and Sparta. Subsequent to December 31, 1996,
the company entered into a contract to sell the Lebanon and Sparta offices,
subject to regulatory approval.
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. The following table displays each of the communities
where the company is currently located and the respective percentage of market
share of deposits the company has in each of these communities. The table also
shows the ranking by deposit size of each of the TFB locations in their local
markets.
<PAGE>
Share of Local Market
Banks, savings & loans and credit unions
Rank in
Market Local Subsidiary
Share Market Bank
South Central Kentucky:
Bowling Green 35% 1 TFB-KY
Glasgow/Cave City 40% 1 TFB-KY
Scottsville 35% 2 TFB-KY
Tompkinsville 18% 3 TFB-KY
Franklin * NM TFB-KY
Northeastern Kentucky:
Maysville 37% 1 TFB-KY
Morehead 33% 1 TFB-KY
Augusta 30% 2 TFB-KY
Eastern Kentucky:
Pike County 19% 3 TFB-KY
Floyd County 27% 3 TFB-KY
Western Kentucky:
Dawson Springs 6% 5 TFB-KY
Russellville/Auburn 16% 3 TFB-FSB
Northern Tennessee:
Clarksville 4% 8 TFB-TN
Middle Tennessee:
Cookeville 6% 5 TFB-TN
Murfreesboro 1% 10 TFB-TN
Nashville * NM TFB-TN
Rockwood/Kingston 14% 4 TFB-FSB
McMinnville 7% 4 TFB-TN
Sparta 3% 4 TFB-TN
Franklin * NM TFB-TN
Lebanon 1% 10 TFB-TN
Crossville 3% 5 TFB-TN
South Central Tennessee:
Tullahoma 13% 2 TFB-FSB
Shelbyville 6% 6 TFB-TN
Manchester 13% 2 TFB-FSB
Winchester 13% 4 TFB-FSB
Columbia/Mt. Pleasant 7% 5 TFB-FSB
NM = not meaningful
* = less than 1%
The company actively competes in its markets with other commercial banks
and financial institutions for all types of deposits, loans, trust accounts, 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 business 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").
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.
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.
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 on
pages 9 through 29 and in note 7 to the consolidated financial statements.
Those pages are incorporated herein by reference.
Description of Statistical Information Page(s)
Average Consolidated Balance Sheets and Net Interest Analysis.......13-14
Analysis of Year-to-Year Changes in Net Interest Income...............15
Loans Outstanding.....................................................18
Loan Maturities and Interest Rate Sensitivity.........................20
Non-performing Assets (Including Potential Problem Loans).............21
Summary of Loan Loss Experience.......................................22
Allocation of Allowance for Loan Losses...............................23
Allocation of Year-End Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans..................23
Carrying Value of Securities..........................................23
Maturity Distribution of Securities Available for Sale................24
Maturity of Time Deposits of $100,000 or More.........................25
Short-Term Borrowings.................................................26
Consolidated Statistical Information..................................29
Impact of Non-accrual Loans on Interest Income (note 7, paragraph 3)..40
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. TFB-KY owns all of the properties at which it conducts its business
except the Ashley Circle and Nashville Road sales centers in Bowling Green, the
Nashville office (which provides trust and investment services), the Virgie
sales center, and one of its Pikeville sales centers (the North Mayo Trail
branch). TFB-KY also leases property in Bowling Green for its operations center.
The facility in which its telemarketing Customer Care Center operates was sold
and leased back on December 31, 1996.
TFB-FSB owns all the properties at which it conducts business except the
Auburn and Franklin sales centers. TFMC leases the property in Tullahoma,
Tennessee, which houses its operations center, with the right to receive the
deed to the property upon completion of the lease, and also leases space in
Greensboro for a loan production office.
TFB-TN owns all the properties at which it conducts business except the
Franklin and Nashville sales centers. Note 8 to the company's consolidated
financial statements contains additional information relating to amounts
invested in premises and equipment.
Item 3. Legal Proceedings
In the ordinary course of operations, the company and 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
consolidated financial condition or results of operations of the company.
On August 12, 1996, Douglas M. Lester, the company's former chairman,
president and chief executive officer, filed suit individually and purportedly
on behalf of the shareholders of the company in Warren Circuit Court, Bowling
Green, Kentucky, against the company and four of its directors. Mr. Lester
claims that the company wrongfully terminated him on June 4, 1996, that the four
named directors breached their fiduciary duties to the company, and also alleges
fraud, breach of contract, interference with contractual relations and invasion
of privacy. Mr. Lester seeks, among other things, $1 million in compensatory
damages, the value of certain stock options, and punitive damages. Management
believes that the litigation will not result in a material adverse change in the
consolidated financial condition or results of operations of the company and
intends to vigorously defend the action.
On August 22, 1996, two former employees of the company and three former
employees of TFB-KY filed suit in Jefferson Circuit Court, Louisville, Kentucky,
against the company. The five plaintiffs claim wrongful termination, sex
discrimination, age discrimination, breach of contract and libel in connection
with the termination of their employment in June 1996. The plaintiffs seek,
among other things, compensatory damages in an unspecified amount, to include
the value of back pay and benefits; the value of certain stock options;
reinstatement as employees or alternatively the value of future earnings and
benefits; and punitive damages. Management believes that the litigation will not
result in a material adverse change in the consolidated financial condition or
results of operations of the company and intends to vigorously defend the
action.
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. 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
Vince A. Berta 1993 38 President, Chief
Executive Officer, and
Director of the
company; Director and
Executive Vice
President of TFB-KY;
Director of TFMC
Barry D. Bray 1984 50 Executive Vice
President, Chief
Credit Officer of the
company; Chief Credit
Officer and Director
of TFB-KY; Chief
Credit Officer of
TFB-TN and TFB-FSB
James G. Campbell 1996 40 Executive Vice
President-General
Sales Manager for the
company; President and
Director of TFB-KY;
Director of TFB-TN
and of TFB-FSB
Tommy W. Cole 1996 41 Executive Vice
President, Corporate
Financial Services
of the company and of
TFB-KY
John K. Davis II 1997 40 Senior Vice President
and Chief Information
Officer of the company
and of TFB-KY
Roger E. Lundin 1987 52 Senior Vice President
and Director of Human
Resources of the
company
Edward R. Matthews 1995 35 Chief Financial
Officer of the company
Michael J. Moser 1994 50 Executive Vice
President and Director
of Marketing of the
company
Michael L. Norris 1995 43 President and Director
of Trans Financial
Mortgage Company
Ronald B. Pigeon 1995 48 Controller of the
company; Secretary/
Treasurer and Director
of TFIS
Jay B. Simmons 1993 40 Senior Vice President,
General Counsel and
Secretary of the
company; Senior Vice
President of TFB-KY,
TFB-TN, and TFB-FSB;
Director and General
Counsel of TFIS;
Director of TFMC
Ronald Szejner 1995 48 Executive Vice
President and Chief
Trust Officer of the
company and of TFB-KY;
President and Director
of TFIS
Thomas R. Wallingford 1996 69 Chairman of the Board
and Director of the
company; Chairman
and Director of
TFB-KY; Retired,
Former Chairman and
Chief Executive
Officer of Kentucky
Community Bancorp,Inc.
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. Davis joined the company in September 1995. Prior to that he
was Director, Strategic Architecture for SmithKline Beecham Clinical
Laboratories.
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, and previously 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.
Mr. Norris joined the company in July, 1993. Prior to that, he was
responsible for all mortgage servicing activities at PNC Mortgage Servicing
Company.
Mr. Pigeon joined the company in November 1993. Prior to that, he was
Controller for a railroad warehousing service company in Denver, Colorado, and
was Vice President for External Reporting with Colorado National Bankshares,
Inc.
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.
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. With respect to certain agreements entered into with certain
officers of the registrant providing severance benefits in the event the
officer's employment is terminated without cause prior to December 31, 1997, see
section entitled Executive Compensation And Other Information-Employment
Contracts and Termination of Employment and Change of Control Arrangements in
the registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders as
incorporated herein by reference at Item 11.
<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 Stock Market under
the symbol TRFI. As of December 31, 1996 there were 1,706 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, 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
First quarter, 1996 18.125 14.75 .16
Second quarter, 1996 18.50 15.125 .16
Third quarter, 1996 20.50 16.875 .16
Fourth quarter, 1996 23.50 19.50 .16
On November 7, 1996, the company issued 46,666 shares of common stock to
Morgan Keegan & Co., Inc. ("Morgan Keegan"). The shares were issued for total
consideration of $516,243. The issuance was pursuant to the warrant dated as of
February 13, 1992, previously issued to Morgan Keegan as underwriting
compensation in connection with an issuance of the company's common stock
underwritten by Morgan Keegan. The issuance of the 46,666 shares of common stock
was not registered under the Securities Act of 1933, as amended, pursuant to
Section 4(2) of the Act.
Additional information for this item is included in note 11 to the
consolidated financial statements.
Item 6. Selected Financial Data
The information for this item is included in the section entitled
"Consolidated Statistical Information" in Item 7 of this report.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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"). 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.--and a
mortgage banking company--Trans Financial Mortgage Company ("TFMC"). The company
sold its travel agency, Trans Travel, Inc., during the fourth quarter of 1996.
At December 31, 1996, the company had total consolidated assets of $2.0
billion, total loans of $1.5 billion, total deposits of $1.6 billion and
shareholders' equity of $131 million. The company's net income decreased 55% in
1996, to $6.9 million, from $15.3 million in 1995, and earnings per share
decreased 56% to $0.60 per common share, from $1.35 in 1995.
Results for 1996 reflect pre-tax charges totaling $5.8 million related to
the company's mid-year commitment to refocus on core financial services, reduce
operating expenses and exit from less-profitable initiatives. Also included in
the 1996 results is a pre-tax charge of $2.6 million resulting from
congressional legislation enacted during the third quarter designed to
re-capitalize the Savings Association Insurance Fund ("SAIF"). In addition, the
provision for loan losses was increased in 1996 by $8.6 million compared to
1995.
The discussion that follows is intended to provide additional insight into
the company's financial condition and results of operations. It should be read
in conjunction with the consolidated financial statements and accompanying
notes, which follow this discussion.
Mergers and Acquisitions
Over the past several years, the company has expanded through mergers and
acquisitions, which are summarized below.
<TABLE>
<CAPTION>
Asset
Date Size
Acquisition Location Consummated (millions)
<S> <C> <C> <C>
Mergers (pooling-of-interests accounting):
Dawson Springs Bancorp, Inc. ........................ South Central & Western Kentucky December-92 $ 70
Kentucky Community Bancorp, Inc. .................... Northeastern Kentucky February-94 175
Peoples Financial Services, Inc. .................... Middle & Eastern Tennessee April-94 123
FGC Holding Company ................................. Eastern Kentucky August-94 127
Acquisitions (purchase accounting):
First Federal Savings and Loan Assoc. of Russellville Southwestern Kentucky November-9 41
Future Federal Savings Bank branches (from RTC) ..... South Central Kentucky August-91 75
First Federal Savings Bank of Tennessee ............. South Central Tennessee March-92 224
Maury Federal Savings Bank .......................... Middle Tennessee March-92 55
Heritage Federal Bank for Savings branches .......... Middle Tennessee August-92 55
Trans Kentucky Bancorp, Inc. ........................ Eastern Kentucky July-93 189
Fifth Third Bank of Kentucky, Inc. branches ......... South Central Kentucky February-95 41
AirLanse Travel (sold November-96) .................. Louisville, Kentucky September-95 1
Correspondents Mortgage Company, L.P. ............... Greensboro, North Carolina November-95 1
</TABLE>
The mergers shown in the above table were 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. The acquisitions 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.
Three banks were acquired in the Kentucky Community Bancorp, Inc. merger.
These three banks were consolidated into the operations of TFB-KY on March 31,
1994. The Peoples Financial Services, Inc. merger included one commercial bank
and one thrift institution. The commercial bank became TFB-TN and the thrift was
consolidated into the operations of TFB-FSB on July 31, 1994. The commercial
bank acquired in the FGC Holding Company ("FGC") merger was consolidated into
the operations of TFB-KY on March 24, 1995. In connection with these 1994
mergers, the company issued a total of 3,727,216 shares of common stock and the
shares of FGC preferred stock were retired.
In connection with the February 1995 branch acquisition from Fifth Third
Bank of Kentucky, Inc., the two Fifth Third 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. AirLanse Travel was consolidated into the operations
of Trans Travel, Inc. and Correspondents Mortgage Company was consolidated into
the operations of TFMC. (As a part of the company's commitment to refocus on
core financial services, Trans Travel, Inc. was sold during the fourth quarter
of 1996.) In addition to the deposits assumed, the company received net cash of
$36.8 million and issued 25,000 shares of common stock in connection with these
1995 acquisitions.
See note 4 to the consolidated financial statements for additional
information regarding business combinations.
Income Statement Review
Net income was $6.9 million in 1996, compared with $15.3 million in 1995,
and $14.4 million in 1994. On a per share basis, net income was $0.60, $1.35 and
$1.28, respectively.
As mentioned previously, non-interest expenses for 1996 reflect pre-tax
charges totaling $5.8 million related to an initiative to refocus the company's
resources on its core financial services, reduce operating expenses and exit
from less-profitable initiatives. This initiative was undertaken in the second
quarter of 1996, when the Board of Directors made a change in executive
management, with the expressed purpose of changing the company's strategic
direction. As of December 31, 1996, the company has accomplished the following
goals of the initiative:
-exited the venture capital and human resources consulting initiatives,
-closed the Louisville, Kentucky office,
-closed mortgage loan production offices in Chattanooga, Jackson and
Knoxville, Tennessee,
-sold the corporate aircraft,
-sold the travel agency,
-sold a newly-constructed building intended to house the company's
corporate headquarters and consolidated office space in Bowling Green,
Kentucky, and
-realized additional cost savings in the company's retail delivery
system of approximately $2.5 million on an annualized pre-tax basis,
primarily through the reduction of administrative personnel.
Based on a comparison of non-interest expenses for the fourth quarter of
1996 to the second quarter (excluding the $5.8 million of charges to implement
the plan), total operating expenses have been reduced by more than $6 million on
an annualized pre-tax basis.
In addition to the charges associated with the refocus initiative, the
company increased its 1996 provision for loan losses by $8.6 million compared
with 1995 and recorded a pre-tax charge of $2.6 million imposed by congressional
legislation enacted during 1996 designed to re-capitalize the Savings
Association Insurance Fund ("SAIF"). All banks with SAIF-insured deposits and
all savings and loans were subject to the SAIF assessment. The increased
provision for loan losses in 1996 was primarily due to a deterioration in the
quality of certain commercial credits in the second quarter of the year.
With the major components of the refocus initiative in place by year-end
1996, management believes the results of the third and fourth quarters of 1996
are more representative of the company's ongoing profitability. Excluding the
SAIF assessment, annualized net income for those periods would have been $20.2
million, which would have resulted in a return on assets of 1.06 percent and a
15.85 percent return on equity.
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
1996 Amount % 1995 Amount % 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ........... $147,935 $ 13,707 10.2 % $134,228 $ 20,246 17.8 % $113,982
Interest expense .......... 73,066 8,467 13.1 64,599 17,224 36.4 47,375
-------- -------- ------- -------- -------- ------- --------
Net interest income ....... 74,869 5,240 7.5 69,629 3,022 4.5 66,607
Provision for loan losses . 13,914 8,654 164.5 5,260 3,048 137.8 2,212
-------- -------- ------- -------- -------- ------- --------
Net interest income after
provision for loan losses 60,955 (3,414) (5.3) 64,369 (26) (0.0) 64,395
Non-interest income ....... 29,689 5,278 21.6 24,411 7,241 42.2 17,170
Non-interest expenses ..... 80,642 14,593 22.1 66,049 5,979 10.0 60,070
-------- -------- ------- -------- -------- ------- --------
Income before income taxes 10,002 (12,729) (56.0) 22,731 1,236 5.8 21,495
Income tax expense ........ 3,120 (4,296) (57.9) 7,416 341 4.8 7,075
-------- -------- ------- -------- -------- ------- --------
Net income ................ $ 6,882 $ (8,433) (55.1) $ 15,315 $ 895 6.2 $14,420
======= ======== ======== ======= ======== ======== ========
Primary earnings
per common share ........ $ 0.60 $ (0.75) (55.6)% $ 1.35 $ 0.07 5.5 % $ 1.28
======= ======== ======== ======= ======== ========= =======
</TABLE>
Each of these components of income and expense is discussed separately in
the sections that follow.
Net Interest Income
Net interest income totaled $74.9 million in 1996, a 7.5% increase over the
$69.6 million recorded in 1995. In 1995 net interest income was up 4.5% over
1994's $66.6 million. On a fully-taxable equivalent basis, net interest income
was $76.5 million in 1996, compared with $71.3 million in 1995 and $68.2 million
in 1994. The increase in net interest income in 1996 and 1995 was due to a
higher level of interest-earning assets, primarily commercial loans.
The following table summarizes the changes in the company's net interest
margin (on a fully-taxable equivalent basis) 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 (F1)
For the years ended December 31
<CAPTION>
Basis Point Basis Point
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Average yield on interest-earning assets 8.84% (5) 8.89% 97 7.92%
Average rate on interest-bearing liabilities 4.89 15 4.74 109 3.65
---- ----- ----- ------ -----
Net interest-rate spread 3.95 (20) 4.15 (12) 4.27
Impact of non-interest-bearing sources and other
changes in balance sheet composition 0.57 5 0.52 12 0.40
---- ----- ------ ------ -----
Net interest margin 4.52% (15) 4.67% - 4.67%
==== === ==== ===== ====
<FN>
(F1)Refer to the tables on pages 13 and 14 for additional data regarding the net
interest analysis.
</FN>
</TABLE>
The table on pages 13 and 14 show, for the past three years, the
relationship between interest income and expense and the levels of average
interest-earning assets and average interest-bearing liabilities. It also
reflects the general increase in interest rates on total interest-bearing
liabilities over the past year, and increased volumes of loans, certificates of
deposit, and borrowed funds.
Approximately $625 million of the company's commercial and consumer loans
are tied to the prime rate. Decreases in the prime lending rate, which began in
the third quarter of 1995, had a negative impact on net interest margin during
1996 as compared to 1995. Although the prime rate leveled off in February 1996,
the company's funding costs continued to rise, as the company placed greater
reliance on wholesale funding sources, such as brokered deposits and other
borrowed funds. As a result, the company's net interest-rate spread (the
difference between the gross yield on interest-earning assets and the rate paid
on interest-bearing liabilities) decreased, negatively impacting the net
interest margin.
Although the net interest-rate spread fell by 12 basis points in 1995 as
compared with 1994, the net interest margin was flat, due to a change in the
composition of the balance sheet. In 1994, loans accounted for 74% of average
earning assets, 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. This trend continued in 1996, with the
ratio of loans to total earning assets increasing to 80% and securities dropping
to 17%. The increased proportion of assets invested in relatively higher-earning
loans served to mitigate in 1996--and fully offset in 1995--the decline in the
interest-rate spread from the previous year.
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.
<PAGE>
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the years ended December 31
Fully-taxable equivalent basis
Dollars in thousands
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(F1) (F2) (F1) (F2) (F1) (F2)
Assets
<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 securities $ - $ - 0.00% $ 24,257 $ 1,686 6.95% $ 69,766 $ 3,967 5.69%
State and municipal obligations - - 0.00 46,674 3,622 7.76 50,111 3,972 7.93
Other securities - - 0.00 4,816 355 7.37 5,723 396 6.92
--------- ------- ---------- -------- ---------- -------
Total securities held to maturity - - 0.00 75,747 5,663 7.48 125,600 8,335 6.64
Securities available for sale:
U.S. Treasury, federal agencies,
and mortgage-backed securities 204,549 11,450 5.60 209,756 11,847 5.65 214,749 11,477 5.34
State and municipal obligations 53,844 4,023 7.47 5,442 445 8.18 - - 0.00
Other securities 33,460 2,133 6.37 13,727 901 6.56 13,526 708 5.23
---------- ------ ---------- -------- ----------- -------
Total securities available
for sale 291,853 17,606 6.03 228,925 13,193 5.76 228,275 12,185 5.34
---------- ------- ---------- -------- ---------- -------
Total securities 291,853 17,606 6.03 304,672 18,856 6.19 353,875 20,520 5.80
Federal funds sold 898 52 5.79 13,652 804 5.89 13,424 540 4.02
Interest-bearing deposits
with banks 117 14 NM 197 17 NM 235 104 NM
Mortgage loans held for sale 53,392 3,938 7.38 19,436 1,644 8.46 17,913 1,152 6.43
Loans, net of unearned income (F3) 1,346,754 127,983 9.50 1,190,101 114,572 9.63 1,073,580 93,263 8.69
---------- ------- ---------- ------- ---------- -------
Total interest-earning assets /
interest income 1,693,014 149,593 8.84% 1,528,058 135,893 8.89% 1,459,027 115,579 7.92%
Less allowance for loan losses 16,563 13,239 12,742
---------- ---------- ----------
1,676,451 1,514,819 1,446,285
Non-interest-earning assets:
Cash and due from banks 58,443 63,726 65,788
Premises and equipment 39,891 38,307 35,275
Other assets 82,543 56,080 40,712
---------- ---------- ----------
Total assets $1,857,328 $1,672,932 $1,588,060
========== ========== ==========
<PAGE>
Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand $ 108,325 3,128 2.89% $ 231,224 6,147 2.66% $ 243,827 5,896 2.42
Savings deposits 113,078 3,027 2.68 131,614 3,778 2.87 155,819 4,351 2.79
Money market accounts 178,566 5,571 3.12 47,288 1,514 3.20 55,636 1,485 2.67
Certificates of deposit 783,386 43,276 5.52 729,269 40,240 5.52 633,608 26,040 4.11
Individual Retirement Accounts 86,097 4,793 5.57 88,547 4,786 5.41 92,122 3,952 4.29
---------- ------- ---------- ------- ---------- -------
Total interest-bearing deposits 1,269,452 59,795 4.71 1,227,942 56,465 4.60 1,181,012 41,724 3.53
Federal funds purchased
and repurchase agreements 42,010 1,949 4.64 47,219 2,013 4.26 40,303 1,253 3.11
Other short-term borrowings 56,136 3,117 5.55 40,652 2,983 7.34 36,669 1,715 4.68
Long-term debt 125,593 8,205 6.53 46,840 3,137 6.70 40,756 2,683 6.58
---------- ------- ---------- ------- ---------- -------
Total borrowed funds 223,739 13,271 5.93 134,711 8,133 6.04 117,728 5,651 4.80
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities/ interest expense 1,493,191 73,066 4.89 1,362,653 64,598 4.74 1,298,740 47,375 3.65
------- ------- -------
Non-interest-bearing liabilities:
Non-interest-bearing deposits 213,332 172,748 168,746
Other liabilities 21,405 15,485 8,687
---------- ---------- ----------
Total liabilities 1,727,928 1,550,886 1,476,173
Shareholders' equity 129,400 122,046 111,887
---------- ---------- ----------
Total liabilities
and shareholders' equity $1,857,328 $1,672,932 $1,588,060
========== ========== ==========
Net interest-rate spread (F4) 3.95 4.15 4.27
Impact of non-interest bearing
sources and other changes in
balance sheet composition 0.57 0.52 0.40
Net interest income /
margin on interest-earning
assets (F5) $76,527 4.52 % $71,295 4.67 % $68,204 4.67 %
======= ==== ======= ==== ======= ====
NM = not meaningful
<FN>
(F1)Average balances are based on daily balances.
(F2)Interest income on tax-exempt securities and loans has been increased 47.5%
in this analysis to reflect fully-taxable-equivalent interest.
(F3)For computational purposes, non-accrual loans are included in loans.
(F4)Net interest-rate 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.
(F5)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 (average balances) and interest rates for the
years ended December 31, 1996 and 1995, 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>
1996 vs. 1995 1995 vs. 1994
Increase (decrease) Increase (decrease)
Fully-taxable equivalent basis 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
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities held to maturity:
U.S. Treasury, federal agencies, and
mortgage-backed securities $ - $(1,686) $(1,686) $ 736 $(3,017) $(2,281)
State and municipal obligations - (3,622) (3,622) (82) (268) (350)
Other securities - (355) (355) 25 (66) (41)
------ ------- ------- ------ ------- -------
Total securities held to maturity - (5,663) (5,663) 679 (3,351) (2,672)
Securities available for sale:
U.S. Treasury, federal agencies, and
mortgage-backed securities (105) (292) (397) 641 (271) 370
State and municipal obligations (42) 3,620 3,578 - 445 445
Other securities (27) 1,259 1,232 182 11 193
------ -------- ------- ------ ------- -------
Total securities available for sale (174) 4,587 4,413 823 185 1,008
------ -------- ------- ------ ------- -------
Total securities (174) (1,076) (1,250) 1,502 (3,166) (1,664)
Federal funds sold (13) (739) (752) 255 9 264
Interest-bearing deposits with banks 5 (8) (3) (72) (15) (87)
Mortgage loans held for sale (236) 2,530 2,294 387 105 492
Loans, net of unearned income (1,493) 14,904 13,411 10,638 10,671 21,309
------ ------- ------- ------ ------- -------
Total interest-earning assets (1,911) 15,611 13,700 12,710 7,604 20,314
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand 491 (3,510) (3,019) 566 (315) 251
Savings deposits (243) (508) (751) 119 (692) (573)
Money market accounts (40) 4,097 4,057 271 (242) 29
Certificates of deposit 47 2,989 3,036 9,857 4,343 14,200
Individual Retirement Accounts 141 (134) 7 993 (159) 834
------ ------- ------- ------ ------- -------
Total interest-bearing deposits 396 2,934 3,330 11,806 2,935 14,741
Federal funds purchased
and repurchase agreements 169 (233) (64) 520 240 760
Other short-term borrowings (834) 968 134 1,065 203 1,268
Long-term debt (79) 5,147 5,068 47 407 454
------ ------- ------- ------ ------- -------
Total borrowed funds (744) 5,882 5,138 1,632 850 2,482
------ ------- ------- ------ ------- -------
Total interest-bearing liabilities (348) 8,816 8,468 13,438 3,785 17,223
------ ------- ------- ------ ------- -------
Increase (decrease) in net interest income $(1,563) $ 6,795 $ 5,232 $ (728) $ 3,819 $ 3,091
======= ======= ======= ====== ======= =======
</TABLE>
Provision for Loan Losses
The provision for loan losses in 1996 was $13.9 million, or 1.03% of
average loans, an increase of $8.6 million from the $5.3 million, or 0.44% of
average loans, in 1995. In 1994, the company recorded a provision of $2.2
million, or 0.21% of average loans.
Net loan charge-offs were $11.6 million in 1996, compared with $2.0 million
in 1995 and $2.2 million in 1994. In 1996 the company charged off $7.0 million
on three non-performing loans which had been placed in non-accrual status during
1995. As a percentage of average loans, net charge-offs were 0.86% in 1996, up
from 0.17% in 1995 and 0.20% in 1994. For the five year period from 1992 through
1996, net charge-offs averaged 0.38%.
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.
The increased provision in 1996 and 1995 provides for overall growth in the loan
portfolio as well as a higher level of non-performing loans than in the previous
three years. Further discussion on loan quality and the allowance for loan
losses is included later in this review in the "Asset Quality" section.
Non-interest Income
Non-interest income for 1996 increased 22% over 1995, after increasing 42%
from 1994 to 1995. The increases in non-interest income were due to:
<TABLE>
<CAPTION>
Increase (Decrease) in
Non-Interest Income
In thousands 1996 vs. 1995 1995 vs. 1994
-----------------------------------
<S> <C> <C>
Increase in service charges on deposit accounts .............. $ 1,069 $ 1,088
Decrease in gains on sale of securities ...................... (180) (57)
Increase (decrease) in mortgage banking income due to:
Recognition of MSR's under SFAS 122 .................... 174 1,243
Increase in gain on sale of mortgage loans held for sale 1,580 845
Increased mortgage servicing fees ...................... 2,618 1,169
Gain on sale of mortgage servicing rights in 1995 ...... (1,687) 1,687
Increase in trust service fees ............................... 563 145
Increase in brokerage income ................................. 473 423
Increase in travel agency fees ............................... 335 203
Increase (decrease) in credit life insurance fees ............ 252 (15)
Increase in all other non-interest income .................... 81 510
------- -------
Total increase in non-interest income .................. $ 5,278 $ 7,241
======= =======
</TABLE>
The increases in non-interest income reflect the company's expanding
mortgage banking business and continued increases in trust and investment
services revenues. As previously mentioned, the company sold its travel business
during the fourth quarter of 1996.
TFMC purchased a $1.0 billion mortgage loan servicing portfolio in 1996 and
a $1.2 billion servicing portfolio in 1995, increasing the size of the servicing
portfolio from $1.3 billion at the end of 1994 to $3.3 billion at year-end 1996.
The significant increase in mortgage servicing fees in 1996 and 1995 was due to
this growth in the servicing portfolio. In the fourth quarter of 1995, TFMC
acquired Correspondents Mortgage Company of Greensboro, North Carolina, doubling
TFMC's wholesale mortgage lending capacity. The Greensboro office accounts for
$2.1 million of the $4.4 million increase in mortgage banking income from 1995
to 1996, and $0.3 million of the increase from 1994 to 1995. Also in 1995, the
company sold a $168 million mortgage loan servicing portfolio, resulting in a
$1.7 million gain on the sale of mortgage servicing rights.
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 years prior to 1995, 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
$1.2 million in non-interest income, before amortization, in 1995 and $1.4
million in 1996.
During 1994, the company engaged an outside consulting firm to review its
banking products and services. As an outcome of this review, the company
implemented a new product and fee structure in April 1995, which resulted in
additional service charges on deposit accounts.
Non-interest Expenses
Non-interest expenses for 1996 increased 22% over 1995, after increasing
10% from 1994 to 1995. The increases in non-interest expense were due to:
<TABLE>
<CAPTION>
Increase (Decrease) in
Non-Interest Expenses
In thousands 1996 vs. 1995 1995 vs. 1994
------------ -------------
<S> <C> <C>
Second quarter initiatives .................................................... $ 5,807 $ --
Increase in compensation and employee benefits ................................ 5,541 4,258
Increase in occupancy and equipment expense ................................... 449 1,106
Increase in communications expense ............................................ 909 476
Deposit insurance:
1996 SAIF assessment, net of fourth quarter refund ...................... 2,563 --
Decrease in deposit insurance premiums .................................. (1,073) (1,088)
Increase (decrease) in advertising and public relations expense ............... (410) 724
Decrease in professional fees ................................................. (594) (318)
Increase in postage, printing and supplies .................................... 482 127
Increase (decrease) in educational expense .................................... (280) 424
Increase (decrease) in foreclosed asset expense ............................... (495) 315
Increase in processing fees ................................................... 931 312
Increase (decrease) in all other non-interest expenses ........................ 763 (357)
-------- -------
$ 14,593 $ 5,979
======== =======
</TABLE>
Costs recognized in the second quarter of 1996 which are associated with
the initiative to refocus the company's resources on core financial services
include severance and related payroll taxes and benefits, write-downs of fixed
assets to be sold or abandoned, legal and accounting fees associated with
discontinuing certain activities and various other costs associated with the
disposition of assets. These charges provide for the cost of exiting several
initiatives which the company entered in recent years, such as human resources
consulting and venture capital. Also included in the charges are expenses
associated with closing the Louisville, Kentucky office; mortgage loan
production offices in Chattanooga, Jackson and Knoxville, Tennessee; and
consolidation of operations in Bowling Green, Kentucky. Severance expense was
also recognized related to changes designed to reduce costs in the retail
delivery system and in investment management. The company sold its corporate
jet, with the cost of its disposition included in second quarter expenses. The
classification of these costs in the consolidated statement of income is as
follows:
In thousands
Compensation and employee benefits $1,798
Net occupancy expense 475
Furniture and equipment expense 325
Professional fees 340
Writedowns and losses on sale of fixed assets 1,698
Other expenses 1,171
------
Total costs associated with the initiative $5,807
======
The increases in non-interest expenses over the past two years also reflect
the company's commitment to invest in new technology, product lines,
distribution channels and people, to provide enhanced customer service and to
support future growth.
Compensation and benefits increased $5.5 million in 1996 (excluding the
refocus initiative charges) as compared to 1995, and increased $4.3 million in
1995 versus 1994--the result of an expansion of the professional staff in 1994
and 1995. Of the increase in compensation and benefits in 1996 and 1995, $1.4
million and $0.8 million, respectively, represent increased payments associated
with the company's implementation of an incentive-based compensation system.
Advertising and public relations expense decreased $0.4 million in 1996,
after increasing $0.7 million in 1995. During 1995, the company expanded its
promotion of the new products and services added during the year, and an
intensified sales training program resulted in a $0.4 million increase in
educational expense that year.
In general, the remaining increases in both 1996 and 1995 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, furniture and equipment and communications costs
increased $1.4 million in 1996 and $1.6 million in 1995. In addition, external
data processing costs, primarily for mortgage loan servicing and electronic
delivery of financial services, increased $0.9 million and $0.3 million in 1996
and 1995, respectively.
As mentioned previously, the company recorded in the third quarter of
1996 a pre-tax charge of $2.7 million resulting from legislation enacted
during 1996 designed to re-capitalize the SAIF. The $1.1 million decreases
in deposit insurance premiums in both 1996 and 1995 were 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, and to zero effective January 1, 1996. Approximately 69% of the
company's deposits are insured through the BIF. The remaining 31% of the
company's deposits are insured through the SAIF. Insurance premiums on the
SAIF deposits remained at $0.23 through 1996, however a refund of $122 thousand
was received from the SAIF in the fourth quarter of 1996. For 1997, the
company expects to recognize deposit insurance expense of approximately $0.065
per $100 of SAIF-insured deposits and $0.013 per $100 of BIF-insured deposits.
Income Taxes
The company had income tax expense of $3.1 million in 1996, compared with
$7.4 million in 1995 and $7.1 million in 1994. These represent effective tax
rates of 31.2%, 32.6% and 32.9%, respectively. 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 1996 totaled $2.0 billion, compared with $1.8 billion at
December 31, 1995. Average total assets for 1996 increased $184 million from
1995, after increasing $85 million from 1994 to 1995. Average interest-earning
assets increased $165 million from 1995 to 1996, and increased $69 million from
1994 to 1995.
Loans
Total loans, net of unearned income, averaged $1.3 billion in 1996,
compared with $1.2 billion in 1995 and $1.1 billion in 1994. At year-end 1996,
loans totaled $1.5 billion, compared with $1.3 billion at December 31, 1995, and
$1.1 billion at the end of 1994.
The company has experienced strong loan growth throughout its markets over
the past five years, 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 over that period.
<TABLE>
Loans Outstanding
December 31
In thousands
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial .................... $ 466,365 $ 372,822 $ 318,970 $ 320,952 $ 235,922
Commercial real estate ........ 470,235 397,741 334,567 234,308 140,554
Residential real estate ....... 385,894 357,697 339,605 303,283 292,847
Consumer ...................... 130,444 132,401 153,754 150,202 114,820
----------- ----------- ----------- ----------- ---------
Total loans ................ 1,452,938 1,260,661 1,146,896 1,008,745 784,143
Less unearned income .......... (1,939) (2,150) (3,063) (3,656) (3,843)
----------- ----------- ----------- ----------- ---------
Loans net of unearned income $ 1,450,999 $ 1,258,511 $ 1,143,833 $ 1,005,089 $ 780,300
=========== =========== =========== =========== =========
</TABLE>
Loan Concentrations
Much of the increase in commercial and commercial real estate loans is
financing the operations of the company's commercial customers. Although many of
these loans are structured as mortgages, the company relies on the borrower's
cash flow to service the loan, rather than on the sale of the underlying
collateral. Commercial real estate loans include financing for industrial parks,
residential developments, retail shopping centers, multi-family apartment
complexes, industrial buildings, fast food and mid-scale restaurants, and hotels
and motels. The primary source of repayment cannot be traced to any specific
industry group.
The percentage distribution of the company's loans, by industry, is shown
in the following table.
Loans by Industry
December 31, 1996
As a percentage of total loans
Agriculture 2.9%
Apartment buildings 2.6
Construction and land development 8.4
Finance and insurance 1.9
Manufacturing:
Durable goods 7.1
Non-durable goods 3.9
Mining 3.1
Services:
Health 2.7
Hotels and motels 4.1
Other than health and hotels 4.6
Wholesale trade 3.1
Retail trade:
Restaurants 4.9
Food stores 2.3
Automotive 1.6
Other 2.2
Other commercial real estate 7.2
All other commercial loans 1.9
-------
Total commercial and commercial real estate loans 64.5
Residential real estate loans 26.6
Consumer loans 8.9
-------
Total loans, net of unearned income 100.0%
=====
Substantially all of the company's loans are to customers located in
Kentucky and Tennessee, in the immediate market areas of the banks. However, the
company has one $6.3 million commercial loan to a Mexican affiliate of a U.S.
corporation. The loan represents financing for an essential part of the
operations of an established customer located in the company's primary market
area.
On December 31, 1996, the company's 49 largest credit relationships
consisted of loans and loan commitments ranging from $5 million to $20 million,
none of which was classified as non-performing. The aggregate amount of these
credit relationships was $472 million.
The following table sets forth the maturity distribution and interest rate
sensitivity of commercial and commercial real estate loans as of December 31,
1996. 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.
<TABLE>
Loan Maturities and Rate Sensitivity
December 31, 1996
In thousands
<CAPTION>
One Year One Through Over Total
or Less Five Years Five Years Loans
By maturity date:
<S> <C> <C> <C> <C>
Commercial ............................................... $184,900 $121,031 $160,434 $466,365
Commercial real estate ................................... 100,581 61,855 307,799 470,235
-------- -------- -------- --------
Total .................................................. $285,481 $182,886 $468,233 $936,600
======== ======== ======== ========
Fixed rate loans ......................................... $ 54,482 $ 73,759 $ 60,079 $188,320
Floating rate loans ...................................... 230,999 109,127 408,154 748,280
-------- -------- -------- --------
Total .................................................. $285,481 $182,886 $468,233 $936,600
======== ======== ======== ========
By next repricing opportunity:
Commercial ............................................... $401,117 $ 48,912 $ 16,336 $466,365
Commercial real estate ................................... 386,956 38,719 44,560 470,235
-------- -------- -------- --------
Total .................................................. $788,073 $ 87,631 $ 60,896 $936,600
======== ======== ======== ========
Fixed rate loans ......................................... $ 54,482 $ 73,759 $ 60,079 $188,320
Floating rate loans ...................................... 733,591 13,872 817 748,280
-------- -------- -------- --------
Total .................................................. $788,073 $ 87,631 $ 60,896 $936,600
======== ======== ======== ========
</TABLE>
Asset Quality
Non-performing loans, which include non-accrual loans, accruing loans past
due over 90 days and restructured loans, totaled $10.6 million at the end of
1996, a decrease of $6.7 million from December 31, 1995. The ratio of
non-performing loans to year-end loans was 0.73%, compared with 1.38% at
year-end 1995 and 0.69% at December 31, 1994. Non-performing loans increased
$4.2 million in the fourth quarter of 1995, primarily due to placing one
commercial loan in non-accrual status. Non-performing assets, which include
non-performing loans, foreclosed real estate and other foreclosed property,
totaled $12.4 million at year-end 1996, and the ratio of total non-performing
assets to total assets decreased to 0.62% at year-end 1996, from 1.24% at
December 31, 1995.
The following table presents information concerning non-performing assets,
including non-accrual and restructured loans:
<TABLE>
Non-performing Assets
December 31
Dollars in thousands
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual loans ............................... $ 4,717 $12,708 $ 4,375 $ 5,926 $ 3,986
Accruing loans which are contractually
past due 90 days or more ...................... 5,863 4,617 3,514 2,377 4,262
Restructured loans .............................. 4 14 30 1,591 718
------- ------- ------- ------- -------
Total non-performing and restructured loans ... 10,584 17,339 7,919 9,894 8,966
Foreclosed real estate .......................... 1,608 4,329 4,998 5,869 9,036
Other foreclosed property ....................... 184 677 199 113 --
------- ------- ------- ------- -------
Total non-performing and restructured loans
and foreclosed property ..................... $12,376 $22,345 $13,116 $15,876 $18,002
======= ======= ======= ======= =======
Non-performing and restructured loans
as a percentage of loans net of unearned income 0.73% 1.38% 0.69% 0.98% 1.15%
Non-performing and restructured loans and other
real estate as a percentage of total assets ... 0.62% 1.24% 0.81% 0.99% 1.30%
</TABLE>
Management classifies commercial and commercial real estate loans as
non-accrual 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 loans are charged off
after 120 days of delinquency unless adequately secured and in the process of
collection. Non-accrual 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.
Two commercial credit relationships account for $2.1 million, or 45%, of
the company's non-accrual loans at December 31, 1996, and 20% of total
non-performing and restructured loans. The larger of these credits is to a
specialty apparel manufacturer and the other is to a company in the coal mining
industry. An allowance for loan losses in the amount of $164 thousand 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 non-accrual balance consists of various commercial and
consumer loans, with no single loan exceeding $350,000.
The increase over the past two years in accruing loans past due 90 days or
more is principally related to residential real estate loans. Personal
bankruptcies, particularly Chapter 13 filings, have been rising in Tennessee and
Kentucky over the past two years. This form of bankruptcy forestalls foreclosure
on a wage earner's residence as long as monthly payments are resumed and a small
additional payment is made to the lender to be applied to the delinquent
mortgage payments. Such a payment plan may stretch out to several years the
period required to bring payments current. Although these loans may be well
secured and in the process of collection, most are reported as more than 90 days
past due and accruing interest.
Foreclosed real estate at December 31, 1996, includes one property with a
book value of $340 thousand, or 21% of the outstanding balance. This 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 a loss to be incurred
on disposition of the remaining parcels. A second property which was included in
foreclosed real estate on December 31, 1995, is a manufacturing facility which
was acquired in the fourth quarter of 1995. The property was sold in the fourth
quarter of 1996. The remaining balance of foreclosed real estate consists of
several properties, with no single property exceeding $250,000.
As of December 31, 1996, the company had $8.4 million of loans which were
not included in the past due, non-accrual 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, 1996, the allowance was $18.1 million, compared with
$15.8 million at December 31, 1995, and $12.5 million at December 31, 1994. The
allowance as a percentage of non-performing loans was 171% at December 31, 1996,
as compared to 91% at year-end 1995, and 158% at December 31, 1994. The ratio of
the allowance for loan losses to total loans (excluding mortgage loans held for
sale) at December 31, 1996, was 1.25%, compared with 1.25% at December 31, 1995,
and 1.10% at December 31, 1994.
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>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ................. $ 15,779 $ 12,529 $ 12,505 $ 9,596 $ 7,700
Provision for loan losses .................... 13,914 5,260 2,212 2,794 2,618
Balance of allowance for loan losses
of acquired subsidiaries at acquisition date -- -- -- 2,433 1,016
Amounts charged off:
Commercial and commercial real estate ...... 10,012 993 1,873 2,195 1,623
Residential real estate .................... 372 106 80 315 138
Consumer ................................... 2,083 1,426 838 936 738
---------- ---------- ---------- ---------- --------
Total loans charged off .................... 12,467 2,525 2,791 3,446 2,499
Recoveries of amounts previously charged off:
Commercial and commercial real estate ...... 390 228 232 615 323
Residential real estate .................... 38 8 41 115 106
Consumer ................................... 411 279 330 398 332
---------- ---------- ---------- ---------- --------
Total recoveries ........................... 839 515 603 1,128 761
---------- ---------- ---------- ---------- --------
Net charge-offs ............................ 11,628 2,010 2,188 2,318 1,738
---------- ---------- ---------- ---------- --------
Balance at end of year ....................... $ 18,065 $ 15,779 $ 12,529 $ 12,505 $ 9,596
========== ========== ========== ========== ========
Total loans, net of unearned income:
Average .................................... $1,346,754 $1,190,101 $1,073,580 $ 898,834 $719,184
At December 31 ............................. 1,450,999 1,258,511 1,143,833 1,006,796 780,846
As a percentage of average loans:
Net charge-offs ............................ 0.86 % 0.17 % 0.20 % 0.26 % 0.24 %
Provision for loan losses .................. 1.03 0.44 0.21 0.31 0.36
Allowance as a percentage of year-end loans .. 1.25 1.25 1.10 1.24 1.23
Allowance as a percentage of non-performing
and restructured loans ..................... 170.7 91.0 158.2 126.4 107.0
</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' evaluations of their own
portfolios, as well as by an independent loan review function.
Management believes that the allowance for loan losses at December 31,
1996, 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 present 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 1996 1995 1994 1993 1992
Commercial ............ $ 9,080 $ 9,133 $ 7,529 $ 6,870 $4,813
Commercial real estate 5,375 4,089 1,883 1,718 1,203
Residential real estate 1,010 640 977 1,358 1,720
Consumer .............. 2,600 1,917 2,140 2,559 1,860
------- ------- ------- ------- ------
Total .............. $18,065 $15,779 $12,529 $12,505 $9,596
======= ======= ======= ======= ======
<TABLE>
Allocation of Year-End Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans
December 31
<CAPTION>
1996 1995 1994 1993 1992
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ............ 50.2% 32.0% 57.9% 29.5% 60.1% 27.8% 54.9% 31.7% 50.2% 30.1%
Commercial real estate 29.8 32.4 25.9 31.6 15.0 29.2 13.7 23.2 12.5 17.9
Residential real estate 5.6 26.6 4.1 28.4 7.8 29.6 10.9 30.2 17.9 37.4
Consumer .............. 14.4 9.0 12.1 10.5 17.1 13.4 20.5 14.9 19.4 14.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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, averaged $292 million in 1996, compared with $305 million in 1995 and
$354 million in 1994. The decline in the securities portfolio throughout this
period 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.
The company reclassified all securities to available for sale on November
30, 1995, as permitted by the Financial Accounting Standards Board in a special
one-time reassessment.
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, 1996.
Carrying Value of Securities
December 31
In thousands 1996 1995 1994
U.S. Treasury and federal agencies:
Available for sale .................. $128,296 $142,199 $146,484
Held to maturity .................... -- -- 3,081
Collateralized mortgage obligations and
mortgage-backed securities:
Available for sale .................. 67,626 81,900 70,895
Held to maturity .................... -- -- 26,372
State and municipal obligations:
Available for sale .................. 51,311 55,552 --
Held to maturity .................... -- -- 49,752
Other securities:
Available for sale .................. 37,922 18,571 12,264
Held to maturity .................... -- -- 5,553
-------- -------- --------
Total securities:
Available for sale .................. 285,155 298,222 229,643
Held to maturity .................... -- -- 84,758
-------- -------- --------
Total securities ................... $285,155 $298,222 $314,401
======== ======== ========
<TABLE>
Maturity Distribution of Securities
December 31, 1996
Dollars in thousands
<CAPTION>
Over Over
One Year Five Years
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>
U.S. Treasury and federal agencies .. $72,883 $38,779 $17,668 $ $ $129,330 $128,296
Collateralized mortgage obligations
and mortgage-backed securities:(F1) 839 6,154 18,109 42,950 -- 68,052 67,626
State and municipal obligations ..... 2,808 13,758 21,911 11,460 -- 49,937 51,311
Other securities .................... 11,217 2,063 1,147 103 23,415 37,945 37,922
------- ------- ------- ------- --------- -------- --------
Total securities available for sale $87,747 $60,754 $58,835 $54,513 $ 23,415 $285,264 $285,155
======= ======= ======= ======= ========= ======== ========
Percent of total .................... 30.76 % 21.30 % 20.62 % 19.11 % 8.21 % 100.00 %
Weighted average yield(F2) ........... 5.41 % 5.03 % 5.49 % 5.92 % 6.51 % 5.53 %
<FN>
(F1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 1996 prepayment projections.
(F2) The weighted average yields are based on amortized cost.
</FN>
</TABLE>
Mortgage Servicing Rights
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. MSR's totaled $41.9 million at December 31, 1996,
compared with $28.3 million at December 31, 1995, and $9.2 million at year-end
1994. During 1996 and 1995, the company purchased servicing portfolios with
mortgage loan principal balances of $1.0 billion and $1.2 billion, respectively.
The company recognized MSR's of $12.5 million and $21.1 million, respectively,
on these purchased portfolios.
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 tranches and two loan types. 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. As of December 31, 1996, approximately 48% of the
MSR recognized on the balance sheet was related to loans which have contractual
interest rates from 7% to 7.99%, with a weighted average rate of 7.48%. Loans
with contractual rates from 8% to 8.99%, with a weighted average rate of 8.31%,
account for another 36% of the MSR balance. If mortgage rates should decline
substantially from current levels, the carrying value of the MSR's could become
impaired in future periods.
To mitigate this risk, in 1996 the company purchased a $75 million
(notional amount) interest rate "floor" contract in which the company will
receive interest on the notional amount to the extent that the interest rate on
ten-year constant maturity U.S. Treasury Notes falls below 5.50%. The cost of
this contract was $548,000 and its fair value as of December 31, 1996, was
$479,000. The cost, which is included in other assets in the consolidated
balance sheet, is being amortized on a straight-line basis over the five-year
life of the contract. In January 1997, the company purchased a second five-year
floor contract, with a $100 million notional amount and a 5.25% floor rate. The
cost of this contract was $455,000. Management believes that the increase in
market value of these two floor contracts which would result from a 100
basis-point drop in the interest rate on ten-year Treasuries would substantially
offset the impairment in the MSR likely to occur with such a decline in interest
rates. Although management believes it is unlikely that ten-year Treasury rates
will drop below 5.25% in the foreseeable future, and may take additional action
to limit the company's exposure if rates begin to decline significantly, the
company is currently exposed to potential impairment of the MSR asset if rates
should drop by more than 100 basis points.
Deposits
Total deposits averaged $1.5 billion in 1996, an $82 million, or 6%,
increase over 1995. Approximately 48% of the increase in average deposits was
due to brokered certificates of deposit issued during 1996--$55 million in the
second quarter and $50 million in the fourth quarter--in order to fund loan
growth. Average deposits for 1995 were $1.4 billion, a 4% increase over 1994.
The company issued in the first quarter of 1995 $30 million of brokered
certificates of deposit and purchased $41 million of deposits from an
unaffiliated bank. Excluding these transactions, average deposits would have
grown approximately $10 million from 1994 to 1995.
During 1996 the company implemented a program that sweeps excess funds from
targeted interest-bearing demand accounts into money market accounts. This
program has significantly reduced the Federal Reserve Bank reserve requirements
for the banks.
Time deposits of $100,000 or more totaled $336.1 million at December 31,
1996, compared with $206.9 million at December 31, 1995. Interest expense on
time deposits of $100,000 or more was $16.5 million in 1996, $11.8 million in
1995 and $6.3 million in 1994. The following table shows the maturities of time
deposits of $100,000 or more, including brokered certificates of deposit, as of
December 31, 1996.
Maturity of Time Deposits of $100,000 or More
December 31, 1996
In thousands
Three months or less $104,351
Over three through six months 29,473
Over six through twelve months 62,399
Over one year through two years 37,165
Over two years through five years 101,966
Over five years 723
------------
Total $336,077
Brokered certificates of deposit, which are included in the above maturity
schedule, mature as follows:
Maturity of Brokered Certificates of Deposit
December 31, 1996
In thousands
Three months or less $ 30,000
Over three through six months -
Over six through twelve months 25,000
Over one year through two years 20,000
Over two years through five years 60,000
----------
Total $135,000
Other information regarding time deposits is contained in note 19 to the
consolidated financial statements.
Liquidity, Short-term Borrowings and Capital Resources Information regarding
short-term borrowings is presented below.
<TABLE>
Short-term Borrowings
Dollars in thousands
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Federal funds purchased and repurchase agreements:
Balance at year end ............................ $ 71,879 $ 75,594 $ 74,553
Weighted average rate at year end .............. 6.26 % 4.83 % 3.50 %
Average balance during the year ................ 42,010 47,219 40,303
Weighted average rate during the year .......... 4.64 % 4.27 % 3.11 %
Maximum month-end balance ...................... 89,640 82,607 74,553
Other short-term borrowings:
Balance at year end ............................ 55,000 45,014 48,033
Weighted average rate at year end .............. 5.42 % 6.67 % 6.36 %
Average balance during the year ................ 56,136 40,652 36,669
Weighted average rate during the year .......... 5.55 % 7.34 % 4.68 %
Maximum month-end balance ...................... 70,005 61,831 48,840
Total short-term borrowings:
Balance at year end ............................ 126,879 120,608 122,586
Weighted average rate at year end .............. 5.90 % 5.52 % 4.62 %
Average balance during the year ................ 98,146 87,871 76,972
Weighted average rate during the year .......... 5.16 % 5.69 % 3.86 %
Maximum month-end balance ...................... 159,645 120,608 122,586
</TABLE>
Substantially all federal funds purchased and repurchase agreements mature
in one business day. Due to an unusually high demand in the market for overnight
funds on December 31, 1996, the rate the company paid for federal funds,
excluding repurchase agreements, on that date was also unusually high (7.12%).
The weighted average rate on the company's federal funds purchased was 5.61% on
December 30, 1996, and was 6.02% on the first business day after year end. 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.
Long-term debt averaged $125.6 million in 1996, compared with $46.8 million
in 1995 and $40.8 million in 1994. The increase in 1996 is due to the issuance
by TFB-KY in the fourth quarter of 1995 of $20 million of two-year notes and $30
million of three-year notes under a $250 million senior bank note program; in
the second quarter of 1996 another $25 million of four-year bank notes were
issued. These notes were issued to support growth in the loan portfolio. Notes
issued to date bear interest at fixed rates of 6.32%, 6.48% and 7.13%,
respectively. The notes issued in 1995 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.
In addition, TFB-KY borrowed on a long-term basis $30 million from the FHLB
in the first quarter of 1996 to fund residential mortgage and commercial loans.
Long-term debt also includes financing from an unaffiliated commercial bank for
the company's leveraged ESOP. Total ESOP debt was $2.5 million at December 31,
1996, and $3.0 million at December 31, 1995.
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, 1996 or
1995. Also, under the book-entry senior bank note program, TFB-KY may issue up
to an additional $175 million of bank notes from time to time in maturities from
30 days to 30 years.
See note 9 to the consolidated financial statements for a further
description of the terms of these borrowings. The company's capital ratios
at December 31, 1996 and 1995 (calculated in accordance with regulatory
guidelines) were as follows:
December 31 1996 1995
Tier 1 risk based 7.68% 8.64%
Regulatory minimum 4.00 4.00
Total risk based 10.87 12.15
Regulatory minimum 8.00 8.00
Leverage 6.12 6.70
Regulatory minimum 3.00 3.00
Capital ratios of all of the company's subsidiaries are in excess of
applicable minimum regulatory capital ratio requirements at December 31, 1996.
The decrease in these ratios over the past year is due to asset
growth--particularly commercial and commercial real estate loans--combined with
minimal growth in shareholders' equity as a result of the decline in net income
in 1996. Notwithstanding the 1996 decline in net income, primarily due to the
loss incurred in the second quarter, the Board of Directors chose to maintain
the quarterly dividend at $0.16. As a result, the company paid dividends
slightly in excess of earnings for 1996. Although there can be no assurance,
management expects the company will pay dividends in 1997 of approximately 30%
to 40% of net income.
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 $7.7million decline in the net unrealized loss on securities available for
sale.
To maintain a desired level of liquidity, the company has several sources
of funds available. The company primarily 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, 1996,
the retained earnings of the banks totaled $69.7 million, of which $24.0 million
was available for the payment of dividends to the parent company.
Asset/Liability Management
Managing interest rate risk is fundamental to the financial services
industry. The company's policies are designed to manage 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 while
optimizing net interest income within the constraints of prudent capital
adequacy, liquidity needs, the interest rate and economic outlook, market
opportunities and customer requirements.
The company uses an earnings simulation model to monitor and evaluate the
impact of changing interest rates on earnings. The simulation model used by the
company is designed to reflect the dynamics of all interest-earning assets,
interest-bearing liabilities and off-balance-sheet financial instruments,
combining the various factors affecting rate sensitivity into a two-year
earnings outlook. 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 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.
The model is updated 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 and historic volatility of those rates.
A stochastic view of net interest income is derived once probabilities have been
assigned to those key rates.
By forecasting a most likely rate environment, the effects on net interest
income of adjusting those rates up or down can reveal the company's approximate
interest rate risk exposure level. As of December 31, 1996, the company's most
likely rate environment assumed the federal funds rate and prime lending rate at
5.25% and 8.25%, respectively, rising to 5.75% and 8.75%, respectively, by
December of 1997. The following illustrates the effects on net interest income
of an immediate shift in market interest rates compared to the most likely rate
assumptions used in the company's model:
- -------------------------------------------------------------------------------
Basis-point change +200 bp +100 bp -100 bp -200 bp
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Increase (decrease) in net interest income 3.3% 1.9% - 0 -% (0.2)%
- -------------------------------------------------------------------------------
As of December 31, 1996, management believes the company's balance sheet
was in an asset-sensitive position, as the repricing characteristics of the
balance sheet 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. It should be noted that some of the assumptions made in the use of
the simulation model will inevitably not materialize and unanticipated events
and circumstances will occur; in addition, the simulation model does 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.
A second interest rate sensitivity tool utilized by the company is the
quantification of market value changes for all assets and liabilities, given an
increase or decrease in interest rates. This approach provides a longer-term
view of interest rate risk, capturing all expected future cash flows. Assets and
liabilities with option characteristics are valued based on numerous interest
rate path valuations using statistical rate simulation techniques.
To assist in achieving a desired level of interest rate sensitivity the
company has entered into off-balance-sheet interest rate swap transactions which
partially 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.
See also the Mortgage Servicing Rights section of this discussion regarding
the use of interest rate floor contracts to hedge against the potential
impairment of the MSR asset resulting from a significant decline in interest
rates. Interest rate swap transactions are described more fully in note 14 to
the consolidated financial statements.
Quarterly Results
Following is a summary of quarterly operating results for 1996 and 1995:
<TABLE>
Quarterly Results of Operations
In thousands, except per share data
<CAPTION>
1996 1995
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 $38,995 $37,896 $36,215 $34,829 $35,097 $34,222 $33,236 $31,673
Interest expense 19,215 18,626 17,940 17,285 17,244 16,686 16,039 14,630
------- -------- ------- ------- ------- ------- ------- -------
Net interest income 19,780 19,270 18,275 17,544 17,853 17,536 17,197 17,043
Provision for loan losses 2,651 1,621 8,421 1,221 3,180 780 780 520
------- -------- ------- ------- ------- ------- ------- -------
Net interest income after
provision 17,129 17,649 9,854 16,323 14,673 16,756 16,417 16,523
Non-interest income 7,756 7,394 7,304 7,235 7,062 5,764 6,925 4,660
Non-interest expenses 17,286 20,472 24,765 18,119 17,500 15,801 17,185 15,563
------- -------- ------- ------- ------- ------- ------- -------
Income before income taxes 7,599 4,571 (7,607) 5,439 4,235 6,719 6,157 5,620
Income tax expense 2,284 1,557 (2,424) 1,703 1,378 2,175 2,038 1,825
------- -------- ------- ------- ------- ------- ------- -------
Net income $ 5,315 $ 3,014 $(5,183) $ 3,736 $ 2,857 $ 4,544 $ 4,119 $ 3,795
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share $ 0.46 $ 0.26 $ (0.45) $ 0.33 $ 0.25 $ 0.40 $ 0.36 $ 0.34
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Significant factors affecting the comparability of quarterly results for
1996 include the second quarter pretax charge of $5.8 million related to the
commitment to refocus on core financial services, reduce operating expenses and
exit from less-profitable initiatives, and a $7.2 million increase in the
quarterly loan loss provision in the second quarter as compared to the first
quarter. These second quarter charges resulted in a net loss for the first half
of 1996. Deposit insurance expense for the third quarter of 1996 was impacted by
the $2.7 million (pretax) SAIF assessment. Due to a decline in deposit insurance
premiums following the re-capitalization of the SAIF, the company received in
the fourth quarter of 1996 a $122 thousand refund of deposit insurance premiums.
Non-interest income in the second quarter of 1995 included a $1.7 million
pre-tax gain from the sale of mortgage servicing rights. For the third quarter
of 1995, deposit insurance expense was reduced by a $585 thousand refund of FDIC
premiums paid in the second quarter. The refund was associated with an
over-capitalization of the Bank Insurance Fund.
===============================================================================
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Although the company believes that the assumptions underlying the forward-
looking statements contained herein are reasonable, any of the assumptions
could be inaccurate, and therefore, there can be no assurance that the forward-
looking statements included herein will prove to be accurate. Factors that could
cause actual results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both generally
and more specifically in the markets in which the company and its banks
operate); competition for the company's customers from other providers of
financial services; government legislation and regulation (which changes from
time to time and over which the company has no control); changes in interest
rates; material unforeseen changes in the liquidity, results of operations, or
financial condition of the company's customers; delays in,customer reactions to,
and other unforeseen complications with respect to, the implementation of the
cost containment measures; and other risks detailed in the company's filings
with the Securities and Exchange Commission, all of which are difficult to
predict and many of which are beyond the control of the company.
================================================================================
<PAGE>
<TABLE>
Consolidated Statistical Information (F1)(F2)
For the years ended December 31
Dollars in thousands, except per share data
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest income $147,935 $134,228 $113,982 $102,819 $95,343
Interest expense 73,066 64,599 47,375 44,250 46,763
-------- -------- -------- ------- -------
Net interest income 74,869 69,629 66,607 58,569 48,580
Provision for loan losses 13,914 5,260 2,212 2,794 2,618
-------- -------- -------- ------- -------
Net interest income after provision for loan losses 60,955 64,369 64,395 55,775 45,962
Non-interest income 29,689 24,411 17,170 17,032 13,793
Non-interest expenses 80,642 66,049 60,070 52,830 39,890
-------- -------- -------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle 10,002 22,731 21,495 19,977 19,865
Income tax expense 3,120 7,416 7,075 6,223 6,400
-------- -------- -------- ------- -------
Income before cumulative effect
of change in accounting principle 6,882 15,315 14,420 13,754 13,465
Cumulative effect of change in accounting principle - - - 296 -
-------- -------- -------- -------- -------
Net income $ 6,882 $ 15,315 $ 14,420 $ 14,050 $13,465
======== ======== ======== ======== =======
Net income applicable to common stock $ 6,882 $ 15,315 $ 14,366 $ 13,969 $13,328
======== ======== ======== ======== =======
Per common share:
Primary earnings per share $ 0.60 $ 1.35 $ 1.28 $ 1.24 $ 1.25
Fully-diluted earnings per share 0.59 1.34 1.28 1.24 1.25
Common shareholders' equity at year end 11.55 11.49 9.96 9.96 9.01
Cash dividends declared 0.64 0.60 0.56 0.51 0.44
Year-end common stock price 23.00 17.88 1 3.00 16.50 15.19
At year end:
Total assets $2,003,952 $1,795,649 $1,617,835 $1,597,453 $1,380,626
Total loans, net of unearned income 1,450,999 1,258,511 1,143,833 1,005,089 780,300
Total deposits 1,579,217 1,444,483 1,335,509 1,376,227 1,222,050
Long-term debt 140,903 86,605 37,334 54,217 21,957
Total shareholders' equity 131,316 129,767 111,632 112,036 99,406
Common shareholders' equity 131,316 129,767 111,632 111,026 98,396
Allowance for loan losses 18,065 15,779 12,529 12,505 9,596
Selected ratios:
Return on average assets 0.37% 0.92% 0.91% 0.96% 1.10%
Return on average shareholders' equity 5.32 12.55 12.89 13.24 14.56
Return on average common shareholders' equity 5.32 12.55 12.92 13.29 14.57
Average shareholders' equity to average
total assets 6.97 7.30 7.05 7.25 7.58
Leverage ratio 6.12 6.70 6.95 6.47 6.57
Tier 1 risk-based capital ratio 7.68 8.64 9.47 9.36 11.05
Total risk-based capital ratio 10.87 12.15 13.31 13.50 12.51
Common dividend payout ratio 106.52 44.49 43.88 41.05 35.10
Allowance for loan losses as a percentage
of year-end loans 1.25 1.25 1.10 1.24 1.23
Allowance for loan losses as a percentage
of non-performing loans 170.68 91.00 158.21 126.39 107.03
Non-performing loans as a percentage
of year-end loans 0.73 1.38 0.69 0.98 1.15
Net charge-offs as a percentage of
average loans 0.86 0.17 0.20 0.26 0.24
Net interest margin 4.42 4.56 4.57 4.32 4.31
Other data:
Number of full-time-equivalent employees at
year end 881 932 836 829 672
Number of common shareholders of record at
year end (F2) 1,706 1,810 1,907 1,273 1,031
Common share trading volume 9,275,700 4,520,000 3,404,400 4,992,300 5,598,900
<FN>
(F1) During 1995, 1993 and 1992, the company acquired one commercial bank, three
thrift institutions and certain branches of another thrift institution in
transactions accounted for using the purchase method of accounting. Financial
information 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.
(F2) 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. Shareholders of record for 1993
and 1992 have not been restated to reflect holders of shares issued in
connection with these business combinations.
</FN>
</TABLE>
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the registrant and
report of independent auditors are included herein:
Report of KPMG Peat Marwick LLP, Independent Auditors
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Income--Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Changes in Shareholders' Equity--Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows--Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
Additional information for this item is included in the table entitled
"Quarterly Results of Operations" in Item 7 of this report.
Independent Auditors' Report
The Board of Directors and Shareholders of Trans Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Trans
Financial, Inc. and subsidiaries as of December 31, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, 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."
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Louisville, Kentucky
January 20, 1997
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31 - In thousands, except share data
<CAPTION>
1996 1995
Assets
<S> <C> <C>
Cash and due from banks ................................................... $ 75,054 $ 81,703
Interest-bearing deposits with banks ...................................... 98 197
Mortgage loans held for sale .............................................. 67,999 46,311
Securities available for sale (amortized cost of $285,264 as of
December 31, 1996 and $298,798 as of December 31, 1995) ................ 285,155 298,222
Loans, net of unearned income ............................................. 1,450,999 1,258,511
Less allowance for loan losses ............................................ 18,065 15,779
-------- -------
Net loans .............................................................. 1,432,934 1,242,732
Premises and equipment, net ............................................... 37,377 41,458
Mortgage servicing rights ................................................. 41,866 28,284
Other assets .............................................................. 63,469 56,742
-------- -------
Total assets ........................................................... $ 2,003,952 $ 1,795,649
========== =========
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing ................................................... $ 231,717 $ 206,725
Interest bearing ....................................................... 1,347,500 1,237,758
--------- ---------
Total deposits ......................................................... 1,579,217 1,444,483
Federal funds purchased and repurchase agreements ......................... 71,879 75,594
Other short-term borrowings ............................................... 55,000 45,014
Long-term debt ............................................................ 140,903 86,605
Other liabilities ......................................................... 25,637 14,186
--------- ---------
Total liabilities ...................................................... 1,872,636 1,665,882
Commitments and contingencies (notes 13 and 14)
Shareholders' equity:
Preferred stock ........................................................ -- --
Common stock, no par value. Authorized 50,000,000 shares;
issued and outstanding 11,372,532 and 11,293,291 shares, respectively 21,324 21,175
Additional paid-in capital ............................................. 44,745 43,872
Retained earnings ...................................................... 67,790 68,152
Net unrealized gain(loss) on securities available for sale, net of tax . (92) (403)
Employee Stock Ownership Plan shares purchased with debt ............... (2,451) (3,029)
--------- ---------
Total shareholders' equity ............................................. 131,316 129,767
--------- ---------
Total liabilities and shareholders' equity ............................. $ 2,003,952 $ 1,795,649
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Income
Years Ended December 31
In thousands, except per share data
<CAPTION>
1996 1995 1994
Interest income
<S> <C> <C> <C>
Loans, including fees $131,466 $115,757 $94,020
Federal funds sold and resale agreements 52 804 540
U.S. Treasury and federal agencies 11,450 13,532 15,444
State and municipal obligations 2,820 2,861 2,770
Other securities 2,133 1,257 1,104
Interest-bearing deposits with banks 14 17 104
-------- ------- -------
Total interest income 147,935 134,228 113,982
Interest expense
Deposits 59,795 56,465 41,724
Federal funds purchased and repurchase agreements 1,949 2,014 1,253
Other short-term borrowings 3,117 2,983 1,715
Long-term debt 8,205 3,137 2,683
-------- ------- -------
Total interest expense 73,066 64,599 47,375
-------- ------- -------
Net interest income 74,869 69,629 66,607
-------- ------- -------
Provision for loan losses 13,914 5,260 2,212
-------- ------- -------
Net interest income after provision for loan losses 60,955 64,369 64,395
Non-interest income
Service charges on deposit accounts 9,541 8,472 7,384
Mortgage banking income 10,381 6,009 2,752
Gain on sale of mortgage servicing rights - 1,687 -
Gain on sale of securities, net 20 200 257
Trust services 1,955 1,392 1,247
Brokerage income 2,201 1,728 1,305
Other 5,591 4,923 4,225
-------- ------- -------
Total non-interest income 29,689 24,411 17,170
Non-interest expenses
Compensation and benefits 37,927 30,588 26,330
Net occupancy expense 5,206 4,836 4,572
Furniture and equipment expense 7,005 6,126 5,284
Deposit insurance 3,585 2,095 3,183
Professional fees 3,170 3,424 3,742
Postage, printing & supplies 4,125 3,643 3,516
Communications 2,516 1,607 1,131
Processing fees 2,043 1,112 800
Writedowns and losses on sale of fixed assets 1,790 - -
Other 13,275 12,618 11,512
-------- ------- -------
Total non-interest expenses 80,642 66,049 60,070
-------- ------- -------
Income before income taxes 10,002 22,731 21,495
-------- ------- -------
Income tax expense 3,120 7,416 7,075
------- ------- -------
Net income $ 6,882 $ 15,315 $ 14,420
===== ====== =======
Net income applicable to common stock $ 6,882 $ 15,315 $ 14,366
===== ====== =======
Primary earnings per common share $0.60 $1.35 $1.28
Fully-diluted earnings per common share 0.59 1.34 1.28
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Changes in Shareholders' Equity
In thousands, except share and per share data
<CAPTION>
Net
Unrealized Employee
Gain (Loss) Stock
on Ownership
Preferred Stock Common Stock Additional Securities Plan Shares Total
Number Number Paid-in Retained Available Purchased Shareholders'
of shares Amount of shares Amount Capital Earnings for Sale With Debt Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 1,010 $1,010 11,149,722 $20,906 $42,256 $51,006 $ 719 $(3,861) $112,036
Net income for the year 14,420 14,420
Cash dividends declared:
Common stock, $.56 per share (5,785) (5,785)
Preferred stock (54) (54)
Redemption of preferred stock (1,010) (1,010) (1,010)
Stock options exercised 22,018 41 178 219
Common stock issued in connection
with dividend reinvestment and
stock purchase plan and
other issuances 31,507 59 376 435
Net unrealized loss on securities
available for sale, net of tax (8,792) (8,792)
ESOP debt reduction, net 163 163
------ ------ ---------- ------- ------- ------- ------- ------- --------
Balance, December 31, 1994 - - 11,203,247 21,006 42,810 59,587 (8,073) (3,698) 111,632
Net income for the year 15,315 15,315
Cash dividends declared:
Common stock, $.60 per share (6,750) (6,750)
Common stock issued in connection
with business combination
accounted for as a purchase 25,000 47 384 431
Stock options exercised, net of
shares redeemed 30,887 58 205 263
Common stock issued in connection
with dividend reinvestment
and stock purchase plan 34,157 64 473 537
Decrease in net unrealized loss on
securities available for sale,
net of tax 7,670 7,670
ESOP debt reduction 669 669
------ ------ ---------- ------- ------- ------- ------- ------- --------
Balance, December 31, 1995 - - 11,293,291 21,175 43,872 68,152 (403) (3,029) 129,767
Net income for the year 6,882 6,882
Cash dividends declared:
Common stock, $.64 per share (7,244) (7,244)
Common stock issued in connection
with the exercise of
stock warrants 46,666 88 428 516
Stock options exercised, net of
shares redeemed 6,026 11 28 39
Common stock issued in connection
with dividend reinvestment and
stock purchase plan 26,549 50 417 467
Decrease in net unrealized loss on
securities available for sale,
net of tax 311 311
ESOP debt reduction 578 578
------ ------ ---------- ------- ------- ------- ------- ------- --------
Balance, December 31, 1996 - $ - 11,372,532 $21,324 $44,745 $67,790 $ (92) $(2,451) $131,316
====== ====== ========== ======= ======= ======= ======= ======= ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Years Ended December 31
In thousands, except per share data
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,882 $ 15,315 $ 14,420
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 13,914 5,260 2,212
Deferred tax expense (3,215) (2,387) (882)
Gain on sale of securities (20) (200) (257)
Loss (gain) on sale of mortgage loans held for sale (3,642) (1,888) 200
Loss (gain) on sale of premises and equipment, net 1,790 (174) (231)
Gain on sale of mortgage servicing rights - (1,687) -
Depreciation and amortization of fixed assets 5,959 5,473 5,032
Amortization of intangible assets 1,361 1,394 1,087
Amortization of premium on securities and loans, net 975 1,077 2,094
Amortization of mortgage servicing rights 5,271 2,720 1,013
Increase in accrued interest receivable (1,391) (1,736) (1,593)
Increase in other assets (5,890) (10,759) (3,159)
Increase in accrued interest payable 916 3,588 114
Increase (decrease) in other liabilities 9,880 (4,993) 4,197
Sale of mortgage loans held for sale 344,293 150,359 133,598
Originations of mortgage loans held for sale (362,339) (188,241) (95,049)
-------- -------- --------
Net cash provided by (used in) operating activities 14,744 (26,879) 62,796
Cash flows from investing activities:
Net decrease in interest-bearing deposits with banks 99 - 250
Net decrease in federal funds sold and resale agreements - - 32,778
Proceeds from sale of securities:
Available for sale 9,417 33,165 5,183
Held to maturity - 2,568 -
Proceeds from prepayment and call of securities:
Available for sale 37,794 22,940 50,975
Held to maturity - 4,758 12,363
Proceeds from maturities of securities:
Available for sale 52,601 33,726 20,412
Held to maturity - 3,140 9,492
Purchase of securities:
Available for sale (87,233) (70,136) (21,566)
Held to maturity - (3,000) (20,047)
Net increase in loans (202,802) (117,938) (140,546)
Purchase and origination of mortgage servicing rights (18,354) (22,331) (7,778)
Proceeds from sale of mortgage servicing rights - 2,180 -
Proceeds from sale of foreclosed assets 3,337 1,705 1,950
Purchases of premises and equipment (8,835) (10,555) (9,785)
Proceeds from disposal of premises and equipment 2,924 836 1,569
Net cash and cash equivalents inflow from acquisitions - 36,815 -
-------- -------- --------
Net cash used in investing activities (211,052) (82,127) (64,750)
Cash flows from financing activities:
Net increase (decrease) in deposits 134,734 67,869 (40,718)
Net increase (decrease) in federal funds purchased
and repurchase agreements (3,715) 1,041 44,849
Net increase (decrease) in other short-term borrowings 9,986 (3,019) 23,033
Proceeds from issuance of long-term debt 55,000 50,000 -
Repayment of long-term debt (124) (60) (6,720)
Proceeds from issuance of common stock 1,022 800 654
Redemption of preferred stock - - (1,010)
Dividends paid (7,244) (6,750) (5,839)
-------- -------- --------
Net cash provided by financing activities 189,659 109,881 14,249
Net increase (decrease) in cash and cash equivalents (6,649) 875 12,295
Cash and cash equivalents at beginning of year 81,703 80,828 68,533
-------- -------- --------
Cash and cash equivalents at end of year $ 75,054 $ 81,703 $ 80,828
======== ======== ========
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 ("TFB-KY"); Trans Financial Bank Tennessee, National
Association; and Trans Financial Bank, F.S.B. Collectively, these three
subsidiaries are referred to in this report as "the banks." In addition, Trans
Financial Bank, National Association has two operating subsidiaries: Trans
Financial Investment Services, Inc., a securities broker/dealer, and Trans
Financial Mortgage Company, a mortgage banking company.
The company's financial services network is comprised of 52 office
locations serving 37 communities in Kentucky and Tennessee by offering
commercial and consumer banking, brokerage, mortgage and trust services. As of
December 31, 1996, the company employed 929 employees and serviced more than 130
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 1996 presentations.
Securities
The company accounts for securities under 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's
asset/liability management policy does not permit securities to be purchased for
the purpose of trading.
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 non-accrual status.
Loans are placed in non-accrual 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 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 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 non-accrual status. In certain circumstances,
however, the company may continue to accrue interest on an impaired loan. Cash
receipts on impaired loans are applied to the recorded investment in the loan,
including any accrued interest receivable. The company does not apply SFAS 114
to loans which are part of a large group of smaller-balance homogeneous loans,
such as residential mortgage and consumer loans. Such loans are collectively
evaluated for impairment. 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 $1,243,000 of the mortgage
banking income recognized in 1995 and $1,417,000 in 1996, which amounts are
included in the gain on sale of mortgage loans held for sale shown on the
consolidated statements of cash flows.
The carrying value of mortgage servicing rights ("MSR's") and the related
amortization are evaluated quarterly in relation to estimated future net
servicing revenues. The company evaluates the 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 based on management's best
estimate of remaining loan lives. Impairment and subsequent adjustments in each
stratum, if any, are 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 Contracts
The company uses interest rate contracts (swaps and floors) to manage its
sensitivity to interest rate risk. Interest income and expense are accrued over
the terms of the swap 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 described in note 8.
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 accounts for income taxes in accordance with 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.
Stock Options
Prior to January 1, 1996, the company accounted for employee stock options
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations. As such,
compensation expense would be recognized on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the company adopted Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities
to continue to apply the provisions of APB 25 and provide disclosures of pro
forma net income and pro forma earnings per share for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS 123 had been applied. The company has elected to continue to apply the
provisions of APB 25 and to provide the pro forma disclosure provisions of SFAS
123. Information regarding stock options is included in note 10.
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 earnings per share follows:
- --------------------------------------------------------------------------------
In thousands 1996 1995 1994
Primary 11,454 11,353 11,258
Fully-diluted 11,576 11,402 11,258
- --------------------------------------------------------------------------------
(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, 1996, 1995 and 1994:
In thousands 1996 1995 1994
Cash paid for interest $72,266 $60,366 $47,261
Cash paid for income taxes 1,955 10,323 8,537
Certain non-cash investing and financing activities of the company and
subsidiaries are summarized below:
For the parent company
Issuance of stock in business combination - 431 -
Change in net unrealized gain (loss) on
securities available for sale, net of tax 467 7,670 (8,792)
Effect on shareholders' equity of reductions
in Employee Stock Ownership Plan debt, net 578 669 163
For the subsidiaries
Loans transferred to foreclosed real estate
and other foreclosed assets 1,161 1,493 1,326
Securities transferred from held to maturity
to securities available for sale:
Related to business combinations - - 58,641
Under special one-time reassessment
guidance issued by the Financial
Accounting Standards Board - 76,921 -
Reclassification of debt from
long-term to short-term - - 10,000
(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 and 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. 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. These three acquisitions
were accounted for using the purchase method of accounting. Accordingly, their
results of operations and cash flows were included in the consolidated financial
statements since the dates of acquisition.
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 deposit base premium and goodwill.
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.
Goodwill and deposit base premium from the above purchase 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 $8,900,000 and $10,409,000 at
December 31, 1996 and 1995, respectively. These intangible assets are reviewed
for possible impairment when events or changed circumstances may affect the
underlying basis of the asset.
Trans Travel, Inc. was sold during the fourth quarter of 1996.
(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
$14,740,000 at December 31, 1996, and $27,706,000 at December 31, 1995.
(6) Securities
The company accounts for securities under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115")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 fair value of
these reclassified securities was $79,049,000 on November 30, 1995, resulting in
a net unrealized gain (loss) of $2,128,000. No securities were classified as
held to maturity or trading securities as of December 31, 1996 or 1995. The
following summarizes securities available for sale at December 31, 1996 and
1995.
<TABLE>
<CAPTION>
Amortized Unrealized Market
Cost Gains Losses Value
December 31, 1996 (In thousands)
<S> <C> <C> <C> <C>
U.S.Treasury and federal agency securities $129,330 $ 131 $1,165 $128,296
Collateralized mortgage obligations
and mortgage-backed securities 68,052 278 704 67,626
State and municipal obligations 49,937 1,501 127 51,311
Corporate debt securities 14,530 108 13 14,625
Equity securities 23,415 209 327 23,297
-------- ------ ------ --------
Total securities available for sale $285,264 $2,227 $2,336 $285,155
======== ====== ====== ========
December 31, 1995 (In thousands)
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
======== ====== ====== ========
</TABLE>
Included in equity securities at December 31, 1996, are Federal Home Loan
Bank and Federal Reserve Bank stock of $13,375,000 and $1,977,000 respectively.
At December 31, 1995, these stock investments were $6,009,000 and $1,977,000,
respectively.
The amortized cost and approximate market value of debt securities at
December 31, 1996, 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.
Amortized Market
In thousands Cost Value
Due in one year or less $ 86,906 $ 86,936
Due after one year through five years 54,601 54,147
Due after five years through ten years 40,727 41,007
Due after ten years 11,563 12,142
-------- --------
193,797 194,232
Collateralized mortgage obligations and
mortgage-backed securities 68,052 67,626
-------- --------
$261,849 $261,858
======== ========
Securities with a carrying value of approximately $141,675,000 and
$162,779,000 at December 31, 1996 and 1995, respectively, were pledged to secure
public funds, trust funds and for other purposes.
Gross gains of $105,000; $293,000; and $257,000; and gross losses of
$85,000; $93,000; and $-0- were realized on sales of securities in 1996, 1995,
and 1994, 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. At the time of sale, the
outstanding principal balances of these securities were less than 15% of the
outstanding principal balances at the time the securities were acquired.
(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, 1996 and 1995, follows:
In thousands 1996 1995
Commercial $ 466,365 $ 372,822
Commercial real estate 470,235 397,741
Residential real estate 385,894 357,697
Consumer 130,444 132,401
Unearned income (1,939) (2,150)
---------- ----------
Loans net of unearned income $1,450,999 $1,258,511
========== ==========
Substantially all of the company's loans are to customers located in
Kentucky and Tennessee, in the immediate market areas of the banks. No industry
group represents 10% or more of the company's total loans.
The principal balance of non-accrual and restructured loans at December 31,
1996 and 1995, was $4,721,000 and $12,722,000, respectively. The interest that
would have been recorded if all those loans were in an accrual status in
accordance with their original terms was $543,000 in 1996; $1,441,000 in 1995;
and $519,000 in 1994. The amount of interest income that was actually recorded
for those loans was $38,000 in 1996; $490,000 in 1995; and $81,000 in 1994.
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 $4,613,000 at December 31, 1996, and $12,444,000 at
December 31, 1995. Of those amounts, $2,042,000 and $11,130,000, respectively,
represent loans for which an allowance for loan losses, in the amounts of
$809,000 and $4,912,000, have been established under SFAS 114. For the years
ended December 31, 1996 and 1995, the recorded investment of impaired loans
averaged $8,611,000 and $7,491,000, respectively. Interest income recognized
on impaired loans totaled $127,000 in 1996 and $57,000 for 1995.
An analysis of the changes in the allowance for loan losses follows:
In thousands 1996 1995 1994
Balance at January 1 $ 15,779 $ 12,529 $ 12,505
Provision for loan losses 13,914 5,260 2,212
Loans charged off (12,467) (2,525) (2,791)
Recoveries of loans previously
charged off 839 515 603
-------- -------- --------
Net charge-offs (11,628) (2,010) (2,188)
-------- -------- --------
Balance at December 31 $ 18,065 $ 15,779 $ 12,529
======== ======== ========
Loans to executive officers and directors and their associates, including
loans to affiliated companies for which these individuals are principal owners,
amounted to $55,397,000 at December 31, 1996 and $52,832,000 at December 31,
1995. During 1996, new loans of $34,914,000 were made and repayments of
$31,319,000 were received. Other changes include net decreases for changes in
executive officers and directors of $1,030,000. 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, 1996 and 1995, follows:
In thousands 1996 1995
Land and improvements $ 6,393 $ 7,017
Buildings and improvements 31,912 34,249
Furniture and equipment 39,405 36,743
------- -------
77,710 78,009
Less accumulated depreciation and amortization 40,333 36,551
------- -------
Total premises and equipment $37,377 $41,458
======= =======
The company leases office space in Bowling Green, Kentucky, and Nashville,
Tennessee, under long-term lease agreements. Rental expense for all real
property totaled $1,357,000 and $603,000, respectively for 1996 and 1995.
Future minimum lease commitments as of December 31, 1996, under
non-cancelable leases with remaining terms exceeding one year are as follows:
In thousands
Year ended December 31
1997 $ 754
1998 760
1999 766
2000 772
2001 804
Later years 4,888
------
$8,744
(9) Long-Term Debt and Other Short-Term Borrowings
Long-term debt consisted of the following at December 31, 1996 and 1995:
In thousands 1996 1995
7.25% Subordinated Notes; due September 15, 2003;
interest payable quarterly $ 32,746 $32,870
Senior bank notes; due October 23, 1998; interest
at 6.48% payable semi-annually 30,000 30,000
Senior bank notes; due October 17, 1997; interest
at 6.32% payable semi-annually 20,000 20,000
Senior bank notes; due May 30, 2000; interest
at 7.13% payable semi-annually 25,000 -
Advance from the Federal Home Loan Bank due
March 6, 1998; interest at 5.50% payable monthly 30,000 -
Employee Stock Ownership Plan ("ESOP") note payable
to bank; due September 30, 2000; interest at the
prime rate; principal and interest payable quarterly 2,451 2,854
ESOP note payable to bank; due July 31, 1996;
interest at 82.5% of the prime rate,
principal and interest payable quarterly - 175
Unsecured demand notes; interest at the
prime rate payable quarterly 706 706
-------- --------
Total long-term debt $140,903 $86,605
======== =======
Other short-term borrowings consisted of the following at December 31, 1996
and 1995:
In thousands 1996 1995
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 March 5, 1996; interest at
5.70% payable monthly - 20,000
Advance from the Federal Home Loan Bank,
due January 6, 1997; interest at
5.45% payable monthly 15,000 -
Advance from the Federal Home Loan Bank,
due February 8, 1997; interest at
5.41% payable monthly 40,000 -
All other short-term borrowings - 14
------- -------
Total other short-term borrowings $55,000 $45,014
======= =======
The prime interest rate associated with certain of the above obligations
was 8.25% at December 31, 1996, and 8.50% at December 31, 1995.
Information concerning securities sold under agreements to repurchase is
presented below:
Dollars in thousands
1996 1995
Average balance during the year $18,415 $38,591
Weighted average rate during the year 3.43 % 3.88 %
Maximum month-end balance 27,810 50,054
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 company has guaranteed the ESOP notes payable. The loan agreement for
the ESOP note payable due September 30, 2000, 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 0.50%; maintaining
non-performing 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 0.75% of gross loans. Prior consent was
obtained from the holder of the ESOP note for reporting in 1996 an annualized
return on assets of less than 0.50%, as required by the covenants noted above.
The ESOP note payable due July 31, 1996, was 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, 1996, are
as follows:
In thousands
Year ended December 31
1997 $20,604
1998 60,672
1999 671
2000 25,504
2001 -
Later years 33,452
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. The line was not in use at
December 31, 1996 or 1995.
(10) Shareholders' Equity
Stock Options
The company has incentive stock option plans which permit options to be
granted for a maximum of 1,057,888 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.
In 1995 the company adopted 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.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $6.65 and $4.64, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1996 1995
Risk-free interest rate 6.56% 5.74%
Expected life (years) 10 10
Expected dividend yield 3.00% 3.00%
Stock price volatility 32.00% 32.00%
A summary of the company's incentive stock option plans and non-qualified
stock option plan as of December 31, 1996, 1995 and 1994 and changes during the
years then ended is shown below:
Incentive Stock Options Weighted
Weighted Average
Average Fair Value
Number Exercise of Options
of shares Price Granted
Options outstanding December 31, 1993 256,977 $10.99
Granted in 1994 141,550 16.70
Exercised in 1994 (18,018) 8.73
Forfeited in 1994 (32,852) 13.97
-------- ------
Options outstanding December 31, 1994 347,657 13.15
Granted in 1995 233,350 13.59 $4.75
Exercised in 1995 (29,807) 7.66
Forfeited in 1995 (56,273) 13.41
-------- ------
Options outstanding December 31, 1995 494,927 13.66
Granted in 1996 332,975 18.91 6.96
Exercised in 1996 (9,265) 9.77
Forfeited in 1996 (104,849) 15.30
-------- ------
Options outstanding December 31, 1996 713,788 $15.92
========
Non-qualified Stock Options Weighted
Weighted Average
Average Fair Value
Number Exercise of Options
of shares Price Granted
Options outstanding December 31, 1994 -
Granted in 1995 202,000 $17.67 $4.51
-------- ------
Options outstanding December 31, 1995 202,000 17.67
Granted in 1996 150,000 21.95 5.95
Forfeited in 1996 (136,000) 18.84
-------- ------
Options outstanding December 31, 1996 216,000 $19.91
========
The following table summarizes information about both stock option plans at
December 31, 1996:
Options Outstanding Weighted
December 31, 1996 Weighted Average
Average Remaining
Number Exercise Contractual
Range of Exercise Prices of shares Price Life
$8.156 to $11.531 91,529 $ 9.70 3.9 years
$13.00 to $16.00 207,367 13.76 7.5 years
$16.50 to $17.85 341,492 17.17 8.2 years
$20.125 to $24.15 289,400 20.96 9.8 years
------- -------
$8.156 to $24.15 929,788 $16.85 8.1 years
=======
Options Exercisable Weighted
December 31, 1996 Average
Number Exercise
Range of Exercise Prices of shares Price
$8.156 to $11.531 91,529 $ 9.70
$13.00 to $16.00 33,380 15.97
$16.50 to $17.85 33,702 16.50
------- ------
$8.156 to $17.85 158,611 $12.47
=======
The company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option plans and, accordingly, no compensation cost has
been recognized for its stock options in the financial statements. Had the
company determined compensation cost based on the fair value at the grant date
for its stock options under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
Net income:
As reported $6,882 $15,315
Pro forma 6,030 14,918
Primary earnings per share:
As reported 0.60 1.35
Pro forma 0.53 1.31
Fully-diluted earnings per share:
As reported 0.59 1.34
Pro forma 0.52 1.31
The pro forma net income and earnings per share in the table above reflect
only options granted in 1996 and 1995. Therefore, the full impact of calculating
the cost for stock options under the fair value method of SFAS 123 is not
reflected in the pro forma net income and earnings per share amounts presented
above because compensation cost is reflected over the options' vesting periods
and compensation cost for options granted prior to January 1, 1995 is not
considered.
Preferred Stock and Rights Plan
The company's Articles of Incorporation authorize 5,000,000 shares of Class
B Preferred Stock, of which the Board of Directors has designated 350,000 shares
as Class B Preferred Stock, Series 1992, to be issued in connection with a
Shareholder Rights Plan which was adopted by the Board of Directors on January
20, 1992. 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. There were no shares of Class B Preferred Stock
outstanding during the three-year period ending December 31, 1996.
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.
Initially, the rights are not exercisable and are not detachable from the
company's common stock. Each right, when and if it becomes exercisable, will
generally 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 rights are detached from the common stock and 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. 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.
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 (except the beneficial owners of
common stock described in the preceding clauses of this sentence) 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.
On September 1, 1994, the company redeemed the two classes of FGC preferred
stock which were outstanding on the date of the FGC acquisition.
(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, 1996, the aggregate retained earnings of the banks
were approximately $69.7 million, of which approximately $24.0 million is
available as of January 1, 1997, for the payment of dividends to the parent
company 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, 1996, the most restrictive of the
covenants limited the payment of dividends by the company to approximately $12.0
million.
(12) Income Taxes
Total income tax expense (benefit) for the years ended December 31, 1996,
1995 and 1994 was allocated as follows:
In thousands 1996 1995 1994
Income from operations $3,120 $ 7,416 $ 7,075
Shareholders' equity, for unrealized net
gain (loss) on securities available for sale 157 4,188 (4,818)
------ ------- -------
$3,277 $11,604 $ 2,257
====== ======= =======
The components of income tax expense (benefit) were as follows:
In thousands 1996 1995 1994
Current federal tax $5,926 $ 9,303 $7,574
Current state tax 409 500 383
Deferred income taxes (3,215) (2,387) (882)
------ ------- ------
$3,120 $ 7,416 $7,075
====== ======= ======
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
1996 1995 1994
U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
Changes from the statutory rate:
Tax exempt investment income (10.8) (4.4) (5.1)
Change in deferred tax valuation allowance (1.1) - -
Amortization of goodwill 2.1 0.8 0.8
Acquisition costs - - 1.2
State income taxes, net of federal
tax benefit 2.7 1.3 1.2
Other, net 3.3 (0.1) (0.2)
----- ---- ----
31.2 % 32.6 % 32.9 %
===== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995, are presented below:
In thousands 1996 1995
Deferred tax assets:
Allowance for loan losses $6,313 $5,463
Deferred compensation 370 285
Second quarter initiatives (see note 16) 1,470 -
Deferred loan fees 430 -
Investment securities 320 302
Purchase accounting adjustments 525 667
------ ------
Total gross deferred tax assets 9,428 6,717
Less valuation allowance - (108)
------ ------
Total deferred tax asset 9,428 6,609
Deferred tax liabilities:
Purchase accounting adjustments 1,121 1,681
Depreciation 200 206
FHLB stock 417 209
Other 173 162
------ ------
Total deferred tax liabilities 1,911 2,258
------ ------
Net deferred tax asset $7,517 $4,351
====== ======
The valuation allowance for deferred tax assets as of January 1, 1994, was
$108,000. There was a reduction in the valuation allowance of $108,000 for the
year ended December 31, 1996. For the years ended December 31, 1995 and 1994,
there was no change in the total valuation allowance. 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 at
December 31, 1996.
Shareholder's equity of Trans Financial Bank, F.S.B., at December 31, 1996,
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.
(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
Board of Directors at its 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, 1996, the ESOP held
343,521 allocated and 183,110 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 1996, 1995, and 1994 were as follows:
- -------------------------------------------------------------------------------
In thousands 1996 1995 1994
Interest incurred $215 $290 $263
Contributions 621 839 894
Dividends used for debt service 355 155 118
- -------------------------------------------------------------------------------
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 $839,000 in 1996,
$668,000 in 1995, and $509,000 in 1994.
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 1996, $-0- in 1995, and $9,000 in 1994.
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 $90,000 in 1996, $-0- in 1995,
and $5,000 in 1994. The plan's funded status at December 31, 1996, was composed
of plan assets of $549,000 and a projected benefit obligation of $549,000.
Subsequent to year end, the company filed to terminate the plan effective
December 31, 1996.
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. No pension expense was recognized for this plan in
1996, 1995 or 1994. 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 non-profit
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 1996, 1995, or 1994.
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.
(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 or to manage the company's
exposure to interest rate risk. 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 $328,026,000 at December
31, 1996, and $286,673,000 at December 31, 1995, 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 creditworthiness 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 $46,724,000 and $36,816,000 at December 31, 1996 and 1995,
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, 1996 and 1995, the company had no commercial letters of
credit outstanding.
Commitments to sell mortgage loans--The company enters into forward
delivery contracts to sell residential mortgage loans or mortgage-backed
securities to broker/dealers at specific prices and dates in order to hedge the
interest rate risk in its portfolio of mortgage loans held for sale and its
residential mortgage loan commitments. Credit risk associated with forward
contracts is limited to the replacement cost of those forward contracts in a
gain position. At December 31, 1996, the total of forward contracts in a gain
position was not material. There were no counterparty default losses on forward
contracts in 1996, 1995 or 1994. Market risk with respect to forward contracts
arises from changes in the value of contractual positions due to changes in
interest rates. The company limits its exposure to market risk by monitoring the
differences between commitments to customers and forward contracts with
broker/dealers. In the event the company has forward delivery contract
commitments in excess of available mortgage loans, the company completes the
transaction by either paying or receiving a fee to or from the broker/dealer
equal to the increase or decrease in the market value of the forward contract.
At December 31, 1996 and 1995, the company had forward contracts outstanding
totaling $74,522,000 and $32,330,000, respectively.
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.
As of December 31, 1996 and 1995, 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 partially 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 (i.e., those which have credit ratings of
investment grade or better from one of the major rating agencies) and each
transaction is specifically approved for applicable credit exposure. 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, 1996, are shown below:
<TABLE>
Dollars in thousands
<CAPTION>
Receiving a Paying a
Notional Fixed Floating Fair Credit
Amount Rate of: Rate of: Value Exposure
<S> <C> <C> <C> <C> <C>
Prime-based swaps, maturing in:
January 1997 $ 30,000 10.40% 8.25% $ 14 $143
June 1997 50,000 8.33 8.25 (11) -
July 1997 50,000 8.50 8.25 23 42
October 1997 20,000 8.60 8.25 30 35
March 1998 30,000 8.23 8.25 (112) 6
June 1998 70,000 8.50 8.25 (133) 9
October 1998 30,000 8.60 8.25 (45) -
December 1999 25,000 8.74 8.25 (114) 6
-------- ----- ----
Total / weighted average $305,000 8.67% 8.25% $(348) $241
======== ===== ====
</TABLE>
Interest rate swaps outstanding as of December 31, 1995, were as follows:
<TABLE>
Dollars in thousands
<CAPTION>
Receiving a Paying a
Notional Fixed Floating Fair Credit
Amount Rate of: Rate of: Value Exposure
<S> <C> <C> <C> <C> <C>
LIBOR-based swap, maturing in
May, 1996 $ 20,000 4.38% 5.88% $ (78) $ -
Prime-based swaps, maturing in:
August, 1996 50,000 9.58 8.50 384 384
November, 1996 50,000 9.25 8.50 413 446
January, 1997 30,000 10.40 8.50 666 763
June, 1997 50,000 8.33 8.50 155 155
July, 1997 50,000 8.50 8.50 295 295
October, 1997 20,000 8.60 8.50 163 163
October, 1998 30,000 8.60 8.50 343 343
-------- ------ ------
Total / weighted average $300,000 8.71% 8.33% $2,341 $2,549
======== ====== ======
</TABLE>
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.
Prepayments of mortgage loans can have a considerable impact on the value
of mortgage servicing rights. 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. To mitigate this risk, the company purchased in 1996 a $75
million (notional amount) interest rate "floor" contract in which the company
will receive interest on the notional amount to the extent that the interest
rate on 10-year constant maturity U.S. Treasury Notes falls below 5.50%. The
cost of this contract was $548,000 and is included in other assets in the
consolidated balance sheet. The cost is being amortized on a straight-line basis
over the five-year life of the contract. Fair values are based on quoted market
prices for like instruments and can be expected to vary inversely with market
expectations for intermediate-term interest rates. As with interest rate swaps,
the company minimizes credit risk in these instruments by dealing only with high
quality counterparties, each transaction is specifically approved for applicable
credit exposure, and all transactions are governed by an International Swap
Dealers Association Master Agreement and subject to bilateral collateral
arrangements.
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
Mortgage loans sold to investors 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
On August 12, 1996, Douglas M. Lester, the company's former chairman,
president and chief executive officer, filed suit individually and purportedly
on behalf of the shareholders of the company in Warren Circuit Court, Bowling
Green, Kentucky, against the company and four of its directors. Mr. Lester
claims that the company wrongfully terminated him on June 4, 1996, that the four
named directors breached their fiduciary duties to the company, and also alleges
fraud, breach of contract, interference with contractual relations and invasion
of privacy. Mr. Lester seeks, among other things, $1 million in compensatory
damages, the value of certain stock options, and punitive damages. Management
believes that the litigation will not have a material adverse effect upon the
consolidated financial statements of the company and intends to vigorously
defend the action.
On August 22, 1996, two former employees of the company and three former
employees of TFB-KY, filed suit in Jefferson Circuit Court, Louisville,
Kentucky, against the company. The five plaintiffs claim wrongful termination,
sex discrimination, age discrimination, breach of contract and libel in
connection with the termination of their employment in June 1996. The plaintiffs
seek, among other things, compensatory damages in an unspecified amount, to
include the value of back pay and benefits; the value of certain stock options;
reinstatement as employees or alternatively the value of future earnings and
benefits; and punitive damages. Management believes that the litigation will not
have a material adverse effect upon the consolidated financial statements of the
company and intends to vigorously defend the action.
As of December 31, 1996, there were various pending legal actions and
proceedings against the company which arise in the normal course of business and
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.
(15) Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
Financial assets:
<S> <C> <C> <C> <C>
Cash and short-term investments $ 75,152 $ 75,152 $ 81,900 $ 81,900
Securities 285,155 285,155 298,222 298,222
Loans 1,500,933 1,666,263 1,289,043 1,287,873
Other assets (interest rate floor contracts) 548 479 - -
Financial liabilities:
Deposits 1,579,217 1,606,223 1,444,483 1,446,836
Federal funds purchased and repurchases 71,879 71,879 75,594 75,594
Other short-term borrowings 55,000 55,235 45,014 45,052
Long-term debt 140,903 145,259 86,605 89,388
Interest rate swaps - (348) - 2,341
</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 equivalent remaining maturities.
Deposits
The fair value of demand deposits, savings accounts, and 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 and floor agreements is based on
quoted market prices or, if market quoted 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 values of loan commitments and
letters of credit were not material at December 31, 1996 and 1995. 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 active 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) Second Quarter Initiatives
Costs recognized in the second quarter of 1996 which are associated with
the initiative to refocus the company's resources on core financial services
include severance and related payroll taxes and benefits, write-downs of fixed
assets to be sold or abandoned, professional fees associated with discontinuing
certain activities and various other costs associated with the disposition of
assets. These charges provide for the cost of exiting several initiatives which
the company entered in recent years, such as human resources consulting and
venture capital, which were outside the company's core financial services. Also
included in the charges are expenses associated with closing the Louisville,
Kentucky office; mortgage loan production offices in Chattanooga, Jackson and
Knoxville, Tennessee; and consolidation of operations in Bowling Green,
Kentucky. Severance expense was also recognized related to changes designed to
reduce costs in the retail delivery system and in investment management. The
company sold its corporate jet, with the cost of its disposition included in
second quarter expenses. The classification of these costs in the consolidated
statement of income is as follows:
- --------------------------------------------------------------------------------
In thousands
Compensation and employee benefits $1,798
Net occupancy expense 475
Furniture and equipment expense 325
Professional fees 340
Writedowns and losses on sale of fixed assets 1,698
Other expenses 1,171
-----
Total costs associated with the second quarter initiatives $5,807
======
- --------------------------------------------------------------------------------
(17) Mortgage Banking and Servicing Activities
The portfolio of mortgage loans serviced for others totaled $3.3 billion
and $2.2 billion at December 31, 1996 and 1995, respectively. At December 31,
1996, the company had capitalized mortgage servicing rights of $41,866,000,
which related to approximately $3.1 billion of the aggregate $3.3 billion of
loans serviced. The mortgage servicing rights associated with the remaining $200
million of loans serviced are not subject to capitalization because the loans
were originated and sold prior to the company's adoption of SFAS No. 122 on
January 1, 1995 (see note 2). At December 31, 1995, the company had capitalized
purchased mortgage servicing rights of $28,284,000. During 1996 and 1995,
respectively, MSR's totaling $1,417,000 and $1,243,000 were recognized on
mortgage loans originated; and $17,436,000 and $21,088,000 were recognized on
servicing portfolios purchased. Approximately $499,000 of the purchase price of
servicing portofolios purchased in 1996 was held back pending transfer of all
documentation for the underlying mortgage loans.
The company assesses the fair values of the capitalized mortgage servicing
rights by stratifying the underlying loans by interest rate. The fair value of
the mortgage servicing rights is then determined through a present value
analysis of the estimated future net servicing revenues and expenses, and
assumptions based upon market estimates for future servicing revenues and
expenses. Significant estimates in the valuation process include loan prepayment
expectations, delinquency and foreclosure rates, ancillary fee income and
earnings on escrow balances. The fair value of the capitalized mortgage
servicing rights was $47,576,000 and $32,318,000 as of December 31, 1996 and
1995, respectively. The fair value of the mortgage servicing rights not subject
to capitalization because the underlying loans were originated and sold prior to
the adoption of SFAS No. 122 was $2,624,000 at December 31, 1996. Based on
management's estimate of the fair value of each strata, no impairment existed at
December 31, 1996 and, consequently, no valuation allowance was necessary.
The cost of capitalized mortgage servicing rights is amortized in
proportion to, and over the period of, estimated net servicing income. The
amortization for the periods ended December 31, 1996 and 1995 was $5,271,000 and
$2,720,000, respectively.
During 1996 and 1995, the company sold into the secondary market
$344,293,000 and $150,359,000, respectively, of residential mortgage loans.
These sales resulted in net gains of $2,225,000 and $645,000, respectively,
excluding the portion capitalized in the MSR asset.
(18) Regulatory Capital Requirements
The company and the banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain actions by regulators that, if
undertaken, could have a material effect on the company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the company and the banks must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities and
certain off-balance-sheet items. Capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the company and the banks to maintain a minimum ratio of Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined) of 4.00%,
total capital (as defined) to risk-weighted assets of 8.00%, and a Tier I
leverage ratio (as defined) of 3.00%. Regulatory capital ratios for the company
and the banks at December 31, 1996 and 1995, were as follows:
December 31 - Dollars in thousands 1996 1995
Trans Financial Bank, National Association:
Tier I capital $ 109,783 $ 101,907
Total risk-based capital 123,555 114,506
Total risk-adjusted assets 1,194,394 1,007,904
Tier I risk-based capital ratio 9.19% 10.11%
Total risk-based capital ratio 10.34 11.36
Tier I leverage ratio 7.67 8.25
Trans Financial Bank Tennessee, National Association:
Tier I capital $ 16,955 $ 15,662
Total risk-based capital 19,032 17,109
Total risk-adjusted assets 166,129 148,287
Tier I risk-based capital ratio 10.21% 10.56%
Total risk-based capital ratio 11.46 11.54
Tier I leverage ratio 8.35 8.60
Trans Financial Bank, F.S.B.:
Tier I capital $ 28,380 $ 34,168
Total risk-based capital 30,525 35,826
Total risk-adjusted assets 230,242 224,049
Tier I risk-based capital ratio 12.33% 15.25%
Total risk-based capital ratio 13.26 15.99
Tier I leverage ratio 7.77 9.19
Trans Financial, Inc. (consolidated):
Tier I capital $ 122,180 $ 119,625
Total risk-based capital 172,991 168,274
Total risk-adjusted assets 1,590,970 1,384,708
Tier I risk-based capital ratio 7.68% 8.64%
Total risk-based capital ratio 10.87 12.15
Tier I leverage ratio 6.12 6.70
For deposit insurance premiums and other supervisory purposes, the bank
regulatory authorities have established four levels of capital adequacy based on
these ratios. The highest of these is well capitalized, with a required Tier I
risk-based capital ratio of at least 6.00%, a total risk-based capital ratio of
at least 10.00%, and a Tier I leverage ratio of at least 5.00%. The most recent
notifications received from the bank regulatory authorities categorized each of
the banks as well capitalized. As of December 31, 1996, no conditions or events
have occurred since those notifications which management believes would change
any of the banks' capital categories.
(19) Deposits
Time deposits of $100,000 or more totaled $336.1 million at December 31,
1996, and $206.9 million at December 31, 1995. Interest expense on time deposits
of $100,000 or more was $16.5 million in 1996, $11.8 million in 1995 and $6.3
million in 1994.
The following table shows the maturities of certificates of deposit,
including individual retirement accounts and brokered certificates of deposit,
as of December 31, 1996.
In thousands
Year ended December 31
1997 $646,798
1998 176,045
1999 92,973
2000 16,923
2001 and later years 8,196
--------
$940,935
(20) Parent Company Financial Statements
Condensed financial data for Trans Financial, Inc. (parent company only)
as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994 are as follows:
Condensed Balance Sheets
December 31 - In thousands 1996 1995
Assets
Cash on deposit with subsidiaries $ 3,277 $ 1,608
Investment in subsidiaries 160,195 161,142
Other investments 356 130
Other assets 11,143 5,527
-------- --------
Total assets $174,971 $168,407
======== ========
Liabilities and Shareholders' Equity
Long-term debt and other notes payable $ 35,903 $ 36,605
Other liabilities 7,752 2,035
Shareholders' equity 131,316 129,767
-------- --------
Total liabilities and shareholders' equity $174,971 $168,407
======== ========
Condensed Statements of Income
Years Ended December 31
In thousands 1996 1995 1994
Income
Dividends from subsidiaries $10,000 $10,000 $15,860
Other interest and dividends 87 180 285
Management fees from subsidiaries
and other income 6,846 5,317 3,732
------- ------- -------
Total income 16,933 15,497 19,877
Expenses
Interest on long-term debt and other
notes payable 2,441 2,462 2,657
Other expenses 12,155 9,819 10,071
------- ------- -------
Total expenses 14,596 12,281 12,728
------- ------- -------
Income before income tax benefit and
equity in undistributed earnings of
subsidiaries 2,337 3,216 7,149
Federal income tax benefit 2,506 2,083 2,621
------- ------- -------
Income before equity in undistributed
earnings of subsidiaries 4,843 5,299 9,770
Equity in undistributed earnings of
subsidiaries 2,039 10,016 4,650
------- ------- -------
Net income $ 6,882 $15,315 $14,420
======= ======= =======
Condensed Statements of Cash Flows
Years Ended December 31
In thousands 1996 1995 1994
Cash flows from operating activities:
Net income $6,882 $15,315 $14,420
Adjustments to reconcile net income to
cash provided by operating activities:
Amortization 858 680 932
Equity in undistributed earnings
of subsidiaries (2,039) (10,016) (4,650)
Increase in other assets (6,013) (1,639) (986)
Increase in other liabilities 5,717 771 143
------ ------- -------
Net cash provided by operating activities 5,405 5,111 9,859
Cash flows from investing activities:
Investments in and acquisitions
of subsidiaries - - (10,440)
Repayment of advances to subsidiaries 2,710 - -
Purchase of securities available for sale (100) - -
------ ------- -------
Net cash used in investing activities 2,610 - (10,440)
Cash flows from financing activities:
Repayment of long-term debt and other
notes payable (124) (60) (6,694)
Proceeds from issuance of common stock 1,022 800 654
Redemption of preferred stock - - (1,010)
Dividends paid (7,244) (6,750) (5,839)
------ ------ ------
Net cash used in financing activities (6,346) (6,010) (12,889)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 1,669 (899) (13,470)
Cash and cash equivalents at beginning
of year 1,608 2,507 15,977
------ ------ -------
Cash and cash equivalents at end of year $3,277 $1,608 $ 2,507
====== ====== =======
Supplemental information:
Cash paid for interest $2,438 $1,866 $2,710
Non-cash transactions (note 3) 1,045 8,770 (8,629)
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 "Section 16(a) Beneficial
Ownership Reporting Compliance and Election of Directors" in the registrant's
Proxy Statement for the 1997 Annual Meeting of Shareholders and the information
set out in the section entitled "Executive Officers of the Registrant" on pages
6 and 7 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" (except the information under the sections entitled "Report
of Compensation Committee of the Board of Directors on Executive Compensation
and "Performance Graph") in the registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set out in the section entitled "Voting Securities and
Ownership Thereof" in the registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set out in the sections entitled "Compensation Committee
Interlocks and Insider Participation" and "Transactions with Management and
Others" in the registrant's Proxy Statement for the 1997 Annual Meeting of
Shareholders is incorporated herein by reference.
<PAGE>
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 59 and 60
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 59 and 60 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/ Vince A. Berta
Vince A. Berta
President
and Chief Executive Officer
Date: February 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on February 17, 1997, by the following persons on
behalf of the registrant and in the capacities indicated.
(a) Principal Executive Officer:
/s/ Vince A. Berta
Vince A. Berta
President, Chief Executive Officer
and Director
(b) Principal Financial Officer:
/s/ Edward R. Matthews
Edward R. Matthews
Chief Financial Officer
(c) Principal Accounting Officer:
/s/ Ronald B. Pigeon
Ronald B. Pigeon
Controller
<PAGE>
(d) Directors:
/s/ Mary D. Cohron
Mary D. Cohron
/s/ Floyd H. Ellis
Floyd H. Ellis
/s/ David B. Garvin
David B. Garvin
----------------------------
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
-----------------------------
C. Cecil Martin
-----------------------------
Frank Mastrapasqua
/s/ James D. Scott
James D. Scott
-----------------------------
William B. Van Meter
/s/ Thomas R. Wallingford
Thomas R. Wallingford
<PAGE>
Exhibits
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. is incorporated by reference to Exhibit 10(e) of the
registrant's Report on Form 10-K for the year ended December 31,
1995.*
10(f) Description of the registrant's Performance Incentive Plan.*
10(g) Form of Deferred Compensation Agreement between registrant and Vince
A. Berta, Barry D. Bray, James G. Campbell, Tommy W. Cole, Roger E.
Lundin, Michael L. Norris, Jay B. Simmons and certain other 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).
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.*
10(n) Investment and Financial Advisory Services Agreement between Trans
Financial Bank, National Association, and Mastrapasqua & Associates,
Inc.*
10(o) Form of Retention Agreements between Registrant and Vince A. Berta,
James G. Campbell, Tommy W. Cole, Ronald Szejner, and certain other
officers.*
10(p) 1996 Directors Stock Compensation Plan is incorporated by reference to
Exhiibt 10(n) of the registrant's report on Form 10-Q for the quarter
ended March 31, 1996.*
11 Statement of Computation of Per Share Earnings
21 List of Subsidiaries of the Registrant
23 Consent of Independent Auditors
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.
EXHIBIT 10(n)
INVESTMENT AND FINANCIAL ADVISORY SERVICES AGREEMENT
THIS INVESTMENT AND FINANCIAL ADVISORY SERVICES AGREEMENT (this "Agreement"),
dated as of the 1st day of January, 1994, is by and between Mastrapasqua &
Associates, Inc. ("M&A") and Trans Financial Bank, National Association ("Trans
Financial").
RECITALS
A. Trans Financial is a national banking association that provides
various trust services to its customers, including custodial and agency accounts
for individuals and entities, and employment benefit accounts for employers.
B. M&A is knowledgeable in the securities and investment business and
is willing to provide investment and financial advice to Trans Financial in
order to assist Trans Financial in performing its duties with respect to certain
trust account relationships.
C. The parties hereto desire to set forth the terms and
conditions for the provision of investment and financial advisory services to be
performed by M&A for Trans Financial.
AGREEMENT
THEREFORE, IN CONSIDERATION of the foregoing and the covenants and
promises set forth below, the parties hereto agree as follows:
1 . Definitions. The following terms shall have the meanings indicated
when used in this Agreement:
(a) "Aggregate Balance" shall mean the aggregate of the average monthly
principal balances of all Managed Accounts.
(b) "Excess Balance" shall mean, with respect to any month, the
Aggregate Balance for that month in excess of $41,000,000.00.
(c) "Managed Accounts" shall mean all (i) all custodial accounts of
trust customers of Trans Financial with respect to which M&A is the investment
advisor pursuant to an investment advisory agreement between M&A and the trust
customer, where Trans Financial receives the entire fee from the trust customer
for the services performed by Trans Financial and M&A, (ii) all accounts of
trust customers of Trans Financial with respect to which Trans Financial has
requested that M&A provide account-specific advice to Trans Financial to assist
it in the management of such account, and (iii) any other accounts, as agreed
upon by Trans Financial and M&A from time to time.
2. Advisory Services. M&A shall work with Trans Financial to:
<PAGE>
- --------------------------------------------------------------------------------
(a) Establish, modify from time to time as necessary, and articulate an
investment philosophy that can be effectively communicated and marketed to
customers and potential customers of Trans Financial;
- --------------------------------------------------------------------------------
(b) Develop a consistent framework for investing and a disciplined
approach for implementation;
(c) Construct a methodology for selecting appropriate fixed income
and equity instruments, and establish an execution strategy;
(d) Market Trans Financial's philosophy and investment approach to
current and prospective customers; and
(e) Develop an expanded customer base for commingled funds offered
by Trans Financial.
3. Advisory Activities. M&A shall perform the following
activities in furtherance of the goals set forth in
the previous section:
(a) M&A shall participate in weekly conference calls with such
employees of Trans Financial as Trans Financial shall deem appropriate, to
discuss market outlook and strategy, as well as pertinent contemporary issues.
The weekly conference calls shall be scheduled as mutually agreed between the
parties. In addition, M&A shall be reasonably available at other times for
unscheduled calls or discussions, as needed by Trans Financial.
(b) M&A shall assist Trans Financial in establishing, and evaluating on
an ongoing basis, asset allocation models to be used by Trans Financial in
managing trust accounts, and shall advise Trans Financial on the mix of
investments within the parameters of each asset allocation model, based on
current market conditions and outlook.
(c) M&A shall provide a portfolio evaluation service, focusing on the
asset allocation approach with sector emphasis and security selection for those
customers identified by Trans Financial.
(d) M&A shall conduct up to six seminars each year in the markets
served by Trans Financial, to cultivate existing and build additional market
base for Trans Financial's trust services and banking operations, and for the
brokerage services offered by Trans Financial's subsidiary broker-dealer. The
seminars shall be scheduled as mutually agreed between the parties, and the
content of the seminars may be educational, service driven or action oriented,
as directed by Trans Financial.
(e) M&A shall make quarterly presentations to existing and prospective
trust account customers of Trans Financial, which may include an outlook forum
(the economy, bond and stock markets and investment strategy), an education
forum (various aspects of investing, types of investments and managing assets),
or such other topics or formats as are agreed to between the parties.
4. Term. The term of this Agreement shall be from the date hereof
through December 31, 1994, and shall automatically renew for successive one-year
periods, unless either party hereto notifies the other party in writing, at
least 90 days prior to the end of the then current term, of the notifying
party's intention to terminate this Agreement at the end of the then current
term.
5. Fees. For services rendered hereunder, Trans Financial shall pay to
M&A a monthly fee equal to $15,000.00 plus 1/12th of 0.25% of the Excess Balance
(if any). Trans Financial shall receive the entire fee charged to customers with
Managed Accounts (unless otherwise agreed in connection with accounts qualifying
as Managed Accounts under subparagraph (iii) of the definition of Managed
Accounts), and shall pay M&A for its services rendered hereunder by means of the
fee provided for in this section. Monthly fees shall be paid in arrears within
15 days of the end of each month.
6. Relationship. M&A is engaged hereunder as a consultant and
independent contractor, and nothing herein shall be construed as creating an
employment, agency, partnership, or joint venture relationship between the
parties hereto.
7. Miscellaneous. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, and shall be governed by and construed under the laws of the
Commonwealth of Kentucky.
EXECUTED as of the date first set forth above.
MASTRAPASQUA & ASSOCIATES
By: /s/Frank Mastrapasqua
TRANS FINANCIAL BANK, NATIONAL ASSOCIATION
By: /s/ Douglas M. Lester
<PAGE>
Date: February 13, 1996
To: Ron Szejner
From: Frank Mastrapasqua
Subject: Investment Services Agreement between Trans Financial and
Mastrapasqua & Associates
Earlier this week you suggested that I advise you with respect to our monthly
compensation billing that has been in effect since October 1, 1995. In
anticipation of drafting a revised Agreement between Trans Financial and
Mastrapasqua & Associates, we revised our billing methodology effective October,
1995 using a mutually agreed upon approach of establishing a "basis point" fee
assessment on total Trust Assets as well as a percentage of Broker Dealer
revenues after certain thresholds were reached. The minimum of $35,000 per month
has been charged to Trans Financial (plus expenses) since October because
asset/revenue levels have been insufficient to warrant charging more than the
minimum monthly fee.
Billings prior to the conversion were running approximately $28,000-$29,000 per
month.
As a follow-up to your recent inquiry, we have calculated January, 1996's
billing if we used the old basis as described in the January 1, 1994 Agreement
between Trans Financial Bank National Association and Mastrapasqua & Associates.
Much to our surprise, the amount charged would have been substantially greater
than the $35,000 minimum or approximately $42,000. This reflects a sharp ramp-up
in the number of Trust Accounts being Advised by M&-A since the September, 1995
time-frame which is consistent with Trans Financial's successful efforts in
attracting new money as well as closer, effective coordination with M&A. This
seems to confirm Doug's vision and expectation of growth. The momentum is
continuing into February.
Going forward, we would suggest that until Trans Financial notifies us to the
contrary, we will assume that the terms of the original agreement dated January
1, 1994 remain in effect, with the exception of the compensation formulation.
With respect to compensation, we would agree to adhere to the mutually agreed
upon revised compensation structure (attached) which for now and prospectively
appears to favor Trans Financial.
6. Compensation.
A. In consideration of the services rendered pursuant to this Agreement,
the Bank will pay the Adviser:
[1] a fee, payable monthly, equal to a percentage of the Trust Assets of the
Bank net of any Trust Assets invested in one or more series of the Trans Adviser
Funds and net of any accounts that are part of Trust Assets and are managed and
introduced to Trust by M&A under M&A's sole investment advisory contract,
provided however that such fee shall in all events equal at least $35,000 per
month. The payment levels will be consistent with the following schedule:
Net Trust Assets Applicable Fee
Up to $599,999,999 .095%
$600,000,000 to $799,999,999 .085%
$800,000,000 to $999,999,999 .075%
$1,000,000,000 to $1,199,999,999 .065%
Over $1,200,000,000 .050%
For purposes of this Section 6.A, the "Trust Assets" of the Bank shall mean all
assets held by the Bank as trustee or otherwise in a fiduciary capacity,
including without limitation, as trustee of estates, guardianships, testamentary
trusts, inter vivos trusts, agencies, corporate trusts and employee benefit plan
trusts. The Trust Assets of the Bank shall be as reflected on the monthly Trust
Department Annual Report filed by the Bank with the Comptroller of the Currency;
and
[2] a fee, payable monthly, equal to 3.00% of the Commissions (as Defined
below); provided, however, that the Adviser shall receive no fee under this
Section 6.A[2] if, in any month, the Commissions do not exceed $350,000.
"Commissions" shall mean the gross commissions actually received by, or
discounts or concessions allowed to, TFIS with respect to all securities
transactions which occur at locations of TFIS, less customary direct offsets.
B. The fees set forth in Section 6.A above shall constitute all the fees payable
to the Adviser pursuant to this Agreement. The Bank shall receive all fees
attributable to custodial accounts of the Bank with respect to which the Adviser
serves as the investment adviser pursuant to a joint M&A/Bank investment
advisory agreement with the Trust customer and all fees attributable to all
other Trust accounts of the Bank with respect to which the Bank has requested
the Adviser to provide specific advice.
C. The monthly fees provided for in this Section 6 shall be paid in arrears
within fifteen (15) days following the end of each month. Upon any termination
of this Agreement, the fees payable pursuant to this Section 6 will be prorated
and paid promptly after termination.
<PAGE>
Billing Mathematics Using Old Basis Of Calculation
Actively Managed Accounts $ 53,834,657
Asset Allocation Accounts $ 34,914,670
Advisory Accounts $ 58,208,074
-------------
Total Account Management $ 146,957,401
Payment Threshold $ 41,000,000
-------------
Amount Applicable to 25 Basis Points $ 105,957,401
Billing @ 25 Basis Points $ 22,074
Plus Base Level Amount Per Month 20,000
-------------
Total Billing for January, 1996 42,074
EXHIBIT 10(o)
RETENTION AGREEMENT
THIS RETENTION AGREEMENT (this "Agreement"), dated as of the ____ day of
December, 1996, is by and between Trans Financial, Inc., with an address of 500
East Main Street, Bowling Green, Kentucky 42101 ("Trans Financial"), and
_____________________, with an address of
("Employee").
RECITALS
A. Employee is currently employed as a senior management official by Trans
Financial and/or its subsidiaries, on an at-will basis.
B. In order to induce Employee to continue his employment with Trans Financial
and devote his full attention to the business of Trans Financial for so long as
Trans Financial requires his services, Trans Financial desires to provide for
the continuation of Employee's salary after the termination of his employment,
under the circumstances described herein.
AGREEMENT
Therefore, in consideration of the foregoing and the mutual covenants
set forth below, the parties hereto agree as follows:
1. Termination of Employment. Employee shall be entitled to the severanc
benefits described in Section 2 below if his employment is terminated on or
before December 31, 1997 (the "Expiration Date"):
(a) by Trans Financial without cause (as defined in Section 3
below); or
(b) by Employee, for any reason, if:
(i) Employee's salary is reduced or his participation in any
bonus plan applying generally to management officials of Trans
Financial and its subsidiaries from time to time, is discontinued, or
(ii) Trans Financial requires a change in excess of 40 miles
in the geographic location where Employee is based as of the date
hereof, without the prior written consent of Employee.
The Board of Directors of Trans Financial may, at its sole option and
discretion, extend the Expiration Date for one or more annual periods, by giving
notice to Employee of the extension at least 60 days prior to the Expiration
Date then in effect.
2. Severance Benefits. In the event of a termination of employment qualifying
Employee for severance benefits pursuant to Section 1 above, Trans Financial
shall provide to Employee all benefits as provided in its then current policies
regarding termination of employment, as if such employment was terminated by the
employer without cause, and the following additional severance benefits:
(a) Employee shall receive continuation of salary at the highest rate
in effect at any time during the year prior to the date of termination of his
employment (subject to all applicable withholdings) for the period beginning on
the day after the date of termination of his employment and ending on the date
eighteen months thereafter (the "Anniversary Date"), in accordance with Trans
Financial's typical pay schedule and methods. Employee will receive paychecks on
the regularly scheduled pay days until such severance pay has been paid in full.
This severance benefit shall be in addition to severance pay payable pursuant to
the then current policies of Trans Financial. If the standard severance pay
provided for by such policies is to be paid periodically, the salary
continuation provided for in this subparagraph (a) may be paid, at the option of
Trans Financial, either concurrently with or consecutive to the payment of
standard severance pay.
(b) Except as otherwise provided herein, Trans Financial shall continue
Employee's coverage under Trans Financial's group health insurance plan, on the
same terms as other management officials generally, through the Anniversary
Date, subject to the continuation of Employee's payroll deductions for such
plan. Employee will be responsible for any increase that may occur in his share
of the premiums under such plan on the same terms from time to time provided to
active management employees generally. Except as otherwise provided herein,
Employee's election period for continuance coverage (commonly referred to as
COBRA coverage) shall commence on the Anniversary Date. In the event Employee
obtains other employment before such date, Employee shall notify Trans Financial
immediately, and Employee's participation in Trans Financial's group health
insurance plans shall cease on the date Employee becomes eligible to participate
in his new employer's health insurance plan (but in no event after Anniversary
Date), and Employee's election period for COBRA coverage shall commence on that
date.
(c) Employee shall receive any pension or retirement benefits to which
he is entitled under the terms of any pension or retirement plans as of the date
of termination of employment. Employee acknowledges and agrees that no further
contributions will be made to such pension or retirement plans after such date.
Any stock options granted to Employee will be treated under the terms of the
controlling stock option plan documents.
Employee shall not be required to mitigate any of these benefits by seeking
other employment, but in the event of reemployment before the Anniversary Date,
Employee shall notify Trans Financial and benefits under subparagraph (b) above
shall cease.
3. Termination Without Cause. Employee shall be deemed to be terminated by Trans
Financial without cause unless, prior to the termination of his employment by
Trans Financial, the Board of Directors of Trans Financial determines, by a vote
of the majority of the directors present and voting at a duly and properly
called meeting at which a quorum is present, that any of the following causes
for terminating his employment exists:
(a) Employee has engaged in any act of personal dishonesty
in the performance of his duties or responsibilities;
(b) Employee has engaged in competition with Trans Financial or any of
its subsidiaries, in any manner, or in activities substantially harmful to, or
not in the best interests of, the business of Trans Financial or of any of its
subsidiaries;
(c) Employee has engaged in illegal conduct;
(d) For any reason, Trans Financial or any of its affiliates is
unable to procure, after good faith efforts, a fidelity bond
on Employee;
(e) Employee has failed to perform or discharge any of his duties or
responsibilities as reasonably required or expected for a management official in
his position with Trans Financial or with any of its subsidiaries; or
(f) Employee is guilty of professional misconduct, or has committed any
act negatively affecting Trans Financial or any of its subsidiaries, of such a
serious nature as would render his service unacceptable to reasonable persons in
the position of the Board of Directors of Trans Financial.
If Employee is a director, Employee shall be included in determining the
presence of a quorum at any meeting at which such issue is considered, but shall
not be entitled to vote on such issue, or, without invitation by a majority of
the other directors present, to attend that portion of the meeting in which such
issue is considered.
4. Employment at Will. This Agreement does not constitute a promise of
employment, and Employee continues to be employed on an at-will basis. Trans
Financial shall have the right to terminate Employee's employment, for any
reason, subject to the terms regarding severance benefits set forth herein.
Employee may also terminate his employment at any time for any reason, and such
termination by Employee shall terminate any rights under this Agreement, except
to the extent that the provisions of Section 1(b) above apply.
5. Miscellaneous.
(a) Trans Financial shall reimburse Employee for any and all legal fees
reasonably incurred by Employee in successfully pursuing his rights under this
Agreement.
(b) Neither party shall assign the benefits of this Agreement to any
other party, without the express prior written consent of the other party. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective representatives, successors and permissible assigns. Trans
Financial shall require any successor entity (including any purchaser of all or
substantially all of the assets of Trans Financial or any Significant
Subsidiary) to expressly assume the obligations of Trans Financial hereunder.
(c) This Agreement shall be governed by and construed under the
laws of the Commonwealth of Kentucky.
(d) This Agreement constitutes the sole and entire agreement between
the parties regarding the subject matter hereof, and shall not be altered or
amended except by an agreement in writing signed by both parties hereto.
EXECUTED as of the date first set forth above.
[EMPLOYEE NAME]
TRANS FINANCIAL, INC.
By:
Thomas Wallingford, Acting Chairman of the Board
Exhibit 11
<TABLE>
Statement Regarding Computation of Per Share Earnings
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
In thousands, except per share data 1996 1995 1994
<S> <C> <C> <C>
Primary earnings per common share:
Average common shares outstanding ............................................ 11,347 11,246 11,175
Common stock equivalents ..................................................... 107 107 83
------- -------- -----
Average shares and share equivalents ....................................... 11,454 11,353 11,258
======= ====== =======
Net income ..................................................................... $ 6,882 $15,315 $ 14,420
Less preferred stock dividends ................................................. -- -- (54)
------- -------- -------
Income available for common stock .............................................. $ 6,882 $15,315 $ 14,366
======= ======= ========
Primary net income per share ................................................... $ 0.60 $ 1.35 $1.28
================================================================================= ======= ======= ========
Fully-diluted earnings per common share:
Average common shares outstanding ............................................ 11,347 11,246 11,175
Common stock equivalents ..................................................... 229 156 83
------- -------- ------
Average shares and share equivalents ....................................... 11,576 11,402 11,258
======= ======== ======
Net income ..................................................................... $ 6,882 $15,315 $ 14,420
Less preferred stock dividends ................................................. -- -- (54)
------- -------- ------
Income available for common stock .............................................. $ 6,882 $15,315 $ 14,366
======= ======= ========
Fully-diluted net income per share ............................................. $ 0.59 $ 1.34 $1.28
================================================================================= ======= ======= ========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 21
List of Subsidiaries of the Registrant
Trans Financial Bank, National Association
Trans Financial Bank, Federal Savings Bank
Trans Financial Bank Tennessee, National Association
Subsidiaries of Trans Financial Bank, National Association:
Trans Financial Mortgage Company
Trans Financial Investment Services, Inc.
Real Estate Holding Company
Subsidiary of Trans Financial Bank, Federal Savings Bank:
General Service Corporation
Exhibit 23
Consent of Independent Auditors
The Board of Directors of Trans Financial, Inc.:
We consent to incorporation by reference in the Registration Statement Nos.
33-40606, 33-60844, 33-56761, 33-64601 and 333-06089 on Form S-3, and
Registration Statement Nos. 33-21517, 33-43046, 33-53960, 33-72492, 33-65347,
33-65349 and 333-18359 on Form S-8 of Trans Financial, Inc. of our report dated
January 20, 1997, relating to the consolidated balance sheets of Trans
Financial, Inc. and subsidiaries as of December 31, 1996 and 1995 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,
1996, which report appears in the December 31, 1996 annual report on Form 10-K
of Trans Financial, Inc.
Our report refers to a change in the method of accounting for mortgage
servicing rights in 1995.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Louisville, Kentucky
February 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000704469
<NAME> Trans Financial, Inc.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-01-1996 Jan-01-1995
<PERIOD-END> Dec-31-1996 Dec-31-1995
<CASH> 75,054 81,703
<INT-BEARING-DEPOSITS> 98 197
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 285,155 298,222
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,518,998 1,304,822
<ALLOWANCE> 18,065 15,779
<TOTAL-ASSETS> 2,003,952 1,795,649
<DEPOSITS> 1,579,217 1,444,483
<SHORT-TERM> 126,879 120,608
<LIABILITIES-OTHER> 25,637 14,186
<LONG-TERM> 140,903 86,605
0 0
0 0
<COMMON> 21,324 21,175
<OTHER-SE> 109,992 108,592
<TOTAL-LIABILITIES-AND-EQUITY>2,003,952 1,795,649
<INTEREST-LOAN> 131,466 115,757
<INTEREST-INVEST> 16,403 17,650
<INTEREST-OTHER> 66 821
<INTEREST-TOTAL> 147,935 134,228
<INTEREST-DEPOSIT> 59,795 56,465
<INTEREST-EXPENSE> 73,066 64,599
<INTEREST-INCOME-NET> 74,869 69,629
<LOAN-LOSSES> 13,914 5,260
<SECURITIES-GAINS> 20 200
<EXPENSE-OTHER> 80,642 66,049
<INCOME-PRETAX> 10,002 22,731
<INCOME-PRE-EXTRAORDINARY> 6,882 15,315
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,882 15,315
<EPS-PRIMARY> .60 1.35
<EPS-DILUTED> .59 1.34
<YIELD-ACTUAL> 4.52 4.67
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<LOANS-TROUBLED> 4 14
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<ALLOWANCE-OPEN> 15,779 12,529
<CHARGE-OFFS> 12,467 2,525
<RECOVERIES> 839 515
<ALLOWANCE-CLOSE> 18,065 15,779
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