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, 1997 Commission File Number: 0-13030
TRANS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1048868
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 East Main Street, Bowling Green, Kentucky 42101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502)793-7717
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, 1998: $397,830,739.
The number of shares outstanding of the issuer's class of common stock on
February 18, 1998: 11,641,651 shares.
Document Incorporated By Reference
Portions of the registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 20, 1998, are incorporated by reference into
Part III of this report.
<PAGE>
TABLE OF CONTENTS
Item Page
Part I
1. Business...............................................................2
2. Properties.............................................................5
3. Legal Proceedings....................................................5-6
4. Submission of Matters to a Vote of Security Holders....................6
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.......................................................9-31
7a. Quantitative and Qualitative Disclosures About Market Risk............32
8. Financial Statements and Supplementary Data........................32-56
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................56
Part III
10. Directors and Executive Officers of the Registrant....................57
11. Executive Compensation................................................57
12. Security Ownership of Certain Beneficial Owners and Management........57
13. Certain Relationships and Related Transactions........................57
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......58
Signatures.............................................................59-60
Exhibit Index..........................................................61-62
<PAGE>
Part I
Item 1. Business
The Company and the Banks
Trans Financial, Inc. ("the company") is a bank holding company registered
under the Bank Holding Company Act of 1956. The company has two commercial bank
subsidiaries--Trans Financial Bank, National Association ("TFB-KY"), consisting
of all of the company's banking activities in Kentucky, and Trans Financial Bank
Tennessee, National Association ("TFB-TN"), consisting of all of the company's
Tennessee banking activity. Collectively, these banking institutions are
referred to in this report as "the banks." (On July 26, 1997, the company's
former thrift subsidiary--Trans Financial Bank, F.S.B.--was merged into TFB-KY,
and its Tennessee operations were sold to TFB-TN. These transactions
consolidated the company's banking operations into its current two national bank
charters.)
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"). The company sold all of the assets of its travel agency, Trans Travel,
Inc., during the fourth quarter of 1996.
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, 1997, approximately $519 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, 1997.
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. TFB-KY introduced its own family of
proprietary mutual funds, the Trans Adviser Funds ("the Funds") in October,
1995. TFB-KY acted as investment adviser to the Funds. On August 29, 1997, the
Funds were transferred to the Countrywide Family of Funds. As a result of this
transfer, TFB-KY no longer serves as investment adviser to the Funds.
TFB-KY has 32 offices in Kentucky: six located in Bowling Green; three in
each of Pikeville and Maysville; two in each of Glasgow, Scottsville, Morehead
and Meta; and one in each of Auburn, Augusta, Cave City, Dawson Springs, Elkhorn
City, Flemingsburg, Franklin, Martin, Prestonsburg, Russellville, Tompkinsville
and Virgie. TFB-TN has 17 offices in Tennessee: two in each of Cookeville and
Columbia; and one in each of Clarksville, Crossville, Franklin, Kingston,
Manchester, McMinnville, Mt. Pleasant, Murfreesboro, Nashville, Rockwood,
Shelbyville, Tullahoma and Winchester. TFMC has a mortgage operations center in
Tullahoma, Tennessee, and loan production offices in Greensboro, North Carolina;
Little Rock, Arkansas; and Cape Coral, Florida. Prior to December 31, 1997, the
company entered into a contract to sell the Mt. Pleasant, Tennessee office,
subject to regulatory approval.
On December 31, 1997, the company had total consolidated assets of $2.1
billion, total loans of $1.5 billion, total deposits of $1.6 billion and
shareholders' equity of $151 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.
Demographics
As of December 31, 1997, the company operated 49 banking offices in 34
communities in Kentucky and Tennessee. These communities are predominantly
non-urban markets under 100,000 in population.
Population
Statewide, Tennessee's population is projected by the U.S. Census Bureau to
grow approximately 2% per year through 2000, while Kentucky's annual growth is
projected at 1%. Nearly all of the company's primary markets should participate
in this growth, with South Central and Northeastern Kentucky experiencing growth
rates in the 0.7% to 1.5% range, and most Tennessee markets experiencing 1.0% to
4.8% growth rates. Eastern Kentucky's population growth, however, is expected to
be slower--approximately 0.2% per year.
<PAGE>
Employment and Income
The 4.2% unemployment rate for Tennessee and the 4.4% unemployment rate for
Kentucky were slightly below the national average of 4.7%. Per capita income in
1996 was $21,949 and $19,797, respectively, for Tennessee and Kentucky--below
the national average of $24,426. The company estimates per capita income levels
in the company's markets to be as follows (1995 data):
South Central Kentucky $18,642
Northeastern Kentucky 14,610
Eastern Kentucky 15,433
Western Kentucky 17,098
Eastern Tennessee 18,749
Middle Tennessee 19,623
South Central Tennessee 18,616
Industry Trends
The local economies in the company's markets are diversified, as discussed
below.
In South Central Kentucky, the largest industries are durable and
non-durable goods manufacturing. Most of the recent growth in South Central
Kentucky has occurred in finance/insurance/real estate and retail trade, while
non-durable goods manufacturing has been in decline in recent years. In the
Bowling Green area, where the company has its largest presence, services
represent the largest industry segment.
In Northeastern Kentucky, state and local government and durable goods
manufacturing are the largest industry groups. Non-durable goods manufacturing
is the fastest-growing sector in this area of the state.
Mining--primarily coal mining--is the largest industry in the company's
Eastern Kentucky market, but has been declining over the past several years.
Services and retail trade, however, have provided strong growth.
In the company's Western Kentucky market area, durable goods manufacturing
and services are the primary industries, with durable goods providing the most
growth. Non-durable goods manufacturing has shown slow growth in recent years,
while mining has declined in importance in this area.
In the company's Tennessee markets, services and durable goods
manufacturing are the largest industry segments. Wholesale trade, transportation
and utilities, and finance, insurance and real estate represent the primary
growth industries, while non-durable goods manufacturing and construction
provide the least growth to this market area.
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
FDIC-insured deposits the company has in each of these communities. The table
also shows the ranking by deposit size of each of the company's locations in
their local markets.
<PAGE>
Share of Local Market
Banks and savings & loans
Rank in
Market Local
Share Market
TRANS FINANCIAL BANK, NA
South Central Kentucky:
Bowling Green ....... 40% 1
Glasgow/Cave City ... 31% 1
Scottsville ......... 35% 2
Tompkinsville ....... 14% 3
Franklin ............ * NM
Northeastern Kentucky:
Maysville ........... 36% 1
Morehead ............ 36% 1
Augusta ............. 30% 2
Eastern Kentucky:
Pike County ......... 19% 2
Floyd County ........ 28% 2
Western Kentucky:
Dawson Springs ...... 6% 6
Russellville/Auburn . 15% 3
TRANS FINANCIAL BANK, TN NA
Eastern Tennessee:
Rockwood/Kingston ... 14% 4
Middle Tennessee:
Clarksville ......... 4% 8
Cookeville .......... 6% 6
Murfreesboro ........ 1% 9
Nashville ........... * NM
McMinnville ......... 5% 6
Franklin ............ * NM
Crossville .......... 4% 5
South Central Tennessee:
Tullahoma ........... 15% 1
Shelbyville ......... 6% 5
Manchester .......... 10% 3
Winchester .......... 14% 5
Columbia/Mt. Pleasant 6% 5
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 savings and loan
associations, credit unions, brokerage firms, insurance companies, other
financial institutions, and institutions which have expanded into the financial
market.
Supervision and Regulation
Bank holding companies and commercial banks are extensively regulated under
both federal and state law. Any change in applicable laws or regulations may
have a material effect on the business and prospects of the company and the
banks.
As a registered bank holding company, the company is subject to the
supervision of and regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956. TFB-KY and TFB-TN are subject to the supervision
of, and regular examination by, the Office of the Comptroller of the Currency.
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") removes state law barriers to interstate bank acquisitions and
permits the consolidation of interstate banking operations. Under the Act,
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 became operative on June 1, 1997, although any state
could, prior to that time, adopt legislation to accelerate interstate branching
or prohibit it completely. The Act's interstate consolidation and branching
provisions 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 31 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.........12-13
Analysis of Year-to-Year Changes in Net Interest Income..................14
Loans Outstanding........................................................17
Loan Maturities and Interest Rate Sensitivity............................19
Non-performing Assets (Including Potential Problem Loans)................20
Summary of Loan Loss Experience..........................................21
Allocation of Allowance for Loan Losses..................................22
Allocation of Year-end Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans.....................22
Carrying Value of Securities Available for Sale..........................22
Maturity Distribution of Securities Available for Sale...................23
Maturity of Time Deposits of $100,000 or More............................24
Short-Term Borrowings....................................................25
Consolidated Statistical Information.....................................31
Impact of Non-accrual Loans on Interest Income (note 7, paragraph 3).....42
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 Auburn,
Franklin and Virgie sales centers, and one of its Pikeville sales centers (the
North Mayo Trail sales center). 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-TN owns all the properties at which it conducts business except the
Franklin and Nashville 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, North Carolina;
Little Rock, Arkansas; and Cape Coral, Florida for loan production offices.
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. The trial is
currently scheduled for April 1, 1998. 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.
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.
<TABLE>
<CAPTION>
Served as
an Executive Position with the
Name Officer Since Age Company and the Banks
<S> <C> <C> <C>
Vince A. Berta 1993 39 President, Chief Executive Officer, and Director of the company;
Director and Executive Vice President of TFB-KY; Director of TFMC
Barry D. Bray 1984 51 Executive Vice President, Chief Credit Officer of the company;
Chief Credit Officer of TFB-KY; Chief Credit Officer of TFB-TN
President and Director of TFB-KY
Tommy W. Cole 1996 42 Executive Vice President, Corporate Financial Services of the
company and of TFB-KY
John K. Davis II 1997 41 Senior Vice President and Chief Information Officer of the company
and of TFB-KY
Gregg A. Hall 1997 41 Senior Vice President and Auditor of the company
Roger E. Lundin 1987 53 Senior Vice President and Director of Human Resources of the
company
Edward R. Matthews 1995 36 Executive Vice President and Chief Financial Officer of the
company
Michael J. Moser 1994 51 Executive Vice President and Director of Marketing of the company
Michael L. Norris 1995 44 President and Director of TFMC
Ronald B. Pigeon 1995 49 Controller of the company; Secretary/Treasurer and Director
of TFIS
Jay B. Simmons 1993 41 Senior Vice President, General Counsel and Secretary of the
company; Senior Vice President of TFB-KY and TFB-TN;
Director and General Counsel of TFIS; Senior Vice President
and Director of TFMC
Thomas R. Wallingford 1996 70 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.
</TABLE>
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 of Information Systems and 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.
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.
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, 1997 there were 1,683 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, 1996 ............................... $ 18.125 $ 14.75 $0.16
Second quarter, 1996 ................................. 18.50 15.125 0.16
Third quarter, 1996 ................................. 20.50 16.875 0.16
Fourth quarter, 1996 ................................. 23.50 19.50 0.16
First quarter, 1997 .................................. 26.50 22.00 0.17
Second quarter, 1997 ................................. 28.625 22.25 0.17
Third quarter 1997 ................................... 32.375 27.25 0.17
Fourth quarter, 1997 ................................. 39.00 30.50 0.17
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 holding company registered
under the Bank Holding Company Act of 1956. The company has two commercial bank
subsidiaries--Trans Financial Bank, National Association ("TFB-KY"), consisting
of all of the company's banking activities in Kentucky, and Trans Financial Bank
Tennessee, National Association ("TFB-TN"), consisting of all of the company's
Tennessee banking activity. (On July 26, 1997, the company's former thrift
subsidiary--Trans Financial Bank, F.S.B.--was merged into TFB-KY, and its
Tennessee operations were sold to TFB-TN. These transactions consolidated the
company's banking operations into its current two national bank charters.)
Collectively, these banking 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"). During the
fourth quarter of 1996, the company sold all of the assets of its travel agency,
Trans Travel, Inc., and exited the travel business.
At December 31, 1997, the company had total consolidated assets of $2.1
billion, total loans of $1.5 billion, total deposits of $1.6 billion and
shareholders' equity of $151 million. The company's net income was $23.9 million
in 1997, up from $6.9 million in 1996. Diluted earnings per share increased to
$2.04 per common share in 1997, from $0.60 in 1996.
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 five years, the company has expanded through mergers and
acquisitions, which are summarized below.
<TABLE>
<CAPTION>
Asset
Date Size
Acquisition Location Consummated (millions)
Mergers (pooling-of-interests accounting):
<S> <C> <C> <C>
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):
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
Surety Mortgage, Inc. ....................................... Cape Coral, Florida December-97 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.
During April 1997, the company sold substantially all of the deposits,
premises and equipment, and certain other assets of its Lebanon and Sparta,
Tennessee offices. These two offices represented $17 million of the company's
total deposits as of March 31, 1997.
On August 29, 1997, the Trans Adviser family of mutual funds ("the Funds")
was transferred to the Countrywide Family of Funds. TFB-KY had acted as
investment adviser to the Funds, which had total assets of $159 million as of
June 30, 1997. However, as a result of this transfer, TFB-KY no longer serves in
that capacity. The transfer did not have a significant impact on the company's
financial condition or results of operations.
AirLanse Travel was consolidated into the operations of Trans Travel, Inc.
in September 1995. In November 1996, as a part of the company's commitment to
refocus on core financial services, the assets of Trans Travel, Inc. were sold,
and the company exited the travel business.
See note 4 to the consolidated financial statements for additional
information regarding business combinations.
<PAGE>
Income Statement Review
Net income was $23.9 million in 1997, compared with $6.9 million in 1996,
and $15.3 million in 1995. On a diluted per-share basis, net income was $2.04,
$0.60 and $1.35, respectively. Results for 1997 include a $1.2 million pre-tax
gain on the sale of the two Tennessee branch offices, a $0.9 million pre-tax
gain on the sale of a portion of the mortgage servicing portfolio and a $0.4
million loss on the sale of securities available for sale.
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. 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 all of the assets of the travel
agency,
-sold a newly-constructed building intended to house the
company's corporate headquarters and consolidated office space in
Bowling Green, Kentucky,
-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, and
-discontinued TFB-KY's role as investment adviser to the Trans Adviser
family of mutual funds.
Based on a comparison of non-interest expenses for the fourth quarter
of 1997 to the second quarter of 1996 (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 that year.
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
1997 Amount % 1996 Amount % 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income ........... $161,411 $ 13,476 9.1% $147,935 $ 13,707 10.2% $134,228
Interest expense .......... 81,200 8,134 11.1 73,066 8,467 13.1 64,599
---------- ------ -------- -------- --------
Net interest income ....... 80,211 5,342 7.1 74,869 5,240 7.5 69,629
Provision for loan losses . 9,500 (4,414) (31.7) 13,914 8,654 164.5 5,260
Net interest income after ---------- ------ -------- -------- --------
provision for loan losses 70,711 9,756 16.0 60,955 (3,414) (5.3) 64,369
Non-interest income ....... 34,410 4,721 15.9 29,689 5,278 21.6 24,411
Non-interest expenses ..... 69,133 (11,509) (14.3) 80,642 14,593 22.1 66,049
--------- ------ -------- -------- --------
Income before income taxes 35,988 25,986 259.8 10,002 (12,729) (56.0) 22,731
Income tax expense ........ 12,055 8,935 286.4 3,120 (4,296) (57.9) 7,416
--------- ------ -------- -------- --------
Net income ................ $ 23,933 $ 17,051 247.8 $ 6,882 $ (8,433) (55.1) $15,315
Basic earnings per share .. $2.09 $1.48 243.5 $0.61 $0.75) (55.1) $1.36
Diluted earnings per share $2.04 $1.44 239.8% $0.60 $(0.75) (55.4)% $1.35
</TABLE>
Each of these components of income and expense is discussed separately
in the sections that follow.
Net Interest Income
Net interest income totaled $80.2 million in 1997, a 7.1% increase
over the $74.9 million recorded in 1996. In 1996 net interest income was up 7.5%
over 1995's $69.6 million. On a fully-taxable-equivalent basis, net interest
income was $81.6 million in 1997, compared with $76.5 million in 1996 and $71.3
million in 1995. The increases in net interest income in both 1997 and 1996 were
due to a higher level of interest-earning assets, primarily commercial loans.
These increases in interest income were partially offset by increases in
interest expense due to a greater reliance on wholesale funding sources, such as
brokered deposits and advances from the Federal Home Loan Bank.
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
1997 Change 1996 Change 1995
<S> <C> <C> <C> <C> <C>
Average yield on interest-earning assets ....... 8.89% 6 8.83% (6) 8.89 %
Average rate on interest-bearing liabilities ... 5.06 17 4.89 15 4.74
---- --- ------ ------ ----
Net interest-rate spread ....................... 3.83 (11) 3.94 (21) 4.15
Impact of non-interest-bearing sources and other
changes in balance sheet composition ........ 0.63 5 0.58 6 0.52
---- --- ------ ------ ----
Net interest margin ............................ 4.46% (6) 4.52% (15) 4.67 %
<FN>
(F1)Refer to the tables on pages 12 and 13 for additional data regarding
the net interest analysis.
</FN>
</TABLE>
The table on pages 12 and 13 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 $675 million of the company's loans reprice immediately
with changes in the prime rate, and another $37 million of loans reprice within
three months of a change in prime. 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. The prime rate increased to 8.25% in February
1996, and remained constant through the remainder of 1996 and through most of
the first quarter of 1997. During this time, 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 average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities) decreased, negatively impacting the net interest margin. This
negative impact was partially offset during 1996 by increased interest income
due to loan growth. As loan growth slowed during 1997, the net interest-rate
spread dropped 11 basis points as compared to 1996. The prime rate increased
twenty-five basis points to 8.50% near the end of the first quarter of 1997,
which had a slight positive impact on net interest income in 1997.
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>
1997 1996 1995
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>
Securities held to maturity:
U.S. Treasury, federal agencies, and
mortgage-backed securities .. $ -- $ -- -% $ -- $ -- -% $ 24,257 $1,686 6.95%
State and municipal obligations -- -- - -- -- - 46,674 3,622 7.76
Other securities ................... -- -- - -- -- -- 4,816 355 7.37
---------- ------ ----- ------ ------- ---- -------- ------ -----
Total securities held to maturity .. -- -- - -- -- -- 75,747 5,663 7.48
Securities available for sale:
U.S. Treasury, federal agencies, and
mortgage-backed securities ....... 180,872 10,293 5.69 204,549 11,450 5.60 209,756 11,847 5.65
State and municipal obligations .... 48,999 3,517 7.18 53,844 4,023 7.47 5,442 445 8.18
Other securities ................... 35,673 2,365 6.63 33,460 2,133 6.37 13,727 901 6.56
---------- ------ ----- ------ ------- ----- -------- ------ -----
Total securities available for sale 265,544 16,175 6.09 291,853 17,606 6.03 228,925 13,193 5.76
---------- ------ ----- ------ ------- ----- -------- ------ -----
Total securities ................... 265,544 16,175 6.09 291,853 17,606 6.03 304,672 18,856 6.19
Federal funds sold ................... 16 1 6.25 898 52 5.79 13,652 804 5.89
Interest-bearing deposits with banks . 98 9 9.18 117 14 11.97 197 17 8.63
Mortgage loans held for sale ........ 91,779 6,880 7.50 53,824 3,938 7.32 19,436 1,644 8.46
Loans, net of unearned income (F3) 1,473,103 139,701 9.48 1,346,754 127,983 9.50 1,190,101 114,572 9.63
---------- ------- ---- --------- ------- ---- --------- ------- -----
Total interest-earning assets /
interest income .................. 1,830,540 162,766 8.89% 1,693,446 149,593 8.83% 1,528,058 135,893 8.89%
Less allowance for loan losses ...... (20,668) (16,563) (13,239)
---------- ------------ ----------
1,809,872 1,676,883 1,514,819
Non-interest-earning assets:
Cash and due from banks ........... 55,524 58,443 63,726
Premises and equipment ............ 37,080 39,891 38,307
---------- ------------ -----------
Total assets .................... $ 1,988,814 $ 1,857,328 $ 1,672,932
<FN>
(F1)Average balances are computed based on daily balances.
(F2)Interest income on tax-exempt securities and loans has been increased
47% in this analysis to reflect comparable interest on fully-taxable-
equivalent investments.
(F3)For computational purposes, non-accrual loans are included
in loans.
</FN>
</TABLE>
<PAGE>
<TABLE>
Average Consolidated Balance Sheets and Net Interest Analysis
For the years ended December 31
Fully-taxable equivalent basis
Dollars in thousands
<CAPTION>
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
Interest (F1) (F2) (F1) (F2) (F1) (F2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ............ $ 39,278 1,397 3.56% $ 108,325 3,128 2.89% $ 231,224 6,147 2.66%
Savings deposits ................... 100,608 2,750 2.73 113,078 3,027 2.68 131,614 3,778 2.87
Money market accounts .............. 270,303 8,867 3.28 178,566 5,571 3.12 47,288 1,514 3.20
Certificates of deposit ............ 711,106 38,995 5.48 715,344 38,490 5.38 700,707 37,962 5.42
Brokered certificates of deposit ... 124,236 7,805 6.28 68,042 4,786 7.03 28,562 2,278 7.98
Individual Retirement Accounts ..... 81,629 4,575 5.60 86,097 4,793 5.57 88,547 4,786 5.41
---------- ------ ---- --------- ------ ---- -------- ------ -----
Total interest-bearing deposits ..... 1,327,160 64,389 4.85 1,269,452 59,795 4.71 1,227,942 56,465 4.60
Federal funds purchased
and repurchase agreements ......... 69,455 3,668 5.28 42,010 1,949 4.64 47,219 2,013 4.26
Other short-term borrowings ......... 63,863 3,607 5.65 56,136 3,117 5.55 40,652 2,983 7.34
Long-term debt ...................... 143,882 9,536 6.63 125,593 8,205 6.53 46,840 3,137 6.70
---------- ------ --------- ------ -------- ------
Total borrowed funds ............... 277,200 16,811 6.06 223,739 13,271 5.93 134,711 8,133 6.04
---------- ------ --------- ------ -------- ------
Total interest-bearing liabilities /
interest expense .................. 1,604,360 81,200 5.06% 1,493,191 73,066 4.89% 1,362,653 64,598 4.74%
Non-interest-bearing liabilities:
Non-interest-bearing deposits ........ 219,302 213,332 172,748
Other liabilities .................... 24,654 21,405 15,485
--------- ---------- ---------
1,848,316 1,727,928 1,550,886
Shareholders' equity ................. 140,498 129,400 122,046
--------- ---------- ---------
Total liabilities
and shareholders' equity ............. $1,988,814 $1,857,328 $1,672,932
Net interest-rate spread (F4) ........ 3.83% 3.94% 4.15%
sources and other changes in
balance sheet composition 0.63% 0.58% 0.52%
Net interest income /
margin on interest-earning assets (F5) $ 81,566 4.46% $ 76,527 4.52% $ 71,295 4.67%
<FN>
(F1)Average balances are computed based on daily balances.
(F2)Interest income on tax-exempt securities and loans has been increased 47%
in this analysis to reflect comparable interest on fully-taxable-equivalent
investments.
(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, 1997 and 1996, 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>
1997 vs. 1996 1996 vs. 1995
-------------------------------------------------------------------------
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)
State and municipal obligations ... -- -- -- -- (3,622) (3,622)
Other securities .................. -- -- -- -- (355) (355)
----- ------ ------ -------- ------- ------
Total securities held to maturity . -- -- -- -- (5,663) (5,663)
Securities available for sale:
U.S. Treasury, federal agencies,
and mortgage-backed securities .... 188 (1,345) (1,157) (105) (292) (397)
State and municipal obligations ... (154) (352) (506) (42) 3,620 3,578
Other securities .................. 87 145 232 (27) 1,259 1,232
------ ------ ------ -------- ------- ------
Total securities available for sale 121 (1,552) (1,431) (174) 4,587 4,413
------ ------ ------ -------- ------- ------
Total securities .............. 121 (1,552) (1,431) (174) (1,076) (1,250)
Federal funds sold ................ 4 (55) (51) (13) (739) (752)
Interest-bearing deposits
with banks ....................... (3) (2) (5) 5 (8) (3)
Mortgage loans held for sale ...... 99 2,843 2,942 (250) 2,544 2,294
Loans, net of unearned income ..... (265) 11,983 11,718 (1,493) 14,904 13,411
------ ------ ------ -------- ------- ------
Total interest-earning assets ..... (44) 13,217 13,173 (1,925) 15,625 13,700
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ........... 602 (2,333) (1,731) 491 (3,510) (3,019)
Savings deposits .................. 63 (340) (277) (243) (508) (751)
Money market accounts ............. 300 2,996 3,296 (40) 4,097 4,057
Certificates of deposit ........... 734 (229) 505 (261) 789 528
Brokered certificates of deposit .. (560) 3,579 3,019 (298) 2,806 2,508
Individual Retirement Accounts .... 32 (250) (218) 141 (134) 7
------ ------ ------ -------- ------- ------
Total interest-bearing deposits ... 1,171 3,423 4,594 (210) 3,540 3,330
Federal funds purchased
and repurchase agreements ..... 300 1,419 1,719 169 (233) (64)
Other short-term borrowings ..... 54 436 490 (834) 968 134
Long-term debt .................. 120 1,211 1,331 (79) 5,147 5,068
------ ------ ------ -------- ------- ------
Total borrowed funds .......... 474 3,066 3,540 (744) 5,882 5,138
------ ------ ------ -------- ------- ------
Total interest-bearing liabilities 1,645 6,489 8,134 (954) 9,422 8,468
------ ------ ------ -------- ------- ------
Increase (decrease) in
net interest income $(1,689) $ 6,728 $ 5,039 $ (971) $ 6,203 $ 5,232
</TABLE>
Provision for Loan Losses
The provision for loan losses in 1997 was $9.5 million, or 0.64%
of average loans, a decrease of $4.4 million from the $13.9 million, or 1.03%
of average loans, in 1996. In 1995, the company recorded a provision of $5.3
million, or 0.44% of average loans.
Net loan charge-offs were $5.5 million in 1997, compared with $11.6
million in 1996, and $2.0 million in 1995. 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 0.38%
in 1997, compared with 0.86% in 1996, and 0.17% in 1995. For the five year
period from 1993 through 1997, net charge-offs averaged 0.40%.
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 1997 and 1996 as compared to 1995 reflects overall
growth in the loan portfolio as well as a higher level of non-performing loans.
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 1997 increased 16% over 1996 after increasing
22% from 1995 to 1996. The increases in non-interest income were due to:
Increase (Decrease) in
Non-Interest Income
In thousands 1997 vs. 1996 1996 vs. 1995
------------- -------------
Service charges on deposit accounts .................. $ 613 $ 1,069
Net gains and losses on sale of securities ........... (376) (180)
Increase (decrease) in mortgage banking income due to:
Recognition of mortgage servicing rights ....... (396) 174
Gain on sale of mortgage loans held for sale ... 1,083 1,580
Mortgage servicing fees ........................ 1,205 2,965
Gain on sale of mortgage servicing rights ...... 889 (1,687)
Trust service fees ................................... 520 563
Brokerage income ..................................... 742 473
Travel agency fees ................................... (650) 335
Credit life insurance fees ........................... 200 252
Gain on sale of branch offices ....................... 1,241 --
All other non-interest income ........................ (350) (266)
------ -------
Total increase in non-interest income .......... $ 4,721 $ 5,278
The increases in non-interest income reflect the company's focus on
its expanding mortgage banking, securities brokerage and trust businesses, as
well as significant improvements in service charges on deposit accounts. Income
from the mortgage banking business includes an $889 thousand pre-tax gain from
the sale of $256 million of mortgage servicing during 1997. The sale allowed the
company to take advantage of attractive market prices, while reducing exposure
to future prepayment risk. Even excluding the sale, growth in the mortgage
servicing portfolio resulted in a $1.9 million increase in other mortgage
banking income for 1997 as compared with 1996. In 1995, the company sold a $168
million mortgage loan servicing portfolio, resulting in a $1.7 million pre-tax
gain.
Non-interest income for 1997 also reflects a $1.2 million pre-tax gain
on the sale of two Tennessee banking offices. The sale of these two offices was
part of the company's plan to improve efficiency of its distribution network by
reallocating resources toward markets with more growth potential. Partially
offsetting these improvements in 1997 was $356 thousand in net security losses
taken to reposition the investment portfolio into higher-yielding securities.
The decrease in travel agency fees in 1997 as compared with 1996 is the result
of the company's exit from the 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 1997, net of the sales in 1995 and 1997. The significant increase in
mortgage servicing fees in 1996 as compared with 1995 was due to this growth in
the servicing portfolio.
Most of the increase in mortgage banking income in 1997, however, was
due to fees associated with mortgage loans originated or purchased and then sold
in the secondary market. In the fourth quarter of 1995, TFMC acquired
Correspondents Mortgage Company, L.P. of Greensboro, North Carolina, doubling
TFMC's wholesale mortgage lending capacity. The Greensboro office accounted for
$2.1 million of the $4.7 million increase in mortgage banking income from 1995
to 1996.
The company accounts for mortgage servicing rights ("MSR's") in
accordance with Statement of Financial Accounting Standards No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS 125"). SFAS 125 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 through loan originations. As a result
of SFAS 125, the company recognized in 1997 $1.0 million in non-interest income,
before amortization, compared with $1.4 million in 1996 and $1.2 million in
1995.
Non-interest Expenses
Non-interest expenses for 1997 decreased 14% from 1996, after
increasing 22% from 1995 to 1996. The changes in non-interest expense over these
periods were due to:
Increase (Decrease) in
Non-Interest Expenses
In thousands
1997 vs. 1996 1996 vs. 1995
------------- --------------
1996 second quarter initiatives .................. $(5,807) $ 5,807
Incentive-based compensation ..................... 439 1,426
All other compensation and employee benefits ..... (1,816) 4,115
Hiring and relocation ............................ (341) (210)
Occupancy expense ................................ (71) (105)
Furniture, equipment and communications expense .. 365 1,463
Deposit insurance:
Deposit insurance premiums ....................... (608) (1,073)
1996 SAIF assessment, net of fourth quarter refund (2,563) 2,563
Advertising and public relations expense ......... 88 (410)
Travel and entertainment ......................... (299) 70
Professional fees ................................ (272) (594)
Postage, printing and supplies ................... (532) 482
Foreclosed asset expense ......................... 246 (495)
Processing fees .................................. 423 931
All other non-interest expenses .................. (761) 623
-------- ------
Total increase (decrease) in non-interest expense $(11,509) $14,593
The decreased expenses in 1997 are a direct result of the cost control
efforts in connection with the company's initiative to refocus the company's
resources on core financial services, which began in mid-1996. Costs associated
with this initiative, which were recognized in the second quarter of 1996,
included 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 provided 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 were 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
======
As a result of higher revenues and lower operating expenses, the efficiency
ratio (a measure of operating expenses per dollar of income) decreased to 61.26%
in 1997 (excluding the mortgage servicing and branch sale gains, and net
securities losses)--a substantial improvement over the 71.6% efficiency ratio in
1996 (excluding the $5.8 million in costs associated with the refocus
initiative).
Although the company is committed to maintaining strict expense control,
increased expenses for furniture, equipment and communications over the past two
years reflect another commitment: to invest in new technology, distribution
channels and product lines, to provide enhanced customer service and support
future growth. To support expanded distribution channels and product lines, the
company has incurred higher external data processing costs, primarily for
mortgage loan servicing and electronic delivery of financial services. These
costs have increased $0.4 million and $0.9 million in 1997 and 1996,
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 (a refund of $122 thousand was received from
the SAIF in the fourth quarter of 1996). The $1.1 million decrease in deposit
insurance premiums in 1996 and the $0.6 million decrease in 1997 were due to a
reduction from $0.23 to $0.04 per $100 of deposits insured through the Federal
Deposit Insurance Corporation's Bank Insurance Fund ("BIF"), effective June 1,
1995, and to zero effective January 1, 1996. Insurance premiums on SAIF-insured
deposits remained at $0.23 through 1996, but were reduced in 1997 to $0.065 per
$100 of SAIF-insured deposits. 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.
Compensation and benefits increased $5.5 million in 1996 (excluding
the refocus initiative charges) as compared to 1995, including a $1.4
million increase in performance-based compensation.
Income Taxes
The company had income tax expense of $12.1 million in 1997, compared with
$3.1 million in 1996 and $7.4 million in 1995. These represent effective tax
rates of 33.5%, 31.2% and 32.6%, 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 1997 totaled $2.1 billion, compared with $2.0 billion at
December 31, 1996. On an average basis, total assets increased $131 million from
1996 to 1997, after increasing $184 million from 1995 to 1996. Average
interest-earning assets increased $137 million from 1996 to 1997, and increased
$165 million from 1995 to 1996.
Loans
Total loans, net of unearned income, averaged $1.473 billion in 1997,
compared with $1.347 billion in 1996 and $1.190 billion in 1995. At year-end
1997, loans totaled $1.538 billion, compared with $1.451 billion at
December 31, 1996, and $1.259 billion at the end of 1995.
Over the past five years, the company has experienced strong loan growth
throughout its markets, with particular strength in middle market commercial and
commercial real estate. The following table presents a summary of the loan
portfolio by category over that period.
<TABLE>
Loans Outstanding
December 31
In thousands
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial ...................... $ 453,487 $ 466,365 $ 372,822 $ 318,970 $ 320,952
Commercial real estate .......... 539,860 470,235 397,741 334,567 234,308
Residential real estate ......... 344,008 335,433 336,769 323,541 292,021
Consumer:
Home equity lines ............ 79,716 50,461 20,928 16,064 11,262
Other consumer ............... 122,835 130,444 132,401 153,754 150,202
----------- ----------- ----------- ----------- -----------
Total loans .................. 1,539,906 1,452,938 1,260,661 1,146,896 1,008,745
Less unearned income ............ (2,086) (1,939) (2,150) (3,063) (3,656)
----------- ----------- ----------- ----------- -----------
Loans, net of unearned income $ 1,537,820 $ 1,450,999 $ 1,258,511 $ 1,143,833 $ 1,005,089
</TABLE>
Loan Concentrations
Much of the increase in commercial and commercial real estate loans is
financing the operations of the company's commercial customers. 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, 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, 1997
As a percentage of total loans
Agriculture ........................................... 3.6%
Apartment buildings ................................... 2.4
Construction and land development ..................... 10.1
Finance and insurance ................................. 3.2
Manufacturing:
Durable goods ...................................... 6.3
Nondurable goods ................................... 3.6
Mining ................................................ 2.4
Services:
Health ............................................. 2.5
Hotels and motels ................................. 4.3
Other than health and hotels ....................... 5.1
Wholesale trade ....................................... 3.1
Retail trade:
Restaurants ........................................ 3.3
Food stores ........................................ 2.1
Automotive ......................................... 1.7
Other .............................................. 2.2
Other commercial real estate .......................... 7.1
All other commercial loans ............................ 1.6
-----
Total commercial and commercial real estate loans 64.6
Residential real estate loans ......................... 27.4
Consumer loans ........................................ 8.0
-----
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 commercial real estate loans totaling $7.4 million to a Mexican
affiliate of a U.S. corporation. The loans represent financing for an essential
part of the operations of an established customer located in Kentucky and are
guaranteed by the U.S. corporation.
As of December 31, 1997, the company's 40 largest credit relationships
consisted of loans and loan commitments ranging from $5 million to $17 million,
one of which was classified as a non-accrual loan (see the Asset Quality
discussion below). The aggregate amount of these credit relationships was $420
million. These large credit relationships have been underwritten and structured
to minimize the company's exposure to loss. However, a significant deterioration
in the financial condition of one or more of these borrowers could result in an
increase in the company's loan charge-offs. In addition, the prepayment of one
or more of these credits or their refinancing at another financial institution
may have a negative impact on the company's future loan growth.
The following table sets forth the maturity distribution and interest rate
sensitivity of commercial and commercial real estate loans as of December 31,
1997. 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.
Loan Maturities and Rate Sensitivity
December 31, 1997
In thousands One Year One Through Over Total
or Less Five Years Five Years Loans
By maturity date:
Commercial ................. $192,995 $119,727 $140,765 $453,487
Commercial real estate ..... 116,199 92,653 331,008 539,860
-------- -------- ------- --------
Total .................... $309,194 $212,380 $471,773 $993,347
Fixed rate loans ........... $ 54,802 $ 66,046 $ 68,770 $189,618
Floating rate loans ........ 254,392 146,334 403,003 803,729
-------- -------- ------- --------
Total .................... $309,194 $212,380 $471,773 $993,347
By next repricing opportunity:
Commercial ................. $402,970 $ 37,595 $ 12,922 $453,487
Commercial real estate ..... 436,537 47,139 56,184 539,860
-------- -------- ------- --------
Total .................... $839,507 $ 84,734 $ 69,106 $993,347
Fixed rate loans ........... $ 54,802 $ 66,046 $ 68,770 $189,618
Floating rate loans ........ 784,705 18,688 336 803,729
-------- -------- ------- --------
Total .................... $839,507 $ 84,734 $ 69,106 $993,347
Asset Quality
Non-performing loans, which include non-accrual loans, accruing loans past
due over 90 days and restructured loans, totaled $24.5 million at the end of
1997, and $10.6 million at December 31, 1996. The ratio of non-performing loans
to year-end loans was 1.59%, compared with 0.73% at year-end 1996 and 1.38% at
December 31, 1995.
The increase in 1997 is primarily attributable to $11.5 million of loans to
a coal mining operation. The terms of this loan were modified during the third
quarter of 1997 to defer principal payments through the end of the year.
Accordingly, the loan was classified as restructured at that time. By December
31, 1997, management concluded that the cash flow from the coal mining operation
had not improved sufficiently in order to service the debt under the
restructured agreement; therefore, it was reclassified as a non-accrual loan.
The company is closely monitoring its $33.5 million exposure to the coal
industry consisting of the non-accrual loan mentioned above as well as an
additional 112 relationships, with the next largest single credit exposure
totaling $3.8 million. This $3.8 million credit was subsequently paid off in
1998; the company's next largest coal credit totals $2.7 million. The increase
in non-performing loans in 1995 was primarily due to placing one commercial loan
in non-accrual status during the fourth quarter of that year.
Non-performing assets, which include non-performing loans, foreclosed real
estate and other foreclosed property, totaled $25.5 million at year-end 1997,
and the ratio of total non-performing assets to total assets increased to 1.21%
at year-end 1997, from 0.62% at December 31, 1996, due primarily to the increase
in non-performing loans.
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>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual loans $21,803 $ 4,717 $12,708 $ 4,375 $ 5,926
Accruing loans which are contractually
past due 90 days or more ...................... 1,991 5,863 4,617 3,514 2,377
Restructured loans .............................. 687 4 14 30 1,591
------- ------- ------- ------- -------
Total non-performing and restructured loans ... 24,481 10,584 17,339 7,919 9,894
Foreclosed real estate .......................... 845 1,608 4,329 4,998 5,869
Other foreclosed property ....................... 217 184 677 199 113
------- ------- ------- ------- -------
and foreclosed property ..................... $25,543 $12,376 $22,345 $13,116 $15,876
Non-performing and restructured loans
as a percentage of loans net of unearned income 1.59% 0.73% 1.38% 0.69% 0.98%
Non-performing and restructured loans and other
real estate as a percentage of total assets ... 1.21% 0.62% 1.24% 0.81% 0.99%
</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.
Six commercial credit relationships account for $17.3 million, or 79%, of
the company's non-accrual loans at December 31, 1997, and 71% of total
non-performing and restructured loans. The largest of these credits is the $11.5
million loan to the coal mining company mentioned above. The other five credits
consist of $1.8 million to a grocery chain, $1.3 million to a tobacco processing
company, $1.2 million to a trucking company, $0.8 million to a commercial real
estate developer and $0.7 million to a plastic injection-mold company. Of the
$3.5 million allowance for loan losses established in accordance with Statement
of Financial Accounting Standards No. 114, Accounting by Creditors for the
Impairment of a Loan, these six credits account for $3.0 million. The remaining
non-accrual balance consists of various commercial and consumer loans, with no
single loan exceeding $500,000.
The significant increases in 1996 and 1995 in accruing loans past due 90
days or more were principally related to residential real estate loans. Personal
bankruptcies, particularly Chapter 13 filings, have been rising in Kentucky and
Tennessee over the past three 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 were reported as more than
90 days past due and accruing interest prior to 1997. During 1997, approximately
$700 thousand of these past-due residential real estate loans were reclassified
to restructured from 90 days past due and accruing; approximately $1 million of
residential real estate loans were reclassified during 1997 from 90 days past
due to non-accrual.
Foreclosed real estate at December 31, 1997, consists of several
properties, with no single property exceeding $225,000.
As of December 31, 1997, the company had $4.1 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 represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans. The
adequacy of the allowance is determined on an ongoing basis through analysis of
the overall size and 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. The potential loss situations are
identified by account officers' evaluations of their own portfolios, as well as
by an independent loan review function.
The allowance for loan losses is established through a provision for loan
losses charged to expense. At December 31, 1997, the allowance was $22.0
million, compared with $18.1 million at December 31, 1996, and $15.8 million at
December 31, 1995. The ratio of the allowance for loan losses to total loans
(excluding mortgage loans held for sale) at December 31, 1997, was 1.43%,
compared with 1.25% at December 31, 1996, and 1.25% at December 31, 1995. The
increase from December 31, 1995 reflects in part management's review of the
growth in the loan portfolio, the continuing concentrations of credit among the
company's largest credit relationships, and anticipated general economic
conditions in the company's markets.
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>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ................. $ 18,065 $ 15,779 $ 12,529 $ 12,505 $ 9,596
Provision for loan losses .................... 9,500 13,914 5,260 2,212 2,794
Balance of allowance for loan losses
of acquired subsidiaries at acquisition date -- -- -- -- 2,433
Amounts charged off:
Commercial and commercial real estate ...... 4,208 10,012 993 1,873 2,195
Residential real estate .................... 470 372 106 80 315
Consumer ................................... 1,709 2,083 1,426 838 936
---------- ---------- ---------- ---------- ----------
Total loans charged off .................... 6,387 12,467 2,525 2,791 3,446
Recoveries of amounts previously charged off:
Commercial and commercial real estate ...... 351 390 228 232 615
Residential real estate .................... 44 38 8 41 115
Consumer ................................... 444 411 279 330 398
---------- ---------- ---------- ---------- ----------
Total recoveries ........................... 839 839 515 603 1,128
---------- ---------- ---------- ---------- ----------
Net charge-offs ............................ 5,548 11,628 2,010 2,188 2,318
---------- ---------- ---------- ---------- ----------
Balance at end of year ....................... $ 22,017 $ 18,065 $ 15,779 $ 12,529 $ 12,505
Total loans, net of unearned income:
Average .................................... $1,473,103 $1,346,754 $1,190,101 $1,073,580 $ 898,834
At December 31 ............................. 1,537,819 1,450,999 1,258,511 1,143,833 1,006,796
As a percentage of average loans:
Net charge-offs ............................ 0.38% 0.86% 0.17% 0.20% 0.26%
Provision for loan losses .................. 0.64 1.03 0.44 0.21 0.31
Allowance as a percentage of year-end loans .. 1.43 1.25 1.25 1.10 1.24
Allowance as a percentage of non-performing
and restructured loans ..................... 90% 171% 91% 158% 126%
</TABLE>
The allowance as a percentage of non-performing loans was 90% at December
31, 1997, as compared to 171% at year-end 1996, and 91% at December 31, 1995.
The fluctuations in the allowance as a percentage of non-performing loans from
December 31, 1994 to December 31, 1996 are in part the result of the company's
placement of one significant loan into non-performing loans at year-end 1995,
thus reducing the ratio of the allowance to non-performing loans. That
borrower's financial condition, along with the financial condition of two other
significant credits, deteriorated in the second quarter of 1996, resulting in
partial charge-offs totaling $7.0 million of these loans in 1996. As a result of
net loan charge-offs of $11.6 million and a provision for loan losses of $13.9
million during 1996, the ratio of the allowance for loan losses to
non-performing loans increased to 171% at December 31, 1996. The decrease in the
ratio at December 31, 1997, is the result of the previously-mentioned $11.5
million coal mining loan, which was classified as non-performing at year-end
1997.
Management believes that the allowance for loan losses at December 31,
1997, 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 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. Further discussion on the allowance for loan losses is included later
in this review in the Year 2000 Risks section.
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 1997 1996 1995 1994 1993
Commercial ............ $12,909 $ 9,080 $ 9,133 $ 7,529 $ 6,870
Commercial real estate 5,631 5,375 4,089 1,883 1,718
Residential real estate 1,053 1,010 640 977 1,358
Consumer .............. 2,424 2,600 1,917 2,140 2,559
------- ------- ------- ------- -------
Total .............. $22,017 $18,065 $15,779 $12,529 $12,505
<TABLE>
Allocation of Year-end Allowance for Loan Losses
and Percentage of Each Type of Loan to Total Loans
<CAPTION>
December 31 1997 1996 1995 1994 1993
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ............ 58.6% 29.5% 50.2% 32.0% 57.9% 29.5% 60.1% 27.8% 54.9% 31.7%
Commercial real estate 25.6 35.0 29.8 32.4 25.9 31.6 15.0 29.2 13.7 23.2
Residential real estate 4.8 27.4 5.6 26.6 4.1 28.4 7.8 29.6 10.9 30.2
Consumer .............. 11.0 8.1 14.4 9.0 12.1 10.5 17.1 13.4 20.5 14.9
------ ---- ---- ---- ---- ---- ---- ---- ---- ----
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 $265 million in 1997, compared with $292 million in 1996 and
$305 million in 1995. 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 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, 1997.
Carrying Value of Securities Available for Sale
December 31
In thousands
1997 1996 1995
U.S. Treasury and federal agencies $139,029 $128,296 $142,199
Collateralized mortgage obligations
and mortgage-backed securities ... 53,375 67,626 81,900
State and municipal obligations ... 47,881 51,311 55,552
Other securities .................. 37,813 37,922 18,571
-------- -------- --------
Total securities available for sale $278,098 $285,155 $298,222
<TABLE>
Maturity Distribution of Securities Available for Sale
December 31, 1997
Dollars in thousands
<CAPTION>
Over Over
One Year Five Years Over
One Year Through Through Ten Equity Total Market
or Less Five Years Ten Years Years Securities Maturities Value
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and federal agencies ... $100,176 $13,031 $25,633 $ -- $ -- $138,840 $139,029
Collateralized mortgage obligations
and mortgage-backed securities:(F1) 25,634 20,208 1,422 5,906 -- 53,170 53,375
State and municipal obligations ...... 3,683 15,351 17,584 9,884 -- 46,502 47,881
Other securities ..................... 9,677 2,296 425 -- 25,644 38,042 37,813
-------- -------- -------- ------- ------- ------- --------
Total securities available for sale $139,170 $50,886 $45,064 $15,790 $25,644 $276,554 $278,098
Percent of total ..................... 50.33% 18.40% 16.29% 5.71% 9.27% 100.00%
Weighted average yield(F2) ............ 5.54% 5.52% 5.94% 5.63% 7.10% 5.75%
<FN>
(F1) Collateralized mortgage obligations and mortgage-backed securities are
grouped into average lives based on December 1997 prepayment projections.
(F2) The weighted average yields are based on amortized cost.
</FN>
</TABLE>
Mortgage Servicing Rights
As mentioned previously, rights to service mortgage loans for others
("MSR's") are recognized as assets, whether those assets were acquired in
purchase transactions or through loan originations. MSR's totaled $46.9 million
at December 31, 1997, compared with $41.6 million at December 31, 1996, and
$28.3 million at year-end 1995.
During 1996 and 1995, the company purchased servicing portfolios with
mortgage loan principal balances of $1.0 billion and $1.2 billion, respectively,
recognizing MSR's of $12.5 million and $21.1 million, respectively, on these
purchased portfolios. During 1997 and 1996, the company recognized MSR's of
$14.3 million and $4.9 million, respectively, related to wholesale mortgage loan
originations.
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, based on management's best estimate of remaining loan lives. Prepayments
of mortgage loans, which can have a considerable impact on the value of the MSR
portfolio, result from a variety of factors, of which the most significant is a
declining mortgage loan interest rate environment that encourages individuals to
refinance existing mortgage loans at a lower rate.
For valuation purposes, serviced loans are stratified into four interest
rate tranches (less than 7%, 7% to 7.99%, 8% to 8.99%, and greater than 9%) and
two loan types (conventional and Government-insured). Management believes that
these interest rate tranches represent meaningful aggregations of loans that
would react similarly to interest rate changes. The two loan types take into
account the difference in servicing fees and prepayment rates on these two types
of loans: Government-insured loans typically command higher servicing fees and
historically have lower prepayment rates than conventional mortgage loans.
Impairment and subsequent adjustments in each stratum, if any, are recognized by
a valuation allowance and a charge against servicing income.
As of December 31, 1997, approximately 40% 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 7.47%. Approximately 61% of the MSR
asset for this tranche is related to conventional loans and 39% to
Government-insured loans. Loans with contractual rates from 8% to 8.99%, with a
weighted average rate of 8.31%, account for another 44% of the MSR balance.
Approximately 46% of the MSR for this tranche is related to conventional loans
and 54% to Government-insured loans. Loans with contractual rates of 9% and
above account for 11% of the MSR asset; the remaining 5% of the MSR asset is
related to loans with rates less than 7%.
To mitigate its prepayment risk in a declining interest rate environment,
the company purchased two interest rate "floor" contracts that provide for the
company to receive interest on the notional amount of the contract to the extent
that the interest rate on the ten-year constant maturity U.S. Treasury Note
("CMT") falls below the contract rate. The first contract, purchased in 1996,
has a notional amount of $75 million and a contract rate of 5.50%. The cost of
this contract was $548,000 and its fair value at December 31, 1997 was $689,000.
The second contract, purchased in 1997, has a notional amount of $100 million
and a contract rate of 5.25%. The cost of this contract was $455,000 and the
fair value at December 31, 1997 was $790,000. Interest rate floors typically
increase in value in a declining long-term interest rate environment, and
decrease in value as rates rise. The company's two floors are hedging specific
interest rate tranches of the MSR asset. Management believes that the increase
in market value of these two floor contracts which would result from a 50
basis-point drop in the interest rate on ten-year CMT's would partially offset
the impairment in the MSR likely to occur with such a decline in interest rates.
The cost of these contracts, which is included with the MSR asset on the
consolidated balance sheet, is being amortized against mortgage servicing income
on a straight-line basis over the five-year lives of the contracts.
During 1997, the company sold $4.1 million of MSR's associated with
approximately $256 million of conventional mortgage loans in order to reduce
potential impairment while taking advantage of relatively high market prices for
servicing. The company recognized a pre-tax gain on sale (net of related selling
expenses) of $889,000.
As of December 31, 1997, mortgage rates had fallen to the lowest level in
the past three years and many industry reports indicated that a new surge in
mortgage refinancings is likely. Should interest rates decline more than 50
basis points from year-end 1997 levels, the MSR carrying value would likely
become impaired in future periods. To address this potential impairment,
management has taken additional actions subsequent to December 31, 1997, to
limit the company's exposure, including additional sales of MSR's.
Deposits
Total deposits averaged $1.5 billion in 1997, a $64 million, or 4%,
increase over 1996. Average deposits for 1996 were $1.5 billion, a 6% increase
over 1995. Approximately 88% of the increase in average deposits was due to
brokered certificates of deposit--$50 million issued during the fourth quarter
of 1996, $25 million in the second quarter of 1997 and $15 million in the fourth
quarter of 1997--in order to fund loan growth.
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 $349.5 million at December 31,
1997, compared with $336.1 million at December 31, 1996. Interest expense on
time deposits of $100,000 or more was $19.4 million in 1997, $16.5 million in
1996, and $11.8 million in 1995. The following table shows the maturities of
time deposits of $100,000 or more, including brokered certificates of deposit,
as of December 31, 1997.
Maturity of Time Deposits of $100,000 or More
December 31, 1997 - In thousands
Three months or less $ 75,187
Over three through six months 60,754
Over six through twelve months 46,364
Over one year through two years 27,413
Over two years through five years 99,043
Over five years 40,709
-------
Total $349,470
Brokered certificates of deposit, which are included in the above maturity
schedule, mature as follows:
Maturity of Brokered Certificates of Deposit
December 31, 1997 - In thousands
Three months or less $ -
Over three through six months 19,960
Over six through twelve months -
Over one year through two years 84,910
Over two years through five years 39,990
Over five years -
-------
Total $144,860
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.
Short-term Borrowings
Dollars in thousands
1997 1996 1995
Federal funds purchased
and repurchase agreements:
Balance at year end ................. $109,348 $ 71,879 $ 75,594
Weighted average rate at year end ... 5.95 % 6.26 % 4.83 %
Average balance during the year ..... 69,455 42,010 47,219
Weighted average rate during the year 5.28 % 4.64 % 4.26 %
Maximum month-end balance ........... 119,588 89,640 82,607
Other short-term borrowings:
Balance at year end ................. 70,000 55,000 45,014
Weighted average rate at year end ... 5.74 % 5.42 % 6.67 %
Average balance during the year ..... 63,863 56,136 40,652
Weighted average rate during the year 5.65 % 5.55 % 7.34 %
Maximum month-end balance ........... 105,000 70,005 61,831
Total short-term borrowings:
Balance at year end ................. 179,348 126,879 120,608
Weighted average rate at year end ... 5.86 % 5.90 % 5.52 %
Average balance during the year ..... 133,318 98,146 87,871
Weighted average rate during the year 5.46 % 5.16 % 5.69 %
Maximum month-end balance ........... 199,588 159,645 120,608
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, 1997 and 1996, the rates the company paid for federal
funds, excluding repurchase agreements, on these dates were also unusually high
(6.73% and 7.12% respectively). The weighted average rates on the company's
federal funds purchased on the preceding business day were 5.90% and 5.61%,
respectively. On the first business day after year-end the weighted average
rates were 5.93% and 5.61%, respectively. Other short-term borrowings
principally represent Federal Home Loan Bank ("FHLB") advances to TFB-KY (with
varying maturity dates), which are funding residential mortgage and commercial
loans.
Long-term debt averaged $143.9 million in 1997, compared with $125.6
million in 1996 and $46.8 million in 1995. 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
and Market Risks section which follows and in note 14 to the consolidated
financial statements.
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. In addition,
TFB-TN borrowed $65 million on a long-term basis in the fourth quarter of 1997
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 $1.8 million at December 31, 1997, and $2.5 million at
December 31, 1996.
The company has a $3 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, 1997 or
1996. 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, 1997 and 1996 (calculated in
accordance with regulatory guidelines) were as follows:
December 31 1997 1996
Tier I risk-based capital ratio 8.48% 7.68%
Regulatory minimum 4.00 4.00
"Well-capitalized" minimum 6.00 6.00
Total risk-based capital ratio 11.71 10.87
Regulatory minimum 8.00 8.00
"Well-capitalized" minimum 10.00 10.00
Tier I leverage ratio 6.81 6.36
Regulatory minimum 3.00 3.00
"Well-capitalized" minimum 5.00 5.00
Capital ratios of all of the company's subsidiaries are in excess of
applicable minimum regulatory capital ratio requirements at December 31, 1997.
The increase in these capital ratios in 1997 is due to the company's increased
earnings. Notwithstanding the decline in net income in 1996, primarily due to
the loss incurred in the second quarter of that year, the Board of Directors
chose to maintain the quarterly dividend for that year at $0.16. As a result,
the company paid dividends slightly in excess of earnings for 1996. For 1997,
the quarterly dividend was increased to $0.17 and, combined with the improvement
in net income in 1997, this resulted in the company paying 32% of its net income
to shareholders as dividends. Although there can be no assurance, management
expects the company will pay dividends in 1998 of approximately 30% to 40% of
net income.
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, 1997, the retained earnings of the banks totaled $86.3 million,
of which $23.4 million was available for the payment of dividends to the parent
company.
Asset/Liability Management and Market Risks
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 1) rate-of-change
differentials, such as federal funds rates versus savings account rates; 2)
maturity effects, such as calls on securities; 3) rate barrier effects, such as
caps or floors on loans; 4) changes in balance sheet levels; 5) floating-rate
financial instruments 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; 6) leads and lags that occur as rates move away from current levels; and
7) the effects of prepayments on various assets, such as residential mortgages,
mortgage-backed securities and consumer loans.
The model is updated bi-monthly (or more frequently, if necessary) 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. Several rate index and yield curve
assumptions are used in the model. As an example, the company's most likely rate
environment as of December 31, 1997, assumed the 3-month Treasury rate at 5.21%,
rising to 5.25% by June 31, 1998, then falling back to 5.02% in December of
1998.
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 measured based on numerous interest
rate path valuations using statistical rate simulation techniques.
As of December 31, 1997, 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.
Derivative financial instruments 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, floors, futures and options with indices
that directly relate to the pricing of specific assets and liabilities of the
company.
Off-balance-sheet derivatives 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.
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. Interest rate
swap transactions are described more fully in note 14 to the consolidated
financial statements.
To mitigate its prepayment risk related to MSR's, the company purchased in
1997 and 1996 two interest rate "floor" contracts that provide for the company
to receive interest on the notional amount of the contract to the extent that
the interest rate on the ten-year CMT's falls below the contract rate. The cost
of these contracts is included in with the MSR asset in the consolidated balance
sheet. Fair values can be expected to vary inversely with market expectations
for intermediate-term interest rates. 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 mortgage interest rates.
The company minimizes the credit risk in all off-balance-sheet derivative
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 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. Management believes
there is minimal risk that the derivatives used for rate sensitivity management
will have any significant unintended effect on the company's financial condition
or results of operations.
The following illustrates the effects of an immediate 100- or
200-basis-point shift in market interest rates on 1) fair values of assets and
liabilities as compared to December 31, 1997 fair values, and 2) net interest
income for one year as compared to the most likely rate assumptions used in the
company's model:
<TABLE>
Market Risk Analysis
<CAPTION>
Increase (Decrease) in Fair Value
Decrease in Rates Increase in Rates
Carrying Fair 200 100 100 200
December 31, 1997 - In thousands Value Value b.p. b.p. b.p. b.p.
Market Risk-Sensitive Assets
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale ......... $ 278,098 $ 278,098 $ 12,900 $ 6,240 $ (5,863) $(11,378)
Mortgage loans held for sale .......... 118,485 118,707 194 97 (96) (192)
Loans, net ............................ 1,515,803 1,580,122 36,453 18,690 (17,710) (32,803)
Mortgage servicing rights and "floors" 46,870 52,747 (11,531) (8,348) 4,023 5,586
Interest rate swaps ................... -- 246 6,582 3,316 (3,389) (6,673)
---------- ---------- -------- -------- --------- --------
Total market risk-sensitive assets .... $1,959,256 $2,029,920 $ 44,598 $ 19,995 $(23,035) $(45,460)
% change in fair value of assets ...... 2.20% .99% -1.13% -2.24%
Market Risk-Sensitive Liabilities
Transaction deposit accounts .......... $ 549,355 $ 548,539 $ (630) $ (313) $ 313 $ 624
Savings accounts ...................... 95,571 87,621 (3,049) (1,234) 1,204 2,464
Certificates of deposit ............... 928,912 954,309 (15,262) (7,535) 7,237 14,457
Short-term borrowings ................. 179,348 179,521 (348) (173) 172 343
Long-term debt ........................ 185,293 190,875 (6,709) (3,307) 3,213 6,320
---------- ---------- -------- -------- --------- --------
Total market risk-sensitive liabilities $1,938,479 $1,960,865 $(25,998) $(12,562) $ 12,139 $ 24,208
% change in fair value of liabilities . -1.33% -0.64% 0.62% 1.23%
</TABLE>
<TABLE>
Market Risk Analysis
<CAPTION>
Most Increase (Decrease)
Likely in Interest Income and Expense
Rate Decrease in Rates Increase in Rates
Scenario
200 100 100 200
Dollars in thousands b.p. b.p. b.p. b.p.
Projected Interest Income
<S> <C> <C> <C> <C> <C>
Securities available for sale ....... $ 16,017 $ (1,467) $ (733) $ 734 $ 1,468
Mortgage loans held for sale ........ 10,936 (2,575) (1,288) 1,288 2,577
Loans, net .......................... 146,298 (21,377) (10,689) 10,687 21,367
Interest rate swaps ................. 1,269 5,614 2,807 (2,806) (5,613)
--------- -------- -------- -------- --------
Total interest income ............... $174,520 $(19,805) $ (9,903) $ 9,903 $ 19,799
% change in interest income ......... -11.35% -5.67% 5.67% 11.34%
Projected Interest Expense
NOW and money market deposit accounts $ 10,570 $ (2,397) $ (1,135) $ 363 $ 661
Savings accounts .................... 2,264 (723) (496) 368 655
Certificates of deposit ............. 52,385 (9,154) (4,577) 4,578 9,155
Short-term borrowings ............... 12,373 (4,372) (2,176) 2,140 4,255
Long-term debt ...................... 11,902 (588) (294) 294 588
--------- -------- -------- -------- --------
Total interest expense .............. $ 89,494 $(17,234) $ (8,678) $ 7,743 $ 15,314
--------- -------- -------- -------- --------
% change in interest expense ........ -19.26% -9.70% 8.65% 17.11%
Net interest income ................. $ 85,026 $ (2,571) $ (1,225) $ 2,160 $ 4,485
% change in net interest income ..... -3.02% -1.44% 2.54% 5.27%
</TABLE>
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.
Quarterly Results
Following is a summary of quarterly operating results for 1997 and 1996:
<TABLE>
Quarterly Results of Operations
In thousands, except per share data
<CAPTION>
1997 1996
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 ................... $42,364 $40,884 $39,504 $38,659 $ 38,995 $37,896 $ 36,215 $34,829
Interest expense .................. 21,510 20,541 19,790 19,359 19,215 18,626 17,940 17,285
------ ------ ------ ------ ------ ------ ------ ------
Net interest income ............... 20,854 20,343 19,714 19,300 19,780 19,270 18,275 17,544
Provision for loan losses ......... 2,000 2,650 2,900 1,950 2,651 1,621 8,421 1,221
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after provision 18,854 17,693 16,814 17,350 17,129 17,649 9,854 16,323
Non-interest income ............... 8,286 9,030 9,175 7,919 7,756 7,394 7,304 7,235
Non-interest expenses ............. 17,471 17,467 17,156 17,039 17,286 20,472 24,765 18,119
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes......... 9,669 9,256 8,833 8,230 7,599 4,571 (7,607) 5,439
Income tax expense ................ 3,289 3,113 2,971 2,682 2,284 1,557 (2,424) 1,703
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ................. $ 6,380 $ 6,143 $ 5,862 $ 5,548 $5,315 $ 3,014 $ (5,183) $ 3,736
Basic earnings (loss) per share ... $ 0.56 $ 0.54 $ 0.51 $ 0.49 $ 0.47 $ 0.27 $ (0.46) $ 0.33
Diluted earnings (loss) per share . 0.54 0.52 0.50 0.48 0.46 0.26 (0.46) 0.33
</TABLE>
Non-interest income in the second quarter of 1997 included a $1.2 million
pre-tax gain on the sales of two Tennessee offices. For the third quarter of
1997, non-interest income includes a $889 thousand pre-tax gain from the sale of
a portion of the mortgage servicing portfolio and a $489 pre-tax loss on the
sale of a portion of the securities portfolio.
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. The $8.4 million loan loss provision in the second quarter of 1996 was
due to several factors:
1) The charge-off of $7.0 million on three problem loans. Prior to the
second quarter of 1996, management expected two of these three borrowers to
be sold as going concerns and the loans to be repaid from the sales
proceeds. As a result, the company had previously allocated $4.2 million in
the allowance for loan losses for these three loans. Due to the rapid
deterioration in the financial condition of those borrowers in the second
quarter of 1996 and the resulting loss of interest by several potential
buyers, sale prospects became unlikely. As the possibility of sales as
going concerns grew less likely, management concluded that the collateral
securing the loans would likely have to be liquidated, resulting in larger
than anticipated losses on the loans. 2) Recent adverse loss trends for
consumer loans resulting from unprecedented levels of bankruptcies,
particularly personal bankruptcies in Kentucky and Tennessee. 3) Three
additional loans over $1 million (totaling $6.6 million) for which
information became known to the company during the quarter which caused
management to have serious doubts as to the ability of the borrowers to
comply with the loan repayment terms, but which were not included in
non-performing loans at June 30, 1996. 4) Continued strong growth in the
loan portfolio, particularly in large commercial relationships (over $5
million).
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.
Year 2000 Risks
The company is exposed to potential future losses, including litigation,
due to business interruption or errors, which could result if any of its
computer systems are not modified to ensure that dates beginning in January,
2000 are not misinterpreted by the system as January, 1900. This eventuality is
commonly referred to as the Year 2000 Problem ("Y2K"). A number of computer
systems which are affected by Y2K are utilized by the company to operate its
day-to-day business. Most of these systems use software developed by and
licensed from third party software vendors. Some of these software applications
have been customized by the company, while others have been developed
internally.
Management has established a task force to identify all instances where the
company is not currently Y2K compliant, and to take actions designed to bring
those systems into compliance before the end of 1999. The assessment phase of
this project has been completed, whereby the company has identified systems that
need modification, and the correction phase of the project has begun. The
correction phase is expected to be completed by the end of 1998, with all of
1999 dedicated to the testing phase. Total cost to the company of the correction
and testing phases is projected to be approximately $500 thousand.
The company is actively managing all of its third party software vendors to
obtain software corrections and warranty commitments. Management believes that
those software vendors which have been identified by the task force as essential
to the company's operations are currently on schedule to meet the company's Y2K
timetable. The company is acting upon the belief and understanding that all
federal agencies are actively managing the Y2K problems which are inherent in
the global banking and payments systems.
The company's credit customers are also subject to potential losses as a
result of Y2K exposure in their own computer systems as well as the computer
systems of their suppliers and customers. The company is working with those
customers that the company believes may be significantly affected to assess each
customer's Y2K exposure and the extent to which the customer has addressed the
problem. Any exposure which, in the opinion of management, is not adequately
addressed will be taken into account in assessing the loss potential, if any,
associated with that credit relationship.
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 and mortgage services; government legislation and regulation (which
changes from time to time and over which the company has no control); changes
in interest rates (both generally and more specifically mortgage interest
rates); material unforeseen changes in the liquidity, results of operations,
or financial condition of the company's customers; material unforeseen
complications related to addressing the Year 2000 Problem experienced
by the company, its suppliers, customers and governmental agencies; 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. The company undertakes no obligation to
republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
<TABLE>
Consolidated Statistical Information (F1)(F2)
For the years ended December 31
Dollars in thousands, except per share data
<CAPTION>
5-Year
Compound
1997 1996 1995 1994 1993 Growth Rate
<S> <C> <C> <C> <C> <C> <C>
Interest income ........................... $ 161,411 $ 147,935 $ 134,228 $ 113,982 $ 102,819 11.1%
Interest expense .......................... 81,200 73,066 64,599 47,375 44,250 11.7
------- ------- ------- ------- -------- ----
Net interest income ....................... 80,211 74,869 69,629 66,607 58,569 10.5
Provision for loan losses ................. 9,500 13,914 5,260 2,212 2,794 29.4
------- ------- ------- ------- -------- ----
provision for loan losses ............... 70,711 60,955 64,369 64,395 55,775 9.0
Non-interest income ....................... 34,410 29,689 24,411 17,170 17,032 20.1
Non-interest expenses ..................... 69,133 80,642 66,049 60,070 52,830 11.6
------- ------- ------- ------- -------- ----
effect of change in accounting principle 35,988 10,002 22,731 21,495 19,977 12.6
Income tax expense ........................ 12,055 3,120 7,416 7,075 6,223 13.5
------- ------- ------- ------- -------- ----
of change in accounting principle ....... 23,933 6,882 15,315 14,420 13,754 12.2
Cumulative effect of change in
accounting principle ..................... -- -- -- -- 296
------- ------- ------- ------- -------- ----
Net income ................................ $ 23,933 $ 6,882 $ 15,315 $ 14,420 $ 14,050 12.2
Net income applicable to common stock ..... $ 23,933 $ 6,882 $ 15,315 $ 14,366 $ 13,969 12.4
Per common share:
Basic earnings per share ................ $ 2.09 $ 0.61 $ 1.36 $ 1.29 $ 1.26 10.8
Diluted earnings per share .............. 2.04 0.60 1.35 1.28 1.24 10.2
Common shareholders' equity at year end . 13.14 11.55 11.49 9.96 9.96 7.8
Cash dividends declared ................. 0.68 0.64 0.60 0.56 0.51 9.1
Year-end common stock price ............. 38.88 23.00 17.88 13.00 16.50 20.7
At year end:
Total assets ............................ $ 2,115,011 $2,003,952 $1,795,649 $1,617,835 $1,597,453 8.9
Total loans, net of unearned income ..... 1,537,819 1,450,999 1,258,511 1,143,833 1,005,089 14.5
Total deposits .......................... 1,573,838 1,579,217 1,444,483 1,335,509 1,376,227 5.2
Long-term debt .......................... 185,293 140,903 86,605 37,334 54,217 53.2
Total shareholders' equity .............. 150,777 131,316 129,767 111,632 112,036 8.7
Common shareholders' equity ............. 150,777 131,316 129,767 111,632 111,026 8.9
Allowance for loan losses ............... 22,017 18,065 15,779 12,529 12,505 18.1
Selected ratios:
Return on average assets ................ 1.20% 0.37% 0.92% 0.91% 0.96%
Return on average shareholders' equity .. 17.03 5.32 12.55 12.89 13.24
Return on average common shareholders'
equity ................................. 17.03 5.32 12.55 12.92 13.29
Efficiency ratio(F3) ..................... 61.26 71.59 71.67 71.92 70.96
Average shareholders' equity to
average total assets .................... 7.06 6.97 7.30 7.05 7.25
Tier I leverage ratio ................... 6.81 6.36 6.92 7.07 6.46
Tier I risk-based capital ratio ......... 8.48 7.63 8.64 9.47 9.36
Total risk-based capital ratio .......... 11.71 10.80 12.15 13.31 13.50
Common dividend payout ratio ............ 33.31 106.51 44.49 43.88 41.05
Allowance for loan losses as a percentage
of year-end loans ..................... 1.43 1.25 1.25 1.10 1.24
Allowance for loan losses as a percentage
of non-performing loans ............... 89.9 170.7 91.0 158.2 126.4
Non-performing loans as a percentage
of year-end loans ..................... 1.59 0.73 1.38 0.69 0.98
Net charge-offs as a percentage
of average loans ........................ 0.38 0.86 0.17 0.20 0.26
Net interest margin (non-tax equivalent) 4.38 4.42 4.56 4.57 4.32
Other data:
Number of full-time-equivalent employees
at year end ............................. 895 881 932 836 829 5.9
Number of common shareholders
of record at year end (F2) ............... 1,683 1,706 1,810 1,907 1,273 10.3
Common share trading volume ............. 10,844,800 9,275,700 4,520,000 3,404,400 4,992,300 14.1
<FN>
(F1) During 1995 and 1993, the company acquired one commercial bank 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, the company merged with three 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 have not been restated
to reflect holders of shares issued in connection with these business
combinations.
(F3) Efficiency ratio is non-interest expense divided by net interest income
and non-interest income. For this calculation, non-interest income excludes
all gains and losses on sales of securities, mortgage servicing rights and
branches; non-interest expense for 1996 excludes the charges related to the
second quarter refocus initiatives.
</FN>
</TABLE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The information for this item is incorporated by reference to the
Asset/Liability Management and Market Risks section of Item 7., Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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, 1997 and 1996
Consolidated Statements of Income--Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Changes in Shareholders' Equity--Years ended
December 31, 1997, 1996 and 1995 Consolidated Statements of Cash
Flows--Years ended December 31, 1997, 1996 and 1995 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.
<PAGE>
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Trans
Financial, Inc. and subsidiaries as of December 31, 1997 and 1996, 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,
1997. 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
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Louisville, Kentucky
January 20, 1998
<PAGE>
<TABLE>
Consolidated Balance Sheets
December 31 - In thousands, except share data
<CAPTION>
1997 1996
Assets
<S> <C> <C>
Cash and due from banks ................................................... $ 70,774 $ 75,054
Interest-bearing deposits with banks ...................................... 99 98
Mortgage loans held for sale .............................................. 118,485 68,814
Securities available for sale (amortized cost
of $276,554 and $285,264, respectively) ................................... 278,098 285,155
Loans, net of unearned income ............................................. 1,537,820 1,450,999
Less allowance for loan losses ............................................ 22,017 18,065
---------- -----------
Net loans .............................................................. 1,515,803 1,432,934
Premises and equipment, net ............................................... 37,429 37,377
Mortgage servicing rights ................................................. 46,870 41,598
Other assets .............................................................. 47,453 62,922
----------- ----------
Total assets ........................................................... $ 2,115,011 $ 2,003,952
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing ................................................... $ 235,695 $ 231,717
Interest bearing ....................................................... 1,338,143 1,347,500
----------- -----------
Total deposits ......................................................... 1,573,838 1,579,217
Federal funds purchased and repurchase agreements ......................... 109,348 71,879
Other short-term borrowings ............................................... 70,000 55,000
Long-term debt ............................................................ 185,293 140,903
Other liabilities ......................................................... 25,755 25,637
---------- -----------
Total liabilities ...................................................... 1,964,234 1,872,636
Commitments and contingencies (notes 13 and 14)
Shareholders' equity:
Preferred stock ........................................................ -- --
Common stock, no par value. Authorized 50,000,000 shares;
issued and outstanding 11,471,689 and 11,372,532 shares, respectively 21,510 21,324
Additional paid-in capital ............................................. 46,284 44,745
Retained earnings ...................................................... 83,947 67,790
Net unrealized gain (loss) on securities available for sale, net of tax 882 (92)
Employee Stock Ownership Plan shares purchased with debt ............... (1,846) (2,451)
---------- -----------
Total shareholders' equity ............................................. 150,777 131,316
---------- -----------
Total liabilities and shareholders' equity ............................. $ 2,115,011 $ 2,003,952
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>
1997 1996 1995
Interest income
<S> <C> <C> <C>
Loans, including fees ........................... $ 146,284 $131,466 $115,757
U.S. Treasury and federal agencies .............. 10,293 11,450 13,532
State and municipal obligations ................. 2,459 2,820 2,861
Other securities ................................ 2,365 2,133 1,257
Other interest income ........................... 10 66 821
------- -------- --------
Total interest income ........................... 161,411 147,935 134,228
Interest expense
Deposits ........................................ 64,389 59,795 56,465
Federal funds purchased and repurchase agreements 3,668 1,949 2,014
Other short-term borrowings ..................... 3,607 3,117 2,983
Long-term debt .................................. 9,536 8,205 3,137
------- -------- --------
Total interest expense .......................... 81,200 73,066 64,599
--------
Net interest income ............................... 80,211 74,869 69,629
Provision for loan losses ....................... 9,500 13,914 5,260
------- -------- --------
Net interest income after provision for loan losses 70,711 60,955 64,369
Non-interest income
Service charges on deposit accounts ............. 10,154 9,541 8,472
Mortgage banking income ......................... 12,620 10,728 6,166
Gain on sale of mortgage servicing rights ....... 889 -- 1,687
Gain (loss) on sale of securities, net .......... (356) 20 200
Trust services .................................. 2,475 1,955 1,392
Brokerage income ................................ 2,943 2,201 1,728
Other ........................................... 5,685 5,244 4,766
------- -------- --------
Total non-interest income ....................... 34,410 29,689 24,411
Non-interest expenses
Compensation and benefits ....................... 34,752 37,927 30,588
Net occupancy expense ........................... 4,660 5,206 4,836
Furniture and equipment expense ................. 6,799 7,005 6,126
Deposit insurance ............................... 414 3,585 2,095
Professional fees ............................... 2,558 3,170 3,424
Postage, printing and supplies .................. 3,593 4,125 3,643
Communications .................................. 2,762 2,516 1,607
Processing fees ................................. 2,466 2,043 1,112
Loss on sale of fixed assets .................... -- 1,790 --
Other ........................................... 11,129 13,275 12,618
------- -------- --------
Total non-interest expenses ..................... 69,133 80,642 66,049
------- -------- --------
Income before income taxes ........................ 35,988 10,002 22,731
Income tax expense ................................ 12,055 3,120 7,416
------- -------- --------
Net income ........................................ $ 23,933 $ 6,882 $ 15,315
Basic earnings per share .......................... $ 2.09 $ 0.61 $ 1.36
Diluted earnings per share ........................ $ 2.04 $ 0.60 $ 1.35
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>
Employee
Net Stock
Unrealized Ownership
Gain (Loss) Plan
Common Stock Additional on Securities Shares Total
Number Paid-in Retained Available Purchased Shareholders'
of shares Amount Capital Earnings for Sale With Debt Equity
<S> <C> <C> <C> <C> <C> <C> <C>
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 on
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, net - - - - - 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 on
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, net - - - - - 578 578
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 11,372,532 21,324 44,745 67,790 (92) (2,451) 131,316
Net income for the year 23,933 23,933
Cash dividends declared on
common stock, $.68 per share (7,776) (7,776)
Stock options exercised, net of
shares redeemed 71,413 134 961 1,095
Common stock issued in connection
with dividend reinvestment and stock
purchase plan 12,561 24 321 345
Common stock issued in connection
with directors' stock compensation plan 15,183 28 257 285
Increase in net unrealized gain on
securities available for sale, net of tax 974 974
ESOP debt reduction, net - - - - - 605 605
--------------------------------------------------------------------------------------------
Balance, December 31, 1997 11,471,689 $21,510 $46,284 $83,947 $ 882 $(1,846) $150,777
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>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .................................................... $ 23,933 $ 6,882 $ 15,315
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses ................................. 9,500 13,914 5,260
Deferred tax expense (benefit) ............................ 504 (3,215) (2,387)
Loss (gain) on sale of securities ......................... 356 (20) (200)
Gain on sale of mortgage loans held for sale .............. (4,329) (3,642) (1,888)
Loss (gain) on sale of premises and equipment ............. (8) 1,790 (174)
Gain on sale of branches .................................. (1,241) -- --
Gain on sale of mortgage servicing rights ................. (889) -- (1,687)
Depreciation and amortization of fixed assets ............. 6,172 5,959 5,473
Amortization of intangible assets ......................... 1,294 1,361 1,394
Amortization of premium on securities and loans, net ...... 788 975 1,077
Amortization of mortgage servicing rights ................. 6,439 5,271 2,720
Increase in accrued interest receivable ....................... (575) (1,391) (1,736)
Decrease (increase) in other assets ........................... 15,991 (5,343) (10,759)
Increase (decrease) in accrued interest payable ............... (582) 916 3,588
Increase (decrease) in other liabilities ...................... 13 9,880 (4,993)
Sale of mortgage loans held for sale .......................... 1,032,880 614,452 150,359
Originations of mortgage loans held for sale .................. (1,078,222) (632,976) (188,578)
--------- --------- --------
Net cash provided by (used in) operating activities ......... 12,024 14,813 (27,216)
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits with banks (1) 99 --
Proceeds from sale of securities:
Available for sale .......................................... 25,722 9,417 33,165
Held to maturity ............................................ -- -- 2,568
Proceeds from prepayment and call of securities:
Available for sale .......................................... 26,263 37,794 22,940
Held to maturity ............................................ -- -- 4,758
Proceeds from maturities of securities:
Available for sale .......................................... 86,760 52,601 33,726
Held to maturity ............................................ -- -- 3,140
Purchase of securities:
Available for sale .......................................... (131,178) (87,233) (70,136)
Held to maturity ............................................ -- -- (3,000)
Net increase in loans ......................................... (94,051) (202,802) (117,938)
Purchase and origination of mortgage servicing rights ......... (15,773) (18,423) (21,994)
Net cash inflow from sale of branches ......................... (13,789) -- --
Proceeds from sale of mortgage servicing rights ............... 4,951 -- 2,180
Proceeds from sale of foreclosed assets ....................... 1,401 3,337 1,705
Purchases of premises and equipment ........................... (7,281) (8,835) (10,555)
Proceeds from disposal of premises and equipment .............. 366 2,924 836
Net cash and cash equivalents inflow from acquisitions ........ (1,733) -- 36,815
--------- --------- --------
Net cash used in investing activities ....................... (118,343) (211,121) (81,790)
Cash flows from financing activities:
Net increase in deposits ...................................... 10,626 134,734 67,869
Net increase (decrease) in federal funds purchased
and repurchase agreements ................................... 37,469 (3,715) 1,041
Net increase (decrease) in other short-term borrowings ........ 15,000 9,986 (3,019)
Proceeds from issuance of long-term debt ...................... 45,000 55,000 50,000
Repayment of long-term debt ................................... (5) (124) (60)
Proceeds from issuance of common stock ........................ 1,725 1,022 800
Dividends paid ................................................ (7,776) (7,244) (6,750)
--------- --------- --------
Net cash provided by financing activities ................... 102,039 189,659 109,881
Net increase (decrease) in cash and cash equivalents .......... (4,280) (6,649) 875
Cash and cash equivalents at beginning of year ................ 75,054 81,703 80,828
--------- --------- --------
Cash and cash equivalents at end of year ...................... $ 70,774 $ 75,054 $ 81,703
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 holding company
registered under the Bank Holding Company Act of 1956. The company has two
commercial bank subsidiaries--Trans Financial Bank, National Association
("TFB-KY"), consisting of all of the company's banking activities in Kentucky,
and Trans Financial Bank Tennessee, National Association ("TFB-TN"), consisting
of all of the company's Tennessee banking activity. (On July 26, 1997,
the company's former thrift subsidiary--Trans Financial Bank, F.S.B.--was
merged into TFB-KY, and its Tennessee operations were sold to TFB-TN. These
transactions consolidated the company's banking operations into its current
two national bank charters.) Collectively, these two subsidiaries 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").
During April 1997, the company sold substantially all of the deposits,
premises and equipment, and certain other assets of its Lebanon and Sparta,
Tennessee offices. These two offices represented approximately $17 million of
the company's total deposits as of March 31, 1997.
On August 29, 1997, the Trans Adviser family of mutual funds ("the Funds")
was transferred to the Countrywide Family of Funds. TFB-KY had acted as
investment adviser to the Funds, which had total assets of $159 million as of
June 30, 1997. However, as a result of this transfer, TFB-KY no longer acts as
investment adviser to the Funds. The transfer did not have a significant impact
on the company's financial condition or results of operations.
The company's financial services network is comprised of 49 office
locations serving 34 communities in Kentucky and Tennessee by offering
commercial and consumer banking, brokerage, mortgage and trust services. In
addition, the mortgage company operates 3 mortgage loan production offices in
Arkansas, Florida, and North Carolina. As of December 31, 1997, the company
employed 921 employees and serviced more than 83 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 and commercial banks 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 inter-company transactions and accounts have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with 1997 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 trading purposes.
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, other than consumer loans (which are charged off when delinquent 120 days
unless adequately secured and in the process of collection), 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 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 accounts for impaired loans in accordance with Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan ("SFAS 114"), as amended by Statement of Financial Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan--Income
Recognition ("SFAS 118"). SFAS 114, as amended, 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
and SFAS 118 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.
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, including the effects of forward delivery contracts.
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 accounts for mortgage servicing rights ("MSR's") in accordance
with Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125"). SFAS 125, which superseded Statement of Financial Accounting
Standards No. 122, Accounting for Mortgage Servicing Rights, 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 through
loan originations. Mortgage servicing rights ("MSR's") are recorded by
allocating the total cost of acquiring mortgage loans to the MSR's and the loans
(without the MSR's), based on their relative fair values.
The carrying value of MSR's and the related amortization are evaluated
quarterly in relation to estimated future net servicing revenues. The company
evaluates the value of the MSR's by estimating the fair value of 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.
Interest Rate Contracts
The company uses interest rate contracts (swaps and floors) to manage its
sensitivity to interest rate risk. These off-balance-sheet transactions are
employed to hedge the inherent interest rate risk of specific on-balance-sheet
assets or liabilities, rather than for speculative trading activity. These
instruments are designated as hedges on the trade date and would not be entered
into unless highly correlated with the financial instruments being hedged.
Generally, a high correlation exists when the contract and the hedged instrument
have the same maturity and similar rate characteristics.
Interest income and expense for each interest rate swap contract is accrued
over the term of the agreement as an adjustment to the yield of the related
asset or liability. Similarly, transaction fees are deferred and amortized
through interest income and expense over the lives of the agreements. The fair
market value of these instruments is not included in the financial statements.
Interest rate floor contracts are currently being utilized by the company
to mitigate the market risk of the mortgage servicing rights portfolio due to
prepayments associated with a decline in interest rates. Under these contracts
the company would receive "interest" on the notional amount to the extent that a
specified market rate for U.S. Treasury securities falls below the designated
"floor" rate. Any "interest" the company would recognize on these floor
contracts would be recorded as mortgage banking income rather than interest
income. Interest rate floors typically increase in value in a declining
long-term interest rate environment, and decrease in value as rates rise. The
company's two floors are hedging specific interest rate tranches of the MSR
asset. Management believes that the increase in market value of these two floor
contracts which would result from a 50 basis-point drop in the interest rate on
ten-year constant maturity U.S. Treasury Notes ("CMT's") would partially offset
the impairment in the MSR likely to occur with such a decline in interest rates.
The cost of these contracts is included in mortgage servicing rights in the
consolidated balance sheet and is amortized against mortgage banking income on a
straight-line basis over the lives of the contracts.
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
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123") permits entities to either 1) recognize as
expense over the vesting period the fair value on the date of grant of all
stock-based awards, or 2) apply Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related
interpretations, providing disclosures of pro forma net income and earnings per
share for stock options granted 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 SFAS
123 pro forma disclosures. As such, compensation expense is recognized on the
date of grant only if the market price of the underlying stock on the grant date
exceeds the exercise price.
Information regarding stock options is included in note 10.
Earnings Per Share
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"), which
established new standards for the calculation and presentation of earnings per
share ("EPS") in financial statements. SFAS 128, which became effective in the
fourth quarter of 1997 and was not permitted to be adopted earlier, replaces
primary and fully-diluted EPS with basic and diluted EPS. All prior periods have
been restated to conform to the SFAS 128 presentation.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share takes into account the dilutive effect of common stock
equivalents, such as stock options. For the company, basic EPS is slightly
higher than primary EPS because common stock equivalents are not considered in
basic EPS; diluted EPS for the company is essentially the same as primary EPS.
The weighted average number of shares outstanding used in the calculation
of earnings per share follows:
1997 1996 1995
Basic earnings per share:
Average common shares outstanding .. 11,432 11,347 11,246
Diluted earnings per share:
Average common shares outstanding .. 11,432 11,347 11,246
Effect of dilutive securities:
Options ......................... 290 106 81
Warrants ........................ -- -- 29
----- ------ ------
Average shares and share equivalents 11,722 11,453 11,356
Anti-dilutive securities that may dilute basic earnings per share in future
periods:
Number of stock options 265 289 421
Weighted average exercise price $35.96 $20.99 $16.40
Newly-Issued Accounting Standards
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"); and Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130
requires companies to present in their financial statements comprehensive income
and its components. In addition to items of income and expense reflected in the
consolidated statement of income, comprehensive income includes unrealized gains
and losses affecting shareholders' equity which are not included in the income
statement. SFAS 131 requires companies to report assets, profit or loss, certain
revenue and expense items, and descriptive information for each of their
operating segments. Operating segments are generally determined based on the
company's own method of regularly assessing the performance of the components of
the enterprise.
These two accounting standards will be adopted by the company in 1998 and,
because they affect financial reporting and disclosures only, they will have no
effect on the company's financial condition or results of operations.
(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, 1997, 1996 and 1995:
In thousands ............. 1997 1996 1995
Cash paid for interest ... $81,171 $72,266 $60,366
Cash paid for income taxes 11,739 1,955 10,323
Certain non-cash investing and financing activities of the company and
subsidiaries are summarized below:
1997 1996 1995
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 974 311 7,670
Effect on shareholders' equity of reductions
in Employee Stock Ownership Plan debt, net 605 578 669
For the subsidiaries
Loans transferred to foreclosed real estate
and other foreclosed assets ............... 1,522 1,161 1,493
Securities transferred from held to maturity
to available for sale under special one-time
reassessment guidance issued by the
Financial Accounting Standards Board ..... -- -- 76,921
(4) Business Combinations
On December 29, 1997, in an acquisition accounted for using the purchase
method of accounting, the company acquired Surety Mortgage, Inc. of Cape Coral,
Florida, for $1.733 million in cash, net of cash acquired. In accordance with
the purchase accounting method, the results of its operations and cash flows
have been included in the consolidated financial statements since the date of
acquisition only. Surety Mortgage was consolidated into the operations of TFMC.
Following is a summary of the net assets acquired in this transaction:
In thousands
Cash paid, net of cash acquired $(1,733)
Premises and equipment 60
Other assets 223
Excess of cost over net assets acquired $1,450
The excess of the cost over the value of net assets acquired was recorded
as goodwill.
On February 21, 1995, the company assumed $41 million of deposits, acquired
three branch facilities and $360 thousand of consumer loans related to the
Bowling Green and Scottsville, Kentucky branches of Fifth Third Bank of
Kentucky, Inc. These assets and liabilities were consolidated into the
operations of TFB-KY. On September 1, 1995, the company acquired AirLanse
Travel, a Louisville, Kentucky, travel agency, for cash and stock of the
company. AirLanse Travel was consolidated into the operations of Trans Travel,
Inc. (All of the assets of Trans Travel, Inc. were sold during the fourth
quarter of 1996, and the company exited the travel business.) On November 15,
1995, the company acquired for cash the assets of Correspondents Mortgage
Company, L.P., located in Greensboro, North Carolina. 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 million and issued 25,000 shares of common stock in connection with
these 1995 acquisitions, which were accounted for using the purchase method of
accounting. Accordingly, their results of operations and cash flows were
included in the consolidated financial statements beginning with 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 cost over net assets acquired 4,237
The excess of the cost over the value of net assets acquired was recorded
as deposit base premium and goodwill. Goodwill and deposit base premium from all
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
$9.164 million and $8.900 million at December 31, 1997 and 1996, respectively.
The carrying value and related lives of these intangible assets are reviewed for
possible impairment when events or changed circumstances may affect the
underlying basis of the asset.
(5) Cash and Due from Banks
Regulatory authorities require the banks to maintain reserve balances on
customer deposits. The amounts of required reserves totaled approximately
$16.930 million at December 31, 1997, and $14.740 million at December 31, 1996.
(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 million 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 million on
November 30, 1995, resulting in a net unrealized gain of $2.128 million.
No securities were classified as held to maturity or trading securities as
of December 31, 1997 or 1996. The following summarizes securities available
for sale at December 31, 1997 and 1996.
<TABLE>
December 31, 1997 (In thousands)
<CAPTION>
Amortized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S.Treasury and federal agency securities $138,840 $ 270 $ 81 $139,029
Collateralized mortgage obligation
and mortgage-backed securities ........... 53,170 387 182 53,375
State and municipal obligations .......... 46,502 1,387 8 47,881
Corporate debt securities ................ 12,398 70 - 12,468
Equity securities ........................ 25,644 7 306 25,345
-------- ------ ------- --------
Total securities available for sale .. $276,554 $2,121 $ 577 $278,098
December 31, 1996 (In thousands)
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
</TABLE>
Included in equity securities at December 31, 1997, are Federal Home Loan
Bank and Federal Reserve Bank stock of $17.355 million and $2.698 million
respectively. At December 31, 1996, these stock investments were $13.375
million and $1.977 million, respectively.
The amortized cost and approximate market value of debt securities at
December 31, 1997, 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.
<TABLE>
In thousands
<CAPTION>
Amortized Market
Cost Value
<S> <C> <C>
Due in one year or less .......................................... $113,536 $112,993
Due after one year through five years ............................ 30,678 31,041
Due after five years through ten years ........................... 43,642 44,784
Due after ten years .............................................. 9,884 10,560
-------- --------
197,740 199,378
Collateralized mortgage obligations and mortgage-backed securities 53,170 53,375
-------- --------
Total debt securities ........................................ $250,910 $252,753
</TABLE>
Securities with a carrying value of approximately $169.709 million and
$141.675 million at December 31, 1997 and 1996, respectively, were pledged to
secure public funds, trust funds and for other purposes.
Gross gains of $225 thousand, $105 thousand, and $293 thousand, and gross
losses of $581 thousand, $85 thousand and $93 thousand were realized on sales of
securities in 1997, 1996, and 1995, respectively. In 1995, the company sold
mortgage-backed securities with a carrying value of $2.568 million from the
held-to-maturity portfolio. A net loss of $82 thousand 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, 1997 and 1996, follows:
In thousands 1997 1996
Commercial ..................... $ 453,487 $ 466,365
Commercial real estate ......... 539,860 470,235
Residential real estate ........ 344,008 335,433
Consumer:
Home equity lines ........... 79,716 50,461
Other consumer .............. 122,835 130,444
Unearned income ................ (2,086) (1,939)
--------- -----------
Loans, net of unearned income $ 1,537,820 $ 1,450,999
Substantially all of the company's loans are to customers located in
Kentucky and Tennessee, in the immediate market areas of the banks. Customers in
the construction and land development industry account for 10.1% of the
company's total loan portfolio; no other industry group represents 10% or more
of the company's total loans.
The principal balance of non-accrual and restructured loans at December 31,
1997 and 1996, was $22.490 million and $4.721 million, respectively. The
interest that would have been recorded if all those loans were in an accrual
status in accordance with their original terms was $2.330 million in 1997, $543
thousand in 1996, and $1.441 million in 1995. The amount of interest income that
was actually recorded for those loans was $1.323 million in 1997, $38 thousand
in 1996, and $490 thousand in 1995.
The company's recorded investment in impaired loans (as defined in
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114")) was $17.584 million at December 31, 1997, and
$4.613 million at December 31, 1996. Of those amounts, $15.615 million and
$2.042 million, respectively, represent loans for which an allowance for loan
losses, in the amounts of $3.526 million and $809 thousand, have been
established under SFAS 114. For the years ended December 31, 1997 and 1996, the
recorded investment of impaired loans averaged $7.881 million and $8.611
million, respectively. Interest income recognized on impaired loans totaled $834
thousand in 1997 and $127 thousand for 1996.
An analysis of the changes in the allowance for loan losses follows:
In thousands 1997 1996 1995
Balance, January 1 ......................... $ 18,065 $ 15,779 $ 12,529
Provision for loan losses ................ 9,500 13,914 5,260
Loans charged off ........................ (6,387) (12,467) (2,525)
Recoveries of loans previously charged off 839 839 515
------ ------ --------
Net charge-offs .......................... (5,548) (11,628) (2,010)
------ ------ --------
Balance, December 31 ....................... $ 22,017 $ 18,065 $ 15,779
Loans to executive officers and directors and their associates, including
loans to affiliated companies for which these individuals are principal owners,
amounted to $73.432 million at December 31, 1997 and $55.397 million at December
31, 1996. During 1997, new loans of $77.788 million were made and repayments of
$58.769 million were received. Other changes include net decreases for changes
in executive officers and directors of $984 thousand. 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, 1997 and 1996, follows:
In thousands 1997 1996
Land and improvements ........................ $ 6,163 $ 6,429
Buildings and improvements ................... 32,963 31,890
Technology and communications equipment ...... 23,731 19,461
Furniture and equipment ...................... 19,419 19,930
------- -------
82,276 77,710
Less accumulated depreciation and amortization 44,847 40,333
------- -------
Total premises and equipment .............. $37,429 $37,377
The company leases office space in Bowling Green, Kentucky, and Nashville,
Tennessee, under long-term lease agreements. Rental expense for all real
property totaled $854 thousand and $1.357 million, respectively for 1997
and 1996.
Future minimum lease commitments as of December 31, 1997, under
non-cancelable leases with remaining terms exceeding one year are as follows:
In thousands
Year ended December 31
1998 $ 760
1999 766
2000 772
2001 804
2002 819
Later years 4,520
-------
Total lease commitments $8,441
<PAGE>
(9) Long-Term Debt and Other Short-Term Borrowings
Long-term debt consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
In thousands 1997 1996
<C> <C> <C>
7.25% Subordinated Notes; due September 15, 2003; interest payable quarterly ............. $ 32,740 $ 32,746
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
Senior bank notes; due May 30, 2000; interest at 7.132% payable semi-annually ............ 25,000 25,000
Advance from the Federal Home Loan Bank due
March 6, 1998; interest at 5.50%, payable monthly ..................................... 30,000 30,000
Advance from the Federal Home Loan Bank due
November 30, 1999; interest at 5.99%, payable monthly ................................. 25,000 --
Advance from the Federal Home Loan Bank due
November 6, 2000; interest at 6.10%, payable monthly .................................. 40,000 --
Employee Stock Ownership Plan ("ESOP") note payable to bank, due September 30, 2000;
interest at the prime rate; principal and interest payable quarterly ................... 1,847 2,451
Unsecured demand notes; interest at the prime rate less 150 basis points payable quarterly 706 706
-------- --------
Total long-term debt .................................................................. $185,293 $140,903
</TABLE>
Other short-term borrowings consisted of the following at December 31, 1997
and 1996:
In thousands 1997 1996
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
Advance from the Federal Home Loan Bank,
due January 29, 1998; interest at 5.69%, payable monthly 40,000 --
Advance from the Federal Home Loan Bank,
due March 30, 1998; interest at 5.81%, payable monthly . 30,000 --
------- -------
Total other short-term borrowings ....................... $70,000 $55,000
The prime interest rate associated with certain of the above obligations
was 8.50% at December 31, 1997, and 8.25% at December 31, 1996. Information
concerning securities sold under agreements to repurchase is presented
below:
Dollars in thousands
1997 1996
Average balance during the year $23,785 $18,415
Weighted average rate during the year 4.35 % 3.43 %
Maximum month-end balance 47,808 27,810
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 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, 1997, are
as follows:
In thousands
Year ended December 31
1998 $60,672
1999 25,671
2000 65,504
2001 -
2002 -
Later years 33,446
The company has a $3 million 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, 1997 or 1996.
(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
1997, 1996 and 1995 was $13.59, $6.65 and $4.64, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following
assumptions:
1997 1996 1995
Risk-free interest rate 5.85% 6.56% 5.74%
Expected life (years) 10 10 10
Expected dividend yield 2.00% 3.00% 3.00%
Stock price volatility 32% 32% 32%
A summary of the company's incentive stock option plans and non-qualified
stock option plan as of December 31, 1997, 1996 and 1995 and changes during the
years then ended is shown below:
<TABLE>
Incentive Stock Options
<CAPTION>
Weighted
Weighted Average
Average Fair Value
Number Exercise of Options
of shares Price Granted
<S> <C> <C> <C>
Options outstanding December 31, 1994 347,657 $13.24
Granted in 1995 233,350 13.59 $ 4.75
Exercised in 1995 (29,807) 7.66
Terminated or canceled in 1995 (56,273) 13.50
----------
Options outstanding December 31, 1995 494,927 13.71
Granted in 1996 332,975 18.91 6.96
Exercised in 1996 (9,265) 9.77
Terminated or canceled in 1996 (104,849) 15.39
----------
Options outstanding December 31, 1996 713,788 15.94
Granted in 1997 194,605 33.82 14.14
Exercised in 1997 (74,772) 12.92
Terminated or canceled in 1997 (43,574) 17.08
----------
Options outstanding December 31, 1997 790,047 $20.57
</TABLE>
<TABLE>
Non-qualified Stock Options
<CAPTION>
Weighted
Weighted Average
Average Fair Value
Number Exercise of Options
of shares Price Granted
<S> <C> <C> <C>
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
Terminated or canceled in 1996 (136,000) 18.84
---------
Options outstanding December 31, 1996 216,000 19.91
Granted in 1997 70,000 41.70 12.07
---------
Options outstanding December 31, 1997 286,000 $25.24
</TABLE>
The following table summarizes information about both stock option plans at
December 31, 1997:
<TABLE>
Options Outstanding
December 31, 1997
<CAPTION>
Weighted
Weighted Average
Average Remaining
Number Exercise Contractual
Range of Exercise Prices of shares Price Life (years)
<S> <C> <C> <C>
$8.16 to $15.99 191,845 $11.98 5.7
$16.00 to $23.99 569,597 18.36 7.7
$24.00 to $31.99 81,855 26.09 9.2
$32.00 to $41.70 232,750 36.84 9.9
---------
$8.16 to $41.70 1,076,047 $21.81 7.9
</TABLE>
Options Exercisable Weighted
December 31, 1997 Average
Number Exercise
Range of Exercise Prices of shares Price
$8.16 to $ 15.99 104,600 $ 11.10
$16.00 to $23.99 90,447 16.32
$8.16 to $23.99 195,047 $ 13.52
As of December 31, 1996 and 1995, options for 158,611 and 130,756 shares,
respectively, were exercisable at weighted average exercise prices of
$12.47 and $10.76, respectively.
In accounting for its stock option plans, the company applies Accounting
Principles Board Opinion No. 25 and, accordingly, no compensation cost has been
recognized in the financial statements for stock options. Had the company
determined compensation cost for stock options based on the fair value at the
grant date, as prescribed in 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:
1997 1996 1995
Net income:
As reported ............ $23,933 $6,882 $15,315
Pro forma .............. 22,622 6,030 14,918
Basic earnings per share:
As reported ............ $2.09 $0.61 $1.36
Pro forma .............. 1.98 0.53 1.33
Diluted earnings per share:
As reported ............ $2.04 $0.60 $1.35
Pro forma .............. 1.93 0.53 1.31
The pro forma net income and earnings per share in the table above do not
reflect options granted prior to January 1, 1995. Therefore, because
compensation cost is reflected over the options' vesting periods, 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.
Preferred Stock and Rights Plan
The company's Articles of Incorporation authorize 5 million shares of Class
B Preferred Stock, of which the Board of Directors has designated 350 thousand
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, 1997.
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.
(11) Dividend Restrictions
Payment of dividends by the company's subsidiaries is restricted by
national banking 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, 1997, the aggregate retained earnings of the banks
were approximately $86.3 million, of which approximately $23.4 million is
available as of January 1, 1998, 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, 1997, the most restrictive of the
covenants limited the payment of dividends by the company to approximately $28.8
million.
(12) Income Taxes
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows:
In thousands 1997 1996 1995
Income from operations ................. $12,055 $ 3,120 $ 7,416
Shareholders' equity, for unrealized net
gain on securities available for sale 680 157 4,188
-------- ------- -------
$12,735 $ 3,277 $11,604
The components of income tax expense (benefit) were as follows:
In thousands 1997 1996 1995
Current federal tax . $11,026 $ 5,926 $ 9,303
Current state tax ... 525 409 500
Deferred income taxes 504 (3,215) (2,387)
------- -------- --------
$12,055 $ 3,120 $ 7,416
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
U.S. federal income tax rate .............................................. 35.0 % 35.0 % 35.0 %
Changes from the statutory rate:
Tax exempt investment income ............................................. (2.1) (10.8) (4.4)
Change in deferred tax valuation allowance ............................... -- (1.1) --
Amortization of goodwill ................................................. 0.6 2.1 0.8
State income taxes, net of federal tax benefit ........................... 1.0 2.7 1.3
Other, net ............................................................... (1.0) 3.3 (0.1)
----- ----- ------
33.5 % 31.2 % 32.6 %
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below:
In thousands 1997 1996
Deferred tax assets:
Allowance for loan losses ........ $7,552 $6,313
Deferred compensation ............ -- 370
Deferred loan fees ............... 531 430
Investment securities ............ 364 320
Other ............................ 63 1,297
------ ------
Total deferred tax asset ... 8,510 8,730
Deferred tax liabilities:
Purchase accounting adjustments .. 496 596
Depreciation ..................... 270 200
FHLB stock ....................... 740 417
Securities available for sale .... 671 --
------- ------
Total deferred tax liability 2,177 1,213
------- ------
Net deferred tax asset ..... $6,333 $7,517
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, 1997.
Shareholder's equity of TFB-KY at December 31, 1997, includes $5.101
million 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. Statement of Position ("SOP") 93-6,
Employers' Accounting for Employee Stock Ownership Plans, issued by the American
Institute of Certified Public Accountants, prescribes the accounting for the
company's ESOP for all shares acquired after December 31, 1992. The SOP requires
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, 1997, the ESOP held 326,295 allocated and 151,801
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 1997, 1996 and 1995 were as
follows:
In thousands 1997 1996 1995
Interest incurred $178 $215 $290
Contributions 390 621 839
Dividends used for debt service 314 355 155
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 contributions made by each participating
employee up to a maximum of 4% of the employee's salary. Contributions in
accordance with the profit sharing plan were $888 thousand in 1997, $839
thousand in 1996 and $668 thousand in 1995.
Former full-time employees of Kentucky State Bank who meet certain
requirements as to age and length of service were covered by a defined benefit
pension plan. Pension expense for this plan was $-0- in 1997, $90 thousand in
1996 and $-0- in 1995. The plan was terminated during 1997 and final
distributions totaling $550 thousand were made in 1997.
Former full-time employees of Peoples Financial Services, Inc. ("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 1997, 1996 or 1995.
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 risk, interest rate
risk 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 $387.065 million at
December 31, 1997, and $328.026 million at December 31, 1996, 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 $58.877 million and $46.724 million at December 31, 1997
and 1996, 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, 1997 and 1996, 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, 1997 and 1996, the total of forward contracts in
a gain position was not material. There were no counterparty default losses on
forward contracts in 1997, 1996 or 1995. 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, 1997 and 1996, the company had forward
contracts outstanding totaling $165.489 million and $74.522 million,
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, floors, 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, 1997 and 1996, 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, 1997, are shown below:
Dollars in thousands
Receiving a Paying a
Notional Fixed Floating Fair Credit
Amount Rate of: Rate of: Value Exposure
Prime-based swaps, maturing in:
March 1998 .......... $ 30,000 8.23% 8.50%$ (19) $ --
June 1998 ........... 70,000 8.50 8.50 (34) 17
October 1998 ........ 30,000 8.60 8.50 (1) --
November 1999 ....... 25,000 8.78 8.50 52 60
December 1999 ....... 25,000 8.74 8.50 29 34
December 1999 ....... 40,000 8.81 8.50 102 105
April 2000 .......... 50,000 9.52 8.50 969 1,052
August 2000 ......... 50,000 8.87 8.50 210 211
November 2000 ....... 40,000 8.80 8.50 78 82
------- ------ ------
Total / weighted average $360,000 8.78% 8.50% $1,386 $1,561
Interest rate swaps outstanding as of December 31, 1996, were as follows:
Dollars in thousands
Receiving a Paying a
Notional Fixed Floating Fair Credit
Amount Rate of: Rate of: Value Exposure
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
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 1997 and 1996 two interest
rate "floor" contracts that provide for the company to receive interest on the
notional amount of the contract to the extent that the interest rate on the
ten-year CMT falls below the contract rate. The first contract, purchased in
1996, has a notional amount of $75 million and a contract rate of 5.50%. The
cost of this contract was $548 thousand; its fair value was $689 thousand and
$479 thousand at December 31, 1997 and 1996, respectively. The second contract,
purchased in 1997, has a notional amount of $100 million and a contract rate of
5.25%. The cost of this contract was $455 thousand and the fair value at
December 31, 1997 was $790 thousand. The cost of these contracts, which is
included in with the MSR asset in the consolidated balance sheet, is being
amortized on a straight-line basis over the five-year lives of the contracts.
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
associated with the counterparties' inability to meet the contractual cash
payments of 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, and that the
four named directors breached their fiduciary duties to the company. He 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.
The trial is currently scheduled for April 1, 1998. 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, 1997, 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, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
Financial assets:
<S> <C> <C> <C> <C>
Cash and short-term investments ............ $ 70,873 $ 70,873 $ 75,152 $ 75,152
Mortgage loans held for sale ............... 118,485 118,707 68,814 71,659
Securities ................................. 278,098 278,098 285,155 285,155
Loans ...................................... 1,515,803 1,580,122 1,432,934 1,518,354
Other assets (interest rate floor contracts) 802 1,479 548 479
Financial liabilities:
Deposits ................................... 1,573,838 1,590,469 1,579,217 1,606,223
Federal funds purchased and repurchases .... 109,348 109,348 71,879 71,879
Short-term borrowings ...................... 70,000 70,173 55,000 55,235
Long-term debt ............................. 185,293 190,875 140,903 145,259
Interest rate swaps .......................... -- 1,386 -- (348)
</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 marke
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, 1997 and 1996. 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 1996 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 1995 and 1996, 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 at
December 31, 1997 and 1996. At December 31, 1997, the company had capitalized
mortgage servicing rights of $46.870 million, which related to approximately
$3.2 billion of the aggregate $3.3 billion of loans serviced. The mortgage
servicing rights associated with the remaining $135 million of loans serviced
are not subject to capitalization because the loans were originated and sold
prior to the company's adoption of Statement of Financial Accounting Standards
No. 122, Accounting for Mortgage Servicing Rights ("SFAS 122"), which has been
superseded by SFAS 125 (see note 2). At December 31, 1996, the company had
capitalized mortgage servicing rights of $41,598,000. During 1997 and 1996,
respectively, MSR's totaling $1.020 million and $1.417 million were recognized
on mortgage loans originated, and $14.306 million and $17.436 million were
recognized on servicing purchased.
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, using
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 $52.747 million and $48.055 million as of December 31, 1997
and 1996, 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 122 was $2.092 million at December 31, 1997. Based
on management's estimate of the fair value of each strata, no impairment existed
at December 31, 1997 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.
Amortization for the years ended December 31, 1997 and 1996 was $6.439 million
and $5.271 million, respectively.
During 1997 and 1996, the company sold into the secondary market $1.033
billion and $614 million, respectively, of residential mortgage loans. These
sales resulted in net gains of $3.308 million and $2.225 million 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, 1997 and 1996, were as follows:
<TABLE>
December 31 - Dollars in thousands
<CAPTION>
1997 1996
Trans Financial Bank, National Association:
<S> <C> <C>
Tier I capital ...................................... $ 131,518 $ 106,188
Total risk-based capital ............................ 147,750 119,960
Total risk-adjusted assets .......................... 1,298,058 1,198,137
Tier I capital ratio ................................ 10.13% 8.86%
Total risk-based capital ratio ...................... 11.38% 10.01%
Tier I leverage ratio ............................... 8.42% 7.80%
Trans Financial Bank Tennessee, National Association:
Tier I capital ...................................... 39,298 16,955
Total risk-based capital ............................ 43,967 19,037
Total risk-adjusted assets .......................... 372,834 166,484
Tier I capital ratio ................................ 10.54% 10.18%
Total risk-based capital ratio ...................... 11.79% 11.43%
Tier I leverage ratio ............................... 7.47% 8.40%
Trans Financial Bank, F.S.B.:
Tier I capital ...................................... -- 28,380
Total risk-based capital ............................ -- 30,525
Total risk-adjusted assets .......................... -- 230,298
Tier I capital ratio ................................ -- 12.32%
Total risk-based capital ratio ...................... -- 13.25%
Tier I leverage ratio ............................... -- 7.82%
Trans Financial, Inc. (consolidated):
Tier I capital ...................................... 140,264 122,012
Total risk-based capital ............................ 193,699 172,823
Total risk-adjusted assets .......................... 1,654,250 1,599,870
Tier I capital ratio ................................ 8.48% 7.63%
Total risk-based capital ratio ...................... 11.71% 10.80%
Tier I leverage ratio ............................... 6.81% 6.36%
</TABLE>
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, 1997, 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 thousand or more totaled $349.5 million at
December 31, 1997, and $336.1 million at December 31, 1996. Interest
expense on time deposits of $100 thousand or more was $19.4 million in 1997,
$16.5 million in 1996 and $11.8 million in 1995.
The following table shows the maturities of certificates of deposit,
including individual retirement accounts and brokered certificates of deposit,
as of December 31, 1997.
In thousands
Year ended December 31
1998 $660,963
1999 184,154
2000 68,431
2001 8,383
2002 and later years 6,981
--------
Later years $928,912
(20) Parent Company Financial Statements
Condensed financial data for Trans Financial, Inc. (parent company only)
as of December 31, 1997 and 1996 and for the years ended December 31, 1997,
1996 and 1995 are as follows:
Condensed Balance Sheets
December 31 - In thousands
1997 1996
Assets
Cash on deposit with subsidiaries ........... $ 2,716 $ 3,277
Investment in subsidiaries .................. 181,843 160,195
Other investments ........................... 100 356
Other assets ................................ 9,290 11,143
-------- --------
Total assets ............................. $193,949 $174,971
Liabilities and Shareholders' Equity
Long-term debt and other notes payable ...... $ 35,293 $ 35,903
Other liabilities ........................... 7,879 7,752
Shareholders' equity ........................ 150,777 131,316
------- --------
Total liabilities and shareholders' equity $193,949 $174,971
<TABLE>
Condensed Statements of Income
Years Ended December 31
In thousands
<CAPTION>
1997 1996 1995
Income
<S> <C> <C> <C>
Dividends from subsidiaries ................................ $ 7,000 $10,000 $10,000
Other interest and dividends ............................... 2 87 180
Management fees from subsidiaries and other income ......... 6,060 6,846 5,317
------- ------- -------
Total income ............................................... 13,062 16,933 15,497
Expenses
Interest on long-term debt and other notes payable ......... 2,430 2,441 2,462
Other expenses ............................................. 9,421 12,155 9,819
------- ------- -------
Total expenses ............................................. 11,851 14,596 12,281
------- ------- -------
Income before income tax benefit and equity
in undistributed earnings of subsidiaries .................. 1,211 2,337 3,216
Federal income tax benefit ................................... 1,818 2,506 2,083
------- ------- -------
Income before equity in undistributed earnings of subsidiaries 3,029 4,843 5,299
Equity in undistributed earnings of subsidiaries ............. 20,904 2,039 10,016
------- ------- -------
Net income ................................................... $23,933 $ 6,882 $15,315
</TABLE>
<TABLE>
Condensed Statements of Cash Flows
Years Ended December 31
In thousands
<CAPTION>
1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ......................................... $ 23,933 $ 6,882 $ 15,315
Adjustments to reconcile net income to cash
provided by operating activities:
Amortization ................................... 568 584 680
Equity in undistributed earnings of subsidiaries (20,904) (2,039) (10,016)
Gain on sale of securities available for sale ...... (210) -- --
Decrease (increase) in other assets ................ 1,865 (5,739) (1,639)
Increase (decrease) in other liabilities ........... (9) 5,717 771
------- ------- --------
Net cash provided by operating activities ........ 5,243 5,405 5,111
Cash flows from investing activities:
Repayment of advances to subsidiaries .............. -- 2,710 --
Proceeds from sale of securities ................... 252 -- --
Purchase of securities available for sale .......... -- (100) --
------- ------- --------
Net cash provided by investing activities ........ 252 2,610 --
Cash flows from financing activities:
Repayment of long-term debt and other notes payable (5) (124) (60)
Proceeds from issuance of common stock ............. 1,725 1,022 800
Dividends paid ..................................... (7,776) (7,244) (6,750)
------- ------- --------
Net cash used in financing activities ............ (6,056) (6,346) (6,010)
------- ------- --------
Net increase (decrease) in cash and cash equivalents (561) 1,669 (899)
Cash and cash equivalents at beginning of year ..... 3,277 1,608 2,507
------- ------- --------
Cash and cash equivalents at end of year ........... $ 2,716 $ 3,277 $ 1,608
Supplemental information:
Cash paid for interest ........................... $ 2,432 $ 2,438 $ 1,866
Non-cash transactions (note 3) ................... 1,579 889 8,770
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
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 Proposal I: Election of Directors in the
registrant's Proxy Statement for the 1998 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 1998 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 in the registrant's Proxy Statement for the 1998 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 1998 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 61 and 62
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 61 and 62 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 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on February 27, 1998, 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
Executive Vice President
and 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
/s/ Wayne Gaunce
Wayne Gaunce
/s/ C. C. Howard Gray
C.C. Howard Gray
/s/ Charles A. Hardcastle
Charles A. Hardcastle
/s/ Carroll F. Knicely
Carroll F. Knicely
/s/ C. Cecil Martin
C. Cecil Martin
/s/ James D. Scott
James D. Scott
/s/ William B. Van Meter
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.*
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.*
10(c) Trans Financial, Inc. 1992 Stock Option Plan.*
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 is
incorporated by reference to Exhibit 10(f) of the registrant's Report
on Form 10-K for the year ended December 31, 1996.*
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) 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(j) 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(k) 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(l) 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(m) Investment and Financial Advisory Services Agreement between Trans
Financial Bank, National Association, and Mastrapasqua & Associates,
Inc. is incorporated by reference to Exhibit 10(n) of the registrant's
Report on Form 10-K for the year ended December 31, 1996.*
10(n) Form of Retention Agreements between Registrant and Vince A. Berta,
James G. Campbell, Tommy W. Cole, Ronald Szejner, and certain other
officers is incorporated by reference to Exhibit 10(o) of the
registrant's Report on Form 10-K for the year ended December 31, 1996.*
10(o) 1996 Directors Stock Compensation Plan is incorporated by reference to
Exhibit 10(n) of the registrant's report on Form 10-Q for the quarter
ended March 31, 1996.*
10(p) 1996 Consolidated Stock Option Plan is incorporated by reference to the
registrant's Proxy Statement dated February 28, 1997, for the
April 28, 1997 Annual Meeting of Shareholders.*
10(q) Summary of 1997 Trans Financial Leadership Incentive Plan is
incorporated by reference to Exhibit 10 of the registrant's report on
Form 10-Q for the quarter ended June 30, 1997.*
10(r) Amendment to 1995 Executive Stock Option Plan is incorporated by
reference to Exhibit 10(a) of the registrant's report on Form 10-Q for
the quarter ended September 30, 1997.*
10(s) Agreement dated September 30, 1997, between registrant and executive
officer is incorporated by reference to Exhibit 10(b) of the
registrant's report on Form 10-Q for the quarter ended
September 30, 1997.*
10(t) First Amendment to Directors' Stock Compensation Plan adopted
December 15, 1997.*
11 Statement Regarding 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 4(a)
RIGHTS AGREEMENT dated
January 20, 1992 between TRANS FINANCIAL
BANCORP, INC.
a Kentucky corporation (the "Company"),
and Manufacturers Hanover,
a New York State Chartered Bank and Trust Company
as Rights Agent (the "Rights Agent")
<PAGE>
TABLE OF CONTENTS
Section 1. Certain Definitions
Section 2. Appointment of Rights Agent
Section 3. Distribution of Rights Certificates
Section 4. Form of Rights Certificates
Section 5. Execution, Countersignature and Registration
Section 6. Transfer, Split-Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost
or Stolen Rights Certificates
Section 7. Exercise of Rights; Expiration Date of Rights
Section 8. Cancellation and Destruction of Rights Certificates
Section 9. Reservation and Availability of Preferred
Stock
Section 10. Preferred Stock Record Date
Section 11. Adjustment of Number and Kind of Shares
and Rights
Section 12. Certificate of Adjustments
Section 13. Consolidation, Merger, Share Exchange or
Sale or Transfer of Major Part of Assets
Section 14. Additional Covenants
Section 15. Fractional Rights and Fractional Shares
Section 16. Rights of Action
Section 17. Transfer and Ownership of Rights and Rights
Certificates
Section 18. Rights Certificate Holder Not Deemed a Stockholder
Section 19. Concerning the Rights Agent
Section 20. Merger or Consolidation or Change of Rights
Agent
Section 21. Duties of Rights Agent
Section 22. Change of Rights Agent
Section 23. Issuance of New Rights Certificates
Section 24. Redemption and Termination
Section 25. Exchange of Rights
Section 26. Notice of Certain Events
Section 27. Notices
Section 28. Supplements and Amendments
Section 29. Determinations and Actions by the Board of
Directors
Section 30. Successors
Section 31. Benefits of this Rights Agreement; Determinations and
Actions by the Board of Directors, etc.
Section 32. Severability
Section 33. Governing Law
Section 34. Counterparts
Section 35. Descriptive Headings
EXHIBIT A Form of Certificate of Designation
EXHIBIT B Form of Rights Certificates
EXHIBIT C Form of Summary of Rights
<PAGE>
RIGHTS AGREEMENT dated
January 20, 1992 between TRANS FINANCIAL
BANCORP, INC.
a Kentucky corporation (the "Company"),
and Manufacturers Hanover,
a New York State Chartered Bank and Trust Company
as Rights Agent (the "Rights Agent")
The Board of Directors of the Company has authorized and
declared a dividend of one Right (as hereinafter defined) for each share of
Common Stock (as hereinafter defined) outstanding as of January 30, 1992 (the
"Record Date"), and has authorized the issuance of one Right with respect to
each share of Common Stock that shall become outstanding between the Record Date
and, except as otherwise provided herein, the earliest of the Distribution Date,
the Redemption Date or the Expiration Date (as such terms are hereinafter
defined), each Right initially representing the right to purchase one one
hundredth of a share of Class B Preferred Stock, Series 1992 of the Company
("Preferred Stock"), having the powers, rights and preferences set forth in the
form of Certificate of Designation, attached hereto as Exhibit A.
Accordingly, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Rights Agreement, the
following terms have the meanings indicated:
A. "Acquiring Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the Common Shares of the Company then outstanding, but shall not
include any Subsidiary of the Company, any employee benefit plan of the Company
or of any of its Subsidiaries or any Person holding Common Shares for or
pursuant to the terms of any such employee benefit plan.
B. "Adverse Person" shall mean any Person who or which, together with
all Affiliates and Associates of such Person, shall be declared by a majority of
the Disinterested Directors to be an Adverse Person, upon a determination by
such Disinterested Directors that such Person, alone or together with its
Affiliates and Associates, has, at any time after the Record Date, become the
Beneficial Owner of an amount of Common Stock which the Disinterested Directors
determine to be substantial (which amount shall in no event be less than 10% of
the shares of Common Stock then outstanding) and a determination by such
Disinterested Directors, after reasonable inquiry and investigation, including
consultation with such persons as such Disinterested Directors shall deem
appropriate, that (a) such Beneficial Ownership by such Person is intended to
cause, is reasonably likely to cause or will cause the Company to repurchase the
Common Stock beneficially owned by such Person or to cause pressure on the
Company to take action or enter into a transaction or series of transactions
intended to provide such Person with short term financial gain under
circumstances where the best long term interests of the Company and its share
holders would not be served by taking such action or entering into such
transactions or series of transactions at that time or (b) such Beneficial
Ownership is causing or reasonably likely to cause a material adverse impact
(including, but not limited to, impairment of relationships with customers or
impairment of the Company's ability to maintain its competitive position or
effectuate a transaction that is in the best long term interests of the
Company's shareholders) on the business or prospects of the Company to the
detriment of the Company's shareholders, or (c) such beneficial ownership
otherwise is not in the best interests of the Company and its shareholders,
employees, customers and communities in which the Company or its Subsidiaries do
business. Notwithstanding any other Section of this Rights Agreement, a majority
of the Disinterested Directors shall have the power, pursuant to this Section,
to designate a Person as an Adverse Person until the Expiration Date and under
no circumstances shall a prior designation made under this subsection be binding
on any subsequent designation by such Disinterested Directors.
C. "Affiliate" and "Associate", when used with reference to any Person,
shall have the respective meanings ascribed to such terms in Rule 12b 2 of the
General Rules and Regulations under the Exchange Act, as in effect on January
20, 1992.
D. A Person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own," any securities:
[1] which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, other than
pursuant to a firm commitment under writing agreement with the Company
with respect to a bona fide public offering of securities, provided
however, that when such underwriter terminates the active distribution
of such securities and holds such securities for investment purposes,
such underwriter shall be deemed the beneficial owner of such
securities;
[2] which such Person or any of such Person's Affiliates or
Associates has [A] the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding, or upon the exercise of
conversion rights, exchange rights, rights (other than Rights issuable
under this Rights Agreement), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the Beneficial
Owner of, or to beneficially own, securities tendered pursuant to a
tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange thereunder; or [B] the right to
vote pursuant to any agreement, arrangement or understanding; provided.
however, that a Person shall not be deemed the Beneficial Owner of, or
to beneficially own, any security if the agreement, arrangement or
understanding to vote such security [1] arises solely from a revocable
proxy given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations under the Exchange Act and [2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
[3] which are beneficially owned, directly or indirectly, by
any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities pursuant to a firm commitment
underwriting agreement with the Company, provided however, that when
such underwriters or selling group members terminate the active
distribution of such securities and hold such securities for investment
purposes, such underwriters and selling group members shall be deemed
the beneficial owners of such securities), whether or not in writing,
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in Section 1(D)(2)(B)) or disposing of any
securities of the Company.
E. "Book Value" when used with reference to Common Shares issued by any
Person shall mean the amount of equity of such Person applicable to each Common
Share, determined [i] in accordance with generally accepted accounting
principles (consistently applied) in effect on the date as of which such Book
Value is to be determined, [ii] using all the consolidated assets and all the
consolidated liabilities of such Person on the date as of which such Book Value
is to be determined, except that no value shall be included in such assets for
goodwill arising from consummation of a Business Combination and [iii] after
giving effect to [A] the exercise of all rights, options and warrants to
purchase such Common Shares, at an exercise or conversion price, per Common
Share, which is less than such Book Value before giving effect to such exercise
or conversion, [B] all dividends and other distributions on the capital stock of
such Person declared prior to the date as of which such Book Value is to be
determined and to be paid or made after such date and [C] any other agreement,
arrangement, understanding, transaction or other action prior to the date as of
which such Book Value is to be determined which would have the effect of
reducing such Book Value after such date.
F. "Business Combination" shall mean any transaction specified in the
following clauses [i], [ii] and [iii]:
[i] the Company shall consolidate with, or merge with and
into, any other Person;
[ii] any Person shall merge with and into the Company
or shall engage in a share exchange with shareholders of the Company and all or
part of the Common Shares of the Company shall be changed into or exchanged
for capital stock or other securities of the Company or of any other Person or
cash or any other property; or
[iii] the Company shall sell, lease, exchange or otherwise
transfer or dispose of one or more of its Subsidiaries shall sell,
lease, exchange or otherwise transfer or dispose of), in one or more
related transactions, the Major Part of the assets of the Company and
its Subsidiaries to any other Person or Persons;
G. "Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in the Borough of
Manhattan, The City of New York or in Bowling Green, Kentucky are authorized or
obligated by law or executive order to close.
H. "Close of Business" on any given date shall mean 5:00 p.m.
Eastern Standard Time, on such date provided, however, that if such date is
not a Business Day, "Close of Business" shall mean 5:00 p.m. Eastern
Standard Time, on the next succeeding Business Day.
I. "Common Shares" when used with reference to the Company prior to a
Business Combination shall mean the shares of Common Stock of the Company or any
other shares of capital stock of the Company into which the Common Stock shall
be reclassified or changed. "Common Shares" when used with reference to any
Person (other than the Company prior to a Business Combination) shall mean
shares of capital stock of such Person (if such Person is a corporation) of any
class or series, or units of equity interests in such Person (if such Person is
not a corporation) of any class or series, the terms of which do not limit (as a
fixed amount and not merely in proportional terms) the amount of dividends or
income payable or distributable on such class or series or the amount of assets
distributable on such class or series upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person and do not provide that
such class or series is subject to redemption at the option of such Person, or
any shares of capital stock or units of equity interests into which the
foregoing shall be reclassified or changed; provided, however, that if at any
time there shall be more than one such class or series of capital stock or
equity interests of such Person, "Common Shares" of such Person shall include
all such classes and series substantially in the proportion of the total number
of shares or other units of each such class or series outstanding at such time.
J. "Common Stock" shall mean the Common Stock, no par value per
share, of the Company.
K. "Company" shall mean Trans Financial Bancorp, Inc., a Kentucky
corporation; provided, however, that if there is a Business Combination,
"Company" shall mean each issuer of Common Shares for which Rights may be
exercised as sat forth in Section 13(a) of this Rights Agreement.
L. "Control" with respect to any Person shall mean the power to direct
the management and policies of such Person, directly or indirectly, by or
through stock ownership, agency or otherwise, or pursuant to or in connection
with an agreement, arrangement or understanding (written or oral) with one or
more other Persons by or through stock ownership, agency or otherwise; and the
terms "controlling" and "controlled" shall have meanings correlative to the
foregoing.
M. "Disinterested Director" shall mean [i] any member of the Board of
Directors of the Company who [a] is not an officer or employee of the Company or
any of its Subsidiaries, [b] beneficially owns less than 10% of the outstanding
Common Stock, [c) is not a nominee or representative of an Acquiring Person or
of any Affiliate or Associate of an Acquiring Person, [d] is not a nominee or
representative of an Adverse Person or of any Affiliate or Associate of an
Adverse Person and [e] was a member of the Board of Directors of the Company on
and prior to the Share Acquisition Date, or [ii] any person who becomes a member
of the Board of Directors of the Company after the Share Acquisition Date who
[a] is not an officer or employee of the Company or any of its Subsidiaries, [b]
beneficially owns less than 10% of the outstanding Common Stock, [c] is not a
nominee or representative of an Acquiring Person or of any Affiliate or
Associate of an Acquiring Person [d] is not a nominee or representative of an
Adverse Person or of any Affiliate or Associate of an Adverse Person and [e] was
recommended for election or elected by a majority of the Disinterested Directors
then on the Board of Directors of the Company.
N. "Distribution Date" shall mean the earlier of [i] the Close of
Business on the tenth Business Day after the Share Acquisition Date or [ii] the
Close of Business on the tenth Business Day after the date of the first public
disclosure by the Board of Directors of the Company of the commencement of, or
the intent to commence, a tender or exchange offer by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any of its Subsidiaries or any Person holding Common Shares for or
pursuant to the terms of any such employee benefit plan) for 25% or more of the
outstanding Common Shares (including any such date which is after the date of
this Rights Agreement and prior to the issuance of the Rights).
0. "Equivalent Shares" shall mean any class or series of capital stock
of the Company other than Common Shares which is entitled to participate in
dividends and other distributions, including distributions upon the liquidation,
dissolution or winding up of the Company, on a proportional basis with the
Common Shares. In calculating the number of any class or series of Equivalent
Shares for purposes of Section 11 of this Rights Agreement, the number of
shares, or fractions of a share, of such class or series of capital stock that
is entitled to the same dividend or distribution as one whole Common Share shall
be deemed to be on e share.
P. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as in effect on the date in question, unless otherwise specifically provided
in this Rights Agreement.
Q. "Exercise Price" with respect to each whole Right shall mean $45,
and shall be payable in lawful money of the United States of America.
R. "Expiration Date" shall mean the Close of Business on January 20,
2002.
S. "Major Part" when used with reference to the assets of the Company
and its Subsidiaries as of any date shall mean assets which meet any of the
following: [i] having a fair market value aggregating 50% or more of the total
fair market value of all the assets of the Company and its Subsidiaries (taken
as a whole) as of the date in question; [ii] accounting for 50% or more of the
total value (net of depreciation and amortization) of all the assets of the
Company and its Subsidiaries (taken as a whole), as would be shown on a
consolidated or combined balance sheet of the Company and its Subsidiaries as of
the date in question, prepared in accordance with generally accepted accounting
principles (consistently applied) then in effect; or [iii] accounting for 50% or
more of the total amount of net income of the Company and its Subsidiaries
(taken as a whole), as would be shown on a consolidated or combined statement of
income of the Company and its Subsidiaries for the period of 12 months ending on
the last day of the month next preceding the date in question, prepared in
accordance with generally accepted accounting principles (consistently applied)
then in effect.
T. "Market Value" when used with reference to the Common Shares on any
date shall be deemed to be the average of the daily closing prices, per share,
for the 30 consecutive Trading Days immediately prior to the date in question;
provided, however, that in the event that the market value of such shares is to
be determined in whole or in part during a period following the announcement by
the issuer of such Common Shares of any dividend, distribution or other action
of the type described in Section 11(A), 11(B), 11(C) or 11(J) of this Rights
Agreement that would require an adjustment thereunder, then in each such case
the Market Value of such shares shall be appropriately adjusted to reflect the
effect of such action on the market price of such shares. The closing price, per
Common Share, for each Trading Day shall be the last sale price, regular way,
or, in case no such sale takes place on such Trading Day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to shares
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over the counter market, as reported by the National Association
of Security Dealers, Inc. Automated Quotation System ("NASDAQ") or such other
comparable system then in use, or, if on any such Trading Day the applicable
shares are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
such shares and selected by a majority of the Disinterested Directors or, if
there are no Disinterested Directors, by the Board of Directors of the Company.
If on any such Trading Day no market maker is making a market in such shares,
the Market Value of such shares on such Trading Day shall mean the fair value of
such shares as determined in good faith by a majority of the Disinterested
Directors or, if there are no Disinterested Directors, by the Board of Directors
of the Company (whose determination, if described in a statement filed with the
Rights Agent, shall be binding on the Rights Agent, the holders of Rights and
all other Persons). For purposes of this Section 1(T), the term Common Shares
shall include Equivalent Shares.
U. "Person" shall include an individual, corporation, partnership,
joint venture, association, trust, unincorporated organization or other
entity.
V. "Preferred Stock" shall mean the Class B Preferred Stock, Series
1992 of the Company, having the powers, rights and preferences set forth in
the Certificate of Designation attached hereto as Exhibit A.
W. "Principal Party" shall mean the Surviving Person in a Business
Combination; provided. however, that if such Surviving Person is a direct or
indirect subsidiary of another Person, "Principal Party" shall mean the Person
who or which is the ultimate parent of such Surviving Person and who or which is
not itself a Subsidiary of another Person. In the event ultimate control of such
Surviving Person is shared by two or more Persons, "Principal Party" shall mean
that Person that is immediately controlled by such two or more Persons.
X. "Record Date" shall mean January 30, 1992.
Y. "Redemption Date" shall mean the Close of Business on the date
as of which the Rights are ordered to be redeemed by the Board of Directors of
the Company as provided in Section 24(A) of this Rights Agreement.
Z. "Redemption Price" shall mean the price required to be paid upon
the redemption of the Rights as provided in Section 24(A) of this Rights
Agreement.
AA. "Registered Common Shares" shall mean Common Shares which are
registered, as of the date of consummation of a Business Combination, and have
been continuously registered during the preceding 12 months under Section 12 of
the Exchange Act.
AB. "Right Certificate" shall mean a certificate distributed in
accordance with the provisions of this Rights Agreement evidencing a Right in
substantially the form attached as Exhibit B to this Rights Agreement.
AC. "Rights" shall mean the rights to purchase Preferred Stock as
provided in this Rights Agreement.
AD. "Securities Act" shall mean the Securities Act of 1933, as
in effect on the date in question, unless otherwise specifically provided
in this Rights Agreement.
AE. "Share Acquisition Date" shall mean [i] the first date of the
public disclosure by the Board of Directors of the Company or an Acquiring
Person that an Acquiring Person has become an Acquiring Person or [ii] the date
on which a majority of the Disinterested Directors determine that an Adverse
Person has become an Adverse Person.
AF. "Subsidiary" shall mean a Person, a majority of the total
outstanding Voting Power of which is beneficially owned, directly or indirectly,
by another Person or by one or more other Subsidiaries of such other Person or
by such other Person and one or more other Subsidiaries of such other Person.
AG. "Summary of Rights" shall mean the Summary of Rights to Purchase
Preferred Stock in substantially the form attached hereto as Exhibit C.
AH. "Surviving Person" shall mean [1] the Person which is the
continuing or surviving Person in a consolidation or merger or share exchange
specified in clause [i] or [ii] of Section 1(F) of this Rights Agreement or [2]
the Person to which the Major Part of the assets of the Company and its
Subsidiaries are sold, leased, exchanged or otherwise transferred or disposed of
as specified in clause [iii] of Section 1(F) of this Rights Agreement; provided.
however, that if the Major Part of the assets of the Company and its
Subsidiaries are sold, leased, exchanged or otherwise transferred or disposed of
in one or more related transactions specified in clause [iii] of Section 1(F) of
this Rights Agreement to more than one Person, the "Surviving Person" in such
case shall mean the Person that acquired assets of the Company and/or its
Subsidiaries with the greatest fair market value in such transaction or
transactions.
AI. "Trading Day" shall mean a day on which the principal national
securities exchange on which any Common Shares, Equivalent Shares or Rights, as
the case may be are listed or admitted to trading is open for the transaction of
business or, if the shares or Rights in question are not listed or admitted to
trading on any national securities exchange, a Business Day.
AJ. "Triggering Event" shall mean the occurrence of any of the
following events after the occurrence of the Distribution Date, pursuant to
Section 1(N)(ii) of the Rights Agreement:
(i) without the prior approval of at least two thirds of the
Disinterested Directors, any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or
of any of its Subsidiaries or any Person holding Common Shares for or
pursuant to the terms of any such employee benefit plan), alone or
together with all Affiliates and Associates of such Person, shall
become the Beneficial Owner of 15% or more of the Common Shares then
outstanding; or
(ii) a Person, together with all Affiliates and Associates of
such Person, is declared an Adverse Person pursuant to Section 1(B).
AK. "Voting Power" when used with reference to the capital stock of, or
units of equity interests in, any Person shall mean the power under ordinary
circumstances (and not merely upon the happening of a contingency) to vote in
the election of directors of such Person (if such Person is a corporation) or to
participate in the management and Control of such Person (if such Person is not
a corporation).
Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights
Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint one or more co-Rights Agents as it may
deem necessary or desirable (the term "Rights Agent" being used herein to refer,
collectively, to the Rights Agent together with any such co- Rights Agents). In
the event the Company appoints one or more co-Rights Agents, the respective
duties of the Rights Agent and any co-Rights Agents shall be as the Company
shall determine.
Section 3. Distribution of Right Certificates.
A. Until the Distribution Date, [i] the Rights will be evidenced by the
certificates for Common Shares of the Company registered in the names of the
holders thereof (which certificates for Common Shares shall also be deemed to be
Right Certificates until the Distribution Date) and not by separate Right
Certificates, and [ii] the right to receive Right Certificates will be
transferable only in connection with the transfer of Common Shares. As soon as
practicable after the Distribution Date, the Rights Agent will send, by first
class, postage prepaid mail, to each record holder of Common Shares as of the
Distribution Date, at the address of such holder shown on the records of the
Company, a Right Certificate, evidencing one Right for each Common Share so
held. As of and after the Distribution Date, the Rights will be evidenced solely
by such Right Certificates.
B. Within a reasonable period after the Record Date, the Company will
send a copy of the Summary of Rights by first class, postage prepaid mail, to
each record holder of Common Shares as of the Close of Business on the Record
Date at the address of such holder shown on the records of the Company. With
respect to certificates for Common Shares outstanding as of the Record Date and
certificates for Common Shares referred to in Section 3(C)(1) of this Rights
Agreement, until the Distribution Date, the Rights associated with the Common
Shares represented by such certificates shall be evidenced by such certificates
for the Common Shares with or without a copy of the Summary of Rights attached
thereto and the registered holders of the Common Shares shall also be the
registered holders of the associated Rights. Until the earliest of the
Distribution Date, the Redemption Date or the Expiration Date, the surrender for
transfer of any of the certificates for the Common Shares outstanding on the
Record Date or any of the certificates for Common Shares referred to in Section
3(C)(1), even without a copy of the Summary of Rights attached thereto, shall
also constitute the transfer of the Rights associated with the Common Shares
represented by such certificate.
C. [1] Certificates for Common Shares that become out standing after
the Record Date, but prior to the earliest of the preparation of certificates of
Common Shares having affixed thereon the legend specified in Section 3(C)(2),
the Distribution Date, the Redemption Date or the Expiration Date, shall be
accompanied by the Summary of Rights when such certificates are issued to the
record holders thereof.
[2] Subject to Section 3(C)(1), certificates for Common
Shares that become outstanding after the Record Date but prior to the earliest
of the Distribution Date, the Redemption Date or the Expiration Date shall have
printed on, written on or otherwise affixed to them a legend substantially in
the following form:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement dated as of January
20, 1992 (the "Rights Agreement"), between Trans Financial Bancorp,
Inc. and Manufacturers Hanover as Rights Agent, the terms of which are
hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Trans Financial Bancorp, Inc.
Under certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this certificate. Trans Financial Bancorp, Inc. will mail
to the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances, Rights beneficially owned by Acquiring Persons
or their Affiliates or Associates and Adverse Persons or their
Affiliates or Associates (as such terms are defined in the Rights
Agreement) are null and void and any holder of any such Rights
(including any subsequent holder) shall not have any right to exercise
such Rights; provided. however, that a holder of a Right which has
become null and void will have the right, at any time prior to the
Expiration Date, subject to the provisions of the Rights Agreement, to
require the Company to repurchase such Right at a purchase price equal
to $.01 per whole Right.
With respect to certificates bearing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby.
Section 4. Form of Right Certificates.
A. The Right Certificates (and the form of election to purchase and
form of assignment to be printed on the reverse side thereof) shall be in
substantially the form set forth as Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Board of Directors of the Company may deem appropriate
and as are not inconsistent with the provisions of this Rights Agreement, or as
may be required to comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange on
which the Rights may from time to time be listed, or to conform to usage.
Subject to the provisions of Sections 11 and 23 hereof, the Right Certificates,
when first distributed, shall be dated as of the Distribution Date, and shall
entitle the holders thereof to purchase such number of shares of Preferred Stock
as shall be set forth therein for the Exercise Price.
B. Notwithstanding any other provisions of this Rights Agreement, [i]
any Right Certificate distributed pursuant to Section 3(A) hereof that
represents Rights known by the Company to be beneficially owned by an Acquiring
Person or any Affiliate or Associate of an Acquiring Person or by an Adverse
Person or any Affiliate or Associate of an Adverse Person, [ii] any Right
Certificate issued at any time upon the transfer of any Right to an Acquiring
Person or Adverse Person or Person known by the Company to be an Affiliate or an
Associate of an Acquiring Person or Adverse Person, or to any Person known by
the Company to be a nominee of such Acquiring Person, Adverse Person, Affiliate
or Associate, and [iii] any Right Certificate issued pursuant to Section 6,
Section 11 or Section 23 hereof upon transfer, exchange, replacement or
adjustment of any other Right Certificate referred to in this sentence, shall
contain (in addition to the legend specified in Section 3(C)(2)) a legend
substantially in the following form:
The Rights represented by this Right Certificate are or were
beneficially owned by a Person who was an Acquiring Person or an
Adverse Person, or an Affiliate or an Associate of an Acquiring Person
or an Adverse Person. Accordingly, this Right Certificate and the
Rights represented hereby may become null and void in the circumstances
specified in Section 7(E) of the Rights Agreement; provided, however,
that a holder of a Right which has become null and void will have the
right, at any time prior to the Expiration Date, subject to the
provisions of the Rights Agreement, to require the Company to
repurchase such Right at a purchase price equal to $.01 per whole
Right.
Notwithstanding the foregoing, the failure to include on any Right Certificate
the foregoing legend shall not impair the applicability to the Rights
represented by such Right Certificate of the provisions set forth in the first
paragraph of Section 7(E) of this Rights Agreement.
Section 5. Execution. Countersignature and Registration.
A. The Right Certificates shall be executed on behalf of the Company by
the President or any Vice President of the Company, either manually or by
facsimile signature, and have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary of the Company, either manually
or by facsimile signature. The Right Certificates shall be countersigned, either
manually or by facsimile signature, by the Rights Agent and shall not be valid
or obligatory for any purpose unless so countersigned. In case any officer of
the Company who shall have signed any of the Rights Certificates shall cease to
be such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Right
Certificates had not ceased to be such officer of the Company; and any Right
Certificate may be signed on behalf of the Company by any person who, at the
actual date of the execution of such Right Certificate, shall be a proper
officer of the Company to sign such Right Certificate although at the date of
the execution of this Rights Agreement such person was not such an officer of
the Company.
B. Following the Distribution Date, the Rights Agent will keep or cause
to be kept records of the registration and transfer of the Right Certificates
issued hereunder. Such records shall show such information as may be specified
by the Company, including, without limitation, the names and addresses of the
respective holders of the Right Certificates, the number of Rights evidenced by
each of the Right Certificates, the certificate number of each of the Rights
Certificates and the date of each of the Right Certificates.
Section 6. Transfer. Split Up. Combination and Exchange of Right Certificates:
Mutilated. Destroyed. Lost or Stolen Right Certificates.
A. Subject to the provisions of Section 15 hereof, at any time after
the Distribution Date, and at or prior to the Expiration Date, any Right
Certificate or Right Certificates may be transferred, split up, combined or
exchanged for another Right Certificate or Right Certificates entitling the
registered holder to purchase a like number of shares of Preferred Stock as the
Right Certificate or Right Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate shall make such request in writing delivered to
the Rights Agent and shall surrender the Right Certificate or Right Certificates
to be transferred, split up, combined or exchanged at the shareholder services
office of the Rights Agent. Thereupon the Rights Agent shall countersign and
deliver to the Person entitled thereto a Right Certificate or Right
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
B. Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to the Company, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make a new Right
Certificate of like tenor and deliver such new Right Certificate to the Rights
Agent for delivery to the registered owner in lieu of the Right Certificate so
lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights: Expiration Date of Rights.
A. Each Right shall vest in the registered holder thereof the right to
purchase, for the Exercise Price, at any time after the Distribution Date and at
or prior to the earlier of the Expiration Date or the Redemption Date, one one
hundredth of a share of Preferred Stock, subject to adjustment from time to time
as provided in Sections 11 and 13 of this Rights Agreement.
B. The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the office of the Rights Agent specified
in the Rights Certificates, together with payment of the Exercise Price for the
Preferred Stock as to which the Rights are exercised, at or prior to the
Expiration Date.
C. Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Exercise Price for the Preferred Stock to be purchased together with an
amount equal to any applicable transfer tax, in lawful money of the United
States of America, by bank check, certified check or money order payable to the
order of the Company or the Rights Agent, the Rights Agent shall thereupon
promptly [i) requisition from any transfer agent of the Common Shares (or make
available, if the Rights Agent is the transfer agent) certificates for the
number of shares of Preferred Stock to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests, [ii]
when appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional shares in accordance with Section 15 hereof,
[iii] promptly after receipt of such certificates, cause the same to be
delivered to or upon the order of the registered holder of such Right
Certificate, registered in such name or names as may be designated by such
holder and [iv] when appropriate, after receipt promptly deliver such cash,
securities or other assets to or upon the order of the registered holder of such
Right Certificate.
D. In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equal in number to the Rights remaining unexercised shall be
issued by the Rights Agent and delivered to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 15 hereof.
E. Notwithstanding anything in this Rights Agreement to the contrary,
any Rights that are or were, at any time on or after the earlier of the
Distribution Date or the Share Acquisition Date, beneficially owned by an
Acquiring Person or an Adverse Person, or any Affiliate or Associate of an
Acquiring Person or an Adverse Person shall become null and void at any time on
or after the earlier of [i] the Share Acquisition Date or [ii] the occurrence of
a Triggering Event and any holder of any such Right (including any holder who
acquired such Right subsequent to [A] the Share Acquisition Date or [B] a
Triggering Event) shall not have any right to exercise any such Right under this
Rights Agreement on or after the earlier of [x] the Share Acquisition Date or
[y] the occurrence of a Triggering Event.
Any holder of a Right that has become null and void as specified in
this Section 7(E) shall have the right, subject to the provisions of this
paragraph, to require the Company to repurchase all, but not less than all, the
Rights held by such holder at a purchase price per whole Right equal to the
Redemption Price per whole Right specified in Section 24 hereof. If any legal or
contractual restrictions prevent the Company from paying the full amount payable
in accordance with this paragraph, the Company shall pay to holders of the
Rights as to which such payments are being made all amounts which are not then
restricted on a pro rata basis. The Company shall continue to make payments on a
pro rata basis as such payments become permissible under such legal or
contractual restrictions until such payments have been paid in full. Subject to
the foregoing, payment of the purchase price for Rights to be repurchased by the
Company pursuant to this paragraph shall be made within 15 days of receipt by
the Rights Agent, at its address specified in the Right Certificates, of a Right
Certificate or Right Certificates representing such Rights together with a
notice by the registered holder thereof that it is exercising its right to have
such Rights repurchased by the Company pursuant to this Section 7(E). No right
to require the repurchase of Rights pursuant to this Section 7(E) may be
exercised after the Expiration Date.
F. Notwithstanding anything in this Rights Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to the registered holder of a Right Certificate upon the
occurrence of any purported exercise of any Rights represented by such Right
Certificate as set forth in this Section 7 unless such registered holder shall
have [i] completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Right Certificate surrendered
for such exercise, and [ii] provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company or the Rights Agent shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any Right Certificate purchased or acquired by the Company.
The Rights Agent shall deliver all canceled Right Certificates to the Company,
or shall, at the written request of the Company, destroy such canceled Right
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Preferred Stock.
A. The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized unissued Preferred Stock or any
authorized and issued Preferred Stock held in its treasury, free from preemptive
rights or any right of first refusal, a number of shares of Preferred Stock
sufficient to permit the exercise in full of all outstanding Rights at the date
of this Rights Agreement.
B. The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all Preferred Stock delivered upon exercise
of Rights shall, at the time of delivery of the certificates for such Preferred
Stock (subject to payment of the Exercise Price), be duly and validly authorized
and issued and fully paid and nonassessable shares.
C. If and so long as the Preferred Stock issuable upon the exercise of
Rights are listed for quotation on any national automated quotation system or
are listed on any national securities exchange, the Company covenants and agrees
to use its best efforts to cause, from and after such time as the Rights become
exercisable, all Shares reserved for such issuance to be listed for quotation on
such quotation system or to be listed on such exchange upon official notice of
issuance upon such exercise.
D. The Company further covenants and agrees that it will pay when due
and payable any and all Federal and state transfer taxes and charges which may
be payable in respect of the issuance or delivery of Right Certificates or of
Preferred Stock upon the exercise of the Rights. The Company shall not, however,
be required to pay any transfer tax which may be payable in respect of any
transfer or delivery of Right Certificates to a Person other than, or in respect
of the issuance or delivery of certificates for Common Shares in a name other
than that of, the registered holder of the Right Certificate evidencing Rights
surrendered for exercise or to transfer or deliver any Right Certificate, or
issue or deliver any certificates for Preferred Stock upon the exercise of any
Rights, until any such tax shall have been paid (any such tax being payable by
the holder of such Right Certificate at the time of surrender) or until it has
been established to the satisfaction of the Company that no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name any
certificate for Preferred Stock is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Stock represented thereby on, and such certificate shall be dated, the date upon
which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Exercise Price (and any applicable transfer taxes) was made;
provided. however, that if the date of such surrender and payment is a date upon
which the Preferred Stock transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock transfer books of the Company are open.
Section 11. Adjustment of Number and Kind of Shares and Rights. The number and
kind of shares covered by each Right and the number of Rights associated with
each Common Share are subject to adjustment from time to time as provided in
this Section 11.
A. If the Company at any time after the date of this Rights Agreement
[i] subdivides (by a stock split or otherwise) or splits the outstanding
Preferred Stock into a larger number of Preferred Stock, [ii] combines (by a
reverse stock split or otherwise) the outstanding Preferred Stock into a smaller
number of Preferred Stock or [iiil issues any shares of its capital stock in a
reclassification or change of the outstanding Preferred Stock (including any
such reclassification or change in connection with a merger in which the Company
is the surviving corporation), then in each such event, the number and kind of
shares of capital stock issuable upon the exercise of the Rights shall be
adjusted so that the holder of any Right exercised after such time shall be
entitled to receive, for the Exercise Price, the aggregate number and kind of
shares of capital stock which such holder would have received if such holder had
exercised such Right prior to such time.
B. If the Company, at any time after the date of this Rights
Agreement, shall fix a record date for the issuance of rights, options or
warrants to all holders of Common Shares or of any class or series of Equivalent
Shares entitling such holder (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Common Shares or Equivalent
Shares (or securities convertible into Common Shares or Equivalent Shares) at a
price per share (or having a conversion price per share, if a security
convertible into Common Shares or Equivalent Shares) less than the Market Value
of such Common Shares or Equivalent Shares on such record date, each Right
outstanding immediately prior to such record date shall thereafter evidence the
right to purchase, for the Exercise Price, that number of shares of Preferred
Stock obtained by multiplying the number of Preferred Stock covered by a Right
immediately prior to the record date by a fraction, the numerator of which shall
be the number of Common Shares and Equivalent Shares (if any) outstanding on
such record date plus the number of additional Common Shares or Equivalent
Shares, as the case may be, to be offered for subscription or purchase (or into
which convertible securities so to be offered are initially convertible) and the
denominator of which shall be the total number of Common Shares and Equivalent
Shares (if any) outstanding on such record date plus the number of Common Shares
or Equivalent Shares, as the case may be, which the aggregate offering price of
the total number of Common Shares or Equivalent Shares, as the case may be, so
to be offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such Market Value. If such
subscription or purchase price may be paid in a consideration, part or all of
which shall be in a form other than cash, the value of such consideration shall
be as determined in good faith by a majority of the Disinterested Directors or,
if there are no Disinterested Directors, by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent. Common Shares and Equivalent Shares owned by or held for the
account of the Company or any Subsidiary of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and if such rights,
options or warrants are not so issued, each Right shall be adjusted to evidence
the right to receive that number of Preferred Stock which such Right would have
entitled the holder to receive, for the Exercise Price, if such record date had
not been fixed. Notwithstanding the foregoing, this Section 11(B) shall not be
deemed to apply to the Company's stock purchase plan or dividend reinvestment
plan, as now existing or hereafter amended.
C. If the Company shall fix a record date for the making of a
distribution to all holders of the Common Shares or of any class or series of
Equivalent Shares (including any such distribution made in connection with
a share exchange or a consolidation or merger in which the Company is the
continuing or surviving corporation) of cash other than a regular periodic
cash dividend at a rate not in excess of 150% of the rate of the last regular
cash dividend theretofore paid on the Common Shares, evidences of
indebtedness, assets, securities (other than Common Shares) or
subscription rights, options or warrants (excluding those referred to in
Section 11(B)), each Right outstanding immediately prior to such record date
shall thereafter evidence the right to purchase, for the Exercise Price,
that number of Preferred Stock obtained by multiplying the number of Preferred
Stock covered by a Right immediately prior to the record date by a fraction,
the numerator of which shall be the Market Value of such Common Shares or
Equivalent Shares on such record date and the denominator of which shall be
the Market Value of such Common Shares or Equivalent Shares on such record
date, less the fair market value (as determined in good faith by a
majority of the Disinterested Directors, or if there are no Disinterested
Directors, by the Board of Directors of the Company, whose determination
shall be described in a statement filed with the Rights Agent) of the
subscription rights, options or warrants applicable to one Common Shares or
Equivalent Share, as the case may be. Such adjustments shall be made
successively whenever such a record date is fixed; and if such distribution
is not so made, each Right shall be adjusted to evidence the right to receive
that number of Preferred Stock which such Right would have entitled the holder
to receive, for the Exercise Price, if such record date had not been fixed.
D. [1] At any time on or after the earlier of [i] the Share
Acquisition Date or [ii] the occurrence of a Triggering Event, proper provision
shall be made so that each holder of a Right, except as provided in Section 7(E)
and below, shall thereafter have the right to receive, upon exercise thereof for
the Exercise Price in accordance with terms of this Rights Agreement, such
number of one one hundredth of shares of Preferred Stock as shall equal the
result obtained by multiplying the Exercise Price by a fraction, the numerator
of which shall be the number of one one hundredths of a share of Preferred Stock
for which a Right is then exercisable and the denominator of which shall be 50%
of the Market Value of the Common Shares on the earlier of [i] the Share
Acquisition Date or [ii] the occurrence of a Triggering Event.
[2] If an event occurs which would require an
adjustment under both Section 11(D)(1) and Section
11(A), 11(B), 11(C) or 11(J), the adjustment provided
for in Section 11(A), 11(B), 11(C) or 11(J) shall be
in addition to, and shall be made prior to, any
adjustment required pursuant to Section 11(D)(1).
E. All calculations under this Section 11 shall be made to the
nearest one thousandth of a share.
F. If as a result of an adjustment made pursuant to Section 11(A)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Stock contained in subsections (A), (B), (C) or (D) of this Section 11
and the provision of Sections 7, 9, 10 and 13 hereof with respect to the
Preferred Stock shall apply on like terms to any such other shares.
G. All Rights originally issued by the Company subsequent to any
adjustment made to the number of Preferred Stock or other securities relating to
a Right shall evidence the right to purchase, for the Exercise Price, the
adjusted number of shares or other securities purchasable from time to time
hereunder upon exercise of the Rights, all subject to further adjustment as
provided herein.
H. Irrespective of any adjustment or change in the number of Preferred
Stock or the number or kind of other securities issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the terms which were expressed in the initial Right
Certificates issued hereunder.
Z. In any case in which this Section 11 shall require that an
adjustment be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event issuing to the
holder of any Right exercised after such record date the Preferred Stock and/or
other securities of the Company, if any, issuable upon such exercise over and
above the Preferred Stock issuable before giving effect to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional securities upon the occurrence of the event requiring such
adjustment.
J. If the Company at any time after the date of this Rights Agreement
and prior to the Distribution Date [x] declares a dividend, or makes a
distribution, on its outstanding Common Shares payable in Common Shares, [y]
subdivides (by a stock split or otherwise) or splits the outstanding Common
Shares into a larger number of Common Shares or [z] combines (by a reverse stock
split or otherwise) the outstanding Common Shares into a smaller number of
Common Shares then, in each such event, the number of Rights associated with
each Common Share of the Company at the time of the record date for such
dividend or distribution or the effective date of such subdivision or
combination, shall be adjusted so that the number of Rights thereafter
associated with each such Common Share shall equal the result obtained by
multiplying the number of Rights associated with each such Common Share
immediately prior to such record date or effective date by a fraction, the
numerator of which shall be the total number of such Common Shares outstanding
immediately prior to such record date or effective date and the denominator of
which shall be the total number of such Common Shares outstanding immediately
following such record date or effective date. If the Company at anytime after
the date hereof and prior to the Distribution Date issues any shares of its
capital stock in a reclassification or change of the outstanding Common Shares
(including any such reclassification or change in connection with a merger in
which the Company is the surviving corporation), the number of Rights associated
with each share of capital stock issued in such reclassification or change shall
be appropriately adjusted to reflect such reclassification or change.
Section 12. Certificate of Adjustment. Whenever an adjustment is made as
provided in Section 11 or Section 13 hereof, the Company shall [a) promptly
prepare a certificate setting forth such adjustment and a brief statement of the
facts accounting for such adjustment, [b] promptly file with the Rights Agent
and with each transfer agent for the Common Shares or Preferred Stock a copy of
such certificate and [c] mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 26 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained.
Section 13. Consolidation. Merger. Share Exchange or Sale or Transfer of
Major Part of Assets. (a) If, following the Distribution Date, directly or
indirectly, any Business Combination shall be consummated, then, in each such
case, unless at least two thirds of the Disinterested Directors shall have
approved such Business Combination at a time when neither the Principal Party to
such Business Combination nor any of its Affiliates or Associates were an
Acquiring Person or an Adverse Person, proper provision shall be made so that
each holder of a Right, except as provided in Section 7(E) hereof, shall
thereafter have the right to receive, upon the exercise thereof for the Exercise
Price in accordance with the terms of this Rights Agreement, the securities
specified below:
A. If the Principal Party in such Business Combination has Registered
Common Shares outstanding, each Right shall thereafter represent the right to
receive, upon the exercise thereof for the Exercise Price in accordance with the
terms of this Rights Agreement, such number of Registered Common Shares of such
Principal Party, free and clear of liens, encumbrances or other adverse claims,
as shall be equal to the result obtained by multiplying the Exercise Price by a
fraction, the numerator of which shall be the number of one one hundredths of a
share of Preferred Stock for which a Right was exercisable immediately prior to
consummation of such Business Combination and the denominator of which shall be
50% of the Market Value of each Registered Common Share of such Principal Party
on the date of such Business Combination;
B. If the Principal Party in such Business Combination does not have
Registered Common Shares outstanding, each Right shall thereafter represent the
right to receive, upon the exercise thereof for the Exercise Price in accordance
with the terms of this Rights Agreement, at the election of the holder of such
Right at the time of the exercise thereof, either:
[1] such number of Common Shares of the Surviving Person in such
Business Combination as shall be equal to the result obtained by
multiplying the Exercise Price by a fraction, the numerator of which
shall be the number of one one hundredths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the consummation
of such Business Combination and the denominator of which shall be 50%
of the Book Value of each Common Share of such Surviving Person
immediately after giving effect to such Business Combination;
[2] such number of Common Shares of the Principal Party in such
Business Combination (if the Principal Party is not also the Surviving
Person in such Business Combination) as shall be equal to the result
obtained by multiplying the Exercise Price by a fraction, the numerator
of which shall be the number of one one hundredths of a share of
Preferred Stock for which a Right was exercisable immediately prior to
the consummation of such Business Combination and the denominator of
which shall be 50% of the Book Value of each Common Share of the
Principal Party immediately after giving effect to such Business
Combination; or
[3] if the Principal Party in such Business Combination is an
Affiliate of one or more Persons which has Registered Common Shares
outstanding, such number of Registered Common Shares of whichever of
such Affiliates of the Principal Party has Registered Common Shares
with the greatest aggregate Market Value on the date of consummation of
such Business Combination as shall be equal to the result obtained by
multiplying the Exercise Price by a fraction, the numerator of which
shall be the number of one one hundredths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the consummation
of such Business Combination and the denominator of which shall be 50%
of the Market Value of each Registered Common Share of such Affiliate
on the date of such Business Combination.
All Common Shares of any Person for which any Right may be exercised after
consummation of a Business Combination as provided in this Section 13(a) shall,
when issued upon exercise thereof in accordance with this Rights Agreement, be
validly issued, fully paid and non-assessable and free of preemptive rights,
rights of first refusal or any other restrictions or limitations on the transfer
or ownership thereof.
(b) After consummation of any Business Combination [i] each issuer of
Common Shares for which Rights may be exercised as set forth in Section 13(a)
shall be liable for, and shall assume, by virtue of such Business Combination,
all the obligations and duties of the Company pursuant to this Rights Agreement,
[ii] the term "Company" shall thereafter be deemed to refer to each such issuer,
[iii] each such issuer shall take such steps in connection with such
consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
Common Shares thereafter deliverable upon the exercise of the Rights and [iv]
the number of Common shares of each such issuer thereafter receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11 and 13 hereof and the
provisions of Sections 7, 9, 10, 11 and 13 hereof with respect to the Preferred
Stock shall apply on like terms to such Common Shares.
(c) The Company shall not consummate any Business Combination unless
each issuer for which Rights may be exercised, as set forth in Section 13(a),
shall have sufficient authorized Common Shares that have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and each such issuer
shall have:
[i] executed and delivered to the Rights Agent a supplemental
agreement providing for the obligation of such issuer to issue Common
Shares upon the exercise of Rights in accordance with the terms set
forth in Section 13(a) and 13(b) and further providing that, as soon as
practicable after the date of such Business Combination, such issuer,
at its own expense, will:
[a] prepare and file a registration statement under
the Securities Act, with respect to the Rights and the
securities purchasable upon exercise of the Rights
on an appropriate form, use its best efforts to cause
such registration statement to become effective
as soon as practicable after such filing and use its best
efforts to cause such registration statement to remain
effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the
Expiration Date;
[b] use its best efforts to qualify or register the
Rights and the securities purchasable upon exercise of the
Rights under the blue sky laws of such jurisdictions as may
be necessary or appropriate; and
[c] use its best efforts to list the Rights and the
securities purchasable upon exercise of the Rights
on a national securities exchange;
[ii] furnished to the Rights Agent an opinion of independent
counsel stating that such supplemental agreement is a valid, binding
and enforceable agreement of such issuer; and
[iii] filed with the Rights Agent a certificate of a
nationally recognized firm of independent accountants setting forth the
number of Common Shares of such issuer which may be purchased upon the
exercise of each Right after the consummation of such Business
Combination.
(d) If a Business Combination shall be consummated at anytime after [i]
the Share Acquisition Date or [ii] the occurrence of a Triggering Event, the
Rights that have not been exercised prior to such time shall thereafter be
exercisable in the manner set forth in Section 13(a).
Section 14. Additional Covenants.
(a) Notwithstanding any other provision of this Rights
Agreement, no adjustment in the number of Preferred Stock or
other securities for which a Right is exercisable or the
number of Rights outstanding or associated with each Common
Share or any similar or other adjustment shall be made or be
effective if such adjustment would have the effect of reducing
or limiting the benefits the holders of the Rights would have
had absent such adjustment, including, without limitation, the
benefits under Section 11(D) and Section 13 hereof, unless the
terms of this Rights Agreement are amended so as to preserve
such benefits.
(b) The Company covenants and agrees that it shall not effect
any Business Combination if at the time of, or immediately
after such Business Combination, there are any rights,
options, warrants or other instruments outstanding which would
diminish or otherwise eliminate the benefits intended to be
afforded by the Rights.
(c) Without limiting the generality of Section 13, if the
nature of the organization of any Person shall preclude or
limit the acquisition of Common Shares of such Person upon
exercise of the Rights as required by Section 13(a) hereof as
a result of a Business Combination, it shall be a condition to
such Business Combination that such Person shall take such
steps (including, but not limited to, a reorganization) as may
be necessary to assure that the benefits intended to be
derived under Section 13 hereof upon the exercise of the
Rights are assured to the holders thereof.
Section 15. Fractional Rights and Fractional Shares.
A. The Company shall not be required to issue fractions of Rights or to
distribute Right Certificates which evidence fractional Rights. In lieu of such
fractional Rights, the Company may pay to the registered holders of the Right
Certificates with regard to which such fractional Rights would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 15(A), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to Rights listed or admitted to trading on a national securities exchange or, if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over the counter market, as reported by NASDAQ
or such other comparable system then in use or, if on any such date the Rights
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Rights selected by a majority of the Disinterested Directors or, if there are no
Disinterested Directors, by the Board of Directors of the Company. If on any
such date no such market maker is making a market in the Rights, the fair value
of the Rights on such date as determined in good faith by a majority of the
Disinterested Directors or, if there are no Disinterested Directors, by the
Board of Directors of the Company, shall be used.
B. The Company shall not be required to issue fractional shares of
Preferred Stock upon exercise of the Rights or distribute certificates which
evidence less than one whole share of Preferred Stock. In lieu of fractional
Preferred Stock, the Company may elect to pay to the registered holders of Right
Certificates, at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of one share of
Preferred Stock. For purposes of this Section 15(B), the current market value of
a share of Preferred Stock (or Common Share) shall be the closing price of one
share of Preferred Stock (or Common Share) (as determined pursuant to the method
of computing Market Value contained in the second sentence of Section 1(T) of
this Rights Agreement) for the Trading Day immediately prior to the date of such
exercise.
C. The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional
securities upon exercise of a Right.
Section 16. Rights of Action.
A. All rights of action in respect of this Rights Agreement are vested
in the respective registered holders of the Right Certificates (and, prior to
the Distribution Date, the registered holders of the Common Shares); and, except
as otherwise provided by the last sentence of this Section 16(A), any registered
holder of any Right Certificate (or, prior to the Distribution Date, of the
Common Shares), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of the Common
Shares), may, in his own behalf and for his own benefit, enforce, and may
institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Rights Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Rights Agreement and shall be entitled to specific performance of
the obligations of any Person under, and injunctive relief against actual or
threatened violations of the obligations of any Person subject to, this Rights
Agreement. Notwithstanding the foregoing, the right of a registered holder of a
Right Certificate representing Rights that have become null and void pursuant to
Section 7(E) of this Rights Agreement to maintain a suit in respect of this
Rights Agreement or such Rights shall be limited to enforcement of such holder's
right to require the Company to repurchase such Rights pursuant to Section 7(E).
B. Any holder of Rights who prevails in an action to enforce the
provisions of this Rights Agreement shall be entitled to recover the reasonable
costs and expenses, including attorneys' fees, incurred in such action.
Section 17. Transfer and Ownership of Rights and Right Certificates.
A. Prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares.
B. After the Distribution Date, the Right Certificates will be
transferable only on the records of the Rights Agent when surrendered at the
shareholder services office of the Rights Agent, duly endorsed or accompanied by
a proper instrument of transfer.
C. The Company and the Rights Agent may deem and treat the Person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated certificate for
Common Shares made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 18. Right Certificate Holder Not Deemed a Stockholder. No holder, as
such, of any Right Certificate shall be entitled to vote or receive dividends or
be deemed, for any purpose, the holder of the Common Shares, Preferred Stock or
of any other securities which may at any time be issuable on the exercise of the
Rights represented thereby, nor shall anything contained herein or in any Right
Certificate be construed to confer upon the holder of any Right Certificate, as
such, any of the rights of a stockholder of the Company, including, without
limitation any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action, or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 26 hereof), or to receive
dividends or other distributions or subscription rights, or otherwise, until the
Right or Rights evidenced by such Right Certificate shall have been exercised in
accordance with the provisions hereof.
Section 19. Concerning the Rights Agent.
A. The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and from time to time, on
demand of the Rights Agent, its expenses and counsel fees and other
disbursements incurred in the administration and execution of this Rights
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Rights Agreement, including the costs and expenses of defending against any
claim of liability arising therefrom, directly or indirectly.
B. The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration of this Rights Agreement in reliance upon any Right
Certificate or certificate for the Common Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons.
Section 20. Merger or Consolidation or Change of Rights Agent.
A. Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation or share exchange to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the stock transfer or corporate trust business of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Rights Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 22 hereof. In case at the time such successor Rights
Agent succeeds to the agency created by this Rights Agreement, any of the Right
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of the predecessor Rights Agent and
deliver such Right Certificates so countersigned and in case at that time any of
the Right Certificates shall not have been countersigned, any successor Rights
Agent may countersign such Right Certificates either in the name of the
predecessor Rights Agent or in the name of the successor Rights Agent; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Rights Agreement.
B. In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates either in its prior name or in its
changed name; and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Rights Agreement.
Section 21. Duties of Rights Agent. The Rights Agent undertakes the duties and
obligations imposed by this Rights Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
A. The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel (if approved by the
Company) shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such opinion.
B. Whenever in the performance of its duties under this Rights
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person or
Adverse Person) be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by any one of the
Chairman of the Board, the President, a Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Rights Agreement in reliance
upon such certificate.
C. The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Rights Agreement or in the
Right Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
E. The Rights Agent shall not be under any responsibility in respect of
the validity of this Rights Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Rights Agreement or in any Right
Certificate; nor shall it be responsible for any adjustment required under the
provisions of Section 11 or 13 hereof or responsible for the manner, method or
amount of any such adjustment or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the exercise of Rights
evidenced by Right Certificates after actual notice of any such adjustment); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any Preferred Stock or other
securities for which a Right is exercisable to be issued pursuant to this Rights
Agreement or any Right Certificate or as to whether any Preferred Stock or other
securities for which a Right is exercisable will, when so issued, be validly
authorized, issued, fully paid and non-assessable.
F. The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Rights Agreement.
G. The Rights Agent is hereby authorized and directed to accept written
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the President, a Vice President, the Treasurer
or the Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer.
H. The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Rights Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
I. The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct provided reasonable care was exercised in the selection
and continued employment thereof.
Section 22. Change of Rights Agent: Co-Rights Agent.
A. The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Rights Agreement upon 30 days' notice in
writing mailed to the Company and to each transfer agent of the Common Shares by
registered or certified mail, and to the holders of the Right Certificates by
first class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case maybe, and to each transfer agent of the
Common Shares by registered or certified mail, and to the holders of the Right
Certificates by first class mail. If the Rights Agent shall resign or be removed
or shall otherwise become incapable of acting, the Company shall appoint a
successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Right Certificate
{who shall, with such notice, submit his Right Certificate for inspection by the
Company), then the registered holder of any Right Certificate may apply to any
court of competent jurisdiction for the appointment of a new Rights Agent. Any
successor Rights Agent, whether appointed by the Company or by such a court,
shall be a corporation organized and doing business under the laws of the United
States or of the Commonwealth of Kentucky (or of any other state of the United
States so long as such corporation is authorized to conduct a stock transfer or
corporate trust business in the Commonwealth of Kentucky) in good standing,
having a principal office in the Commonwealth of Kentucky which is authorized
under such laws to exercise stock transfer or corporate trust powers and is
subject to supervision or examination by Federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 22, however, or any defect therein shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
B. Notwithstanding anything to the contrary in this Rights Agreement,
it is agreed that the Company may appoint certain individuals in the Company as
co-Rights Agents hereunder. If such appointments are made, any reference herein
to the office of the Rights Agent shall be deemed to include the office of the
stock transfer department of the Company.
Section 23. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Rights Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by the Board of Directors of the Company to reflect
any adjustment or change made in accordance with the provisions of this Rights
Agreement. In addition, in connection with the issuance or sale of shares of
Common Stock following the Distribution Date and prior to the Expiration Date,
the Company [a] shall, with respect to shares of Common Stock so issued or sold
pursuant to the exercise of stock options or under any employee plan or
arrangement, or upon the exercise, conversion or exchange of securities, notes
or debentures issued by the Company, and [b] may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Right
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided. however, that [i] no such Right Certificate
shall be issued if, and to the extent that the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Right Certificate
would be issued, and [ii] no such Right Certificate shall be issued if, and to
the extent that, appropriate adjustment shall otherwise have been made in lieu
of the issuance thereof.
Section 24. Redemption and Termination.
A. The Board of Directors of the Company may, at its option, at any
time prior to the earliest of [i] the Close of Business on the tenth Business
Day following the Share Acquisition Date, [ii] the occurrence of a Triggering
Event or [iii] the Expiration Date, order the redemption of all, but not less
than all, the then outstanding Rights at a Redemption Price of $.01 per whole
Right; provided, however, that immediately upon the date that an Acquiring
Person becomes an Acquiring Person or an Adverse Person becomes an Adverse
Person, and thereafter until the earliest of [i] the Close of Business on the
tenth Business Day following the Share Acquisition Date, [ii] the occurrence of
a Triggering Event or [iii] the Expiration Date, the Rights may be redeemed only
if a majority of the Disinterested Directors then in office determine that such
redemption is, in their judgment, in the best interest of the Company and its
shareholders.
B. Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights, and without any further action and
without any notice, the right to exercise the Rights will terminate and the only
right thereafter of the holders of Rights shall be to receive the Redemption
Price. Within ten Business Days after the action of the Board of Directors of
the Company ordering the redemption of the Rights, the Company shall give notice
of such redemption to the holders of the then outstanding Rights by mailing such
notice to all such holders at their last addresses as they appear upon the
records of the Rights Agent or, prior to the Distribution Date, on the records
of the transfer agent for the Common Shares. Each such notice of redemption will
state the method by which the payment of the Redemption Price will be made. The
notice, if mailed in the manner herein provided, shall be conclusively presumed
to have been duly given, whether or not the holder of Rights receives such
notice. In any case, failure to give such notice by mail, or any defect in the
notice, to any particular holder of Rights shall not affect the sufficiency of
the notice to other holders of Rights. Neither the Company nor any of its
Affiliates or Associates may redeem the Rights at any time, in any manner, other
than that specifically set forth in this Section 24.
Section 25. Exchange of Right.
A. The Board of Directors of the Company may, at its option, at any
time after a Person becomes an Acquiring Person or an Adverse Person, exchange
all or part of the then outstanding and exercisable Rights (which shall not
include Rights that have become null and void pursuant to the provisions of
Section 7(E)) for shares of Preferred Stock at an exchange ratio of one one
hundredth share of Preferred Stock per Right, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction occurring after the date
hereof (such exchange ratio being hereinafter referred to as the "Exchange
Ratio"). Notwithstanding the foregoing, the Board of Directors of the Company
shall not be empowered to effect such exchange at any time after any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any of its Subsidiaries or any Person holding Common
Shares for or pursuant to the terms of any such employee benefit plan), alone or
together with all Affiliates and Associates of such Person, becomes the
Beneficial Owner of 50% or more of the Common Shares then outstanding.
B. Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to Section 25(A) and without any
further action and without any notice, the right to exercise such Rights shall
terminate and the only right thereafter of a holder of such Rights shall be to
receive that number of shares of Preferred Stock equal to the number of such
Rights held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Preferred Stock for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become null and void pursuant to the provisions of Section
7(E)) held by each holder of Rights.
C. In the event that there shall not be sufficient shares of Preferred
Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 25, the
Company shall take all such action as may be necessary to authorize additional
shares of Preferred Stock for issuance upon exchange of the Rights. In the event
the Company shall, after good faith effort, be unable to take all such action as
may be necessary to authorize such additional Preferred Stock, the Company shall
substitute, for each share or fractional share of Preferred Stock that would
otherwise be issuable upon exchange of a Right, a number of Common Shares or
Equivalent Shares or fraction thereof having an aggregate Market Value equal to
the Market Value of the Preferred Stock otherwise issuable upon exchange of the
Right.
D. The Company is not required to issue fractions of shares of
Preferred Stock or to distribute certificates which evidence fractional shares
of Preferred Stock. In lieu of fractional shares of Preferred Stock, there shall
be paid to the registered holders of the Right Certificates with regard to which
such fractional shares of Preferred Stock would otherwise be issuable, an amount
in cash equal to the same fraction of the Market Value of a whole share of
Preferred Stock. For the purpose of this subsection (D), the Market Value of a
whole share of Preferred Stock shall be the closing price per share of Preferred
Stock (as determined pursuant to the second sentence of Section 1(T)) for the
Trading Day immediately prior to the date of exchange pursuant to this Section
25.
Section 26. Notice of Certain Events.
A. In case the Company shall propose [i] to take any action of the type
described in Section 11(A), 11(B), 11(C) or 11(J) hereof that would require an
adjustment thereunder, [ii] to effect any Business Combination or [iii] to
effect the liquidation, dissolution or winding up of the Company, then, in such
case, the Company shall give to each holder of a Rights Certificate, in
accordance with Section 27 hereof, a notice of such proposed action, which shall
specify any record date for the purposes of determining any participation
therein by the holders of the Common Shares and/or Preferred Stock, or the date
on which such action is to take place and the date of any participation therein
by the holders of the Common Shares and/or Preferred Stock, if any such date is
to be fixed, and such notice shall be so given at least twenty days prior to any
such record date, the taking of such action or the date of participation therein
by the holders of the Common Shares and/or Preferred Stock, whichever shall be
the earliest.
B. In the event that the Share Acquisition Date or a Triggering Event
shall occur, then, in any either case, the Company shall as soon as practicable
thereafter give to each holder of a Right Certificate, in accordance with
Section 27 hereof, a notice of such occurrence, which shall specify the cause
and the consequences of reaching the tenth Business Day following the Share
Acquisition Date or the Triggering Event to holders of Rights under Section
11(D) hereof.
Section 27. Notices. Notices or demands authorized by this Agreement to be given
or made by the Rights Agent or by the holder of any Right Certificate to or on
the Company shall be sufficiently given or made if sent by first class mail,
postage prepaid, addressed (until another address is filed in writing with the
Rights Agent) as follows:
Trans Financial Bancorp, Inc.
500 East Main Street
Bowling Green, Kentucky 42101 Attn: Chief Financial Officer
Subject to the provisions of Section 22 hereof, any notice or demand authorized
by this Rights Agreement to be given or made by the Company or by the holder of
any Right Certificate to or on the Rights Agent shall be sufficiently given or
made if sent by first class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Manufacturers Hanover
450 W. 33rd Street, 15th Floor
New York, New York 10001
Notices or demands authorized by this Rights Agreement to be given or made by
the Company or the Rights Agent to any holder of a Right Certificate shall be
sufficiently given or made if sent by first class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the record
books of the Rights Agent or, prior to the Distribution Date, on the record
books of the transfer agent for the Common Shares.
Section 28. Supplements and Amendments. At any time prior to the Distribution
Date and subject to the last sentence of this Section 28, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Rights Agreement without the approval of any holder of the Rights
(including, without limitation, the time when the Distribution Date shall
occur). From and after the Distribution Date and subject to applicable law, the
Company and the Rights Agent shall, if the Company so directs, amend this Rights
Agreement without the approval of any holders of Right Certificates [i] to cure
any ambiguity or to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provision of this Rights
Agreement or [ii] to make any other provisions in regard to matters or questions
arising here under which the Company may deem necessary or desirable and which
shall not adversely affect the interests of the holders of Right Certificates
(other than an Acquiring Person or an Adverse Person or an Affiliate or
Associate of an Acquiring Person or Adverse Person). Without limiting the
generality of the foregoing, the Company may at any time prior to such time as
any Person becomes an Acquiring Person amend this Agreement to lower the
thresholds set forth in Sections 1(A) and 1(AJ) from 15%, to not less than the
greater of [i] the largest percentage of the outstanding Common Shares then
known by the Company to be beneficially owned by any Person (other than the
Company, any Subsidiary of the Company, any employee benefit plan of the Company
or of any of its Subsidiaries or any Person holding Common Shares for or
pursuant to the terms of any such employee benefit plan) plus .01% or [ii] 10%.
Upon the delivery of a certificate from an appropriate officer of the Company
which states that a proposed supplement or amendment to this Rights Agreement is
in compliance with the provisions of this Section 28, the Rights Agent shall
execute such supplement or amendment. Notwithstanding anything contained in this
Rights Agreement to the contrary, [1] at any time that there shall be an
Acquiring Person or Adverse Person, this Rights Agreement may be supplemented or
amended only if a majority of the Disinterested Directors then in office
determine that such supplement or amendment is in their judgment in the best
interest of the Company and [2] no supplement or amendment to this Rights
Agreement shall be made which reduces the Redemption Price, or provides for an
earlier Expiration Date.
Section 29. Determinations and Actions by the Board of Directors. The Board of
Directors of the Company (and/or, as provided for in this Rights Agreement, the
Disinterested Directors) shall have the exclusive power and authority to
administer this Rights Agreement and to exercise all rights and powers
specifically granted to the Board of Directors or the Company (and/or, as
provided for in this Rights Agreement, the Disinterested Directors) or as may be
necessary or advisable in the administration of this Rights Agreement,
including, without limitation, the right and power to interpret this Rights
Agreement and to make conclusively all determinations deemed necessary or
advisable for the administration of this Rights Agreement. All such acts,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) that are done or
made by the Board of Directors and/or the Disinterested Directors, in good faith
shall (x) be final, conclusive and binding on the Company, the Rights Agent and
the holders of the Rights and all other parties and (y) not subject the Board of
Directors or the Disinterested Directors to any liability to the holders of the
Rights or any other party.
Section 30. Successors. All the covenants and provisions in this Rights
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns here under.
Section 31. Benefits of This Rights Agreement: Determinations and Actions by
the Board of Directors. etc.
A. Nothing in this Rights Agreement shall be construed to give to any
person or corporation other than the Company, the Rights Agent and the
registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Rights Agreement; but this Rights Agreement shall be the sole and exclusive
benefit of the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
B. Any action which this Rights Agreement specifies is to be taken by
the Disinterested Directors shall be a sufficient act of the Company if approved
by the requisite number of the Disinterested Directors specified in this Rights
Agreement without any further act of the Board of Directors of the Company. Any
action which this Rights Agreement does not specify is to be taken by the
Disinterested Directors and which otherwise would require approval of the Board
of Directors of the Company, shall be a sufficient act of the Company if
approved by a majority of the directors of the Company present at a meeting of
the Board of Directors of the Company at which a quorum is present and, if there
are Disinterested Directors, by a majority of the Disinterested Directors.
Section 32. Severability. If any term, provision, covenant or restriction of
this Rights Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Rights Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 33. Governing Law. This Rights Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
Commonwealth of Kentucky and, except as to the duties of the Rights Agent and as
hereinafter otherwise provided, for all purposes shall be governed by and
construed in accordance with the laws of such Commonwealth applicable to
contracts to be made and performed entirely within such Common wealth. The
duties of the Rights Agent shall be governed by and construed in accordance with
the laws of the State of New York.
Section 34. Counterparts. This Rights Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 35. Descriptive Headings. Descriptive headings of the several Sections
of this Rights Agreement are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions of this Rights
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed, all as of the day and year first above written.
TRANS FINANCIAL BANCORP, INC.
By:
/s/ Douglas M. Lester
Douglas M. Lester, President
MANUFACTURERS HANOVER as Rights Agent
By:/s/Manufacturers Hanover, Rights Agent
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATION OF CLASS B PREFERRED STOCK, SERIES
1992 OF TRANS FINANCIAL BANCORP, INC.
I, David A. Blackburn, Secretary of Trans Financial
Bancorp, Inc. (the "Corporation"), a corporation organized and existing
under the Kentucky Business Corporation Act, in accordance with the
provisions of KRS 271.B.6 020 thereof, do hereby certify:
That pursuant to the authority conferred upon the Board of
Directors by the Articles of Incorporation of the Corporation, the Board of
Directors on January 20, 1992, adopted the following resolution creating a
series of Preferred Stock designated as Class B Preferred Stock, Series 1992:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of the Corporation and in accordance with the
provisions of its Articles of Incorporation, a Series of Preferred Stock of the
Corporation be and hereby is, created, and that the designation and amount
thereof and the relative rights and preferences of the shares of such series,
are as follows:
1. Designation and Amount. There is hereby created a series of
Preferred Stock, such series being designated as "Class B Preferred Stock,
Series 1992" (the "Series 1992 Preferred Stock"), and the number of shares
initially constituting such series shall be 350,000. The number of shares
constituting such series may, unless prohibited by the Articles of Incorporation
or by applicable law of the Commonwealth of Kentucky, be increased or decreased
by subsequent amendment of this resolution by the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series 1992 Preferred
Stock to a number less than the number of 'shares then outstanding plus the
number of shares issuable upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
corporation convertible into Series 1992 Preferred Stock.
2. Dividends and Distributions.
A. The holders of Series 1992 Preferred Stock shall be
entitled to receive as a dividend per share per annum, when, as and if declared
by the Board of Directors out of the funds legally available for the purpose, an
amount (rounded to the nearest cent) equal to the greater of (1) $6.00 or (2)
the sum of the Formula Amounts with respect to each quarterly payment of
dividends on the Series 1992 Preferred Stock. The Formula Amount for any such
quarterly payment shall be the Formula Number then in effect times the aggregate
per whole share amount of (x) dividends payable in cash and (y) a cash amount
equal to the fair market value of all dividends or other distributions payable
in assets, securities or other forms of non-cash consideration (other than
dividends or distributions solely in Common Stock, no par value of the
Corporation ("Common Shares") or any distribution of stock into which the Common
Shares may be reclassified or exchanged as contemplated by subparagraph B of
this Section 2), declared on the Common Shares since the immediately preceding
date of a quarterly payment of dividends on the Series 1992 Preferred Stock (a
"Quarterly Dividend Payment Date") or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share of Series 1992
Preferred Stock. As used herein, the "Formula Number" shall be 100; provided.
however, that if at any time after January 20, 1992, the Company shall (i)
declare a dividend, or make a distribution, on its outstanding Common Shares
payable in Common Shares, (ii) subdivide (by a stock split or otherwise) or
split the outstanding Common Shares into a larger number of Common Shares, or
(iii) combine (by a reverse stock split or otherwise) the outstanding Common
Shares into a smaller number of Common Shares, then in each such event the
Formula Number shall be adjusted to a number determined by multiplying the
Formula Number in effect immediately prior to such event by a fraction, the
numerator of which is the number of Common Shares that are outstanding
immediately after such event and the denominator of which is the number of
shares that are outstanding immediately prior to such event (and rounding the
result to the nearest whole number); and provided further that if at any time
after January 20, 1992, the Company shall issue any shares of its capital stock
in a reclassification or change of the outstanding Common Shares (including any
such reclassification or change in connection with a merger in which the Company
is the surviving corporation), then in such event the Formula Number shall be
appropriately adjusted to reflect such reclassification or change.
B. The Corporation shall declare a dividend or distribution on
the Series 1992 Preferred Stock as provided in subparagraph A of this Section 2
simultaneously with its declaration of a dividend or distribution on the Common
Shares (other than a dividend payable in Common Shares or a subdivision of the
outstanding Common Shares); provided, that in the event no dividend or
distribution (other than a dividend payable in Common Shares or a subdivision of
the outstanding Common Shares) shall have been declared on the Common Shares
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.50 per share on the
Series 1992 Preferred Stock shall nevertheless be payable, out of the funds
legally available for such purpose, on such subsequent Quarterly Dividend
Payment Date.
C. Dividends shall begin to accrue and be cumulative
on outstanding Series 1992 Preferred Stock from the Quarterly Dividend
Payment Date immediately preceding the date of issue of such Series 1992
Preferred Stock, unless the date of issue of such shares is prior to
the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of Series 1992
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend .Payment Date, in either of which events such dividend shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends payable on the
Series 1992 Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share by share basis among all such shares outstanding at that time.
The Board of Directors may fix a record date for the determination of holders of
Series 1992 Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be the same as the record
date for the corresponding dividend or distribution on the Common Shares.
3. Voting Rights. The holders of Series 1992 Preferred Stock shall
have the following voting rights:
A. Subject to the provision for adjustment hereinafter set
forth, each whole share of Series 1992 Preferred Stock shall entitle the holder
thereof to the number of votes equal to the Formula Number then in effect for
each share of Series 1992 Preferred Stock held of record on all matters
submitted to a vote of the shareholders of the Corporation.
B. Except as otherwise provided in any other Certificate of
Designation creating a series of Preferred Stock, by law or as otherwise
provided herein, the holders of Series 1992 Preferred Stock and the holders of
Common Shares and any other capital shares of the Corporation having general
voting rights shall vote together as one class on all matters submitted to a
vote of the shareholders of the Corporation.
C. Except as otherwise provided by law or as otherwise
provided herein, the holders of the Series 1992 Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent that they are entitled to vote with holders of Common Shares and any
other capital stock of the Corporation having general voting rights as set forth
herein) for taking any corporate actions.
4. Certain Restrictions.
A. Whenever quarterly dividends or other dividends or
distributions payable on the Series 1992 Preferred Stock as provided in the
Section 2 hereof are in arrears, thereafter until all accrued and unpaid
dividends and distributions, whether or not declared, on Series 1992 Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
[1] declare or pay dividends, or make any other
distribution on, or redeem or purchase or otherwise acquire
for consideration any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series 1992 Preferred Stock;
[2] declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series 1992 Preferred Stock, except
dividends paid ratably on the Series 1992 Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amount to which the holders
of all such shares are then entitled;
[3] redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series 1992 Preferred Stock, provided that the
corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares
of stock of the corporation ranking junior (both as to
dividends and upon liquidation, dissolution or winding up) to
the Series 1992 Preferred Stock; or
B. The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the corporation unless the corporation could, under subparagraph A of
this section 4, purchase or otherwise acquire such shares at such time and in
such a manner.
5. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (a)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series 1992 Preferred Stock
unless, prior thereto, the holders of Series 1992 Preferred Stock shall have
received the greater of (1) $12 per share or (2) an aggregate amount per share
equal to the Formula Number then in effect times the aggregate amount to be
distributed per share to holders of Common Shares or (b) to the holders of
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series 1992 Preferred Stock, except
distributions made ratably on the Series 1992 Preferred Stock and all other such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon liquidation, dissolution or winding up declared, on
Series 1992 Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
[1] declare or pay dividends, or make any other
distribution on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
1992 Preferred Stock;
[2] declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series 1992 Preferred Stock, except dividends paid ratably on the
Series 1992 Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amount
to which the holders of all such shares are then entitled;
[3] redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
1992 Preferred Stock, provided that the corporation may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of stock of the corporation ranking junior (both
as to dividends and upon liquidation, dissolution or winding up) to the
Series 1992 Preferred Stock; or
6. Consolidation. Merger. Exchange. etc. In case the corporation
shall enter into any consolidation, merger, combination, statutory share
exchange or other transaction in which the Common Shares are exchanged for or
changed into other stock or securities, money and/or any other property, then in
any such case the Series 1992 Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share equal to the Formula
Number then in effect times the aggregate amount of stock, securities, cash or
any other property (payable in kind), as the case may be, into which or for
which each Common Share is exchanged or changed.
7. No Redemption. Except as otherwise provided in Section 6, the
Series 1992 Preferred Stock shall not be redeemable.
8. Rank. The Series 1992 Preferred Stock shall rank junior in terms of
dividends and liquidation, dissolution and winding up rights to any Class A
Preferred Stock and to all other series of the corporation's Preferred Stock
hereinafter issued unless the terms of such series shall provide otherwise.
9. Fractional Shares. The corporation shall not be required to issue
fractional shares of the Series 1992 Preferred Stock and in lieu of fractional
shares, the corporation shall pay an amount in cash equal to the same fraction
of the current market value of one share of Preferred Stock.
IN WITNESS WHEREOF, I have executed this Certificate of
Designation, this the 20th day of January, 1992.
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David A. Blackburn, Secretary
EXHIBIT B
Form of Right Certificate
Certificate No.___ ___________ Rights
NOT EXERCISABLE AFTER JANUARY 20, 2002, OR EARLIER IF REDEEMED. THE
RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01
PER WHOLE RIGHT, ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. [THE
RIGHTS REPRESENTED BY THIS RIGHT CERTIFICATE ARE OR WERE BENEFICIALLY
OWNED BY A PERSON WHO WAS AN ACQUIRING PERSON OR AN ADVERSE PERSON, OR
AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON OR ADVERSE PERSON.
ACCORDINGLY, THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY
MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(E)
OF THE RIGHTS AGREEMENT; PROVIDED, HOWEVER, THAT A HOLDER OF A RIGHT
WHICH HAS BECOME NULL AND VOID WILL HAVE THE RIGHT, AT ANY TIME PRIOR
TO THE EXPIRATION DATE, SUBJECT TO THE PROVISIONS OF THE RIGHTS
AGREEMENT, TO REQUIRE THE COMPANY TO REPURCHASE SUCH RIGHT AT A
PURCHASE PRICE EQUAL TO $.01 PER WHOLE RIGHT.]i
RIGHT CERTIFICATE
TRANS FINANCIAL BANCORP, INC.
This certifies that ________________________________, or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement dated as of January 20, 1992 (the "Rights
- --------------------------------------------
' The portion of the legend in brackets shall be inserted only if
Right Certificate was held or transferred by an Acquiring Person or Adverse
Person.
Agreement"), between Trans Financial Bancorp, Inc., a Kentucky corporation (the
"Company") and Manufacturers Hanover, 450 W. 33rd Street, 15th Floor, New York,
New York 10001, a state chartered bank and trust company, as Rights Agent (the
"Rights Agent"), unless the Rights evidenced hereby shall have been previously
redeemed, to purchase from the Company at any time after the Distribution Date
(as defined in the Rights Agreement) and prior to 5:00 p.m., Eastern Standard
Time on January 20, 2002 (the "Expiration Date"), at the principal corporate
trust office of the Rights Agent, or its successors as Rights Agent, in [City,
State], one one hundredth of a fully paid, non-assessable share of preferred
stock, without par value, of the Company (the "Preferred Stock"), upon
presentation and surrender of this Right Certificate with the Form of election
to Purchase duly executed. The exercise price with respect to each whole Right
shall be $45 (the "Exercise Price").
The number and kind of shares of which may be purchased upon
exercise of each Right evidenced by this Right Certificate, as set forth above,
are the number and kind of shares as of January 20, 1992. As provided in the
Rights Agreement, the number and kind of shares which may be purchased upon the
exercise of each Right evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
If the Rights evidenced by this Right Certificate are or were
at any time on or after the earlier of the Distribution Date or the Share
Acquisition Date (as such terms are defined in the Rights Agreement)
beneficially owned by an Acquiring Person or an Adverse Person, or an Affiliate
or Associate of an Acquiring Person or Adverse Person (as such terms are defined
in the Rights Agreement), such Rights shall become null and void at any time on
or after the earlier of [i] the Share Acquisition Date or [ii] the occurrence of
a Triggering Event (as defined in the Rights Agreement) and the holder of any
such Right (including any holder who acquired such Right after [i] the Share
Acquisition Date or [ii] the occurrence of a Triggering Event) shall not have
any right to exercise any such Right on or after [i] the Share Acquisition Date
or [ii] the occurrence of a Triggering Event; provided, however, that such
holder will have the right at any time prior to the Expiration Date, subject to
the provisions of the Rights Agreement, to require the Company to repurchase any
such Right at a purchase price equal to $.01 per whole Right.
This Right Certificate is subject to all the terms, provisions
and conditions of the Rights Agreement, which terms, provisions and conditions
are hereby incorporated herein by reference and made a part hereof and reference
to the Rights Agreement is hereby made for a full description of rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the above mentioned office of the Rights
Agent and are also available from the Company upon written request.
This Right Certificate, with or without other Right
Certificates, upon surrender at the above mentioned office of the Rights Agent,
may be exchanged for another Right Certificate or Right Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number and kind of shares as the Rights evidenced by the Right
Certificate or Right Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder shall
be entitled to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Right Certificate may be redeemed by the Company at its option
at a redemption price of $.01 per whole Right at any time prior to the earliest
of [i] the Close of Business on the tenth Business Day following the Share
Acquisition Date, [ii1 an occurrence of a Triggering Event or [iii] the
Expiration Date.
The Company is not required to issue fractional shares of
Preferred Stock upon the exercise of any Rights evidenced hereby. In lieu of
issuing fractional shares, the Company will make a cash payment as provided in
the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed or confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company, including without limitation, any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or, to receive notice of meetings or other actions affecting
stockholders (except as provided in the Rights Agreement), or to receive
dividends or other distributions or subscription rights, or otherwise, until the
Right or Rights evidenced by this Right Certificate shall have been exercised as
provided in accordance with the provisions of the Rights Agreement.
This Right Certificate shall not be valid or obligatory for
any purpose until it shall have been counter signed by the Rights Agent.
WITNESS the facsimile signature of the proper officers
of the Company and its corporate seal. Dated as of
[Distribution Date].
TRANS FINANCIAL BANCORP, INC.
By
[Name]
[Title]
Attest:
- -----------------------------------------------------
[Name]
[Title]
Countersigned:
[NAME OF RIGHTS AGENT],
By
- -----------------------------------------------------
Authorized Signature
[On Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Rights
represented by this Right Certificate.)
FOR VALUE RECEIVED _______________________________, hereby sells,
assigns and transfers unto (Please print name and address of transferee) this
Right Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint Attorney, to transfer the within Right
Certificate on the books of the within named Company, with full power of
substitution.
Dated
______________________, 19___ ___________________________
Signature
Signature Guaranteed:
Certificate
Signature Guarantee
The undersigned hereby certifies by checking the appropriate
boxes that:
1. this Right Certificate [ ] is [ ] is not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person or an
Adverse Person, or an Affiliate or Associate of any such Acquiring Person or
Adverse Person (as such terms are defined in to the Rights Agreement);
2. after due inquiry and to the best knowledge of the under signed,
it [ ] did [ ] did not acquire the Rights evidenced by this Right
Certificate from any Person who is or was an Acquiring Person or
an Adverse Person, or an Affiliate or Associate of an Acquiring
Person or Adverse Person.
Dated
______________________, 19___ ___________________________
Signature Guaranteed:
NOTICE
The signature on the foregoing Form of Assignment and
Certificate must correspond to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
[On Reverse Side of Right Certificate]
FORM OF ELECTION TO PURCHASE
(To be executed by the registered holder if such holder desires to exercise the
Rights
represented by this Right Certificate.)
To the Rights Agent:
The undersigned hereby irrevocably elects to exercise
___________________ Rights represented by this Right Certificate to purchase the
Preferred Stock (or other shares or any cash, debt securities or other property)
issuable or payable upon the exercise of such Rights and requests that
certificates for such shares (or documents of ownership for such other property)
be issued in the name of:
Please insert social security
or other identifying number: __________________________
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced
by this Right Certificate, a new Right Certificate for the balance remaining of
such Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number: __________________________
(Please print name and address)
Date _______________________, 19___
- ------------------ ------------------------------
__________________ Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
1. this Right Certificate [ ] is [ ] is not being exercised by or on
behalf of a Person who is or was an Acquiring Person or an Adverse Person, or an
Affiliate or Associate of any such Acquiring Person or Adverse Person (as such
terms are defined in to the Rights Agreement);
2. after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Right Certificate from
any Person who is or was an Acquiring Person or an Adverse Person, or any
Affiliate or Associate of an Acquiring Person or Adverse Person.
Dated _________________, 19____ ____________________________________
__________________ Signature
Signature Guaranteed:
NOTICE
The signature on the foregoing Form of Election to Purchase
must correspond to the name as written upon the face of this Right Certificate
in every particular, without alteration or enlargement or any change whatsoever.
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK OF
TRANS FINANCIAL BANCORP, INC.
On January 20, 1992, the Board of Directors of Trans Financial
Bancorp, Inc. (the "Company") declared a dividend of one Right for each
outstanding share of Common Stock, no par value per share, of the Company (the
"Common Shares"). The distribution is payable on February 6, 1992, to the
holders of record of Common Shares on January 30, 1992. Each Right, when and if
it becomes exercisable as described below, will entitle the registered holder to
purchase from the Company one one hundredth of a share of Class B Preferred
Stock, Series 1992 of the Company ("Preferred Stock"), subject to adjustment,
having the rights and preferences set forth in the form of Certificate of
Designation attached to the Rights Agreement dated as of January 20, 1992 (the
"Rights Agreement") between the Company and Manufacturers Hanover as Rights
Agent (the "Rights Agent").
Until the Distribution Date, the Rights will be evidenced by
the certificates for Common Shares registered in the names of the holders
thereof (which certificates for Common Shares shall also be deemed to be Right
Certificates, as defined below) and not by separate Right Certificates.
Therefore, until the Distribution Date, the Rights will be transferred with and
only with the Common Shares.
The "Distribution Date" is defined as the earlier of [i] the
tenth business day after the first date of the public disclosure by the Board of
Directors of the Company or an Acquiring Person (as hereafter defined) that a
person or group (including any affiliate or associate of such person or group)
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Shares (such person or group being called an
"Acquiring Person") or [ii] the tenth business day after the Disinterested
Directors of the Company (as defined in the Rights Agreement) determine that a
shareholder's beneficial ownership, such beneficial ownership being not less
than 10% of the Common Shares of the Company, has a detrimental effect on the
Company or its Shareholders (such person or group being called an "Adverse
Person") (such dates provided in [i] or [ii] above being called the "Share
Acquisition Date") or [iii] the tenth business day after the first public
disclosure by the Board of Directors of the Company of the commencement of, or
intent to commence, a tender or exchange offer for 25% or more of the
outstanding Common Shares.
As soon as practicable following the Distribution Date,
separate certificates evidencing the Rights ("Right Certificates") will be
mailed to holders of record of the Common Shares as of the close of business on
the Distribution Date, and such separate Right Certificates alone will
thereafter evidence the Rights.
The Rights are not exercisable until the Distribution Date and
will expire on January 20, 2002 (the "Expiration Date"), unless earlier redeemed
by the Company as described below.
The number of shares of Preferred Stock issuable upon
exercise of the Rights is subject to adjustment from time to time in the
event of [i] a subdivision, combination or reclassification of the Preferred
Stock, [ii] the issuance of certain rights, options or warrants to holders of
Common Shares or Equivalent Shares (as defined in the Rights Agreement) to
subscribe for or purchase Common Shares or Equivalent Shares at a price per
share less than the market value of such Common Shares or Equivalent Shares, or
[iii] the distribution to holders of Common Shares or Equivalent Shares, of
cash (excluding regular periodic cash dividends at a rate not in excess of
150% of the rate of the last regular cash dividend theretofore paid) or
evidence of indebtedness, assets or securities or subscription rights,
options or warrants (other than those referred to above). The number of Rights
associated with each Common Share is subject to adjustment in the event of the
declaration of a stock dividend payable in Common Shares or a subdivision,
combination or reclassification of, the Common Shares.
The Company shall not issue fractional shares, and in lieu of
fractional shares, the Company shall make a cash payment based on the market
price of such shares on the trading date immediately prior to the date of
exercise.
The number and kind of stock issuable upon exercise of the
Rights is also subject to adjustment. Such an adjustment will occur upon the
occurrence of any of the following events: (a) if the Company is acquired in a
merger or other business combination or 50% or more of its assets or assets
representing more than 50% of its earning power are sold, leased, exchanged or
otherwise transferred (in one or more transactions), to a publicly traded
corporation, and such transaction is not approved by two thirds of the
Disinterested Directors of the Company, the Rights will entitle each holder of a
Right to purchase, for the Exercise Price, that number of common shares of such
corporation which at the time of the transaction would have a market value of
twice the Exercise Price; and (b) if the Company is acquired in a merger or
other business combination or 50% or more of the assets or assets representing
more than 50% of the earning power of the Company are sold, leased, exchanged or
otherwise transferred (in one or more related transactions) to an entity that is
not a publicly traded corporation, the Rights will entitle each holder of a
Right to purchase, for the Exercise Price, at such holder's option, [i] that
number of common shares of such entity (or, at the holder's option, of the
surviving corporation in such acquisition) which would have a book value of
twice the Exercise Price or [ii] if such entity has an affiliate which has
publicly traded common shares, that number of common shares of such affiliate
which would have a market value of twice the Exercise Price.
A "Triggering Event" is defined as the occurrence of any
of the following events after the Distribution Date: [i] without the
approval of at least two thirds of the Disinterested Directors, a person or
group, alone or together with all affiliates and associates of such
person, shall become the beneficial owner of 15% or more of the Common Shares
then outstanding; or [ii] a person is declared an Adverse Person. At any time
on or after the earlier of [i] the Share Acquisition Date or
[ii] the occurrence of a Triggering Event, the Rights will entitle each holder
of a Right to purchase, for the Exercise Price, that number of Preferred Stock
which at the time of the transaction would have a market value of twice the
Exercise Price.
Any rights that are or were, at any time on or after the
earlier of the Distribution Date or the Share Acquisition Date, beneficially
owned by an Acquiring Person or Adverse Person (or any affiliate or associate of
such Person) will become null and void at any time on or after the earlier of
[i] the Share Acquisition Date or [ii] the occurrence of a Triggering Event, and
any holder of any such Right (including any holder who acquired such Right
subsequent to [A] the Share Acquisition Date or [BJ a Triggering Event) will be
unable to exercise any such Right on or after the earlier of [x] the Share
Acquisition Date or [y] the occurrence of a Triggering Event, provided, however,
that such holder of a Right that has become null and void will have the right,
at any time prior to the Expiration Date, subject to the provisions of the
Rights Agreement, to require the Company to repurchase such Right at a purchase
price equal to $.01 per whole Right.
At any time prior to the earliest of [i] the close of
business on the tenth business day following the Share Acquisition Date,
[ii] the occurrence of a Triggering Event, or [iii] the
Expiration date, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per whole Right (the "Redemption
Price"); however, immediately upon the date that an Acquiring Person becomes an
Acquiring Person or an Adverse Person becomes an Adverse Person, and thereafter
until the earliest of [i] the close of business on the tenth business day
following the Share Acquisition Date, [ii] the occurrence of a Triggering Event,
or [iii] the Expiration Date, the Rights may be redeemed only if a majority of
the Disinterested Directors then in office determine that such redemption is, in
their judgment, in the best interests of the Company and its stockholders.
Upon the action of the Board of Directors of the Company
electing to redeem the Rights, the Company shall make an announcement thereof,
and upon such election, the right to exercise the Rights will immediately
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
At any time after any person or group becomes an Acquiring
Person or Adverse Person and prior to the acquisition by such person or group of
50% or more of the outstanding Common Shares, the Board of Directors of the
Company may exchange the Rights (other than Rights owned by such person or
group, which will have become null and void), in whole or in part, at an
exchange ratio of one one hundredth of a share of Preferred Stock per Right
(subject to adjustment).
The Board of Directors and the Company shall not have any
liability to any person as a result of the redemption or exchange of the Rights
pursuant to the provisions of the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company including without limitation the
right to vote or to receive dividends.
At any time prior to the Distribution Date the Company may,
without the approval of any holder of the Rights, supplement, amend or extend
any provision of the Rights Agreement (including the date on which the
Distribution Date shall occur) except that no supplement, amendment or extension
shall be made which reduces the Redemption Price or provides for an earlier
Expiration Date. Prior to the time any person or group becomes an Acquiring
Person, the Board of Directors of the Company may amend the Rights Agreement to
lower the thresholds for an Acquiring Person and the Triggering Event from the
15% to not less than the greater of [i] the sum of .01% and the largest
percentage of the outstanding Common Shares then known to the Company to be
beneficially owned by any person or group, and [ii] 10%. However, at any time
when there shall be an Acquiring Person or Adverse Person, the Rights Agreement
may be supplemented or amended only if a majority of the Disinterested Directors
then in office determine that such supplement or amendment is in the best
interest of the Company and its stockholders.
A copy of the Rights Agreement will be filed with the
Securities and Exchange Commission as an Exhibit to a Registration Statement on
Form 8 A. A copy of the Rights Agreement is available free of charge from the
Company upon written request. This summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated herein by reference.
PRESS RELEASE
Adoption of Shareholder Rights Plan
Bowling Green, Kentucky -- Trans Financial Bancorp, Inc.
announced today that its Board of Directors approved a Shareholders Rights Plan
in which a preferred stock purchase right will be distributed as a dividend
on each share of the company's common stock outstanding as of January 30, 1992.
"The Rights Plan is intended to discourage coercive takeover
tactics that may not be in the best interests of the company and its
stockholders," said Douglas M. Lester, President of Trans Financial Bancorp,
Inc. "It also is intended to increase the likelihood that all stockholders will
receive a fair price that reflects the full value of the company in the event of
a takeover. Although the Rights Plan does not prevent a takeover event, it will
strongly encourage potential acquirers to negotiate with the board prior to
attempting a takeover and should give the board increased leverage in
negotiating the terms of any business combination that may occur."
Lester stated that the company is not aware of any present
takeover attempt at this time. Initially, the rights are not
exercisable and are not detachable from the common stock, and
they do not
give any immediate value to stockholders. The rights can be exercised and will
trade separately from the common stock ten days after any person or group
acquires 15% or more of the company's outstanding common stock, or the
disinterested directors designate a person or group with greater than 10%
ownership as being adverse to the company, or a person or group announces a
tender offer for 25% or more of the company's outstanding common stock.
After the rights become exercisable, they could become
valuable. If 15% or more of the company's outstanding common stock is acquired
by an outside party, or the disinterested directors designate a person or group
with greater than 10% ownership as being adverse to the company, holders of the
rights can purchase preferred stock of Trans Financial Bancorp, Inc. at 50% of
its then market price. If the company is a party to a merger or other business
combination, holders of the rights can purchase stock of the acquiring company
at 50% of its then market price.
The rights will expire on January 20, 2002, unless earlier
redeemed by the company. The distribution of rights will be
made on each share of common stock outstanding on January 30,
1992, and
on each addition al share of common stock sold by Trans Financial Bancorp, Inc.
after the date and prior to the date on which the rights trade separately as
described above. Until the right is exercised, the holder will receive no
additional voting stock. The rights distribution will not dilute the
stockholder's ownership of the company.
January 20, 1992
Dear Stockholder:
Your Board of Directors has adopted a Shareholders Rights Plan
(the "Rights Plan"). Under the Rights Plan, Rights to purchase one one hundredth
of a share of Series 1992 Preferred Stock of Trans Financial Bancorp, Inc. (the
"Company") will be distributed as a dividend at the rate of one Right for each
share of the Company's Common Stock. A summary of the terms of the Rights Plan
is included with this letter.
Initially, the Rights are not exercisable and are not
detachable from the Company's Common Stock, and they do not give any immediate
value to stockholders. No certificates representing the Rights will be issued at
this time.
Instead, the Rights will be evidenced by the Common Stock certificate.
The Rights will become exercisable 10 business days after (1)
any person or group acquires 15% or more of the Company's outstanding Common
Stock, (2) the Disinterested Directors designate a person or group with greater
than 10% ownership as being adverse to the Company or (3) any person or group
announces a tender offer for 25% or more of the Company's outstanding Common
Stock. Thereafter, the Rights will trade separately from the Company's Common
Stock, and separate certificates representing the Rights will be issued.
After the Rights become exercisable, they could become
valuable. If any person or group acquires 15% or more of the Common Stock or the
Disinterested Directors designate a person or group with greater than 10%
ownership as having an adverse impact on the Company, the holders of Rights can
purchase preferred stock of Trans Financial Bancorp, Inc. at 50% of its then
market price. If the Company is a party to a merger or other business
combination, holders of Rights can purchase stock of the acquiring company at
50% of its market value price. The Rights will expire on January 20, 2002 unless
exercised or redeemed by the Company.
The Rights Plan contains provisions that are intended to
protect stockholders from abusive takeover tactics that may be used by an
acquirer which the Board believes are not in the best interest of the
stockholders. Examples of abusive takeover tactics include a gradual
accumulation of shares in the open market or a partial or two tier tender offer
that does not treat all stockholders equally or other acquisition attempts which
may unfairly pressure stockholders by coercing them to relinquish their
investment, thereby depriving them of the full value of their shares. The Rights
Plan increases the Board's ability to represent effectively the interests of the
stockholders in the event of an unfair acquisition proposal. While the Board is
not aware of any specific effort to acquire control of the Company, it believes
these Rights represent a sound and reasonable means of safeguarding your
interests as stockholders.
The Rights are not intended to prevent a takeover of the
Company and will not do so. However, they should discourage any effort to
acquire the Company in a manner or on terms not approved by the Board. The
Rights are designed to deal with serious problems of a potential acquirer using
coercive tactics to deprive the Company's Board and the stockholders of any real
opportunity to determine the future of the Company and to realize the full value
of the stockholders' investment in the Company.
The distribution of Rights will not in any way alter the
financial strength of the Company or interfere with its business plans. The
distribution will not change the way in which you currently trade the Company's
shares and will not be dilutive or affect purported earnings per shares. While
the distribution of rights will not be taxable either to you or to the Company,
stockholders may, depending on their individual circumstances, recognize taxable
income should the rights become exercisable. As explained in further detail in
the summary of the Rights, the Rights will become exercisable if and only if a
problem arises for which the Rights were created.
A large number of companies, including many financial
institutions, have issued Rights similar to those adopted by the Board. The
Board is aware that some investors feel that Rights of the sort we are issuing
deter legitimate acquisition proposals. The Board carefully considered that
position and concluded that it does not justify denying stockholders the
protection which the Rights afford against abusive takeover tactics. In
declaring the Rights dividend the Board has expressed its confidence in the
future of Trans Financial Bancorp, Inc., and its determination that stockholders
be given every opportunity to participate fully in that future.
Sincerely,
Exhibit 10(b)
TRANS FINANCIAL BANCORP, INC.
1990 STOCK OPTION PLAN
1. Purpose. The purpose of this Stock Option Plan ("Plan") is to
strengthen Trans Financial Bancorp, Inc. ("Corporation") by providing an
additional means of retaining and attracting competent management personnel and
by providing to participating officers and other key employees of the
Corporation and its subsidiaries added incentive for high levels of performance
and for unusual efforts to increase the earnings of the Corporation through the
opportunity for stock ownership offered under this Plan.
It is intended that the options granted under the terms of
this Plan will, to the maximum extent permitted by law, constitute "incentive
stock options" as contemplated by and defined in Section 422A of the Internal
Revenue Code of 1986, as amended ("Code").
2. Administration. The Board of Directors of the Corporation ("Board")
shall appoint an option committee ("Plan Committee") to administer the Plan,
which Plan Committee shall consist of not less than three members of the Board
who are not and have not at any time for one year prior to appointment to the
Committee been eligible to receive stock or options under any plan of the
Corporation or any of its subsidiaries. The decision of a majority of the
members of the Plan Committee shall constitute the decision of the Plan
Committee and the Plan Committee may act either at a meeting at which a majority
of the members of the Plan Committee is present, or by a writing signed by all
of the members of the Plan Committee. The Plan Committee shall have full power
and authority to construe, interpret and administer the Plan and may from time
to time adopt such rules and regulations for carrying out this Plan as it may
deem proper and in the best interests of the Corporation. The Plan Committee
shall have the sole, final and conclusive authority to determine, consistent
with and subject to the provisions of the Plan:
A. The individuals ("Optionees") to whom options shall be
granted under the Plan;
B. The number of shares of the common stock of the
Corporation ("Common Stock") to be granted under
each option;
C. The price to be paid for the Common Stock upon the
exercise of each option ("Option Price"); and
D. The terms and conditions of each option between the
Corporation and an Optionee.
3. Eligibility. The employees of the Corporation or any of its subsidiaries,
who, in the opinion of the Plan Committee, are from time to time materially
responsible for the management of the business or have materially contributed
to the successful performance of the Corporation or any of its subsidiaries,
shall be eligible to be granted options under the Plan; provided, however, that
no employee may be granted options if, at the time such options are granted,
the employee owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Corporation or any of its subsidiaries.
The terms "subsidiary" or "subsidiaries," as used herein, mean any company or
companies whose relationship to the Corporation, whether established before or
after adoption of this Plan, is such that the Corporation would be deemed to be
the "parent corporation" of such company or companies within the meaning of
Section 425(e) of the Code.
4. Stock Subject to Plan. The aggregate number of shares of Common
Stock which may be issued under the Plan shall not exceed 50,000 shares;
subject, however, to adjustment as provided in Section 6 hereof. Either
authorized and unissued shares or shares reacquired by the Corporation,
including shares purchased in the open market, may be delivered under the Plan.
If any option shall expire or terminate for any reason, as to any shares, such
shares shall again become available under the Plan.
5. Terms of Options. Each option shall be evidenced by a written
agreement (a "1990 Incentive Stock Option Agreement") between the Corporation
and the Optionee, and shall be subject to the following terms and conditions,
and to such other terms and conditions not inconsistent therewith as the Plan
Committee may deem appropriate in each case:
A. Option Price. The Option Price per share of Common Stock
shall be set by the grant but shall in no instance be less than fair market
value on the date of grant, determined by the average of the closing bid and
asked quotations or the closing high bid quotation, whichever is available, for
the Common Stock in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System (the "Market
Price"), on the business day immediately preceding the date of grant.
B. Period for Exercise of Option. The option shall be
exercisable in such manner and within such period or periods as shall be
determined by the Plan Committee upon payment in full in cash and/or Common
Stock of the Option Price. If payment of the Option Price is made in Common
Stock, the value of the Common Stock used for payment of the Option Price shall
be based on the Market Price of the Common Stock as determined on the business
day preceding the day the notice of exercise is sent to the Secretary of the
Corporation. The option shall lapse if the Optionee is then living, at the
earliest of the following times:
[1], ten (10) years after the date of grant;
[2] three (3) months after termination of
employment, other than discharge for cause but
[i] only to the extent the Optionee had the right
to exercise such option at the date of such
termination, and [ii] if the termination was
the result of the resignation of the Optionee,
only so long as the Optionee does not become
employed by or render services for a financial
institution having an office within an area of
100 miles from Bowling Green, Kentucky.
[1] immediately upon termination of employment
through discharge for cause as determined by
the Plan Committee in its sole discretion; or
[2] any earlier times set by the grant.
Except to the extent otherwise provided by Section 5.E, in no
event shall an option be exercisable before the second anniversary of the date
of grant. On and after the second anniversary of the date of grant, the option
shall become exercisable as to one-third of the total number of shares
optioned; on and after the third anniversary of the date of the grant, the
option shall become exercisable as to two-thirds of the total number of shares
optioned; on and after the fourth anniversary of the date of the grant, the
option granted shall become fully exercisable. If the holder of the option
shall not purchase all of the Common Stock which he or she is entitled to
purchase in any given installment period, the right to purchase the Common
Stock not purchased in such installment period shall continue until the lapse
or termination of such option. No option or installment thereof shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded.
Leave of absence approved by the Plan Committee or a transfer
of employment from the Corporation to any subsidiary or from a subsidiary to
the Corporation or any other subsidiary, shall not constitute termination of
employment. If any Optionee ceases to be an employee of the Corporation or any
of its subsidiaries by reason of permanent or total disability (within the
meaning of Section 22(e)(3) of the Code), any option granted to him or her
pursuant to the Plan may be exercised by him or her within one (1) year after
the date of his or her cessation of employment (but not later than ten (10)
years after the date such option was granted) to the full extent such option
was exercisable on the date of such cessation. In the event of the death of an
Optionee while in the employ of the Corporation or any of its subsidiaries and
within ten (10) years after the date on which an option is granted, such option
granted to him or her pursuant to the Plan may be exercised within one (1) year
after the date of his or her death by his estate or by the person or persons
entitled thereto by will or by applicable laws of descent and distribution
("Optionee Representative"), to the full extent such option was exercisable on
the date of his or her death.
B. Maximum Amount. Except to the extent provided otherwise by Section 5.E.,
the aggregate fair market value (determined at the time the option is granted)
of the shares of Common Stock with respect to which options are exercisable
for the first time by such Optionee during any calendar year (under all
incentive stock option plans of the Optionee's employer corporation and its
parent and subsidiary corporations) shall not exceed $100,000.
D. Special Limitations for Director Optionees. In addition
to all other limitations contained in this Plan, an employee of the Corporation
or its subsidiaries who is also a director of the Corporation may receive
options to purchase shares of Common Stock provided the total number of shares
to be optioned during a calendar year does not exceed 10,000 shares.
E. Acceleration. Notwithstanding the provisions of
Section 5.B. or Section 5.C. to the contrary, if there is a Change in Control
of the Corporation, as defined by Section 7, then, at the discretion of the
Plan Committee, the exercise dates of all outstanding options shall
accelerate so that each option outstanding may be exercised on or after the
date of the Change in Control of the Corporation.
6. Adjustment of Shares. In the event of capital adjustment after the
effective date of the Plan in the Common Stock of the Corporation by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger or consolidation, or any other change (after the effective
date of the Plan) in the nature or number of shares of Common Stock of the
Corporation, a proportionate adjustment shall be made in the maximum number and
kind of shares which may be delivered under the Plan, and in the Option Price
under and the number and kind of shares of Common Stock covered by outstanding
options granted under the Plan. By virtue of such a capital adjustment, the
price of any share under option shall be adjusted so that there will be no
change in the aggregate purchase price payable upon exercise of any such
option. Such determination by the Plan Committee shall be conclusive.
Without limitinq the generality of the foregoing, if [a] there is a Change in
Control of the Corporation, as hereafter defined, and [b] as a result of the
transactions contemplated by the Change in Control, another person or entity
(a "Successor") will acquire all or a substantial portion of the assets or
outstanding capital stock of the Corporation, then the kind of shares of
common stock which shall be subject to the Plan and to each outstanding option
shall automatically be converted into and replaced by shares of common stock,
or such other class of equity securities having rights and preferences no less
favorable than common stock of the Successor, and the number of shares subject
to the options and the purchase price per share upon exercise of the options
shall be correspondingly adjusted, so that, by virtue of such Change in
Control of the Corporation, each optionee shall have the right to purchase [i]
that number of shares of the Successor which, as of the date of the Change in
Control, have a fair market value equal to the fair market value of the shares
of the Corporation theretofore subject to an option, [ii] for a purchase price
per share which, when multiplied by the number of shares of the Successor
subject to the option, shall equal the aggregate exercise price at which the
Optionee could have acquired shares of the Corporation under such option.
The granting of an option pursuant to this Plan shall not
affect in any way the right and power of the Corporation to make adjustments,
reorganizations, reclassifications, or changes of its capital or business
structure or to merge, consolidate, dissolve, liquidate, sell or transfer all
of any part of its business or assets; provided, however, that the Corporation
shall not, and shall not permit its subsidiaries to, recommend or agree or
consent to a transaction or series of transactions which would result in a
Change of Control of the Corporation unless and until the person or persons
acquiring or succeeding to assets or capital stock of the Corporation or its
subsidiaries as a result of such transaction or transactions agrees to be
bound by the terms of the Plan so far as it pertains to options therefore
granted and agrees to assume and perform the obligations of the Corporation
and its Successor hereunder.
7. Change in Control of the Corporation Defined. The term Change in
Control of the Corporation shall mean [a) any share exchange or merger or
consolidation of the Corporation or a significant subsidiary of the
Corporation if either [i] the Corporation will not be the surviving or
acquiring corporation or will not own 100% of the outstanding capital stock of
the surviving or acquiring corporation following the consummation of the
transactions contemplated by the plan or agreement of exchange, merger or
consolidation, or [ii] there will be a substantial change in the proportionate
ownership of outstanding share of voting stock of the Corporation as a result
of the transactions contemplated by such plan or agreement of exchange, merger
or consolidation; [b] any sale, lease, exchange, transfer or other disposition
of all or any substantial part of the assets of the Corporation or a
subsidiary of the Corporation followed by a liquidation of the Corporation;
[c] the commencement of any tender offer, exchange offer or other purchase
offer for, and/or any agreement to purchase, as much as (or more than) 30% of
the outstanding Common Stock of the Corporation or a subsidiary of the
Corporation; or [d] the Board or the shareholders of the Corporation approve,
adopt, agree to recommend, or accept any agreement, contract, offer or other
arrangement providing for, or any series of transactions resulting in, any of
the transactions described above.
8. Employees' and Optionees' Rights. No employee or other person
shall have any claim or right to be granted an option under the Plan except as
the Plan Committee shall have conferred in its discretion in the
administration of the Plan. Participation in the Plan shall not confer upon
any Optionee any right with respect to continuation of employment by the
Corporation or any of its suhsidiaries, nor interfere with the right of the
Corporation or such subsidiary to terminate at any time the employment of any
Optionee. An option shall not confer any rights as a stockholder upon the
holder thereof, except only as to shares of Common Stock actually delivered
pursuant to the Plan.
9. Privileges of Stock Ownership: Purchase for Investment. Neither the
Optionee nor any Optionee Representative shall be entitled to the privilege of
stock ownership as to any shares of Common Stock not actually issued and
delivered to such Optionee or Optionee Representative. Upon the exercise of an
option at a time when there is not in effect a registration statement under the
Securities Act of 1933 and any applicable state securities laws (the
"Securities Laws") relating to the shares of Common Stock issuable upon
exercise thereof and available for delivery a prospectus meeting the
requirements of the Securities Laws, the shares of Common Stock may be issued
only if the Optionee or Optionee Representative represents and warrants in
writing to the Corporation that the shares being purchased are being acquired
for investment and not with a view to the distribution thereof. The shares of
the Common Stock shall contain such legends or other restrictive endorsements
as counsel for the Corporation shall deem necessary or proper. No shares of
Common Stock shall be purchased upon the exercise of any option unless and
until there shall have been satisfied any applicable requirements of the
Securities and Exchange Commission or other regulatory agencies having
jurisdiction and of any exchanges upon which stock of the Corporation may be
listed. The Corporation covenants that it will take all actions necessary to
register under the Securities Laws the Common Stock issuable upon exercise of
options granted pursuant to this Plan.
10. Transferability. Options are not transferable except by will or
the laws of descent and distribution, and then only to the extent provided
herein. Options may be exercised during the lifetime of the Optionee
only by the Optionee and after the death of the Optionee, only as provided in
Section 5 hereof.
11. Termination. The Plan shall terminate on December 31, 1999
and may be terminated at any earlier time by the Plan Committee. No option
shall be granted hereunder after termination of the Plan. Termination of the
Plan, however, shall not affect the validity of any option theretofore granted
under the Plan.
12. Amendment. The Plan Committee may amend the Plan from time to
time, except that, without the approval of a majority of the votes represented
and entitled to be voted at a duly held meeting of the stockholders of the
Corporation:
A. The maximum number of shares of Common Stock which may
be delivered under the Plan may not be increased except as provided in
Section 6 hereof;
B. The Option Price under any option may not be reduced
except as provided in Section 6 hereof; and
C. The period during which an option may be exercised may
not be extended beyond the period provided in Section 5 hereof.
No amendment of the Plan, however, may, without the consent of the Optionee or
Optionee Representative, make any changes in any outstanding option theretofore
granted under the plan which would adversely affect the rights of such Optionee
or Optionee Representative.
13. Tax Withholding. The employer corporation of each Optionee shall
have the right to deduct any sums required by federal, state or local tax law
to be withheld due to the exercise of any option but, in the alternative, the
Optionee or Optionee Representative may elect to pay such sums to the employer
corporation by delivering written notice of that election to the Board not less
than thirty (30) nor more than sixty (60) days prior to exercise. There is no
obligation hereunder that Optionee be advised of the existence of the tax or
the amount which the employer corporation may be so required to withhold.
14. Governing Law. This Plan and the 1990 Incentive Stock Option
Agreements issued hereunder shall be governed by, and construed in accordance
with, the laws of the Commonwealth of Kentucky.
15. Effective Date. This Plan shall become effective upon the approval
by the Board of Directors of the Corporation; subject, however, to the
ratification of this Plan by the affirmative vote of a majority of the shares
present or represented by proxy at the Annual Meeting of Stockholders to be
held on April 16, 1990, or any adjournment thereof. The effective date of each
option shall be the day on which it is granted to any Optionee; provided
however, if the Plan is not approved at the aforementioned Annual Meeting of
Stockholders, then any options theretofore granted shall be void and of no
effect.
Dated this 19th day of February 1990.
TRANS FINANCIAL BANCORP, INC.
ATTEST: By: /s/ Douglas M. Lester
Chairman of the Board
/s/ Roland D. Willock
Secretary
Exhibit 10(c)
TRANS FINANCIAL BANCORP, INC.
1992 STOCK OPTION PLAN
1. Purpose. The purpose of this Stock Option Plan ("Plan") is to
strengthen Trans Financial Bancorp, Inc. ("Corporation") by providing an
additional means of retaining and attracting competent management personnel and
by providing to participating officers and other key employees of the
Corporation and its subsidiaries added incentive for high levels of performance
and for unusual efforts to increase the earnings of the Corporation through the
opportunity for stock ownership offered under this Plan.
It is intended that the options granted under the terms of
this Plan will, to the maximum extent permitted by law, constitute "incentive
stock options" as contemplated by and defined in Section 422 of the Internal
Revenue Code of 1986, as amended ("Code").
2. Administration. The Board of Directors of the Corporation ("Board")
shall appoint an option committee ("Plan Committee") to administer the Plan,
which Plan Committee shall consist of not less than three members of the Board
who are not and have not at any time for one year prior to appointment to the
Committee been eligible to receive stock or options under any plan of the
Corporation or any of its subsidiaries. The decision of a majority of the
members of the Plan Committee shall constitute the decision of the Plan
Committee and the Plan Committee may act either at a meeting at which a majority
of the members of the Plan Committee is present, or by a writing signed by all
of the members of the Plan Committee. The Plan Committee shall have full power
and authority to construe, interpret and administer the Plan and may from time
to time adopt such rules and regulations for carrying out this Plan as it may
deem proper and in the best interests of the Corporation. The Plan Committee
shall have the sole, final and conclusive authority to determine, consistent
with and subject to the provisions of the Plan:
A. The individuals ("Optionees") to whom options shall be
granted under the Plan;
B. The number of shares of the common stock of the
Corporation ("Common Stock") to be granted under each option;
C. The price to be paid for the Common Stock upon the
exercise of each option ("Option Price"); and
D. The terms and conditions of each option between the
Corporation and an Optionee.
3. Eligibility. The employees of the Corporation or any of its
subsidiaries, who, in the opinion of the Plan Committee, are from time to time
materially responsible for the management of the business or have materially
contributed to the successful performance of the Corporation or any of its
subsidiaries, shall be eligible to be granted options under the Plan; provided,
however, that no employee may be granted options if, at the time such options
are granted, the employee owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Corporation or any of its
subsidiaries. The terms "subsidiary" or "subsidiaries," as used herein, mean any
company or companies whose relationship to the Corporation, whether established
before or after adoption of this Plan, is such that the Corporation would be
deemed to be the "parent corporation" of such company or companies within the
meaning of Section 424(e) of the Code.
4. Stock Subject to Plan. The aggregate number of shares of Common
Stock which may be issued under the Plan shall not exceed 188,000 shares;
subject, however, to adjustment as provided in Section 6 hereof. Either
authorized and unissued shares or shares reacquired by the Corporation,
including shares purchased in the open market, may be delivered under the Plan.
If any option shall expire or terminate for any reason, as to any shares, such
shares shall again become available under the Plan.
5. Terms of Options. Each option shall be evidenced by a written
agreement (a "1992 Incentive Stock Option Agreement") between the Corporation
and the Optionee, and shall be subject to the following terms and conditions,
and to such other terms and conditions not inconsistent therewith as the Plan
Committee may deem appropriate in each case:
A. Option Price. The Option Price per share of Common Stock
shall be set by the grant but shall in no instance be less than fair market
value on the date of grant, determined by the average of the closing bid and
asked quotations or the closing high bid quotation, whichever is available, for
the Common Stock in the over the counter market, as reported by the National
Association of Securities Dealers Automated Quotation System (the "Market
Price"), on the business day immediately preceding the date of grant.
B. Period for Exercise of Option. The option shall be
exercisable in such manner and within such period or periods as shall be
determined by the Plan Committee upon payment in full in cash and/or Common
Stock of the Option Price. If payment of the Option Price is made in Common
Stock, the value of the Common Stock used for payment of the Option Price shall
be based on the Market Price of the Common Stock as determined on the business
day preceding the day the notice of exercise is sent to the Secretary of the
Corporation. The option shall lapse at the earliest of the following times:
[1] ten (10) years after the date of grant;
[2] three (3) months after termination of
employment, other than discharge for cause, but [i] only to the extent
the Optionee had the right to exercise such option at the date of such
termination, and [ii] if the termination was the result of the
resignation of the Optionee, only so long as the Optionee does not
become employed by or render services for a financial institution
having an office within an area of 100 miles from Bowling Green,
Kentucky.
[3] immediately upon termination of employment
through discharge for cause as determined by the Plan Committee in its sole
discretion; or
[4] any earlier times set by the grant.
Except to the extent otherwise provided in Section 5.D, in no
event shall an option be exercisable during the first two (2) years after the
date of grant. Thereafter, options may be exercised on or after the anniversary
of the date of grant in three (3) equal annual installments so that the full
grant may be exercised not sooner than four (4) years after the date of grant.
If the holder of the option shall not purchase all of the Common Stock which he
or she is entitled to purchase in any given installment period, the right to
purchase the Common Stock not purchased in such installment period shall
continue until the lapse or termination of such. No option or installment
thereof shall be exercisable except in respect of whole shares, and fractional
share interests shall be disregarded.
Leave of absence approved by the Plan Committee or a transfer
of employment from the Corporation to any subsidiary or from a subsidiary to the
Corporation or any other subsidiary, shall not constitute termination of
employment. If any Optionee ceases to be an employee of the Corporation or any
of its subsidiaries by reason of permanent and total disability (within the
meaning of Section 22(e)(3) of the Code), any option granted to him or her
pursuant to the Plan may be exercised by him or her within one (1) year after
the date of his or her cessation of employment (but not later than ten (10)
years after the date such option was granted) to the full extent such option was
exercisable on the date of such cessation. In the event of the death of an
Optionee while in the employ of the Corporation or any of its subsidiaries and
within ten (10) years after the date on which an option is granted, such option
granted to him or her pursuant to the Plan may be exercised within one (1) year
after the date of his or her death by his estate or by the person or persons
entitled thereto by will or by applicable laws of descent and distribution
("Optionee Representative"), to the full extent such option was exercisable on
the date of his or her death (provided, however, that in no event shall an
option be exercisable after the expiration of ten (10) years from date of
grant).
C. Maximum Amount. Notwithstanding any provisions contained herein to the
contrary, except to the extent provided otherwise by Section 5.D., the aggregate
fair market value (determined at the time the option is granted) of the shares
of Common Stock with respect to which options are exercisable for the first time
by such Optionee during any calendar year (under all incentive stock option
plans of the Optionee's employer corporation and its parent and subsidiary
corporations) shall not exceed $100,000.
D. Acceleration. Notwithstanding the provisions of
Section 5.B. or Section 5.C. to the contrary, if there is a Change in Control of
the Corporation, as defined by Section 7, then, at the discretion of the Plan
Committee, the exercise dates of all outstanding options shall accelerate so
that each option outstanding may be exercised on or after the date of the Change
in Control of the Corporation.
6. Adjustment of Shares. In the event of capital adjustment after the
effective date of the Plan in the Common Stock of the Corporation by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, merger or consolidation, or any other change (after the effective
date of the Plan) in the nature or number of shares of Common Stock of the
Corporation, a proportionate adjustment shall be made in the maximum number and
kind of shares which may be delivered under the Plan, and in the Option Price
under and the number and kind of shares of Common Stock covered by outstanding
options granted under the Plan. By virtue of such a capital adjustment, the
price of any share under option shall be adjusted so that there will be no
change in the aggregate purchase price payable upon exercise of any such option.
Such determination by the Plan Committee shall be conclusive.
Without limiting the generality of the foregoing, if [a] there
is a Change in Control of the Corporation, as hereafter defined, and [b] as a
result of the transactions contemplated by the Change in Control, another person
or entity (a "Successor") will acquire all or a substantial portion of the
assets or outstanding capital stock of the Corporation, then the kind of shares
of common stock which shall be subject to the Plan and to each outstanding
option shall automatically be converted into and replaced by shares of common
stock, or such other class of equity securities having rights and preferences no
less favorable than common stock of the Successor, and the number of shares
subject to the options and the purchase price per share upon exercise of the
options shall be correspondingly adjusted, so that, by virtue of such Change in
Control of the Corporation, each optionee shall have the right to purchase [i]
that number of shares of the Successor which, as of the date of the Change in
Control, have a fair market value equal to the fair market value of the shares
of the Corporation theretofore subject to an option, [ii] for a purchase price
per share which, when multiplied by the number of shares of the Successor
subject to the option, shall equal the aggregate exercise price at which the
Optionee could have acquired shares of the Corporation under such option.
The granting of an option pursuant to this Plan shall not affect in any way the
right and power of the Corporation to make adjustments, reorganizations,
reclassifications, or changes of its capital or business structure or to merge,
consolidate, dissolve, liquidate, sell or transfer all of any part of its
business or assets; provided, however, that the Corporation shall not, and shall
not permit its subsidiaries to, recommend or agree or consent to a transaction
or series of transactions which would result in a Change of Control of the
Corporation unless and until the person or persons acquiring or succeeding to
assets or capital stock of the Corporation or its subsidiaries as a result of
such transaction or transactions agrees to be bound by the terms of the Plan so
far as it pertains to options therefore granted and agrees to assume and perform
the obligations of the Corporation and its Successor hereunder.
7. Change in Control of the Corporation Defined. The term Change in
Control of the Corporation shall mean [a) any share exchange or merger or
consolidation of the Corporation or a significant subsidiary of the Corporation
if either [i] the Corporation will not be-the surviving or acquiring corporation
or will not own 100% of the outstanding capital stock of the surviving or
acquiring corporation following the consummation of the transactions
contemplated by the plan or agreement of exchange, merger or consolidation, or
[ii] there will be a substantial change in the proportionate ownership of
outstanding shares of voting stock of the Corporation as a result of the
transactions contemplated by such plan or agreement of exchange, merger or
consolidation; [b] any sale, lease, exchange, transfer or other disposition of
all or any substantial part of the assets of the Corporation or a subsidiary of
the Corporation followed by a liquidation of the Corporation; [c) the
commencement of any tender offer, exchange offer or other purchase offer for,
and/or any agreement to purchase, as much as (or more than) 30% of the
outstanding Common Stock of the Corporation or a subsidiary of the Corporation;
or [d] the Board or the shareholders of the Corporation approve, adopt, agree to
recommend, or accept any agreement, contract, offer or other arrangement
providing for, or any series of transactions resulting in, any of the
transactions described above.
8. Employees' and Optionees' Rights. No employee or other person shall
have any claim or right to be granted an option under the Plan except as the
Plan Committee shall have conferred in its discretion in the administration of
the Plan. Participation in the Plan shall not confer upon any Optionee any right
with respect to continuation of employment by the Corporation or any of its
subsidiaries, nor interfere with the right of the Corporation or such subsidiary
to terminate at any time the employment of any Optionee. An option shall not
confer any rights as a stockholder upon the holder thereof, except only as to
shares of Common Stock actually delivered pursuant to the Plan.
9. Privileges of Stock Ownership: Purchase for Investment. Neither
the Optionee nor any Optionee Representative shall be entitled to the privilege
of stock ownership as to any shares of Common Stock not actually issued and
delivered to such Optionee or Optionee Representative. Upon the exercise of an
option at a time when there is not in effect a registration statement under the
Securities Act of 1933 and any applicable state securities laws (the "Securities
Laws") relating to the shares of Common Stock issuable upon exercise thereof and
available for delivery a prospectus meeting the requirements of the Securities
Laws, the shares of Common Stock may be issued only if the Optionee or Optionee
Representative represents and warrants in writing to the Corporation that the
shares being purchased are being acquired for investment and not with a view to
the distribution thereof. The shares of the Common Stock shall contain such
legends or other restrictive endorsements as counsel for the Corporation shall
deem necessary or proper. No shares of Common Stock shall be purchased upon the
exercise of any option unless and until there shall have been satisfied any
applicable requirements of the Securities and Exchange Commission or other
regulatory agencies having jurisdiction and of any exchanges upon which stock of
the Corporation may be listed. The Corporation covenants that it will take all
actions necessary to register under the Securities Laws the Common Stock
issuable upon exercise of options granted pursuant to this Plan.
10. Transferability. Options are not transferable except by will or
the laws of descent and distribution, and then only to the extent provided
herein. Options may be exercised during the lifetime of the Optionee
only by the Optionee and after the death of the Optionee, only as provided in
Section 5 hereof.
11. Termination. The Plan shall terminate on December 31, 2000
and may be terminated at any earlier time by the Plan Committee. No option
shall be granted hereunder after termination of the Plan. Termination of the
Plan, however, shall not affect the validity of any option theretofore granted
under the Plan.
12. Amendment. The Plan Committee may amend the Plan from time to
time, except that, without the approval of a majority of the votes represented
and entitled to be voted at a duly held meeting of the stockholders of the
Corporation:
A. The maximum number of shares of Common Stock which may be
delivered under the Plan may not be increased except as provided in Section 6
hereof;
B. The Option Price under any option may not be reduced
except as provided in Section 6 hereof; and
C. The period during which an option may be exercised may not
be extended beyond the period provided in Section 5 hereof.
No amendment of the Plan, however, may, without the consent of
the Optionee or Optionee Representative, make any changes in any outstanding
option theretofore granted under the Plan which would adversely affect the
rights of such Optionee or Optionee Representative.
13. Tax Withholding. The employer corporation of each Optionee shall
have the right to deduct any sums required by federal, state or local tax law to
be withheld due to the exercise of any option but, in the alternative, the
Optionee or Optionee Representative may elect to pay such sums to the employer
corporation by delivering written notice of that election to the Board not less
than thirty (30) nor more than sixty (60) days prior to exercise. There is no
obligation hereunder that Optionee be advised of the existence of the tax or the
amount which the employer corporation may be so required to withhold.
14. Governing Law. This Plan and the 1992 Incentive Stock Option
Agreements issued hereunder shall be governed by, and construed in accordance
with, the laws of the Commonwealth of Kentucky.
15. Effective Date. This Plan is effective upon the approval by the
Board of Directors of the Corporation on November 22 1991; subject, however, to
the ratification of this Plan by the affirmative vote of a majority of the
shares present or represented by proxy at the Annual Meeting of Stockholders to
be held on April 20, 1992, or any adjournment thereof. The effective date of
each option shall be the day on which it is granted to any Optionee; provided
however, if the Plan is not approved at the aforementioned Annual Meeting of
Stockholders, then any options theretofore granted shall be void and of no
effect.
Dated as of this 22nd day of November,1991.
TRANS FINANCIAL BANCORP INC.
By: /s/ Douglas M. Lester
Douglas M. Lester, President, Chief
Executive Officer and Chairman of the
Board
_________
ATTEST:/s/ David A. Blackburn
David A. Blackburn, Secretary
Exhibit 10(t)
FIRST AMENDMENT TO DIRECTORS' STOCK COMPENSATION PLAN
ADOPTED THRU BOARD OF DIRECTORS RESOLUTIONS
ON DECEMBER 15, 1997
The following resolutions were adopted by the Board of Directors of Trans
Financial, Inc., on December 15, 1997:
WHEREAS, Trans Financial, Inc. has adopted the Directors Stock
Compensation Plan (the "Plan"), effective for all
compensation payable to directors on or after May 1, 1996;
WHEREAS, the Board of Directors has reserved the right to amend the
Plan, pursuant to Section 12 of the Plan: and
WHEREAS, the Board of Directors finds that it is necessary and
desirable to amend the Plan with respect to the method for determining
the number of shares of common stock of the Corporation issued annually
to each director under the Plan;
THEREFORE, BE IT RESOLVED that Section 6 of the Plan be, and hereby is,
amended to state in its entirety as follows:
Section 6. Grant Shares.
A. Each Director shall be granted, without any further action
or authorization, Shares as his or her only compensation for
regular services performed as a director or advisory or
honorary director from the effective date of the Plan with
respect to such Director (or from the date he or she became a
Director, if he or she is elected after such effective date),
to the expiration of his or her term of office; provided,
however, that, in accordance with Section 6.E. hereof, any
Director who receives remuneration from a subsidiary of the
Corporation, pursuant to a binding deferred compensation
agreement between the subsidiary and such Director, shall not
receive Shares pursuant to this Plan for his or her
remuneration that is subject to such agreement, so long as
such agreement remains in effect.
B. Shares shall be issued as of the first business day of each
year with respect to remuneration payable with respect to
services performed during the preceding year.
C. Each Director shall be granted annually a maximum of 400
Shares for service as a director of the Corporation, 200
Shares for service as a director of one or more of the
Corporation's subsidiaries, and 100 Shares for service as an
advisory or honorary director of the Corporation and its
subsidiaries. The grant of Shares for each category of
Director is non-exclusive, such that a person serving in two
or more categories would be eligible to receive annually the
number of shares equal to the aggregate maximum for such
categories.
D. The number of Shares to be issued to each Director for each
category of service described in Section 6.C. above shall be
determined by multiplying the maximum number of Shares which
such Director is eligible to receive for such category of
service during a calendar year, by a fraction, the numerator
of which is the number of months (or portion thereof) that the
Director served the Corporation and or subsidiaries in that
capacity and the denominator of which is 12, e.g., if a
Director's service as a director of the Corporation terminates
on April 1, the number of Shares issued as of the first
business day of the following year for such service would be
400 Shares times 4/12ths. If the above formula produces a
fractional Share, the Director shall receive the cash value of
such fractional Share, based on the closing price per Share on
the last trading day of the preceding year, instead of
receiving such fractional Share.
E. Any Director who receives remuneration from a subsidiary of
the Corporation pursuant to a binding deferred compensation
agreement between the subsidiary and such Director shall not
receive Shares pursuant to this Plan for his or her
remuneration that is subject to such agreement, so long as
such agreement remains in effect. Such Director's remuneration
for service as a director of the Corporation's subsidiary
shall be equal to an amount not less than the amount subject
to the deferred compensation agreement as of the effective
date of the First Amendment to this Plan. If the amount
deferred is less than the dollar amount (the "Subsidiary
Remuneration") determined by multiplying the number of Shares
otherwise issuable to the Director in accordance with Section
6.D. of the Plan times the closing price per Share on the last
trading day of the year in which the services were rendered,
then the Corporation shall issue to that Director as of the
first business day of the succeeding the year in which the
services were rendered that number of Shares equal to the
difference between the Subsidiary Remuneration and the amount
deferred, divided by the closing price per Share on the last
trading day of the year in which the services were rendered.
The compensation deferred pursuant to the binding deferred
compensation agreement shall be deemed to be deferred in the
year in which the services were rendered.
F. In the event of the death of a Director prior to his or her
grant of Shares for any calendar year, any Shares otherwise
payable to such Director shall be issued to the Director's
estate.
FURTHER RESOLVED, that such amendment shall be deemed effective as of
January 1, 1998, and will not affect the issuance of shares of common
stock in January, 1998 to directors for their services in 1997.
FURTHER RESOLVED, that the Board of Directors, on behalf of the
Corporation as sole shareholder of its subsidiary banks, recommends and
instructs the subsidiary banks to adopt and approve the amendment set
forth in these resolutions, effective as of January 1, 1998.
Exhibit 11
<TABLE>
Statement Regarding Computation of Per Share Earnings
Years Ended December 31
In thousands, except per share data
<CAPTION>
1997 1996 1995
Calculation of basic earnings per share:
<S> <C> <C> <C>
Net income (numerator) ............................. $23,933 $ 6,882 $15,315
Average common shares outstanding (denominator) .... 11,432 11,347 11,246
Basic earnings per share ........................... $2.09 $0.61 $1.36
Calculation of diluted earnings per share:
Net income (numerator) ............................. $23,933 $ 6,882 $15,315
Average common shares outstanding .................. 11,432 11,347 11,246
Effect of dilutive securities:
Options ......................................... 290 106 81
Warrants ........................................ -- -- 29
------ ------ -------
Average shares and share equivalents (denominator) 11,722 11,453 11,356
Diluted earnings per share ......................... $2.04 $0.60 $1.35
</TABLE>
Exhibit 21
List of Subsidiaries of the Registrant
Trans Financial Bank, National Association
Trans Financial Bank Tennessee, National Association
Subsidiaries of Trans Financial Bank, National Association:
Trans Financial Mortgage Company (incorporated in Kentucky)
Trans Financial Investment Services, Inc. (incorporated in Kentucky)
Real Estate Holding Company (incorporated in Kentucky)
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, 333-18359, and 333-45883 on Form S-8 of Trans Financial, Inc. of our
report dated January 20, 1998, relating to the consolidated balance sheets of
Trans Financial, Inc. and subsidiaries as of December 31, 1997 and 1996 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,
1997, which report appears in the December 31, 1997 annual report on Form 10-K
of Trans Financial, Inc.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Louisville, Kentucky
March 3, 1998
<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-31-1997 Dec-31-1996
<PERIOD-START> Jan-01-1997 Jan-01-1996
<PERIOD-END> Dec-31-1997 Dec-31-1996
<CASH> 70,774 75,054
<INT-BEARING-DEPOSITS> 98 98
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 278,098 285,155
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,656,305 1,519,813
<ALLOWANCE> 22,017 18,065
<TOTAL-ASSETS> 2,115,011 2,003,952
<DEPOSITS> 1,573,838 1,579,217
<SHORT-TERM> 179,348 126,879
<LIABILITIES-OTHER> 25,755 25,637
<LONG-TERM> 185,293 140,903
0 0
0 0
<COMMON> 21,510 21,324
<OTHER-SE> 129,267 109,992
<TOTAL-LIABILITIES-AND-EQUITY>2,115,011 2,003,952
<INTEREST-LOAN> 146,284 131,466
<INTEREST-INVEST> 15,117 16,403
<INTEREST-OTHER> 10 66
<INTEREST-TOTAL> 161,411 147,935
<INTEREST-DEPOSIT> 64,389 59,795
<INTEREST-EXPENSE> 81,200 73,066
<INTEREST-INCOME-NET> 80,211 74,869
<LOAN-LOSSES> 9,500 13,914
<SECURITIES-GAINS> (356) 20
<EXPENSE-OTHER> 69,133 80,642
<INCOME-PRETAX> 35,988 10,002
<INCOME-PRE-EXTRAORDINARY> 23,933 6,882
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,933 6,882
<EPS-PRIMARY> 2.09 .61
<EPS-DILUTED> 2.04 .60
<YIELD-ACTUAL> 4.46 4.52
<LOANS-NON> 21,803 4,717
<LOANS-PAST> 1,991 5,863
<LOANS-TROUBLED> 687 4
<LOANS-PROBLEM> 4,053 8,443
<ALLOWANCE-OPEN> 18,065 15,779
<CHARGE-OFFS> 6,387 12,467
<RECOVERIES> 839 839
<ALLOWANCE-CLOSE> 22,017 18,065
<ALLOWANCE-DOMESTIC> 22,017 18,065
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
