PROSPECTUS
$25,000,000
PFBI Capital Trust
9.75% Preferred Securities
(Liquidation Amount $25 per Preferred Security)
fully and unconditionally guaranteed, as described herein, by
Premier Financial Bancorp, Inc.
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of PFBI Capital Trust, a statutory business
trust created under the laws of the State of Delaware (the "Issuer Trust").
Premier Financial Bancorp, Inc. (the "Company") will initially be the holder of
all of the beneficial interests represented by common securities of the Issuer
Trust (the "Common Securities" and, together with the Preferred Securities, the
"Trust Securities").The Issuer Trust exists for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in 9.75% Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures," and
together with the Trust Securities, the "Securities") to be issued by the
Company. The Junior Subordinated Debentures will mature on June 30, 2027, which
date may be shortened (such date, as it may be shortened, the "Stated Maturity")
to a date not earlier than June 30, 2002 if certain conditions are met
(including the Company having received the prior approval of the Board of
Governors of the Federal Reserve System (the "Federal Reserve"), if then
required under applicable capital guidelines or policies of the Federal Reserve
(such shortening of the maturity date, the "Maturity Adjustment")). The
Preferred Securities will have a preference under certain circumstances over the
Common Securities with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise. See "Description of Preferred Securities
- -- Subordination of Common Securities."
(Continued on next page)
----------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREOF FOR CERTAIN INFORMATION
RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES.
----------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A
BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER INSURER OR GOVERNMENT AGENCY.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
Underwriting Proceeds to
Price to Public(1) Discount (2) Issuer Trust(3)(4)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security................... $25.00 (4) $25.00
- -----------------------------------------------------------------------------------------------------------------------------
Total(5)................................. $25,000,000 (4) $25,000,000
=============================================================================================================================
</TABLE>
(1) Plus accrued Distributions, if any, from June 6, 1997.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933.
See "Underwriting."
(3) Before deduction of expenses payable by the Company estimated at $240,000.
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures, the
Company has agreed to pay to the Underwriters, as compensation for
arranging the investment therein of such proceeds, $1.00 per Preferred
Security (or $1,000,000 in the aggregate). See "Underwriting."
(5) The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
$3,750,000 aggregate liquidation amount of the Preferred Securities on the
same terms as set forth above, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public
and Proceeds to Issuer Trust will be $28,750,000 and $28,750,000,
respectively. See "Underwriting."
The Preferred Securities are offered by the Underwriters subject to
receipt and acceptance by them, prior sale and the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the Preferred Securities will be
made in book-entry form through the book-entry facilities of The Depository
Trust Company on or about June 6, 1997, against payment therefor in immediately
available funds.
ADVEST, INC.
The date of this Prospectus is June 5, 1997
<PAGE>
(cover page continued)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. Application has been made to include the
Preferred Securities in Nasdaq's National Market. Settlement for the Preferred
Securities will be made in immediately available funds. The Preferred Securities
will trade in DTC's Same-Day Funds Settlement System, and secondary market
trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from June 6, 1997, and
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year commencing September 30, 1997, at the annual rate of 9.75% of the
Liquidation Amount of $25 per Preferred Security ("Distributions"). The Company
has the right to defer payment of interest on the Junior Subordinated Debentures
at any time or from time to time for a period not exceeding 20 consecutive
quarterly periods with respect to each deferral period (each, an "Extension
Period"), provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. No interest shall be due and
payable during any Extension Period, except at the end thereof. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Preferred Securities will also
be deferred and the Company will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash distributions with respect to the
Company's capital stock or with respect to debt securities of the Company that
rank pari passu in all respects with or junior to the Junior Subordinated
Debentures. During an Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Preferred Securities are entitled will accumulate) at the rate of
9.75% per annum, compounded quarterly, and holders of Preferred Securities will
be required to accrue interest income for United States federal income tax
purposes. See "Description of Junior Subordinated Debentures -- Option to Extend
Interest Payment Period" and "Certain Federal Income Tax Consequences --
Interest Income and Original Issue Discount."
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities as described
below. See "Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Guarantee -- Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Company does not make
payments on the Junior Subordinated Debentures held by the Issuer Trust, the
Issuer Trust may have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Issuer Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce payment of such Distributions to such
holder. See "Description of Junior Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Preferred Securities." The obligations of the
Company under the Guarantee and the Preferred Securities are subordinate and
junior in right of payment to all Senior Indebtedness (as defined in
"Description of Junior Subordinated Debentures -- Subordination") of the
Company.
The Preferred Securities are subject to mandatory redemption (i) in
whole, but not in part, upon repayment of the Junior Subordinated Debentures at
Stated Maturity or, at the option of the Company,
2
<PAGE>
(cover page continued)
their earlier redemption in whole upon the occurrence of a Tax Event, an
Investment Company Event or a Capital Treatment Event (each as defined herein)
and (ii) in whole or in part at any time on or after June 30, 2002
contemporaneously with the optional redemption by the Company of the Junior
Subordinated Debentures in whole or in part. The Junior Subordinated Debentures
are redeemable prior to maturity at the option of the Company (i) on or after
June 30, 2002, in whole at any time or in part from time to time, or (ii) in
whole, but not in part, at any time within 90 days following the occurrence and
continuation of a Tax Event, Investment Company Event or Capital Treatment
Event, in each case at a redemption price set forth herein, which includes the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption. The ability of the Company to exercise its rights
to redeem the Junior Subordinated Debentures or to cause the redemption of the
Preferred Securities prior to the Stated Maturity may be subject to prior
regulatory approval by the Federal Reserve, if then required under applicable
Federal Reserve capital guidelines or policies. See "Description of Junior
Subordinated Debentures -- Redemption" and "Description of Preferred Securities
- -- Liquidation Distribution Upon Dissolution."
The holders of the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, to cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. The ability
of the Company, as holder of the Common Securities, to dissolve the Issuer Trust
may be subject to prior regulatory approval of the Federal Reserve, if then
required under applicable Federal Reserve capital guidelines or policies. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction
of liabilities to creditors of the Issuer Trust as provided by applicable law,
the holders of the Preferred Securities will be entitled to receive a
Liquidation Amount of $25 per Preferred Security plus accumulated and unpaid
Distributions thereon to the date of payment, subject to certain exceptions,
which may be in the form of a distribution of such amount in Junior Subordinated
Debentures. See "Description of Preferred Securities -- Liquidation Distribution
Upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to
all Senior Indebtedness of the Company. See "Description of Junior Subordinated
Debentures -- Subordination."
Prospective purchasers must carefully consider the information set
forth in "Certain ERISA Considerations."
THE JUNIOR SUBORDINATED DEBENTURES ARE DIRECT AND UNSECURED OBLIGATIONS
OF THE COMPANY, DO NOT EVIDENCE DEPOSITS AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER INSURER OR GOVERNMENT AGENCY.
3
<PAGE>
MAP
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
PREFERRED SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTING SHARES OF THE
PREFERRED SECURITIES AND BIDDING FOR AND PURCHASING SUCH SHARES AT A LEVEL ABOVE
THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus is based on the assumption that the Underwriters (as defined
herein) will not exercise their over-allotment option.
THE COMPANY
The Company, a Kentucky corporation, is a bank holding company
headquartered in Georgetown, Kentucky with five banking subsidiaries (the
"Banks"). At March 31, 1997, the Company had total assets of $298.1 million,
total deposits of $239.9 million and total stockholders' equity of $40.4
million. The Banks' deposits are federally insured by the Federal Deposit
Insurance Corporation ("FDIC") through the Bank Insurance Fund ("BIF"). The
Company's principal business is to serve as a holding company for the Banks.
The Company was incorporated in 1991. The Company was organized in
connection with the reorganization of Citizens Deposit Bank and Trust Company,
Vanceburg, Kentucky (the "Vanceburg Bank") into a holding company structure. The
Vanceburg Bank is a banking corporation organized under the laws of Kentucky,
resulting from the merger in 1930 of Deposit Bank, chartered in 1894, with
Citizens Bank, chartered in 1903. In 1992, the Company acquired Bank of
Germantown, Germantown, Kentucky (the "Germantown Bank"), a banking corporation
organized under the laws of Kentucky in 1900. The Company in March, 1995
acquired Georgetown Bancorp, Inc. and its subsidiary, the Georgetown Bank and
Trust Company, Georgetown, Kentucky (the "Georgetown Bank"), a banking
corporation organized under the laws of Kentucky in 1988, and in October, 1995,
Citizens Bank, Sharpsburg, Kentucky (the "Sharpsburg Bank"), a banking
corporation organized under the laws of Kentucky in 1903. On July 1, 1996, the
Company acquired Farmers Deposit Bancorp, Eminence, Kentucky ("Eminence") and
indirectly, its commercial bank subsidiary, Farmers Deposit Bank (the "Eminence
Bank"). On May 28, 1997, the Company entered into an Agreement and Plan of
Merger ("Sabina Merger Agreement") with the Sabina Bank, an Ohio banking
corporation that is a member of the Federal Reserve System ("Sabina"). Pursuant
to the Sabina Merger Agreement, Sabina will be acquired by the Company in
exchange for stock of the Company (the "Sabina Acquisition"). Upon consummation
of the Sabina Acquisition, Sabina will become a wholly owned subsidiary of the
Company. The Sabina Acquisition is conditioned upon a representation from the
accountants that it will qualify for pooling of interests accounting treatment.
The Company focuses on providing quality community banking services to
individuals and small-to-medium sized businesses primarily in non-urban areas.
By seeking to provide such banking services in non-urban areas, the Company
believes that it can minimize the competitive effect of larger financial
institutions that typically are focused on large metropolitan areas. Through its
experience in acquiring its Banks, the Company has successfully developed and
implemented a strategy of combining community banks that retain their commitment
to local orientation and direction, while having the benefit of the Company's
capital for growth and staff assistance to promote safety, soundness and
regulatory compliance. The Banks are managed on a decentralized basis, offering
customers direct access to the Banks' presidents and other officers in an
environment conducive to friendly, informed and courteous service. This
decentralized approach also enables each Bank to offer local and timely
decision-making, that provides flexibility with respect to operating procedures
and credit policies, limited only by a framework of centralized risk controls
provided by the Company to promote prudent banking practices. Each Bank
maintains its community orientation by, among other things, having selected
members of its community as members of its board of directors, who assist in the
introduction of prospective customers to the Bank and in the development or
modification of products and services to meet customer needs. As a result of
developing strong banking relationships with their customers, through convenient
and personalized service, the Banks have been successful in funding loan demand
through growth in core deposits.
As of March 31, 1997, the Banks provided community banking services
through 12 locations in Central Kentucky. The Banks offer a wide variety of
consumer and commercial lending and deposit services. The loans offered by the
Banks include commercial, real estate, agricultural and consumer loans. The
Banks' range of deposit services include checking accounts, NOW accounts,
savings accounts, money market accounts, club accounts, individual retirement
accounts, certificates of deposit and overdraft protection. The Georgetown Bank,
the
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Eminence Bank, and the Vanceburg Bank also offer limited trust services and act
as executor,administrator, trustee and in various other fiduciary capacities.
Through Premier Data Services, Inc., the Company's data processing subsidiary,
the Company currently provides centralized data processing services to three of
the Banks as well as two non-affiliated banks.
The executive office of the Company is located at 120 N. Hamilton
Street, Georgetown, Kentucky 40324, and its telephone number is (502) 863-7500.
Financial Summary
<TABLE>
<CAPTION>
At or For the
Three Months
Ended
March 31, At or for the Years Ended December 31,
--------- -----------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income.................... $ 1,158 $ 3,436 $ 2,156 $ 1,513 $ 1,351 $ 729
Total assets.................. 298,059 292,565 155,475 115,443 108,774 100,364
Net loans .................... 223,092 217,587 113,064 81,276 74,450 65,159
Stockholders' equity.......... 40,409 39,863 11,215 9,453 8,868 7,617
Return on average assets...... 1.59% 1.53% 1.69% 1.36% 1.23% 0.88%
Return on average equity...... 11.6% 12.2% 20.5% 16.4% 15.4% 10.0%
Net interest margin........... 5.24% 5.32% 5.23% 5.41% 4.92% 5.27%
</TABLE>
PFBI CAPITAL TRUST
The Issuer Trust is a statutory business trust formed under Delaware
law pursuant to (i) a trust agreement, dated as of May 27, 1997, executed by the
Company, as Depositor, and Bankers Trust (Delaware), as Delaware Trustee, and
(ii) the filing of a Certificate of Trust with the Delaware Secretary of State
on May 27, 1997. Such initial trust agreement will be amended and restated in
its entirety (as so amended and restated, the "Trust Agreement"), as of the date
the Preferred Securities are initially issued. Two individuals will be selected
by the holder of the Common Securities to act as administrators with respect to
the Issuer Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as Administrators. The Issuer Trust's
business and affairs are conducted by its Property Trustee, Delaware Trustee,
and two Administrators. The Issuer Trust exists for the exclusive purposes of
(i) issuing and selling the Preferred Securities and Common Securities, (ii)
using the proceeds from the sale of Preferred Securities and Common Securities
to acquire the Junior Subordinated Debentures issued by the Company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Preferred Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of the
Issuer Trust and payments under the Junior Subordinated Debentures will be the
sole revenue of the Issuer Trust. All of the Common Securities will be owned by
the Company. The Common Securities will rank pari passu, and payments will be
made thereon pro rata, with the Preferred Securities, except that upon the
occurrence and during the continuance of an Event of Default under the Trust
Agreement resulting from an Event of Default under the Indenture, the rights of
the Company as holder of the Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise will be
subordinated to the rights of the holders of the Preferred Securities. The
Company will acquire Common Securities representing an aggregate liquidation
amount equal to 3% of the total capital of the Issuer Trust. The Issuer Trust
has a term of 31 years, but may terminate earlier as provided in the Trust
Agreement. The principal executive office of the Issuer Trust is 120 N. Hamilton
Street, Georgetown, Kentucky 40324, and its telephone number is (502) 863-7500.
- --------------------------------------------------------------------------------
6
<PAGE>
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered............................ The $25,000,000 aggregate liquidation amount of Preferred
Securities offered hereby represents preferred undivided
beneficial interests in the Issuer Trust's assets, which will
consist solely of the Junior Subordinated Debentures. The Trust
has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an
additional $3,750,000 aggregate liquidation amount of Preferred
Securities at the offering price, solely to cover over-allotments,
if any.
Offering Price................................ $25 per Preferred Security (Liquidation Amount $25), plus
accumulated Distributions, if any, from June 6, 1997.
Distributions................................. The distributions payable on each Preferred Security will be
fixed at a rate per annum of 9.75% of the stated liquidation
amount per Preferred Security, will be cumulative, will accrue
from June 6, 1997, the date of issuance of the Preferred
Securities, and will be payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year,
commencing September 30, 1997. See "Description of
Preferred Securities -- Distributions."
Junior Subordinated Debentures................ The Issuer Trust will invest the proceeds from the issuance of
the Preferred Securities and Common Securities in an equivalent
amount of 9.75% Junior Subordinated Debentures of the
Company. The Junior Subordinated Debentures will mature on
June 30, 2027. The Junior Subordinated Debentures will rank
subordinate and junior in right of payment to all Senior
Indebtedness of the Company. In addition, the Company's
obligations under the Junior Subordinated Debentures will be
structurally subordinated to all existing and future liabilities and
obligations of its subsidiaries.
Guarantee..................................... Under the terms of the Guarantee, the Company has guaranteed
the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust described herein.
The Company and the Issuer Trust believe that the obligations of
the Company under the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Junior Subordinated
Indenture taken together, fully, irrevocably and unconditionally
guarantee all of the Issuer Trust's obligations relating to the
Preferred Securities. The obligations of the Company under the
Guarantee and the Preferred Securities are subordinate and
junior in right of payment to all Senior Indebtedness. See
"Description of Guarantee."
</TABLE>
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7
<PAGE>
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<TABLE>
<CAPTION>
<S> <C>
Right to Defer Interest....................... The Company has the right, at any time, to defer payments of
interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters; provided that no Extension
Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of the Company's
extension of the interest payment period, quarterly Distributions
on the Preferred Securities will be deferred (though such
Distribution would continue to accrue with interest thereon
compounded quarterly, since interest will continue to accrue and
compound on the Junior Subordinated Debentures during any
such Extension Period). During an Extension Period, the
Company will be prohibited, subject to certain exceptions
described herein, from declaring or paying any cash
distributions with respect to its capital stock or debt securities
that rank pari passu with or junior to the Junior Subordinated
Debentures. Upon the termination of any Extension Period and
the payment of all amounts then due, the Company may
commence a new Extension Period, subject to the foregoing
requirements. See "Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, Preferred Security
holders will continue to include interest income (and de
minimis original issue discount, if any) for United
States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
Redemption.................................... The Preferred Securities are subject to mandatory redemption (i)
in whole, but not in part, at the Stated Maturity upon repayment
of the Junior Subordinated Debentures, (ii) in whole, but not in
part, contemporaneously with the optional redemption at any
time by the Company of the Junior Subordinated Debentures
upon the occurrence and continuation of a Tax Event,
Investment Company Event or Capital Treatment Event and (iii)
in whole or in part at any time on or after June 30, 2002,
contemporaneously with the optional redemption by the
Company of the Junior Subordinated Debentures in whole or in
part, in each case at the applicable Redemption Price. See
"Description of Preferred Securities -- Redemption."
Liquidation of the Issuer Trust............... The Company, as holder of the Common Securities, has the
right at any time to dissolve the Issuer Trust and cause the
Junior Subordinated Debentures to be distributed to holders of
Preferred Securities in liquidation of the Issuer Trust, subject to
the Company having received prior approval of the Federal
Reserve to do so if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description
of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
</TABLE>
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8
<PAGE>
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<TABLE>
<CAPTION>
<S> <C>
Voting Rights................................. Generally, the holders of the Preferred Securities will not have
any voting rights. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement" and "Risk
Factors Relating to the Offering -- Limited Voting Rights."
Use of Proceeds............................... The proceeds from the sale of the Preferred Securities
offered hereby will be used by the Issuer Trust to purchase
the Junior Subordinated Debentures issued by the Company. The proceeds
received by the Company from the sale of the Junior
Subordinated Debentures will be used for financing growth,
which may include branch acquisitions and/or acquisitions of
other financial institutions and/or financial services companies,
and for general corporate purposes. In addition, a portion of the
proceeds may be contributed through investments in or advances
to the Banks. The Trust Securities will qualify as Tier 1 or core
capital of the Company, subject to the 25% Capital Limitation
(as defined herein), under the risk-based capital guidelines of the
Federal Reserve. The portion of the Trust Securities that
exceeds the 25% Capital Limitation will qualify as Tier 2 or
supplementary capital of the Company. See "Use of Proceeds."
ERISA Considerations.......................... Prospective purchasers should consider the information set forth
under "Certain ERISA Considerations."
Nasdaq National Market Symbol................. Application has been made to have the Preferred Securities
approved for quotation on the Nasdaq National Market under the
symbol "PFBIP".
RISK FACTORS
Prospective investors should carefully consider the matters set forth
under "Risk Factors," beginning on page 11.
</TABLE>
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9
<PAGE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following summary information regarding the Company should be read in
conjunction with the consolidated financial statements of the Company and notes
beginning on page F-1. Consolidated historical financial and other data
regarding the Company at or for the three months ended March 31, 1997 and 1996,
have been prepared by the Company without audit and may not be indicative of
results on an annualized basis or any other period. In the opinion of
management, all adjustments (consisting only of normal recurring accruals) that
are necessary for a fair presentation for such periods or dates have been made.
The consolidated selected financial data presented below has been retroactively
adjusted to reflect all prior stock splits effected in the form of share
dividends.
<TABLE>
<CAPTION>
At or for the Three
Months Ended
March 31, At or for the Years Ended December 31,
--------------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ------------ ----------- ---------- ---------- ---------- -----------
(In thousands except share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Net interest income.............. $ 3,466 $ 1,821 $ 10,837 $ 6,023 $ 5,524 $ 4,938 $ 4,203
Provision for possible
loan losses.................... 184 73 575 86 207 170 325
Non-interest income.............. 559 319 1,484 825 684 733 592
Non-interest expense............. 2,183 1,397 6,793 4,493 4,005 3,640 3,375
--------- -------- ------- ------- ------- ------- -------
Income taxes..................... 500 172 1,517 113 483 510 366
--------- -------- ------- -------- -------- -------- --------
Net income..................... $ 1,158 $ 498 $ 3,436 $ 2,156 $ 1,513 $ 1,351 $ 729
========= ======== ======== ======== ======== ======== ========
Financial Position
Total assets..................... $ 298,059 $ 158,137 $292,565 $155,475 $115,443 $108,774 $100,364
Loans, net of unearned income.... 223,092 115,027 217,587 113,064 81,276 74,450 65,159
Allowance for loan losses........ 2,669 1,790 2,523 1,735 886 884 938
Goodwill......................... 5,456 242 5,490 248 - - -
Securities....................... 46,401 28,525 44,363 24,929 19,688 21,864 18,965
Deposits......................... 239,868 138,864 235,574 136,246 102,839 98,846 91,704
Other borrowings................. 15,263 1,399 14,976 1,502 - 119 230
Debt............................. - 5,000 - 5,000 1,500 - -
Stockholders' equity............. 40,409 11,365 39,863 11,215 9,453 8,868 7,617
Share Data
Net income....................... 0.28 0.26 1.05 1.13 0.80 0.72 0.39
Book value....................... 9.60 5.95 9.47 5.87 5.02 4.72 4.05
Cash dividend.................... 0.125 0.125 0.50 0.45 0.36 0.28 0.20
Ratios
Return on average assets......... 1.59% 1.27% 1.53% 1.69% 1.36% 1.23% 0.88%
Return on average equity......... 11.6% 17.7% 12.2% 20.5% 16.4% 15.4% 9.97%
Dividend payout.................. 45.4% 47.9% 52.9% 39.8% 45.0% 38.9% 51.3%
Stockholders' equity to total
assets at period-end........... 13.56% 7.19% 13.63% 7.21% 8.19% 8.15% 7.59%
Average stockholders' equity
to average total assets........ 13.65% 7.20% 12.52% 8.25% 8.27% 8.04% 8.80%
Capital Ratios
Equity to assets................. 13.56% 7.19% 13.63% 7.21% 8.19% 8.15% 7.59%
Tier 1 risk-based capital ratio.. 15.92% 9.67% 15.95% 9.47% 11.49% 10.87% 11.67%
Total risk-based capital ratio... 17.13% 11.22% 17.12% 10.72% 12.52% 11.90% 12.83%
Leverage ratio................... 12.25% 7.06% 12.04% 6.92% 8.42% 7.62% 7.46%
Ratios of Earnings to Fixed Charges(1)
Excluding interest on deposits... 9.29x 6.36x 9.42x 8.25x 37.98x 144.15x 44.80x
Including interest on deposits... 1.58x 1.41x 1.56x 1.45x 1.58x 1.55x 1.36x
</TABLE>
- ---------------------
(1) The consolidated ratio of earnings to fixed charges has been computed by
dividing income before income taxes, cumulative effect of changes in
accounting principles and fixed charges by fixed charges. Fixed charges
represent all interest expense (ratios are presented both excluding and
including interest on deposits). There were no amortization of notes and
debentures expense nor any portion of net rental expense which was deemed
to be equivalent to interest on debt. Interest expense (other than on
deposits) includes interest on notes, federal funds purchased and
securities sold under agreements to repurchase, and other funds borrowed.
- --------------------------------------------------------------------------------
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Preferred Securities offered by this Prospectus. Certain statements in this
Prospectus and documents incorporated herein by reference are forward-looking
and are identified by the use of forward-looking words or phrases such as
"intended," "will be positioned," "expects," is or are "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. To the extent any of the information
contained in this Prospectus constitutes a "forward-looking statement" as
defined in Section 27A(i)(1) of the Securities Act, the risk factors set forth
below are cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking statement.
RISK FACTORS RELATING TO THE OFFERING
Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures
The obligations of the Company under the Guarantee issued by the
Company for the benefit of the holders of Preferred Securities and under the
Junior Subordinated Debentures are subordinate and junior in right of payment to
all Senior Indebtedness. None of the Junior Subordinated Indenture, the
Guarantee or the Trust Agreement places any limitation on the amount of secured
or unsecured debt, including Senior Indebtedness, that may be incurred by the
Company. See "Description of Guarantee -- Status of the Guarantee" and
"Description of Junior Subordinated Debentures -- Subordination."
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required.
Option to Extend Interest Payment Period; Tax Consequences
So long as no Event of Default (as defined in the Junior Subordinated
Indenture) has occurred and is continuing with respect to the Junior
Subordinated Debentures (a "Debenture Event of Default"), the Company has the
right under the Junior Subordinated Indenture to defer the payment of interest
on the Junior Subordinated Debentures at any time or from time to time for a
period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. See "Description of Junior
Subordinated Debentures -- Debenture Events of Default." As a consequence of any
such deferral, quarterly Distributions on the Preferred Securities by the Issuer
Trust will be deferred during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of 9.75% per
annum, compounded quarterly from the relevant payment date for such
Distributions, computed on the basis of a 360-day year of twelve 30-day months
and the actual days elapsed in a partial month in such period. Additional
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. The term "Distribution" as used herein
shall include any such additional Distributions. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of the Company's capital stock or (ii) make any payment of principal of or
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank pari passu in all respects with or junior in
interest to the Junior Subordinated Debentures (other than (a) repurchases,
redemptions or other acquisitions of shares of capital stock of the Company in
connection with any employment
11
<PAGE>
contract, benefit plan or other similar arrangement with or for the benefit of
any one or more employees, officers, directors or consultants, in connection
with a dividend reinvestment or stockholder stock purchase plan or in connection
with the issuance of capital stock of the Company (or securities convertible
into or exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks pari passu with or junior to
such stock). Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. Upon the termination of any Extension Period
and the payment of all interest then accrued and unpaid (together with interest
thereon at the annual rate of 9.75%, compounded quarterly, to the extent
permitted by applicable law), the Company may elect to begin a new Extension
Period subject to the above conditions. No interest shall be due and payable
during an Extension Period, except at the end thereof. The Company must give the
Issuer Trustees notice of its election to begin an Extension Period at least one
Business Day prior to the earlier of (i) the date the Distributions on the
Preferred Securities would have been payable but for the election to begin such
Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new Extension Period to the holders of the
Preferred Securities. Subject to the foregoing, there is no limitation on the
number of times that the Company may elect to begin an Extension Period. See
"Description of Preferred Securities -- Distributions" and "Description of
Junior Subordinated Debentures -- Option to Extend Interest Payment Period."
Should an Extension Period occur, a holder of Preferred Securities will
continue to accrue income (in the form of original issue discount ("OID")) for
United States federal income tax purposes in respect of its pro rata share of
the Junior Subordinated Debentures held by the Issuer Trust, which will include
a holder's pro rata share of both the stated interest and de minimis OID, if
any, on the Junior Subordinated Debentures. As a result, a holder of Preferred
Securities will include such OID in gross income for United States federal
income tax purposes in advance of the receipt of cash, and will not receive the
cash related to such income from the Issuer Trust if the holder disposes of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences -- Interest Income and Original
Issue Discount" and "-- Sales of Preferred Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be affected. A holder that disposes of his, her or its Preferred Securities
during an Extension Period, therefore, might not receive the same return on his,
her or its investment as a holder that continues to hold its Preferred
Securities. In addition, as a result of the existence of the Company's right to
defer
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<PAGE>
interest payments, the market price of the Preferred Securities (which represent
preferred undivided beneficial interests in the assets of the Issuer Trust) may
be more volatile than the market prices of other securities on which original
issue discount or interest accrues that are not subject to such deferrals.
Tax Event, Investment Company Event or Capital Treatment Event Redemption
Upon the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event, the Company has the right
to redeem the Junior Subordinated Debentures in whole, but not in part, at any
time within 90 days following the occurrence of such Tax Event, Investment
Company Event or Capital Treatment Event and thereby cause a mandatory
redemption of the Preferred Securities. Any such redemption shall be at a price
equal to the liquidation amount of the Preferred Securities, together with
accumulated Distributions to but excluding the date fixed for redemption. The
ability of the Company to exercise its rights to redeem the Junior Subordinated
Debentures prior to the stated maturity may be subject to prior regulatory
approval by the Federal Reserve, if then required under applicable Federal
Reserve capital guidelines or policies. See "Description of Junior Subordinated
Debentures -- Redemption" and "Description of Preferred Securities --
Liquidation Distribution Upon Dissolution."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion will not be, deductible by the Company, in whole
or in part, for United States federal income tax purposes or (iii) the Issuer
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
See "-- Possible Tax Law Changes Affecting the Preferred Securities"
and "Certain Federal Income Tax Consequences -- Proposed Tax Law Changes" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to June 30, 2002.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), which change or prospective change becomes
effective or would become effective, as the case may be, on or after the date of
the issuance of the Preferred Securities.
13
<PAGE>
A "Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the Liquidation Amount of the
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof) except
as otherwise restricted under the 25% Capital Limitation (as defined herein),
for purposes of the risk-based capital adequacy guidelines of the Federal
Reserve, as then in effect and applicable to the Company.
Exchange of Preferred Securities for Junior Subordinated Debentures
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. The ability
of the Company, as holder of the Common Securities, to dissolve the Issuer Trust
may be subject to prior regulatory approval of the Federal Reserve, if then
required under applicable Federal Reserve capital guidelines or policies. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
Under current United States federal income tax law and interpretations
and assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of the
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences -- US Holders -- Receipt of Junior
Subordinated Debentures or Cash Upon Liquidation of the Issuer Trust."
Rights Under the Guarantee
Bankers Trust Company will act as the trustee under the Guarantee and
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. Bankers Trust Company will also act as Debenture Trustee for the
Junior Subordinated Debentures and as Property Trustee under the Trust
Agreement. Bankers Trust (Delaware) will act as Delaware Trustee under the Trust
Agreement. The Guarantee guarantees to the holders of the Preferred Securities
the following payments, to the extent not paid by or on behalf of the Issuer
Trust: (i) any accumulated and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Issuer Trust has funds on hand
available therefor at the payment date, (ii) the Redemption Price with respect
to any Preferred Securities called for redemption, to the extent that the Issuer
Trust has funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding up or liquidation of the Issuer
Trust (unless the Junior Subordinated Debentures are distributed to holders of
the Preferred Securities), the lesser of (a) the aggregate of the Liquidation
Amount and all accumulated and unpaid Distributions to the date of payment, to
the extent that the Issuer Trust has funds on hand available therefor at such
time, and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Preferred Securities on
14
<PAGE>
liquidation of the Issuer Trust. The Guarantee is subordinated as described
under "-- Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures" and "Description of Guarantee -- Status of the
Guarantee." The holders of not less than a majority in aggregate Liquidation
Amount of the outstanding Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of the Guarantee or to direct the exercise of
any trust power conferred upon the Guarantee Trustee under the Guarantee. Any
holder of the Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Issuer Trust, the Guarantee Trustee
or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Preferred Securities in the Direct Action.
Except as described herein, holders of Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities,"
"-- Debenture Events of Default" and "Description of Guarantee." The Trust
Agreement provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
Limited Voting Rights
Holders of Preferred Securities will have limited voting rights
relating generally to the modification of the Preferred Securities and the
Guarantee and the exercise of the Issuer Trust's rights as holder of Junior
Subordinated Debentures. Holders of Preferred Securities will not be entitled to
appoint, remove or replace the Property Trustee or the Delaware Trustee except
upon the occurrence of certain events specified in the Trust Agreement. The
Property Trustee and the holders of all the Common Securities may, subject to
certain conditions, amend the Trust Agreement without the consent of holders of
Preferred Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Issuer Trust (i)
will not be taxable as a corporation for United States federal income tax
purposes, or (ii) will not be required to register as an "investment company"
under the Investment Company Act. See "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement" and "-- Removal of Issuer Trustees;
Appointment of Successors."
Absence of Market
The Preferred Securities are a new issue of securities with no
established trading market. Application has been made to list the Preferred
Securities in the Nasdaq National Market, but one of the
15
<PAGE>
requirements for listing and continued listing is the presence of two market
makers for the Preferred Securities. The Company and the Issuer Trust have been
advised by Advest, Inc. that it intends to make a market in the Preferred
Securities. However, Advest, Inc. is not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the sole
discretion of Advest, Inc. Moreover, there can be no assurance of a second
market maker for the Preferred Securities. Accordingly, no assurance can be
given as to the development or liquidity of any market for the Preferred
Securities.
Market Prices
There can be no assurance as to the market prices for Preferred
Securities, or the market prices for Junior Subordinated Debentures that may be
distributed in exchange for Preferred Securities if a liquidation of the Issuer
Trust occurs. Accordingly, the Preferred Securities or the Junior Subordinated
Debentures that a holder of Preferred Securities may receive on liquidation of
the Issuer Trust may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. Because holders of Preferred
Securities may receive Junior Subordinated Debentures on termination of the
Issuer Trust, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and should
carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of Junior Subordinated
Debentures."
Possible Tax Law Changes Affecting the Preferred Securities
On February 6, 1997, President Clinton released his budget proposals
for fiscal year 1998. One of the revenue provisions of those proposals would
generally deny interest deductions for interest on an instrument issued by a
corporation that has a maximum term of more than 15 years and that is not shown
as indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. If enacted as
proposed by the President, this provision would be effective for instruments
issued on or after the date of first action by a Congressional committee with
respect to the proposal. It is not clear from the President's proposals as to
what constitutes Congressional "committee action" with respect to this proposal.
If the provision were to apply to the Junior Subordinated Debentures, the
Company would be unable to deduct interest on the Junior Subordinated
Debentures. There can be no assurance, however, that future legislative
proposals or final legislation will not affect the ability of the Company to
deduct interest on the Junior Subordinated Debentures. Such a change could give
rise to a Tax Event, which may permit the Company to cause a redemption of the
Preferred Securities before June 30, 2002. See "Description of Junior
Subordinated Debentures -- Redemption" and "Description of Preferred Securities
- -- Redemption." See also "Certain Federal Income Tax Consequences -- Proposed
Tax Law Changes." Under current law, the Company will be able to deduct interest
on the Junior Subordinated Debentures.
RISK FACTORS RELATING TO THE COMPANY
Status of the Company as a Bank Holding Company
The Company is a legal entity separate and distinct from the Banks,
although the principal source of the Company's cash revenues is dividends from
the Banks. The ability of the Company to pay the interest on, and principal of,
the Junior Subordinated Debentures will be significantly dependent on the
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<PAGE>
ability of the Banks to pay dividends to the Company and the ability of the
Company to realize a return on its investments in amounts sufficient to service
the Company's debt obligations. Payment of dividends by the Banks is restricted
by various legal and regulatory limitations.
The right of the Company to participate in the assets of any subsidiary
upon the latter's liquidation, reorganization or otherwise (and thus the ability
of the holders of Preferred Securities to benefit indirectly from any such
distribution) will be subject to the claims of the subsidiaries' creditors,
which will take priority except to the extent that the Company may itself be a
creditor with a recognized claim. As of March 31, 1997, there existed no debt at
the Company level, although the subsidiaries had indebtedness and other
liabilities of approximately $257.6 million.
The Banks are also subject to restrictions under federal law which
limit the transfer of funds by them to the Company, whether in the form of
loans, extensions of credit, investments, asset purchases or otherwise. Such
transfers by the Banks to the Company or any nonbank subsidiary of the Company
are limited in amount to 10% of the bank's capital and surplus and, with respect
to the Company and all its nonbank subsidiaries, to an aggregate of 20% of the
bank's capital and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specified amounts. Federal law also prohibits banks
from purchasing "low-quality" assets from affiliates.
Growth Strategy and Management Structure
The Company intends to continue its growth strategy which includes
acquisitions of commercial banks in non-urban areas. This strategy is focused
upon growth through acquisitions of community banks which retain their corporate
identity and are managed on a decentralized basis. There are risks associated
with the Company's acquisition strategy that could adversely affect net income.
These risks include, among others, inaccurately assessing the asset quality of a
particular institution being acquired, encountering greater than anticipated
costs of incorporating acquired businesses into the Company, and being unable to
deploy funds acquired in an acquisition profitably. In a decentralized
management structure there are risks regarding the Company's ability to manage
and control the subsidiary banks and the capabilities of subsidiary bank
management. There can be no assurance that the Company will be successful in
implementing, or will have the necessary regulatory capital or acquisition
opportunities to implement, its growth strategy. Moreover, the Company
anticipates that it will be in substantial competition with other financial
institutions for potential acquisition candidates.
Adequacy of Allowance for Loan Losses
The risk of loan losses varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value of the collateral for the loan. Management maintains an allowance for
loan losses based upon, among other things, historical experience, an evaluation
of economic conditions and regular review of delinquencies and loan portfolio
quality. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for loan losses based upon a percentage of the outstanding balances
and for specific loans when their ultimate collectibility is considered
questionable. If management's assumption and judgments prove to be incorrect and
the allowance for loan losses is inadequate to absorb future credit losses, or
if the bank regulatory authorities require any Bank to increase the allowance
for loan losses, such Bank's earnings could be significantly and adversely
affected. Because certain lending activities involve greater risks, the
percentage applied to specific loan types may vary.
17
<PAGE>
As of March 31, 1997, the allowance for loan losses was $2.7 million
which represented 1.2% of total loans, net of unearned income. Nonperforming
loans were $1.3 million and other nonperforming assets were $524,000, for total
nonperforming assets of $1.8 million as of March 31, 1997. The Company actively
manages its nonperforming loans in an effort to minimize credit losses and
monitors its asset quality to maintain an adequate allowance for loan losses.
Although management believes that its allowance for loan losses is adequate,
there can be no assurance that the allowance will prove sufficient to cover
future credit losses. Further, although management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or if adverse developments arise with respect to the
Company's nonperforming or performing loans. Material additions to the Company's
allowance for loan losses would result in a decrease in the Company's net
income, possibly its capital, and could result in the inability to pay
dividends, among other adverse consequences. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Other Safety and Soundness Regulations
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution becomes in danger of default or in default.
For example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
otherwise. See "Supervision and Regulation." In addition, the "cross-guarantee"
provisions of federal law require insured depository institutions under common
control to reimburse the FDIC for any loss suffered or reasonably anticipated by
the federal deposit insurance funds as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provision if it
determines that a waiver is in the best interests of the federal deposit
insurance funds. The FDIC's claim for a reimbursement is superior to claims of
shareholders of the insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The federal banking agencies also have broad powers under current
federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized," as defined by the law. See "Supervision and Regulation." As
of March 31, 1997, the Company and each of the Banks were classified as "well
capitalized."
State regulatory authorities also have broad enforcement powers over
the Banks, including the power to impose fines and other civil and criminal
penalties, and to appoint a conservator in order to conserve the assets of any
such institution for the benefit of depositors and other creditors and has the
authority to take possession of a state bank in certain circumstances,
including, among other things, when it appears that such bank has violated its
charter or any applicable laws or is conducting its business in an unauthorized
or unsafe manner, or is in an unsafe or unsound condition to transact its
business or has an impairment of its capital stock.
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Effect of Interest Rate Fluctuations and Economic Conditions
The Company's consolidated results of operations depend to a large
extent on the level of its net interest income, which is the difference between
interest income from interest-earning assets (such as loans and investments) and
interest expense on interest-bearing liabilities (such as deposits and
borrowings). If interest-rate fluctuations cause its cost of funds to increase
faster than the yield on its interest-earning assets, net interest income will
be reduced. The Company measures its interest-rate risk using simulation, price
elasticity and gap analyses. The differences between an institution's
interest-rate sensitive assets and its interest-rate sensitive liabilities at a
point in time is its gap position. A negative gap indicates that cumulative
interest-rate sensitive liabilities exceed cumulative interest-rate sensitive
assets for that period. A positive gap indicates that cumulative interest-rate
sensitive assets exceed cumulative interest-rate sensitive liabilities for that
period.
Fluctuations in interest rates are not predictable or controllable. The
Company endeavors to structure its asset and liability management strategies to
mitigate the impact on net interest income of changes in market interest rates.
However, there can be no assurance that the Company will be able to manage
interest rate risk so as to avoid significant adverse effects in net interest
income. At March 31, 1997, the Company had a one year cumulative positive gap of
2.29%. This positive one year gap position may have a negative impact on
earnings in a declining interest rate environment. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Interest Rate
Sensitivity Analysis."
While the Company uses various monitors of interest-rate risk, it is
unable to predict future fluctuations in interest rates or the specific impact
thereof. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Competition
Banking institutions operate in a highly competitive environment. The
Company competes with other commercial banks, credit unions, savings
institutions, finance companies, mortgage companies, mutual funds, and other
financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Federal and
state legislation and/or regulations also affect the Company's competitiveness
in the financial services business. It is impossible to predict the competitive
impact on the Company of certain federal and state legislation and/or
regulations relating to the banking industry and interstate banking. See
"Business of the Company" and "Supervision and Regulation."
Economic Conditions and Monetary Policy
The operating results of the Company will depend to a great extent upon
the rate differentials that result from the difference between the income it
receives from its loans, securities and other interest-earning assets and the
interest expense it pays on its deposits and other interest-bearing liabilities.
These rate differentials are highly sensitive to many factors beyond the control
of the Company, including general economic conditions and the policies of
various governmental and regulatory authorities, in particular the Federal
Reserve.
19
<PAGE>
Like other depository institutions, the Company is affected by the
monetary policies implemented by the Federal Reserve. A primary instrument of
monetary policy employed by the Federal Reserve is the restriction on the
expansion of the money supply through open market operations, including the
purchase and sale of government securities and the adjustment of reserve
requirements. These actions may at times result in significant fluctuations in
interest rates, which could have adverse effects on the operations of the
Company. In particular, the Company's ability to make loans and attract
deposits, as well as public demand for loans, could be adversely affected. See
"Supervision and Regulation -- Bank Regulation -- Effect of Government Monetary
Policies; Possible Further Legislation."
Local Economic Conditions
The success of the Company is dependent to a certain extent upon the
general economic conditions in the geographic markets served by the Banks.
Although the Company expects that economic conditions will be favorable in these
markets, no assurance can be given that favorable economic conditions will
prevail. Adverse changes in economic conditions in the geographic markets that
the Banks serve could result in lower lending activity, impair the Bank's
ability to collect existing loans, or otherwise have a negative effect on the
operating results and financial condition of the Company. See "Business of the
Company."
Government Regulation
The Company and the Banks each are subject to extensive state and
federal governmental supervision, regulation and control. Future legislation and
government policy could adversely affect the banking industry and the operations
of the Company and the Bank. See "Supervision and Regulation."
PFBI CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware
law pursuant to the filing of a Certificate of Trust with the Delaware Secretary
of State on May 27, 1997. The Issuer Trust will be governed by the Trust
Agreement among the Company, as Depositor, Bankers Trust (Delaware), as Delaware
Trustee, and Bankers Trust Company, as Property Trustee (together with the
Delaware Trustee, the "Issuer Trustees"). Two individuals will be selected by
the holder of the Common Securities to act as administrators with respect to the
Issuer Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as the Administrators. See "Description
of Preferred Securities -- Miscellaneous." The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, convenient or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities will initially be owned by the Company. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities, except that upon the occurrence and during
the continuation of a Debenture Event of Default arising as a result of any
failure by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holder of the Common Securities to
payment in respect of Distributions and Payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of
20
<PAGE>
the Preferred Securities. See "Description of Preferred Securities --
Subordination of Common Securities." The Company will acquire Common Securities
in an aggregate liquidation amount equal to 3% of the total capital of the
Issuer Trust. The Issuer Trust has a term of 31 years, but may terminate earlier
as provided in the Trust Agreement. The address of the Delaware Trustee is
Bankers Trust (Delaware), 1001 Jefferson Street, Wilmington, Delaware 19801,
telephone number (302) 576-3301. The address of the Property Trustee, the
Guarantee Trustee and the Debenture Trustee is Bankers Trust Company, Four
Albany Street, 4th Floor, New York, New York 10006, telephone number (212)
250-2500.
USE OF PROCEEDS
All the proceeds to the Issuer Trust from the sale of the Preferred
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The proceeds from the sale of the Preferred Securities are expected
to qualify as Tier 1 or core capital with respect to the Company under the risk-
based capital guidelines established by the Federal Reserve, however capital
received from the proceeds of the sale of the Preferred Securities cannot
constitute more than 25% of the total Tier 1 capital of the Company (the "25%
Capital Limitation"). Amounts in excess of the 25% Capital Limitation will
constitute Tier 2, or supplementary capital, of the Company. The net proceeds to
be received by the Company from the sale of the Junior Subordinated Debentures
will be used for general corporate purposes which may include branch
acquisitions and/or acquisitions of other financial institutions. In addition, a
portion of the proceeds may be used to make contributions through investments in
or advances to the Banks. Pending any such use, the net proceeds may be invested
in short-to-medium-term obligations. The precise amounts and timing of the
application of proceeds will depend upon the funding requirements of the Company
and its subsidiaries and the availability of other funds.
THE SABINA ACQUISITION
On May 28, 1997, the Company entered into the Sabina Merger Agreement
with Sabina. Under the Sabina Merger Agreement, the Company will acquire all of
the outstanding shares of Sabina in exchange for 4.33 shares of Company common
stock per Sabina share of common stock resulting in the issuance of an aggregate
of 476,300 shares of Company common stock valued at approximately $7.8 million
at May 27, 1997. The Sabina Acquisition is conditioned upon a representation
from the accountants that it will qualify for pooling of interests accounting
treatment. Following consummation of the share exchange, Sabina will be a wholly
owned subsidiary of the Company. The executive management of Sabina and
substantially all of the directors of Sabina are expected to continue their
service in such positions following consummation of the share exchange. The
Sabina Merger Agreement is subject to several conditions precedent including,
among other things, the holders of not more than 10% of the issued and
outstanding shares of Sabina common stock shall have properly demanded appraisal
or dissenters rights, receipt of stockholder and regulatory approval and the
receipt of tax opinions to the effect that the Sabina Acquisition will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended. There can be
no assurance that all conditions precedent to consummation of the merger will
occur.
At March 31, 1997, Sabina had total assets of $36.9 million (including
net loans of $24.6 million), total liabilities of $32.4 million (including total
deposits of $32.0 million and long-term debt of $230,000) and total
stockholders' equity of $4.5 million.
21
<PAGE>
The Sabina Acquisition will enable the Company to affiliate with Sabina
and expand its business operations in central Ohio. Sabina is located in Clinton
County, Ohio, approximately 65 miles northeast of Cincinnati, Ohio, and
approximately 45 miles southwest of Columbus, Ohio. Agriculture is the primary
industry within Clinton County. The Company also regards Sabina's customer base
as local and loyal, and its management, based upon prior results of operations,
as capable of continuing to manage Sabina on the decentralized basis on which
the Company's business strategy is based. See "Business of the Company."
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of
the Company at March 31, 1997, (ii) the consolidated capitalization of the
Company giving effect to the issuance of the Preferred Securities hereby offered
by PFBI Capital Trust and application by the Company of the net proceeds from
the corresponding sale of the Junior Subordinated Debentures to PFBI Capital
Trust as if the sale of the Preferred Securities had been consummated on March
31, 1997, and assuming the Underwriters' over-allotment was not exercised, and
(iii) the actual and pro forma capital ratios of the Company.
<TABLE>
<CAPTION>
(Unaudited)
As Adjusted
For the Sale of
Actual Preferred Securities
------ --------------------
(Dollars in thousands)
<S> <C> <C>
Guaranteed preferred beneficial interests in the Company's
subordinated debt (1)..................................... $ -- $25,000
STOCKHOLDERS' EQUITY:
Preferred stock no par value, 1,000,000 shares
authorized, none issued.................................... -- --
Common stock no par value, 10,000,000 shares
authorized; 4,209,090 outstanding.......................... 978 978
Surplus..................................................... 32,941 32,941
Net unrealized losses on securities available-for-sale...... (253) (253)
Retained earnings........................................... 6,743 6,743
------- -------
Total stockholders' equity.............................. 40,409 40,409
------- -------
Total capitalization........................................ $ 40,409 $65,409
======= ======
COMPANY CAPITAL RATIOS(2):
Equity to total assets...................................... 13.56% 12.51%
Tier 1 risk-based capital ratio(3).......................... 15.92 21.22
Total risk-based capital ratio.............................. 17.13 28.48
Leverage ratio ............................................. 12.25 15.02
</TABLE>
- ------------------
(1) Preferred Securities representing beneficial interests in an aggregate
principal amount of $25,000,000 of the 9.75% Junior Subordinated Debentures
of the Company (not including the $3,750,000 aggregate principal amount of
Junior Subordinated Debentures to be purchased in the event the
Underwriters exercise their over-allotment option). The Junior Subordinated
Debentures will mature on June 30, 2027.
(2) The capital ratios, as adjusted, are computed including the total estimated
proceeds from the sale of the Preferred Securities, in a manner consistent
with Federal Reserve guidelines.
(3) Federal Reserve guidelines for calculation of Tier 1 capital limit the
amount of cumulative preferred stock which can be included in Tier 1
capital to 25% of total Tier 1 capital.
22
<PAGE>
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as
a subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated balance sheets of the
Company and appropriate disclosures about the Preferred Securities, the
Guarantee and the Junior Subordinated Debentures will be included in the notes
to the consolidated financial statements of the Company. For financial reporting
purposes, Distributions on the Preferred Securities will be recorded in the
consolidated statements of income of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section presents a review of the Company's consolidated financial
condition and results of operations. Data is presented for both the Company and
its subsidiaries unless otherwise noted.
In addition to historical information, this discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in this section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
In 1996, the Company continued to pursue its strategic plan to build a
network of independently managed community banks. For the year ended December
31, 1996, the Company posted record earnings. Net income rose 59.3% to $3.4
million from $2.2 million in 1995. Total assets nearly doubled to $292.6 million
from $155.5 million in 1995. Through earnings and a successful offering of
common stock, stockholders' equity increased to $39.9 million which was over 3.5
times the $11.2 million at year end 1995. Higher earnings were reported at each
subsidiary bank while the increase in total assets was split between internal
growth of $8.8 million, the acquisition of the Eminence Bank of $115.7 million
and net public offering proceeds of $12.6 million. The growth in stockholders'
equity was primarily due to the $27.1 million in public offering proceeds and
$1.6 million from growth in retained earnings.
Acquisitions
The Company's acquisition philosophy is to target community banks
primarily located in non- urban areas that are anticipated to have a favorable
impact on the Company's earnings in a reasonable amount of time. In evaluating
acquisition opportunities, the Company conducts due diligence to assess the
target's risk profile, earnings, and earnings potential. Desirable targets have
capable local management teams that are active in the community and maintain a
leadership position in terms of deposit share.
On May 28, 1997, the Company entered into the Sabina Merger Agreement
pursuant to which it will acquire Sabina in exchange for Company common stock.
The Sabina Acquisition is conditioned upon a representation from the accountants
that it will qualify for pooling of interests accounting treatment. See "The
Sabina Acquisition."
23
<PAGE>
On July 1, 1996, Farmers Deposit Bancorp of Eminence, Kentucky, and its
wholly owned subsidiary, Farmers Deposit Bank, were acquired in a cash
transaction that was accounted for as a purchase. At the acquisition date,
Eminence Bank had total assets of $107 million.
In 1995, the Company completed two acquisitions. On March 24, 1995, the
Company acquired Georgetown Bancorp, Inc. and its wholly owned subsidiary,
Georgetown Bank & Trust, Georgetown, Kentucky, in a business combination
accounted for as a pooling of interests. At the acquisition date, Georgetown
Bank had total assets of $21.1 million.
On October 31, 1995, the Company acquired all of the outstanding shares
of Citizens Bank of Sharpsburg, Kentucky, for cash. This combination was
accounted for as a purchase. At the acquisition date, the Sharpsburg Bank had
total assets of $19.8 million.
The significant financial data relative to the 1995 and 1996
acquisitions is set forth in Note 2 to the financial statements.
Results of Operations
Earnings Summary
Net income for the three months ended March 31, 1997, of $1.2 million
or $0.28 per share, was 132% higher than net income of $498,000 or $0.26 for the
three months ended March 31, 1996. This $660,000 increase in net income was
primarily due to the increase in average interest-earning assets of $127.4
million. The Company's asset growth is attributed to the additional capital from
the proceeds of the initial public stock offering in the second quarter of 1996,
and the acquisition of the Eminence Bank on July 1, 1996, in addition to the
continued growth of the Company's other commercial bank subsidiaries. The
primary component of the growth is an increase of $106.3 million in average
loans for the three-month period as compared to the corresponding three-month
period in 1996. The net interest margin was 5.24% for the first quarter of 1997
compared to a 5.19% in the first quarter of 1996 and 5.32% for the full year
1996. The return on stockholders' equity and return on average assets were 11.6%
and 1.59%, respectively, for the three months ended March 31, 1997, compared to
17.7% and 1.27%, respectively, for the same period in 1996. The decrease in the
return on equity is attributable to the additional $27 million net proceeds
received from the initial public offering in the second quarter of 1996.
The Company recorded net income for 1996 of $3.4 million, an increase
of 59.3% over the $2.2 million for 1995, and an increase of approximately 230%
over net income of $1.5 million for 1994. Major factors contributing to the
higher net income were an increase of 79.9% in net interest income from $6.0
million in 1995 to $10.8 million in 1996, and an increase of $659,000 in
non-interest income to $1.5 million that was up 79.9% from the $825,000 for
1995. Partially offsetting these increases were increases in loan loss provision
of $489,000, up from $86,000 in 1995, non-interest expense which rose $2.3
million to $6.8 million or 51.2% from $4.5 million in 1995 and an increase in
income taxes of $1.4 million to $1.5 million from $112,000 recorded in 1995. In
1995, income taxes were substantially reduced as a result of the elimination of
a $504,000 valuation allowance with respect to the deferred tax assets related
to the acquisition of the Georgetown Bank. Per share earnings in 1996 of $1.05
were down $0.08 or 7.1% from the $1.13 recorded in 1995. The reduced level of
per share earnings was attributable to the 2.3 million increase in outstanding
shares as a result of the initial public offering of shares in the second
quarter of 1996.
24
<PAGE>
For the year ended December 31, 1995, net income of $2.2 million was
$643,000 or 42.5% above net income of $1.5 million for 1994. The increase in net
income in 1995 was primarily attributable to a $499,000 increase in net interest
income and reductions of $370,000 in income taxes and $121,000 in loan loss
provision that was partially offset by an increase of $488,000 in non-interest
expenses.
Net Interest Income
The Company's primary source of revenue is its net interest income,
which is the difference between the interest received on its earning assets and
the interest paid on the funds acquired to support those assets. Loans made to
businesses and individuals are the primary interest-earning assets, followed by
investment securities and federal funds sold in the inter-bank market. Deposits
are the primary interest-bearing liabilities used to support the
interest-earning assets. The level of net interest income is affected by both
the balances and mix of interest-earning assets and interest-bearing
liabilities, the changes in their corresponding yields and costs, by the volume
of interest-earning assets funded by noninterest-bearing deposits, and the level
of capital. The Company's long term objective is to manage this income to
provide the largest possible amount of income while balancing interest rate,
credit and liquidity risks.
Nontaxable income from loans and investment securities is presented on
a tax-equivalent basis whereby income exempt from tax has been adjusted upward
by an amount equivalent to the prevailing federal income taxes that would have
been paid if the income had been fully taxable. The discussion of factors
influencing net interest income that follows is based on taxable equivalent
data. In each of the three years, this adjustment is based on an assumed federal
income tax rate of 34%.
Average Consolidated Balance Sheets and Net Interest Analysis
The table below shows, for the periods indicated, the average
distribution of assets, liabilities and the interest earned or paid on those
items, together with the level of stockholders' equity, as well as the Company's
net interest spread and net interest margin. The net interest margin for the
first quarter of 1997 was 5.24% versus 5.32% for the year ended 1996, and the
spread declined to 4.37% in 1997 from 4.45% for the year ended December 31,
1996. The margin compression was partially offset by an increase in average
total loans to $218.9 million in the first quarter of 1997 versus $112.6 million
in the first quarter of 1996 and $164,321 for the full year of 1996. The
increase primarily reflects the full impact of the Eminence Bank acquisition
which was completed on July 1, 1996. In 1996, tax equivalent net interest income
increased to $11.2 million from $6.2 million in 1995, an increase of $5.0
million or 79.7%. This increase was due to an increase of $91.3 million or 76.7%
in average earning assets and an increase of $71.2 million or 68.9% in average
interest-bearing liabilities. This growth is primarily attributable to the
acquisition of the Eminence Bank in mid-year and the net proceeds in excess of
the issuance costs from the Company's initial public stock offering in the
second quarter. Yield on interest-earning assets for 1996 of 9.52% was
essentially equivalent to the 9.50% yield in 1995 while the cost of
interest-bearing liabilities increased from 4.92% in 1995 to 5.07% in 1996. The
increased cost of interest-bearing liabilities reflected higher rates paid on
large money market deposits by the Eminence Bank. The net interest spread for
1996 declined 13 basis points from 4.58% in 1995 to 4.45% while the net interest
margin, which measures net interest income as a percent of average earning
assets, increased from 5.23% in 1995 to 5.32% in 1996. The increase in net
interest margin is attributable to the higher levels of noninterest-bearing
deposits and capital supporting interest-earning assets which rose from 19.6% of
interest-earning assets in 1995 to 23.1% of interest-earning assets in 1996. In
1995, net interest income was up $559,000 to $6.2 million from $5.7 million in
1994 due principally to an increase in average interest-earning assets of $14.4
million. The favorable impact of the increase in net interest-earning assets was
partially offset by a decrease of 18 basis points in the net interest margin to
5.23%.
25
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
1997
----------------------------------------
Average Average
Balance Interest Rate
------------ ------------ -----------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
U.S. Treasury and federal
agency securities(1)...... $ 26,649 $ 397 5.96%
States and municipal
obligations(1)(2).......... 14,441 312 8.64
Other securities (1)(2)...... 4,430 120 10.84
------------ ------------ -----
Total investment
securities.............. 45,520 829 7.28
Federal funds sold........... 10,864 145 5.34
Interest-bearing deposits
with banks................. - - -
Loans, net of unearned
income(2)(3)(4):
Commercial................. 98,594 2,475 10.04
Real estate mortgage....... 92,802 2,274 9.80
Installment................ 27,470 729 10.62
------------ ------------ -----
Total loans............. 218,866 5,478 10.01
Total interest-earning assets.. 275,250 6,452 9.38
Allowance for loan losses...... (2,603)
Cash and due from banks........ 6,041
Premises and equipment......... 4,058
Other assets................... 10,114
------------
Total assets................ 292,860
Liabilities:
Interest-bearing deposits:
NOW and money market....... 39,990 352 3.52
Savings.................... 25,984 228 3.51
Certificates of deposit
and other time deposits.. 146,604 2,064 5.63
------------ ------------ -----
Total interest-
bearing deposits.... 212,578 2,644 4.98
Other borrowings........... 5,733 74 5.16
FHLB advances.............. 8,916 126 5.65
Debt....................... - - -
------------ ------------ -----
Total interest-bearing
liabilities............... 227,227 2,844 5.01
Non-interest-bearing
demand deposits........... 23,347
Other liabilities........... 2,059
------------
Total liabilities...... 252,633
^Stockholders' Equity........... 40,227
Total liabilities and
stockholders' equity......... $ 292,860
===========
Net interest income (2)........ $ 3,608
===========
Net interest spread (2)........ 4.37%
====
Net interest margin (2)........ 5.24%
====
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
------------------------------------- -------------------------------- -------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------ ----------- ---------- ---------- --------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (Dollars in thousands)
Interest-earning assets:
U.S. Treasury and federal
agency securities(1)...... $ 24,823 $ 1,449 5.84% $ 14,122 $ 786 5.57% $ 15,012 $ 736 4.90%
States and municipal
obligations(1)(2).......... 10,119 800 7.91 5,495 440 8.01 4,823 391 8.11
Other securities (1)(2)...... 3,573 385 10.78 2,499 277 11.08 1,400 116 8.29
------------ -------- ------ ------------ -------- ------ -------- --------- ------
Total investment
securities.............. 38,515 2,634 6.84 22,116 1,503 6.80 21,235 1,243 5.85
Federal funds sold........... 7,163 388 5.42 4,966 279 5.62 3,696 145 3.92
Interest-bearing deposits
with banks................. 376 19 5.05 436 35 8.03 396 15 3.79
Loans, net of unearned
income(2)(3)(4):
Commercial................. 83,163 8,405 10.11 55,040 5,624 10.22 48,590 4,627 9.52
Real estate mortgage....... 62,892 6,340 10.08 26,229 2,642 10.07 22,393 2,140 9.56
Installment................ 18,266 2,234 12.23 10,242 1,222 11.93 8,312 933 11.22
------------ -------- ------ ------------ -------- ------- --------- --------- -----
Total loans............. 164,321 16,979 10.33 91,511 9,488 10.37 79,295 7,700 9.71
Total interest-earning assets.. 210,375 20,020 9.52 119,029 11,305 9.50 104,622 9,103 8.70
Allowance for loan losses...... (2,164) (1,049) (963)
Cash and due from banks........ 5,834 4,073 4,295
Premises and equipment......... 2,813 1,689 1,309
Other assets................... 8,101 3,820 2,000
------------ ------------ ---------
Total assets................ 224,959 127,562 111,263
Liabilities:
Interest-bearing deposits:
NOW and money market....... 28,439 966 3.40 15,175 381 2.51 15,299 390 2.55
Savings.................... 19,286 574 2.98 15,009 434 2.89 17,796 524 2.95
Certificates of deposit
and other time deposits.. 117,390 6,737 5.74 69,040 3,953 5.73 55,932 2,470 4.42
------------ ------- ------ ------------ -------- -------- --------- --------- -------
Total interest-
bearing deposits.... 165,115 8,277 5.01 99,224 4,768 4.81 89,027 3,384 3.80
Other borrowings........... 3,582 184 5.14 400 16 4.00 302 16 5.30
FHLB advances.............. 3,660 208 5.68 713 44 6.17 179 10 5.58
Debt....................... 2,029 168 8.28 2,891 253 8.75 311 28 9.00
------------ -------- ---- ------------ -------- ---- --------- --------- -----
Total interest-bearing
liabilities............... 174,386 8,837 5.07 103,228 5,081 4.92 89,819 3,438 3.83
Non-interest-bearing
demand deposits........... 20,335 12,841 11,414
Other liabilities........... 2,064 974 828
------------ ------------ ---------
Total liabilities...... 196,785 117,043 102,061
^Stockholders' Equity........... 28,174 10,519 9,202
Total liabilities and
stockholders' equity......... $ 224,959 $ 127,562 $ 111,263
=========== =========== ========
Net interest income (2)........ $ 11,183 $ 6,224 $ 5,665
======= ======= ========
Net interest spread (2)........ 4.45% 4.58% 4.87%
==== ==== ====
Net interest margin (2)........ 5.32% 5.23% 5.41%
==== ==== ====
</TABLE>
- ----------------
(1) Yields are calculated on historical cost except for yields on marketable
equity securities which are calculated using fair value.
(2) Taxable - equivalent yields are calculated assuming a 34% federal income
tax rate.
(3) Includes loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans.
(4) Includes loans on nonaccrual status.
<PAGE>
The accompanying analysis of changes in net interest income in the
following table shows the relationship of the volume and rate portions of these
changes in 1996 and 1995.
Analysis of Changes in Net Interest Income
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
Increase (decrease) due to change in Increase (decrease) due to change in
------------------------------------ ------------------------------------
Volume Rate Net Change Volume Rate Net Change
------ ---- ---------- ------ ---- ----------
(Dollars in thousands on a taxable equivalent basis)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans..................................... $7,526 $ (35) $7,491 $1,241 $547 $1,788
Investment securities..................... 1,121 10 1,131 53 207 260
Federal funds sold ....................... 119 (10) 109 59 75 134
Deposits with banks....................... (4) (12) (16) 2 18 20
----- ----- ----- ----- --- ------
Total interest income................. 8,762 (47) 8,715 1,355 847 2,202
----- ----- ----- ----- --- -----
Interest Expense:
Deposits -
NOW and money market.................... 416 169 585 (3) (6) (9)
Savings................................. 127 13 140 (80) (10) (90)
Negotiable certificates of deposit...... 2,774 10 2,784 651 832 1,483
Other borrowings.......................... 162 6 168 12 (1) 11
FHLB borrowings........................... 169 (5) 164 21 2 23
Debt...................................... (72) (13) (85) 226 (1) 225
----- ---- ----- ----- --- ------
Total interest expense................ 3,576 180 3,756 827 816 1,643
----- ---- ----- ----- --- -----
Net interest income................ $5,186 $(227) $4,959 $ 528 $ 31 $ 559
===== ==== ===== ===== === =====
</TABLE>
Provision and Allowance for Loan Losses
The Company maintains its allowance for loan losses (allowance) at a level
that is considered sufficient to absorb potential losses in the loan portfolio.
The allowance is increased by the provision for loan losses as well as
recoveries of previously charged-off loans, and is decreased by loan
charge-offs. The provision provides for current loan losses and maintains the
allowance at an adequate level commensurate with management's evaluation of the
risks inherent in the loan portfolio. Various factors are taken into
consideration when the Company determines the amount of the provision and the
adequacy of the allowance. Some of the factors include: past due and
nonperforming assets; specific internal analyses of loans requiring special
attention; the current level of regulatory classified and criticized assets and
the associated risk factors with each; and examinations and reviews by the
Company's independent accountants and internal loan review personnel.
The data collected from these sources is evaluated with regard to current
national and local economic trends, prior loss history, underlying collateral
values, credit concentrations, and industry risks. An estimate of potential
future loss on specific loans is developed in conjunction with an overall risk
evaluation of the total loan portfolio.
27
<PAGE>
The following table is a summary of the Company's loan loss experience for
each of the past five years.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
1997 1996 1995 1994 1993 1992
-------------------- ------------ -------------- ------------- -------------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year........ $ 2,523 $ 1,735 $ 886 $ 884 $ 938 $ 874
Balance of allowance for loan
losses of acquired subsidiaries at
acquisition date.................. - 812 803 - - 20
Amount charged off:
Commercial........................ 24 177 28 270 275 223
Real estate mortgage.............. - 68 19 5 21 33
Consumer.......................... 66 514 44 35 38 96
-------- -------- -------- -------- -------- --------
Total loans charged off......... 90 759 91 310 334 352
Recoveries on amounts previously charged off:
Commercial........................ 10 78 28 89 60 53
Real estate mortgage.............. - 4 2 5 38 -
Consumer.......................... 42 78 21 11 12 18
------- ------- ------- ------- ------- -------
Total recoveries................ 52 160 51 105 110 71
Net charge-offs..................... 38 599 40 205 224 281
Provision for loan losses........... 184 575 86 207 170 325
-------- -------- -------- -------- -------- --------
Balance at end of period............ $ 2,669 $ 2,523 $ 1,735 $ 886 $ 884 $ 938
======== ======== ======== ========= ========= =========
Total loans, net of unearned income:
Average........................... $218,866 $164,321 $ 91,511 $ 79,295 $ 74,477 $ 59,916
======= ======= ======= ======= ======= =======
At period end..................... $223,092 $217,587 $113,064 $ 81,276 $ 74,450 $ 65,159
======= ======= ======= ======= ======= =======
As a percentage of average loans:
Net charge-offs................... .02% .36% .04% .26% .30% .47%
Provision for loan losses......... .08% .35% .09% .26% .23% .54%
Allowance as a percentage of
year-end net loans................ 1.20% 1.16% 1.53% 1.09% 1.19% 1.44%
Allowance as a multiple of net
charge-offs....................... 70x 4x 43x 4x 4x 3x
</TABLE>
The provision for loan losses and net chargeoffs were $184,000 and $38,000,
respectively, for the first quarter of 1997, compared to $73,000 and $18,000,
respectively, for the first quarter of 1996. The increases in these amounts
primarily relate to the increase in average loans between the two periods. Total
nonperforming loans were $1.3 million at March 31, 1997, compared to $951,000 at
December 31, 1996. The allowance for loan losses at March 31, 1997, of 1.2% of
total loans was an increase from 1.16% of total loans at December 31, 1996. At
March 31, 1997, the allowance for loan losses was 203.2% of nonperforming loans
as compared to 265.3% at December 31, 1996.
The provision for loan losses for 1996 was $575,000 compared to $86,000 in
1995, an increase of $489,000. This increase resulted from loan growth including
the acquisition of the Eminence Bank and provisions made for possible loan
losses in connection with the establishment of a consumer finance subsidiary by
the Vanceburg Bank. In 1996, net charge-offs were $599,000 compared to $40,000
in
28
<PAGE>
1995, an increase of $559,000. This increase was primarily attributable to the
charge-off of loans acquired in the Sharpsburg Bank acquisition on October 31,
1995, that had been fully reserved at December 31, 1995 and the acquisition of
the Eminence Bank. At December 31, 1996, the Company's allowance for loan losses
was 1.16% of period-end loans compared to 1.53% at December 31, 1995.
Net charge-offs to average loans were .36% for the year 1996 compared to
.04% for the year 1995. At December 31, 1996, the Company's allowance for loan
losses totaled $2.5 million, representing an increase of $788,000 over the
amount reported at December 31, 1995. The allowance for loan losses was 265.3%
of nonperforming loans on December 31, 1996, compared to 147.0% at December 31,
1995. At year end 1996, nonperforming loans represented .44% of total
outstanding loans, down from .93% on December 31, 1995.
The provision for loan losses for 1995 was $86,000, down from $207,000 in
1994. Net charge-offs in 1995 were $40,000, down $165,000 from the $205,000
charged-off in 1994.
29
<PAGE>
The following table sets forth an allocation for 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 for the allowance for loan losses is an
estimate of the portion of the allowance that will be used to cover future
charge-offs in each major loan category, but it does not preclude any portion of
the allowance allocated to one type of loan being used to absorb losses of
another loan type.
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
At March 31, At December 31,
------------ --------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------------ --------------- -------------- -------------- ---------------- -----------------
Amount % Amount % Amount % Amount % Amount % Amount %
--------- ------- ------ ------ ------ ------ ------ ----- ------ ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .......... $ 914 34.2% $ 948 37.6% $ 653 37.6% $ 537 60.6% $ 535 60.5% $ 581 61.9%
Real estate mortgage 1,179 44.2 1,082 42.9 563 32.5 160 18.1 126 14.3 131 14.0
Consumer ............ 548 20.5 464 18.4 396 22.8 99 11.2 120 13.6 118 12.6
Unallocated ......... 28 1.1 29 1.1 123 7.1 90 10.1 103 11.6 108 11.5
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ............. $2,669 100.0% $2,523 100.0% $1,735 100.0% $ 886 100.0% $ 884 100.0% $ 938 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
30
<PAGE>
Non-Interest Income and Expenses
Non-interest income is a significant component of the Company's total
income. The Company continues to develop and enhance existing products and to
create new products in order to augment fee income as trends in the financial
services industry and the economic environment continue to put pressure on the
Company's ability to increase its net interest income. Non-interest income
includes deposit service charges, fees from data processing and trust services,
and fees and commissions from many other corporate and retail products.
Non-interest income increased $240,000 to $559,000 for the first three
months of 1997 compared to $319,000 for the first three months of 1996.
Non-interest income of $207,000 was recorded for the first quarter of 1997 at
the Eminence Bank, which was acquired in the second quarter of 1996, with the
balance of the growth attributed to overall growth and expansion of the
Company's business and its customer base. Non-interest income recorded in the
first quarter of 1996 included a non-recurring fee of $50,000 received in
connection with an exchange of an investment in preferred stock.
Non-interest income was $1.5 million in 1996, an increase of $659,000 or
79.9% over 1995. Excluding the Eminence Bank, non-interest income would have
been $1.2 million in 1996, an increase of $391,000, or 47.4% over 1995. Service
charges on deposit accounts rose $287,000 or 54% to $817,000 and insurance
commissions were up $153,000, nearly double the $156,000 for 1995. Other income
was up $212,000 to $357,000 and included fees received by Premier Data Services,
Inc. for data processing services to non-affiliated banks.
Non-interest income in 1995 of $825,000 was 20.6% above the 1994 level of
$684,000 as growth in service charge income of $134,000 or 33.8% and insurance
commissions of $64,000 or 70% more than offset a $76,000 reduction in investment
securities gains.
Non-interest expenses for the first quarter of 1997 totaled $2.2 million or
2.96% of average assets on an annualized basis compared to $1.4 million or 3.56%
of average assets for the same period of 1996. This increase in non-interest
expenses is attributed to the expansion of the Company's business, with $524,000
representing non-interest expenses incurred at the Eminence Bank. As a
percentage of average assets, non-interest expenses for the first quarter of
1997 were reduced by 16.7% as compared to the first quarter of 1996.
Non-interest expenses increased $2.3 million from $4.5 million in 1995 to
$6.8 million in 1996 or 51.2%. In 1995, non-interest expenses were 12.2% or
$487,000 higher than the 1994 level of $4.0 million. The significant increase in
non-interest expenses in 1996 is primarily related to the inclusion of the
Eminence Bank ($1.2 million) for half of the year and the Sharpsburg Bank for
the full year ($493,000) vs. two months in 1995.
Salaries and employee benefits, the largest component of non-interest
expense, of $3.8 million in 1996 were $1.5 million or 63.1% higher than 1995 and
represented 55.4% of total non-interest expense. This increase reflects the
inclusion of the Eminence Bank for half of the year and a full year of the
Sharpsburg Bank and the 34.4% increase in full time equivalent employees which
grew from 96 at year end 1995 to 129 at year end 1996, as well as from normal
increases in salary and benefit costs. The increase in full time equivalent
employees included 29 employees of the Eminence Bank. Salaries and employee
benefits for 1995 increased $327,000 or 16.5% compared to $2.0 million in 1994.
31
<PAGE>
Net occupancy and equipment expense for 1996 of $1.1 million was $211,000
or 24.6% higher than the $857,000 for 1995. The increase in net occupancy and
equipment expense included $111,000 related to the Eminence Bank. In 1995, net
occupancy and equipment expense increased $197,000 or 29.8% for the 1994 amount
of $660,000.
Other non-interest expenses, which is the second largest category of
non-interest expenses, of $1.3 million for 1996 was $510,000 or 63.4% above the
1995 level of $804,000. This increase reflects the addition of the Eminence Bank
which had other operating expenses of $347,000, the full year inclusion of the
Sharpsburg Bank, growth of the Company and inflationary increases, and expenses
in connection with the listing of the Company's common stock on the Nasdaq stock
market. Other non-interest expenses for 1995 were $44,000 or 5.8% higher than
the $760,000 recorded in 1994.
FDIC insurance expense decreased $92,000 to $32,000 in 1996 and had
decreased $98,000 in 1995. These decreases resulted from changes in the FDIC
insurance fund which substantially reduced insurance premiums for well
capitalized profitable commercial banks.
Legal and professional fees for 1996 totaled $189,000, an increase of
$49,000 or 35.0% from 1995 and a decrease of $95,000 or 40.4% between 1994 and
1995. The level of legal and professional fees generally varies with the level
and type of acquisitions completed during any year.
Amortization of goodwill was $197,000 in 1996 compared to $2,000 in 1995
and $0 in 1994. The increase in 1996 reflects the amortization of goodwill
generated in the acquisition of the Eminence Bank on July 1, 1996.
No acquisition expenses in 1996 were charged to expenses in 1996, while
acquisition expenses of $110,000 were charged to expenses in 1995 and $37,000 in
1994. Expenses related to acquisitions are charged to expenses in connection
with acquisitions accounted for as pooling of interests while expenses related
to acquisitions where purchase accounting is used are added to goodwill and
amortized over 15 years.
The Company continually seeks to develop fees and other income for services
provided while holding operating expenses to the minimum amount required to
provide quality service. In 1996, total net non-interest expenses as a percent
of average total assets were reduced to 2.36% from 2.87% in 1995 and 2.98% in
1994.
32
<PAGE>
The following table is a summary of non-interest income and expenses for
the periods indicated.
Non-Interest Income and Expenses
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, For the Years Ended December 31,
----------------------------- -----------------------------------------------------
Increase Increase Increase
(decrease) (decrease) (decrease)
1997 vs. 1996 vs. 1995 vs.
1997 1996 1996 1996 1995 1995 1995 1994 1994
---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-Interest Income:
Service charges on deposit accounts $ 232 $ 147 $ 85 $ 817 $ 530 $ 287 $ 530 $ 396 $ 134
Insurance income ................... 120 44 76 309 156 153 156 92 64
Investment securities gain (losses) -- -- -- 1 (6) 7 (6) 70 (76)
Other ............................. 207 128 79 357 145 212 145 126 19
------- ------- ------- ------- ------- ------- ------- ------- -------
Total non-interest income ....... 559 319 240 1,484 825 659 825 684 141
Non-Interest Expenses:
Salaries and employee benefits ..... 1,228 817 411 3,765 2,309 1,456 2,309 1,982 327
Net occupancy and equipment ........ 290 128 162 1,068 857 211 857 660 197
FDIC insurance ..................... 6 13 (7) 32 124 (92) 124 222 (98)
Legal and professional ............. 49 31 18 189 140 49 140 235 (95)
Taxes, other than payroll,
property and income .............. 84 39 45 228 146 82 146 109 37
Acquisition expenses ............... -- -- -- -- 110 (110) 110 37 73
Amortization of goodwill ........... 95 5 90 197 2 195 2 -- 2
Other .............................. 431 364 67 1,314 804 510 804 760 44
------- ------- ------- ------- ------- ------- ------- ------- -------
Total non-interest expenses ...... $ 2,183 $ 1,397 $ 786 $ 6,793 $ 4,492 $ 2,301 $ 4,492 $ 4,005 $ 487
======= ======= ======= ======= ======= ======= ======= ======= =======
Net non-interest expenses as a
percent of average assets .......... 2.22% 2.75% 2.36% 2.87% 2.87% 2.98%
</TABLE>
33
<PAGE>
Income Taxes
Income tax expense was $500,000 for the first quarter of 1997 compared to
$172,000 for the first quarter of 1996. Income tax expense for 1997 was higher
than 1996 as a result of higher income before taxes and a higher effective tax
rate. The effective tax rate for 1997 was 30.2% as compared to 25.7% for the
same period in 1996. This higher rate was primarily attributable to the
inclusion of amortization of goodwill recorded in connection with the Eminence
Bank acquisition which is non-deductible for tax purposes.
The Company recorded income tax expense for 1996 of $1.5 million, which
represented 30.6% of pre-tax income substantially above the $113,000 or 5.0% of
pre-tax income recorded in 1995. The lower 1995 income tax expense was
attributable primarily to the elimination of the valuation allowance of $504,000
for deferred tax assets at the Georgetown Bank. In 1994, tax expense of $483,000
or 24.2% of pre-tax income was recorded. No changes in the valuation allowance
for deferred tax assets were made in 1996.
Financial Condition
Lending Activities
Loans are the Company's primary use of financial resources and represent
the largest component of earning assets. The Company's loans are made
predominantly within the Banks' market areas and the portfolio is diversified.
Credit risk is inherent in each financial institution's loan and investment
portfolio. In an effort to minimize credit risk, each of the Banks follows a
credit administration program, including specific lending authorities for each
loan officer, a system of loan committees to review and approve loans, and a
loan review and credit quality rating system. These programs assist in the
evaluation of the quality of new loans and in the identification of problem or
potential problem credits and enable management to determine the adequacy of the
allowance for loan losses.
Total loans, net of unearned income, were $223.1 million at March 31, 1997,
compared to $217.6 million at December 31, 1996, and averaged $218.9 million for
the three months ended March 31, 1997. Total loans, net of unearned income,
averaged $164.3 million in 1996 compared with $91.5 million in 1995. At year end
1996, loans net of unearned income totaled $217.6 million compared to $113.1
million at December 31, 1995, an increase of $104.5 million. Of this $104.5
million increase, $87.3 million is attributable to the acquisition of the
Eminence Bank and the remaining $17.2 million increase is due to a 15.2% growth
in loans at the other Banks.
34
<PAGE>
The following table presents a summary of the Company's loan portfolio by
category for each of the last five years. Other than the categories noted, there
is no concentration of loans in any industry greater than 5% in the portfolio.
The Company has no foreign loans or highly leveraged transactions in its loan
portfolio.
Loan Portfolio Composition
<TABLE>
<CAPTION>
March 31, December 31,
----------------- ---------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 % 1992 %
-------- ------- -------- ------ -------- ------- -------- ------- -------- ------ -------- -------
(Dollars in thousands)
Commercial, secured by
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
real estate .......... $ 60,214 26.7% $ 59,834 27.2% $ 39,357 34.6% $ 30,191 37.1% $ 28,808 38.5% $ 22,313 34.0%
Commercial,
other .............. 37,388 16.6 33,908 15.4 17,889 15.7 16,782 20.6 14,404 19.2 15,585 23.7
Real estate
construction ....... 3,315 1.5 4,138 1.9 2,119 1.9 1,822 2.2 881 1.2 708 1.1
Real estate
mortgage ........... 78,595 34.9 76,600 34.9 32,678 28.7 21,700 26.6 20,259 27.1 16,340 24.9
Agricultural ......... 9,731 4.3 10,050 4.6 5,216 4.6 1,073 1.3 992 1.3 1,217 1.9
Consumer ............. 35,504 15.8 33,751 15.4 16,087 14.1 9,647 11.9 9,252 12.4 9,167 13.9
Other ................ 450 0.2 1,351 0.6 429 0.4 274 0.3 247 0.3 316 0.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans ........ 225,197 100.0% 219,632 100.0% 113,775 100.0% 81,489 100.0% 74,843 100.0% 65,646 100.0%
===== ===== ===== ===== ===== ========
Less unearned
income............ 2,105 2,045 711 213 393 487
------- ------- ------ ------ ------ ------
Total loans net
of unearned
income.......... $223,092 $217,587 $113,064 $81,276 $74,450 $65,159
======= ======= ======= ====== ====== ======
</TABLE>
35
<PAGE>
Commercial loans generally are made to small-to-medium size businesses
located within a Bank's defined market area and typically are generally secured
by business assets and guarantees of the principal owners. Real estate mortgage
loans include residential properties and generally do not exceed 80% of the
value of the real property securing the loan, based on recent independent
appraisals. The Company's real estate mortgage loan portfolio primarily consists
of adjustable rate residential mortgage loans. The origination of these mortgage
loans can be more difficult in a low interest rate environment where there is a
significant demand for fixed rate mortgages. Consumer loans generally are made
to individuals living in a Bank's defined market area who are known to the
Bank's staff. Consumer loans are made for terms of up to seven years on a
secured or unsecured basis. While consumer loans generally provide the Company
with increased interest income, consumer loans may involve a greater risk of
default. Loss experience in all categories has remained low over the past five
years, with net charge offs being .36% of loans in 1996 and .04% in 1995. With
respect to consumer loans in particular, net charge offs for the year ended
December 31, 1996 were $436,000, or 1.38% of total consumer loans outstanding at
December 31, 1996, and $23,000 in 1995, or .14% of total consumer loans
outstanding at December 31, 1995. This increase is primarily attributable to the
loans acquired in the Eminence and Sharpsburg Bank acquisitions, which
acquisitions occurred in 1996 and 1995, respectively.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1996. Maturities are
based upon contractual terms. The Company's policy is to specifically review and
approve any loan renewed; no loans are automatically rolled over.
<TABLE>
<CAPTION>
One
Through Over
One Year Five Five Total
or Less Years Years Loans
------- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, secured by real estate................. $16,763 $10,347 $32,724 $59,834
Commercial, other.................................. 22,679 8,183 3,046 33,908
Real estate construction........................... 4,107 - 31 4,138
Agricultural....................................... 6,641 1,783 1,626 10,050
------- ------- ------- --------
Total..................................... $50,190 $20,313 $37,427 $107,930
====== ====== ====== =======
Fixed rate loans................................... $21,311 $11,782 $12,931 $46,024
Floating rate loans................................ 26,992 9,234 25,680 61,906
------ ------- ------- --------
Total..................................... $48,303 $21,016 $38,611 $107,930
====== ====== ====== =======
</TABLE>
36
<PAGE>
Nonperforming assets
Nonperforming assets consist of loans on which interest is no longer
accrued, certain restructured loans where interest rate or other terms have been
renegotiated, accruing loans past due 90 days or more and real estate acquired
through foreclosure.
The Company discontinues the accrual of interest on loans that become
90 days past due as to principal or interest unless they are adequately secured
and in the process of collection. A loan remains in a nonaccrual status until
doubts concerning the collectibility no longer exist. A loan is classified as a
restructured loan when the interest rate is materially reduced or the term is
extended beyond the original maturity date because of the inability of the
borrower to service the loan under the original terms. Other real estate is
recorded at the lower of cost or fair value less estimated costs to sell.
37
<PAGE>
A summary of the components of nonperforming assets, including several
ratios using period-end data, is shown below:
Nonperforming Assets
<TABLE>
<CAPTION>
March 31, December 31,
--------- -----------------------------------------------
1997 1996 1995 1994 1993 1992
--------- -------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans ................... $ 426 $ 423 $ 592 $ 46 $ 749 $ 473
Accruing loans which are
contractually past due
90 days or more .................. 887 528 456 219 407 291
Restructured loans ................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total nonperforming and
restructured loans ............. 1,313 951 1,048 265 1,156 764
Other real estate and in-substance
foreclosures ..................... 524 485 132 393 51 328
------ ------ ------ ------ ------ ------
Total nonperforming and
restructured loans and
other real estate ............. $1,837 $1,436 $1,180 $ 658 $1,207 $1,092
====== ====== ====== ====== ====== ======
Nonperforming and restructured
loans as a percentage of net loans .59% .44% .93% .32% 1.55% 1.17%
Nonperforming and restructured
loans and other real estate
as a percentage of total assets .. .62% .49% .76% .57% 1.11% 1.09%
</TABLE>
38
<PAGE>
The above table reflects all loans where known information about the
possible credit problems of the borrower caused management to have doubts as to
the ability of borrowers to comply with the loan repayment terms. The Company is
unaware of any trends, events, uncertainties or current recommendations by
regulatory authorities that will have, or that are reasonably likely to have a
material adverse effect.
Nonaccrual loans at December 31, 1996, were $423,000 compared to
$592,000 at December 31, 1995 and $46,000 at December 31, 1994. The increase
from 1994 is due to the acquisition of the Sharpsburg Bank on October 31, 1995,
which accounted for all of the nonaccrual loans at December 31, 1996, and
$539,000 of the total at December 31, 1995. Total nonperforming assets at
December 31, 1996 were $1.4 million, an increase of $256,000 from the $1.2
million reported at December 31, 1995. Of the $1.4 million total nonperforming
assets at December 31, 1996, $329,000 relates to the Eminence Bank. Excluding
the Eminence Bank, total nonperforming assets decreased $73,000 from December
31, 1995, to December 31, 1996. Total nonperforming assets at December 31, 1995,
were $522,000 more than the year-end 1994 amount of $658,000.
The Company continues to follow its long-standing policy of not
engaging in international lending and not concentrating lending activity in any
one industry.
The following table reflects interest income on nonaccrual and
restructured loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-------------------------- ---------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------------------- ----------- ----------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Contractual interest............ $10 $64 $227 $9 $21 $50
Interest recognized............. - 2 22 - 6 3
</TABLE>
Investment Activities
The securities portfolio consists of debt and equity securities which
provide the Company with a long-term, relatively stable source of income.
Additionally, the investment portfolio provides a balance to interest rate and
credit risks in other categories of the balance sheet. The securities portfolio
is also used as a secondary source of liquidity by the Company. The Company has
classified all municipal securities and certain U. S. Treasury and Agency
securities as held to maturity based on management's positive intent and ability
to hold such securities to maturity. These municipal securities provide tax-free
income and are within management's guidelines with respect to credit risk and
market risk. The municipal securities have been issued principally by Kentucky
municipalities. The U. S. Treasury and Agency securities are held as a source of
stable, long-term income which can be used as collateral to secure municipal
deposits and repurchase agreements. All other investment securities are
classified as available for sale. The securities portfolio does not contain
significant holdings in mortgage-backed securities, collateralized mortgage
obligations or other mortgage-related derivative products and/or structured
notes.
39
<PAGE>
Securities as a percentage of average interest-earning assets decreased
from 20.3% in 1994 to 18.6% in 1995, 18.3% in 1996 and 16.5% in the first
quarter of 1997. At December 31, 1996, investment securities represented 15.7%
of interest-earning assets. These decreases in securities reflect management's
emphasis on originating higher yielding loans and placing a lesser reliance on
the securities portfolio for sources of income.
At March 31, 1997, and December 31, 1996 and 1995, the Company had an
investment in noncumulative perpetual preferred stock of First Guaranty Bank,
Hammond, Louisiana. The market value of this investment approximated its book
value which totaled $2.0 million at March 31, 1997, and December 31, 1996 and
1995. The dividend rate on the preferred stock is 2% in excess of the prime rate
as in effect from time to time. See "Certain Relationships and Related
Transactions."
The following tables present the carrying values and maturity
distribution of investment securities.
Carrying Value of Securities
<TABLE>
<CAPTION>
March 31, December 31,
------------------- ---------------------------
1997 1996 1995 1994
------------------- ------------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies:
Available-for-sale.................. $18,361 $17,418 $13,153 $ 8,698
Held-to-maturity.................... 7,983 8,387 2,300 4,221
State and municipal obligations:
Available-for-sale.................. 1,716 1,621 - -
Held-to-maturity.................... 13,425 12,190 6,347 4,965
Equity securities:
Available-for-sale.................. 2,775 2,788 2,819 1,806
Held-to-maturity.................... - - - -
Other securities:
Available-for-sale.................. - - - -
Held-to-maturity.................... 387 416 18 -
Total securities:
Available-for-sale.................. 22,852 21,827 15,972 10,504
Held-to-maturity.................... 21,795 20,993 8,665 9,186
------ ------ ------ ------
Total................................. $44,647 $42,820 $24,637 $19,690
====== ====== ====== ======
</TABLE>
40
<PAGE>
Maturity Distribution of Securities
March 31, 1997
<TABLE>
<CAPTION>
One Five
Year Through Through Over
or Five Ten Ten Other Market
Less Years Years Years Securities Total Value
---- ----- ----- ----- ---------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Federal
agencies:
Available-for-sale................ $ 7,800 $ 9,458 $ 1,329 $ - $ - $18,587 $18,361
Held-to-maturity.................. 1,350 6,035 598 - - 7,983 7,975
State and municipal
obligations:
Available-for-sale................ 350 1,333 - - - 1,683 1,716
Held-to-maturity.................. 1,545 3,277 5,510 3,093 - 13,425 13,545
Other securities:
Available-for-sale................ - - - - 2,900 2,900 2,775
Held-to-maturity.................. - - - - 387 387 386
Total securities:
Available-for-sale................ 8,150 10,791 1,329 - 2,900 23,170 22,852
Held-to-maturity.................. 2,895 9,312 6,108 3,093 387 21,795 21,906
-------- ------ ------ ------ ------- ------ ------
Total............................... $11,045 $20,103 $ 7,437 $ 3,093 $ 3,287 $44,965 $44,758
====== ====== ====== ====== ====== ====== ======
Percent of total.................... 24.56% 44.71% 16.54% 6.88% 7.31% 100.00% 99.54%
Weighted average yield* 5.71% 6.01% 6.48% 5.94% 9.48% 6.26% 6.29%
</TABLE>
*The weighted average yields are calculated on historical cost on a non
tax-equivalent basis.
Deposit Activities
Managing the mix and repricing of deposit liabilities is an important
factor affecting the Company's ability to maximize its net interest margin. The
strategies used to manage interest-bearing deposit liabilities are designed to
adjust as the interest rate environment changes. In this regard, management of
the Company regularly assesses its funding needs, deposit pricing, and interest
rate outlooks.
For the three months ended March 31, 1997, total deposits averaged
$235.9 million. Total deposits averaged $185.5 million in 1996, a 65.5% increase
over 1995. Total deposits averaged $112.1 million in 1995, an increase of $11.6
million or 11.57% over 1994. Noninterest bearing deposits averaged 10.97% of
total deposits in 1996, compared to 11.5% in 1995 and 11.4% in 1994.
Deposits totaled $239.9 million at March 31, 1997, compared to $235.6
million at December 31, 1996, an increase of $4.3 million. At December 31, 1996,
deposits totaled $235.6 million, compared to $136.2 million at December 31,
1995, an increase of $99.3 million, or 72.9%. Of this $99.3 million increase,
$89.6 million is attributable to the acquisition of the Eminence Bank. Excluding
the Eminence Bank, deposits increased $9.7 million from December 31, 1995, to
December 31, 1996, representing a 7.1% increase.
41
<PAGE>
The table below provides information on the maturities of time deposits
of $100,000 or more at March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(In thousands)
<S> <C> <C> <C>
Maturing 3 months or less............................ $ 4,822 $ 9,891
Maturing over 3 months through 6 months.............. 4,921 3,791
Maturing over 6 months through 12 months............. 14,362 11,061
Maturing over 12 months.............................. 11,679 8,907
------ ------
Total........................................... $35,784 $33,650
====== ======
</TABLE>
42
<PAGE>
The following table sets forth the average amount of and average rate
paid on selected deposit categories during the three months ended March 31,
1997, and during the past three full years.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, For the Years Ended December 31,
----------------------- -------------------------------------------------------------------
1997 1996 1995 1994
------------------------ ------------------------- ------------------- ---------------------
Amount Rate (%) Amount Rate (%) Amount Rate (%) Amount Rate (%)
---------- ------------ ---------- ------------- ------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand................................ $ 23,347 - % $ 20,335 - % $ 12,841 - % $11,414 - %
NOW and money market accounts......... 39,990 3.52 28,439 3.40 15,175 2.51 15,299 2.55
Savings............................... 25,984 3.51 19,286 2.98 15,009 2.89 17,796 2.95
Certificates of deposit and other time 146,604 5.63 117,390 5.74 69,040 5.73 55,932 4.42
------- ---- ------- ---- ------- ---- ------- ----
Total............................ $235,925 4.48% $185,450 4.46% $112,065 4.25% $100,441 3.37%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
43
<PAGE>
Capital
On May 22, 1996, the Company completed its initial public offering of
2,000,000 common shares at an offering price of $13.00 per share and on June 19,
1996, the Company completed the sale of an additional 300,000 common shares
(which represented the Underwriters' over-allotment option) at a price of $13.00
per share. Total proceeds to the Company, net of the underwriting discount and
issuance costs, were $27.1 million. The net proceeds were used to retire
existing debt, $5.0 million, purchase the Eminence Bank, $12.6 million, and
retire the Eminence Bank's existing debt of $1.9 million. The remaining $7.6
million will be used to fund the future growth of the Company, including
additional acquisitions.
The Company's principal source of funds for dividend payments to
stockholders is dividends received from the Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid
without prior approval of regulatory agencies in any calendar year is limited to
the current year's net profits, as defined, combined with the retained net
profits of the preceding two years, subject to the capital requirement
limitations. During 1997, the Banks could, without prior approval, declare
dividends to the Company of approximately $2.7 million plus any 1997 net profits
retained to the date of the dividend declaration.
The Company's primary regulator, the Federal Reserve (which regulates
bank holding companies), has issued guidelines classifying and defining bank
holding company capital into the following components: (1) Tier 1 Capital, which
includes tangible stockholders' equity for common stock and certain qualifying
perpetual preferred stock, and (2) Tier 2 Capital, which includes a portion of
the allowance for loan losses, certain qualifying long-term debt and preferred
stock that does not qualify as Tier 1 Capital. The risk-based capital guidelines
require financial institutions to maintain specific defined credit risk factors
(risk-adjusted assets). As of March 31, 1997, the minimum Tier 1 and the
combined Tier 1 and Tier 2 capital ratios required by the Federal Reserve were
4% and 8%, respectively.
In addition to the risk-based capital guidelines discussed above, the
Federal Reserve requires that a bank holding company which meets that
regulator's highest performance and operating standards maintain a minimum
leverage ratio (Tier 1 capital as a percentage of tangible assets) of 3%. Those
bank holding companies anticipating significant growth are expected to maintain
a leverage ratio above the minimum ratio. Minimum leverage ratios for each
entity will be evaluated through the ongoing regulatory examination process.
Regulations have also been issued by the FDIC establishing similar risk- based
and leverage capital ratios which apply to each bank as a separate entity. See
"Supervision and Regulation -- Bank Regulation -- Regulatory Capital
Requirements."
The Company's capital ratios at March 31, 1997, and at December 31,
1996 and 1995, were as follows:
44
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
---------------- --------------------------------
1997 1996 1995
---------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity............................................. $ 40,409 $ 39,863 $ 11,215
Less disallowed amounts of goodwill and other intangibles........ (5,517) (5,554) (325)
Less disallowed amounts of deferred tax assets................... - - (210)
Add unrealized loss on securities available-for-sale............. 169 55 50
--------- --------- ---------
Tier 1 capital................................................... 35,061 34,364 10,730
Tier 2 capital adjustments:
Allowance for loan losses...................................... 2,669 2,522 1,416
------- ------- -------
Total capital.................................................... $ 37,730 $ 36,886 $ 12,146
======= ======= =======
Total risk-weighted assets....................................... $220,292 $215,438 $113,280
======= ======= =======
Tier 1 capital ratio............................................. 15.92% 15.95% 9.47%
Total capital ratio.............................................. 17.13% 17.12% 10.72%
Leverage ratio................................................... 12.25% 12.04% 6.92%
</TABLE>
Liquidity
Liquidity for a financial institution can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company to
meet the demands of both the borrower and the depositor on a timely basis, as
well as pursuing other business opportunities as they arise. Thus, liquidity
management embodies both an asset and liability aspect. Liquidity is maintained
through the Company's ability to convert assets into cash, manage the maturities
of liabilities and generate funds through the attraction of local deposits.
As part of its liquidity management, the Company maintains funding
relationships with the FHLB and other financial institutions, including approval
for a two year $20 million revolving line of credit available for both general
corporate purposes and future acquisitions. The Company prefers to manage its
liquidity requirements generally through the matching of maturities of assets
and liabilities.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity. A discussion of the cash flow statements for 1996, 1995 and
1994 follows.
Net cash provided from operating activities was $5.2 million, $1.8
million and $1.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increases in net cash provided from operating activities was
primarily due to higher net income and increases in non-cash expenses over the
three year period.
Cash used in investing activities was $38.3 million, $19.1 million and
$6.6 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Cash was used to fund net loan growth, the acquisition of the Eminence Bank, and
the acquisition of additional premises and equipment. The Company's policy is to
reinvest the proceeds from the sale, maturity and call of investment securities
into similar type investment securities if such proceeds are not required to
fund loans. In 1996, the Company received $10.6 million and $2.2 million from
sales, calls and maturities of securities available for sale and securities held
to maturity, respectively, and purchased $10.9 million and $2.7 million of
securities available for sale and securities held to maturity, respectively. In
1995, the Company received proceeds of $11.9 million and $2.2 million from
sales, calls and
45
<PAGE>
maturity of securities available for sale and securities held to maturity and
purchased $13.1 million and $1.7 million, respectively.
Cash provided from financing activities was $33.9 million, $18.6
million and $5.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The cash provided from financing activities in 1996 included $27.1
million from the issuance of common stock - see "-- Capital." In 1995 and 1994,
the cash provided from financing activities was primarily attributable to
deposit growth and proceeds from debt and other borrowings.
Liquidity risk is the possibility that the Company may not be able to
meet its cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and meet the needs of
borrowers, depositors and creditors. Liquidity must be maintained at a level
which is adequate but not excessive. Excess liquidity has a negative impact on
earnings resulting from the lower yields on short-term assets.
In addition to cash, cash equivalents and Federal funds sold, the
securities portfolio provides an important source of liquidity. The total of
securities maturing within one year along with cash, due from banks and Federal
funds sold totaled $26.7 million as of December 31, 1996. Additionally,
securities available-for-sale with maturities greater than one year and equity
securities totaled $15.8 million at December 31, 1996. These securities are
available to meet liquidity needs on a continuing basis.
To maintain a desired level of liquidity, the Company has several
sources of funds available. One is the cash flow generated daily from the Banks'
various loan portfolios in the form of principal and interest payments. Another
source is its deposit base. The Company maintains a relatively stable base of
customer deposits which has historically exhibited steady growth. This growth,
when combined with other sources, is expected to be adequate to meet its demand
for funds. Due to the nature of the markets served by the Banks, management
believes that the majority of certificates of deposit of $100,000 or more are no
more volatile than its core deposits. During a period of relatively stable
interest rates, these balances have remained relatively the same for 1996 and
1995. Certificates of deposits and other time deposits of $100,000 or more
represented approximately 14% and 15% of total deposits for 1996 and 1995,
respectively. A number of techniques are used to measure the liquidity position,
including the utilization of several ratios that are presented below.
These ratios are calculated based on annual averages for each year.
Liquidity Ratios
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, For the Years Ended December 31,
--------------- --------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total loans/total deposits................... 92.77% 88.61% 81.66% 78.95%
Total loans/total deposits less float........ 94.13% 90.06% 83.30% 83.44%
Net short-term borrowings/total assets....... 4.22% 3.22% 0.87% 0.43%
</TABLE>
This analysis shows that the Company's loan to deposit ratios have
continued to increase due to increases in loan demand that exceed the increase
in deposit activity.
46
<PAGE>
Information regarding short-term borrowings for the periods indicated
is presented in the following table.
<TABLE>
<CAPTION>
For the Three
Months Ended For the Year Ended
March 31, December 31,
----------- --------------------------------------------------
1997 1996 1995 1994
----------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal funds purchased and repurchase agreements:
Balance at period end................................... $ 5,779 $ 5,599 $ 747 $ -
Weighted average rate at period end..................... 5.18% 5.05% 3.25% -%
Average balance during the period....................... $ 5,733 $ 3,582 $ 400 $ 302
Weighted average rate during the period................. 5.16% 5.14% 3.85% 5.30%
Maximum month-end balance............................... $ 5,953 $ 6,496 $ 747 $ 650
Other short-term borrowings:
Balance at period end................................... $7,200 $7,055 $ 755 $ 755
Weighted average rate at period end..................... 5.62% 5.57% 6.05% 5.53%
Average balance during the period....................... $ 6,614 $ 3,660 $ 713 $ 179
Weighted average rate during the period................. 5.64% 5.68% 6.17% 5.58%
Maximum month-end balance............................... $ 7,200 $ 8,555 $ 755 $ 755
Total short-term borrowings:
Balance at period end................................... $12,979 $12,654 $1,502 $ 755
Weighted average rate at period end..................... 5.42% 5.34% 4.88% 5.53%
Average balance during the period....................... $12,347 $7,242 $1,113 $ 481
Weighted average rate during the period................. 5.42% 5.41% 5.34% 5.40%
Maximum month-end balance............................... $13,153 $15,051 $1,502 $1,405
</TABLE>
Substantially all federal funds purchased and repurchase agreements
mature in one business day. Other short-term borrowings principally represent
FHLB advances (with varying maturity dates), which are funding residential
mortgage and commercial loans.
Interest Rate Sensitivity
The interest spread and liability funding discussed above are directly
related to changes in asset and liability mixes, volumes, maturities and
repricing opportunities of interest-earning assets and interest-bearing
liabilities. Interest-sensitive assets and liabilities are those which are
subject to being repriced in the near term, including both floating or
adjustable rate instruments and instruments approaching maturity. The interest
sensitivity gap is the difference between total interest-sensitive assets and
total interest-sensitive liabilities. Interest rates on the Company's various
asset and liability categories do not respond uniformly to changing market
conditions. Interest rate risk is the degree to which interest rate fluctuations
in the marketplace can affect net interest income.
The need for interest sensitivity gap management is most critical in
times of a significant change in overall interest rates. Management generally
seeks to limit the exposure of the Company to interest rate fluctuations by
maintaining a relatively balanced mix of rate sensitive assets and liabilities
on a one-year time horizon. This mix is altered periodically depending upon
management's assessment of current business conditions and the interest rate
outlook.
47
<PAGE>
One tool which is used to monitor interest rate risk is the interest
sensitivity analysis as shown in the table below. This analysis reflects the
repricing characteristics of assets and liabilities over various time periods.
The gap indicates the level of assets and liabilities that are subject to
repricing over a given time period.
As shown by the interest rate sensitivity analysis as of March 31,
1997, the total amount of the Company's interest-earning assets repricing during
the first year is greater than the total amount of its interest-bearing
liabilities repricing during this period. This position, which is normally
termed a positive interest sensitivity gap, generally allows for enhanced net
interest income during periods of increasing interest rates. This positive gap
is within the Company's internal policy guidelines and is not expected to impact
significantly the Company's net interest income during a period of declining
interest rates.
The following table provides an analysis of the Company's interest rate
sensitivity at March 31, 1997.
<TABLE>
<CAPTION>
0 - 90 91 Days - 1 - 5 Over 5
Days 1 Year Years Years Total
---- ------ ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Loans, net of unearned income............. $58,963 $64,779 $54,901 $44,449 $223,092
Investment securities..................... 7,741 8,177 18,980 9,749 44,647
Federal funds sold........................ 8,285 - - - 8,285
------ -------- -------- -------- -------
Total earning assets.................... 74,989 72,956 73,881 54,198 276,024
Sources of Funds:
NOW, money market and savings............. 27,893 14,393 15,636 17,613 75,535
Time deposits............................. 26,508 72,160 56,019 5,437 160,124
Short-term borrowings..................... 679 - - 5,778 6,457
-------- -------- -------- ------ -------
Total interest-bearing deposits......... 55,080 86,553 71,655 28,828 242,116
Interest Sensitivity Gap:
For the period............................ $19,909 $(13,597) $ 2,226 $25,370 $ 33,908
====== ======= ====== ====== =======
Cumulative................................ $19,909 $ 6,312 $ 8,538 $33,908
====== ======= ====== ======
Cumulative as a percent
of earnings assets...................... 7.21% 2.29% 3.09% 12.28%
==== ==== ==== =====
</TABLE>
BUSINESS OF THE COMPANY
The Company is organized under the laws of the Commonwealth of Kentucky
and is registered as a bank holding company under the Bank Holding Company Act
of 1956, as amended ("BHCA"). The Company only conducts business through the
Banks and other direct or indirect subsidiaries.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order to
achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review and compliance and internal auditing
to the Banks to enhance their ability to compete effectively. The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. Each Bank participates in product devel-
48
<PAGE>
opment by advising management of new products and services needed by their
customers and desirable changes to existing products and services.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. The Georgetown Bank, the Eminence Bank, and the
Vanceburg Bank also offer limited trust services and act as executor,
administrator, trustee and in various other fiduciary capacities. Through
Premier Data Services, Inc., the Company's data processing subsidiary, the
Company currently provides centralized data processing services to three of the
Banks as well as two non-affiliated banks.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences, or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans.
The Banks' range of deposit services include checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
County Finance, Inc., a subsidiary of the Vanceburg Bank, is a consumer
loan company that provides secured and unsecured loans to customers who would
generally not qualify, due to credit experience or other factors, for loans at
that Bank.
Competition
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking has created a highly competitive
environment for financial services providers. In one or more aspects of its
business, each Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies and other financial
intermediaries operating in its market and elsewhere, many of whom have
substantially greater financial and managerial resources. With respect to the
Georgetown Bank and the Ger- mantown Bank, primary competitors include large
bank holding companies having substantially greater resources that offer certain
services that these two Banks do not currently provide. Each Bank seeks to
minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.
Management believes that each Bank is well positioned to compete
successfully in its respective primary market area, although no assurances can
be given. Competition among financial institutions is based upon interest rates
offered on deposit accounts, interest rates charged on loans and other credit
and service charges, the quality and scope of the services rendered, the
convenience of the banking facilities and, in the case of loans to commercial
borrowers, relative lending limits. Management believes that the commitment of
its Banks to personal service, innovation and involvement in their respective
communities and primary market areas, as well as their commitment to quality
community banking service, are factors that contribute to their competitiveness.
49
<PAGE>
Personnel
As of March 31, 1997, the Company and its subsidiaries collectively had
approximately 135 full-time equivalent employees. These employees are not
represented by any collective bargaining unit. Relations between management and
employees are considered good.
Properties
The Company owns all the properties on which it conducts its business,
either directly or through subsidiaries.
The Vanceburg Bank, in addition to its main office at 400 Second
Street, Vanceburg, Kentucky, has four branch offices in Lewis County. The
Germantown Bank, with its main office on Highway 10 in Germantown, has no other
offices. The Georgetown Bank, in addition to its main office, has one branch in
Scott County. The Sharpsburg Bank, with its main office located on Main Street
in Sharpsburg, has no other offices, and the Eminence Bank with its main office
on Main Street in Eminence, Kentucky, also has two branches located in Henry
County.
Legal Proceedings
The Banks are respectively parties to legal actions that routinely
arise out of the normal course of the commercial banking business. In
management's opinion, the outcome of such matters, individually or in the
aggregate, will not have a material adverse impact on the results of operations
or financial position of the Company.
MANAGEMENT
Directors and Executive Officers
The Board of Directors of the Company is currently composed of seven
members, each of whom serves for a term of one year. Executive officers are
elected annually by the Board of Directors and serve at the Board's discretion.
50
<PAGE>
The following table sets forth information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Current
Term as
Director/Executive Director Director
Officer Age Position Since Expires
- ---------------------------------- --- ----------------------------------------- ----- -------
<S> <C> <C> <C> <C>
J. Howell Kelly 51 President and Chief Executive 1995 1998
Officer
Marshall T. Reynolds 60 Chairman of the Board 1996 1998
Gardner E. Daniel 61 Senior Vice President, Assistant 1995 1998
Secretary and Director
Toney Adkins 47 Director 1991 1998
Benjamin T. Pugh 48 Executive Vice President, 1991 1998
Treasurer and Director
Wilbur M. Jenkins 69 Director 1995 1998
E.V. Holder, Jr. 64 Secretary and Director 1991 1998
</TABLE>
Biographical Information
Directors and Executive Officers of the Company. The principal
occupation of each director and executive officer of the Company is set forth
below.
J. Howell Kelly became Chief Executive Officer of the Company in
January 1996, and President of the Company in February 1995. Mr. Kelly has been
a director of Cambridge Financial Services, Inc., Iselin, New Jersey, a
financial advisory and management consulting firm, since 1992. Prior to 1992,
Mr. Kelly was an independent consultant providing financial advice to financial
institutions, individuals and industrial corporations. From 1983 until December
1994, Mr. Kelly also served as a director of Banc One West Virginia, Inc. (or
its predecessor, Key Centurion Bancshares, Inc.) and served as Chairman of that
corporation's audit committee.
Benjamin T. Pugh assumed the positions of Executive Vice President and
Treasurer of the Company in January 1996. Prior to this, Mr. Pugh was Chief
Executive Officer of the Company and prior to February 1995, also its President.
He is also President and Chief Executive Officer of the Vanceburg Bank and the
Germantown Bank. Mr. Pugh is also Chairman of Premier Data Services, Inc.
Gardner E. Daniel became Senior Vice President of the Company in April
1995 and Assistant Secretary in January 1996. He has been a director of the
Company since April 1995. Mr. Daniel has served as President and Chief Executive
Officer of both the Georgetown Bank and the Sharpsburg Bank since April 1992 and
November 1995, respectively.
E. V. Holder, Jr. has been a Director, and has served as Secretary of
the Company since July 1991. Mr. Holder is an attorney.
Wilbur M. Jenkins has been a Director of the Company since April 1995.
Mr. Jenkins has been retired for over five years. He previously owned a cable
manufacturing business.
51
<PAGE>
Toney K. Adkins has been a Director of the Company since July 1991. Mr.
Adkins has been employed by Champion Industries, Inc., a commercial printing and
office supplies business, since November 1995 where he is Vice President of
Administration. Prior to this, he was President of KYOWVA Corrugated, Inc.
Marshall T. Reynolds serves as the Company's Chairman of the Board.
From 1985 to November 1993, Mr. Reynolds also served as Chairman of the Board of
Directors of Banc One West Virginia, Inc. (or its predecessor, Key Centurion
Bancshares, Inc.). He is Chairman and Chief Executive Officer of Champion
Industries, Inc., a commercial printer and provider of office supplies.
52
<PAGE>
Executive Compensation
Summary Compensation Table. The following table summarizes compensation
earned in 1996, 1995 and 1994 by the Company's Chief Executive Officer and
certain of the Company's other executive officers who earned a salary and/or
bonus in 1996 that exceeded $100,000. Except as set forth below, no executive
officer had a salary and bonus during the year ended December 31, 1996, that
exceeded $100,000 for services rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------------------------- ------------
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary Bonus Compensation(2) Options (#) (1)
- ------------------ ---- ------ ----- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
J. Howell Kelly 1996 $110,807 $36,000 $16,116 20,000 $9,105
President & CEO (2) 1995 82,385 36,000 5,325 -- --
Benjamin T. Pugh 1996 90,536 36,000 3,450 20,000 7,901
Executive President (3) 1995 82,500 36,000 3,600 -- 7,395
1994 80,000 30,000 2,700 -- 7,386
Gardner E. Daniel 1996 87,715 15,000 3,600 -- 6,414
Senior Vice President (4) 1995 83,178 15,000 2,100 -- --
1994 79,891 8,250 1,250 -- --
</TABLE>
- ------------------
(1) Employer contributions to the Company's Profit Sharing Plan.
(2) Mr. Kelly became President and Chief Executive Officer on February 14,
1995. The salary for 1995 includes $17,000 paid by the Vanceburg Bank
during the period of January 1, 1995 through April 30, 1995 for
services rendered to that bank subsidiary. Other annual compensation
includes $14,400 in director's fees paid by bank subsidiaries of the
Company, as well as personal use of a company automobile valued at
$1,716.
(3) Salary and bonus amounts for all years were paid by the Vanceburg Bank
for services rendered by Mr. Pugh as President and Chief Executive
Officer of that bank subsidiary. Other annual compensation includes
director's fees paid by bank subsidiaries of the Company.
(4) Salary and bonus amounts for all years were paid by the Georgetown Bank
for services rendered by Mr. Daniel as President and Chief Executive
Officer of that bank subsidiary. Other annual compensation includes
director's fees paid by bank subsidiaries of the Company.
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Stock Option Plan. The following table contains certain information
with respect to stock options granted in 1996 under the Company's 1996 Employee
Stock Ownership Incentive Plan to the named executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total Potential Realizable Value at
Securities Options Assumed Rates of Stock Price
Underlying Granted to Exercise or Appreciation for Option Term
Options Employees in Base Price Expiration -----------------------------
Name Grant Date Granted (#)(1) Fiscal Year ($/Sh) Date (2) 5%(3) 10%(3)
---- ---------- -------------- ----------- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Howell Kelly 5/15/96 20,000 50% 13.00 5/15/07 $163,513 $414,373
Benjamin T. Pugh 5/15/96 20,000 50% 13.00 5/15/07 163,513 414,373
</TABLE>
- ----------------------
(1) Options for 7,000 shares became exercisable on November 15, 1996, options
for an additional 7,000 shares became exercisable on April 1, 1997 and
options for an additional 2,000 shares will become exercisable on April 1,
1998, April 1, 1999 and April 1, 2000 if on such vesting dates the
individual remains employed with the Company (subject to earlier vesting in
circumstances of death, disability or a change in control of the Company).
(2) The stock options are subject to termination prior to their expiration date
in the event of termination of employment.
(3) The potential realizable value reflected in the table represents the
difference between (i) the price the Common Stock would attain at the end
of the option's 10-year term if the price appreciated from the date of the
stock option grant at a rate of 5% or 10% per year (as the case may be),
and (ii) the option exercise price. The amounts shown in the table are the
result of multiplying the amount described above by the number of options
granted to the respective individual on the applicable grant date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
# of Securities Value of Unexercised
Underlying In-the-Money
Shares Acquired on Unexercised Options Options at FY-End
Name Exercise (#) Value Realized ($) FY-End (#)(1) ($)(1)(2)
---- -------------- ------------------ -------------- ---------
<S> <C> <C> <C> <C>
J. Howell Kelly -- -- 20,000 20,000
Benjamin T. Pugh -- -- 20,000 20,000
</TABLE>
- -------------------
(1) Options covering 13,000 of these shares were unexercisable at fiscal
year-end.
(2) The value of each unexercised in-the-money stock option is equal to the
difference between $14 (the closing price of the Common Stock on December
31, 1996) and the exercise price of the stock option.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's subsidiaries have made, and expect to make in the future,
to the extent permitted by applicable federal and state banking laws, bank loans
in the ordinary course of business to directors and officers of the Company and
its subsidiaries, and their affiliates and associates, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. In the opinion of the Company,
such loans do not involve more than a normal risk of collectibility or present
other unfavorable features. In addition, the Company's banking subsidiaries have
engaged, and in the future may engage, in transactions with such persons and
their affiliates and associates as a depositary of funds, transfer agent,
registrar, fiduciary and provider of other similar services.
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<PAGE>
In June, 1995, the Company made a $1,000,000 investment in First
Guaranty Bank, Hammond, Louisiana ("First Guaranty"), a commercial bank in which
the Company's Chairman of the Board, Marshall T. Reynolds, beneficially owns
41.4% of that bank's outstanding common stock.
Mr. Reynolds also serves as a director of First Guaranty. The Company's
investment in First Guaranty was made through the purchase of 1,000 shares of
Series B Preferred Stock (the "Series B Stock"), which is non-voting, is not
convertible into common stock of First Guaranty, and has a non-cumulative
quarterly dividend preference (on a parity with Series A Preferred Stock) in a
per annum amount equal to two percent in excess of "prime rate" (as published in
THE WALL STREET JOURNAL during the quarter for which any dividend on common
stock of First Guaranty is paid). The Company has received a quarterly dividend
in the full amount of the dividend preference for each quarter during which the
Series B Stock has been held by it. The Company's purchase of the Series B Stock
was funded through a credit facility with an unaffiliated commercial bank
lender. Under that credit facility, the Company pays interest on the outstanding
principal balance at an annual rate equal to that lender's prime rate. In
January, 1996, the Company acquired an additional 1,000 shares of Series B Stock
(and in connection therewith received a $50,000 cash payment from First
Guaranty) in consideration of its exchanging 1,000 shares of Series A Preferred
Stock of First Guaranty purchased by the Company at an aggregate cost of
$1,000,000 in September, 1994. The purchase of the Series A Preferred Stock was
financed under the same credit facility described above that was used to
purchase the Series B Stock in 1995. The Company determined that it was in it
best interests to exchange its Series A Preferred Stock for an additional Series
B Stock because (i) it no longer viewed any conversion of the Series A Preferred
Stock for common stock of First Guaranty as a viable opportunity in view of the
Company's strategic growth plans, and it regarded as attractive the $50,000
payment offered by First Guaranty to encourage the Company to exchange the
Series A Preferred Stock, thereby eliminating the Company's ability to convert
such stock into common stock, and (ii) it determined that an increase in the
dividend preference to two percent in excess of prime rate (which preference the
Series B Stock has), as opposed to one percent in excess of prime rate (which
preference the Series A Preferred Stock has), provided a more favorable yield on
a tax equivalent basis in view of the Company's strategic growth plans and its
determination that any conversion of Series A Preferred Stock was not a likely
event in the foreseeable future. Mr. Reynolds was not Chairman of the Board or a
director of the Company at the times when the Company's Board of Directors
determined to purchase the Series B Stock or acquire additional Series B Stock
in exchange for its Series A Preferred Stock in First Guaranty.
During the years ended December 31, 1996, 1995 and 1994, the Company or
its subsidiaries have paid approximately $241,000, $65,000 and $53,000,
respectively, for commercial printing services and office supplies from Champion
Industries, Inc., Huntington, West Virginia, of which the Company's Chairman of
the board, Marshall T. Reynolds, is its President and Chief Executive Officer
and a principal shareholder. The Company or its subsidiaries have also paid to
Champion Industries, Inc. approximately $317,000, $223,000, and $185,000 in
1996, 1995 and 1994, respectively, to permit employees of the Company and its
subsidiaries to participate in that other corporation's medical benefit plan.
The Company believes that the above transactions are on terms substantially the
same, or at least as favorable to the Bank, as those that would be entered into
with a non-affiliate.
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<PAGE>
SUPERVISION AND REGULATION
Introduction
Bank holding companies and banks are extensively regulated under both
federal and state law. The following information describes certain aspects of
that regulation applicable to the Company and the Banks, and does not purport to
be complete. The discussion is qualified in its entirety by reference to all
particular statutory or regulatory provisions.
The Company is a legal entity separate and distinct from the Banks.
Accordingly, the right of the Company, and consequently the right of creditors
and shareholders of the Company, to participate in any distribution of the
assets or earnings of the Banks is necessarily subject to the prior claims of
creditors of the Banks, except to the extent that claims of the Company in its
capacity as creditor may be recognized. The principal source of the Company's
revenue and cash flow is dividends from the Banks. There are, however, legal
limitations on the extent to which a subsidiary bank can finance or otherwise
supply funds to its parent holding company.
The Company
General. As a registered holding company, the Company is regulated
under the BHCA and is subject to supervision and regular inspection by the
Federal Reserve. The BHCA requires, among other things, the prior approval of
the Federal Reserve in any case where the Company proposes to (i) acquire all or
substantially all of the assets of any bank, (ii) acquire direct or indirect
ownership or control of more than 5 percent of the voting shares of any bank, or
(iii) merge or consolidate with any other bank holding company.
Acquisitions/Permissible Business Activities. The BHCA currently
permits bank holding companies from any state to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
certain nationwide- and state-imposed concentration limits. Effective June 1,
1997, the Banks will have the ability, subject to certain restrictions,
including state opt-out provisions, to acquire by acquisition or merger branches
outside its home state. The establishment of new interstate branches also will
be possible in those states with laws that expressly permit it. Interstate
branches will be subject to certain laws of the states in which they are
located. Competition may increase further as banks branch across state lines and
enter new markets.
Under the BHCA, the Company is prohibited, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5 percent of
any class of voting shares of any nonbanking corporation. Further, the Company
may not engage in any business other than managing and controlling banks or
furnishing certain specified services to subsidiaries, and may not acquire
voting control of nonbanking corporations except those corporations engaged in
businesses or furnishing services that the Federal Reserve deems to be closely
related to banking.
Source of Strength Policy. Under Federal Reserve policy, a bank holding
company is expected to serve as a source of financial strength to each of its
subsidiary banks and to commit resources to support each such bank. Consistent
with its "source of strength" policy for subsidiary banks, the Federal Reserve
has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fund fully the
dividends, and the prospective rate of earnings
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<PAGE>
retention appears to be consistent with the corporation's capital needs, asset
quality and overall financial condition.
Bank Regulation
The Banks are state-chartered banks and, other than the Vanceburg Bank,
are not members of the Federal Reserve System. As such they are subject to the
primary federal supervision of the FDIC under the Federal Deposit Insurance Act
(the "FDIA"), as well as the supervision, regulation and examination of the
Kentucky Department of Financial Institutions (the "Department", and together
with the FDIC and the Federal Reserve, the "Regulatory Authorities"). The
Vanceburg Bank, as a member of the Federal Reserve System, is subject to the
primary federal supervision of the Federal Reserve. Prior approval of the
Regulatory Authorities is required for the Banks to establish or relocate a
branch office or to engage in any merger, consolidation or significant purchase
or sale of assets. In addition, the Banks are subject to numerous federal and
state laws and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The Regulatory Authorities regularly examine the operations of the
respective Banks and their condition, including but not limited to capital
adequacy, reserves, loans, investments and management practices. These
examinations are for the protection of the Banks' depositors and the BIF and not
the Banks' stockholder. In addition, the Banks are required to furnish quarterly
and annual reports to the Regulatory Authorities. The Regulatory Authorities'
enforcement authority includes the power to remove officers and directors and
the authority to issue orders to prevent a bank from engaging in unsafe or
unsound practices or violating laws or regulations governing its business.
The Regulatory Authorities have adopted regulations regarding the
capital adequacy of banks subject to its primary supervision, which require such
banks to maintain specified minimum ratios of capital to total assets and
capital to risk-weighted assets. See "--Regulatory Capital Requirements."
Bank Dividends. Under the FDIA, the Banks are prohibited from declaring
or paying dividends or making any other capital distribution if, after that
distribution, they would fail to meet their regulatory capital requirements. At
March 31, 1997, the Banks met their regulatory capital requirements. The FDIC
also has authority to prohibit the payment of dividends by a bank when it
determines such payment to be an unsafe and unsound banking practice. The FDIC
may prohibit bank holding companies of banks which are deemed to be
"significantly undercapitalized" under the FDIA or which fail to properly submit
and implement capital restoration plans required thereby from paying dividends
or making other capital distributions without the permission of the FDIC.
Restrictions Upon Intercompany Transactions. The Banks are subject to
restrictions imposed by federal law on extensions of credit to, and certain
other transactions with, the Company and other affiliates. Such restrictions
prevent the Company and such other affiliates from borrowing from the Banks
unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Such secured loans and other transactions by each of the Banks
are generally limited in amount as to the Company and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Company and all other
affiliates to an aggregate of 20% of the Banks' capital and surplus. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Banks for its cash needs, including funds for acquisitions and for
payment of dividends, interest and operating expenses.
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<PAGE>
Deposit Insurance. Since the Banks are FDIC member institutions, their
respective deposits are currently insured to a maximum of $100,000 per depositor
through the BIF, administered by the FDIC, and the Banks are required to pay
semi-annual deposit insurance premium assessments to the FDIC.
The amount of FDIC assessments paid by individual insured depository
institutions is based on their relative risk as measured by regulatory capital
ratios and certain other factors.
Enforcement Powers. The bank regulatory agencies have broad discretion
to issue cease and desist orders if they determine that the Company or its Banks
are engaging in "unsafe or unsound banking practices." In addition, the federal
bank regulatory authorities are empowered to impose substantial civil money
penalties for violations of certain federal banking statutes and regulations,
violation of a fiduciary duty, or violation of a final or temporary cease and
desist order, among other things. Financial institutions, and directors,
officers, employees, controlling shareholders, agents, consultants, attorneys,
accountants, appraisers and others associated with a depository institution are
subject to the imposition of fines, penalties, and other enforcement actions
based upon the conduct of their relationships with the institution.
Under the FDIA, the FDIC may be appointed as a conservator or receiver
for a depository institution based upon a number of events and circumstances,
including: (i) consent by the board of directors of the institution; (ii)
cessation of the institution's status as an insured depository institution;
(iii) the institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized when required to do so, fails to submit an
acceptable capital plan or materially fails to implement an acceptable capital
plan; (iv) the institution is critically undercapitalized or otherwise has
substantially insufficient capital; (v) appointment of a conservator or receiver
by a state banking authority, such as the Department; (vii) the institution's
assets are less than its obligations to its creditors and others; (viii)
substantial dissipation in the institution's assets or earnings due to violation
of any statute or regulation or unsafe or unsound practice; (ix) a willful
violation of a cease and desist order that has become final; (x) an inability of
the institution to pay its obligations or meet its depositors' demands in the
normal course of business; or (xi) any concealment of the institution's books,
records or assets or refusal to submit to examination.
Under the FDIA, the FDIC as a conservator or receiver of a depository
institution has express authority to repudiate contracts with such institution
which it determines to be burdensome or if such repudiation will promote the
orderly administration of the institution's affairs. Certain "qualified
financial contracts", defined to include securities contracts, commodity
contracts, forward contracts, repurchase agreements, and swap agreements,
generally are excluded from the repudiation powers of the FDIC. The FDIC is also
given authority to enforce contracts made by a depository institution
notwithstanding any contractual provision providing for termination, default,
acceleration, or exercise of rights upon, or solely by reason of, insolvency or
the appointment of a conservator or receiver. Insured depository institutions
also are prohibited from entering into contracts for goods, products or services
which would adversely affect the safety and soundness of the institutions.
Regulatory Capital Requirements. The Federal Reserve and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies and state-chartered banks that are not members
of the Federal Reserve System ("state non-member banks"), respectively. The
regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified
minimum ratio of capital to total assets, and risk-based capital rules, which
require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
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The regulations of the Federal Reserve and the FDIC require bank
holding companies and state non-member banks, respectively, to maintain a
minimum leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve and the FDIC
require bank holding companies and state non-member banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components: a Tier 1 or core capital requirement and a Tier 2 or supplementary
capital requirement. Tier 1 capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less most intangible assets, primarily goodwill. Tier 2 capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify for Tier 1 and
long-term preferred stock with an original maturity of at least 20 years from
issuance; hybrid capital instruments, including perpetual debt and mandatory
convertible securities; and subordinated debt and intermediate-term preferred
stock.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios, (i) supplementary capital is limited to no more than 100% of core
capital, and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan losses which may be included as capital to 1.25% of total risk-weighted
assets.
FDICIA also required the federal banking regulators to classify insured
depository institutions by capital levels and to take various prompt corrective
actions to resolve the problems of any institution that fails to satisfy the
capital standards. The FDIC has issued final regulations establishing these
capital levels and otherwise implementing FDICIA's prompt corrective action
provisions. Under FDICIA and these regulations, all institutions, regardless of
their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to fail to satisfy
the minimum levels for any of its capital requirements.
Under the FDIC's prompt corrective action regulation, a
"well-capitalized" bank is one that is not subject to any regulatory order or
directive to meet any specific capital level and that has or exceeds the
following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a leverage ratio of 5%. An "adequately
capitalized" bank is one that does not qualify as "well-capitalized" but meets
or exceeds the following capital requirements: a total risk- based capital ratio
of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either
(i)
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4% or (ii) 3% if the bank has the highest composite examination rating. A bank
not meeting these criteria will be treated as "undercapitalized," "significantly
undercapitalized," or "critically undercapitalized" depending on the extent to
which to which the bank's capital levels are below these standards. A bank that
falls within any of the three "undercapitalized" categories established by the
prompt corrective action regulation will be: (i) subject to increased monitoring
by the appropriate federal banking regulator; (ii) required to submit an
acceptable capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the institution into capital compliance as of the date it
failed to comply with its capital restoration plan. A significantly
undercapitalized institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, will be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution.
Effect of Government Monetary Policies; Possible Further Legislation
The earnings of the Company, through the Banks, are and will be
affected by domestic and international economic conditions and the monetary and
fiscal policies of the United States and foreign governments and their agencies.
The Federal Reserve's monetary policies have had, and will probably
continue to have, an important impact on the operating results of commercial
banks through its power to implement national monetary policy in order, among
other things, to curb inflation or combat a recession. The Federal Reserve has a
major effect upon the levels of bank loans, investments and deposits through its
open market operations in United States Government securities and through its
regulation of, among other things, the discount rate on borrowings of banks and
the imposition of non-earning reserve requirements against member bank deposits.
It is not possible to predict the nature and impact of future changes in
monetary and fiscal policies.
From time to time, proposals are made in the United States Congress,
the Kentucky Legislature, and various bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. It is impossible to predict whether any of these proposals will
be adopted and any impact of such adoption on the business of the Company and
the Banks.
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Preferred
Securities and the Common Securities. The Preferred Securities will represent
preferred undivided beneficial interests in the assets of the Issuer Trust and
the holders thereof will be entitled to a preference in certain circumstances
with respect to Distributions and amounts payable on redemption or liquidation
over the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Preferred Securities and
the Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the
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<PAGE>
definitions therein of certain terms. Wherever particular defined terms of the
Trust Agreement are referred to herein, such defined terms are incorporated
herein by reference. A copy of the form of the Trust Agreement is available upon
request from the Issuer Trustees.
General
The Preferred Securities will be limited to $25,000,000 aggregate
Liquidation Amount outstanding (which amount may be increased by up to
$3,750,000 aggregate liquidation amount of referred Securities for exercise of
the Underwriters' over-allotment option). See "Underwriting." The Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." The Junior Subordinated Debentures will be registered in the name
of the Issuer Trust and held by the Property Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
will be a guarantee on a subordinated basis with respect to the Preferred
Securities but will not guarantee payment of Distributions or amounts payable on
redemption or liquidation of such Preferred Securities when the Issuer Trust
does not have funds on hand available to make such payments. See "Description of
Guarantee."
Distributions
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and Distributions on each Preferred
Security will be payable at the annual rate of 9.75% of the stated Liquidation
Amount of $25, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each a "Distribution Date"), to the holders of the
Preferred Securities at the close of business on 15th day of March, June,
September and December (whether or not a Business Day (as defined below)) next
preceding the relevant Distribution Date. Distributions on the Preferred
Securities will be cumulative. Distributions will accumulate from June 6, 1997.
The first Distribution Date for the Preferred Securities will be September 30,
1997. The amount of Distributions payable for any period less than a full
Distribution period will be computed on the basis of a 360-day year of twelve
30-day months and the actual days elapsed in a partial month in such period.
Distributions payable for each full Distribution period will be computed by
dividing the rate per annum by four. If any date on which Distributions are
payable on the Preferred Securities is not a Business Day, then payment of the
Distributions payable on such date will be made on the next succeeding day that
is a Business Day (without any additional Distributions or other payment in
respect of any such delay), with the same force and effect as if made on the
date such payment was originally payable.
So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right under the Junior Subordinated Indenture to
defer the payment of interest on the Junior Subordinated Debentures at any time
or from time to time for a period not exceeding 20 consecutive quarterly periods
with respect to each Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer Trust will be deferred during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate of 9.75% per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distributions" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may not
(i) declare or pay any
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dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholder's rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks pari passu with or junior to
such stock). Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period. No interest shall be due and payable during an Extension
Period, except at the end thereof. The Company must give the Issuer Trustees
notice of its election of such Extension Period at least one Business Day prior
to the earlier of (i) the date the Distributions on the Preferred Securities
would have been payable but for the election to begin such Extension Period and
(ii) the date the Property Trustee is required to give notice to holders of the
Preferred Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee will give notice of the Company's election to begin a
new Extension Period to the holders of the Preferred Securities. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period. See "Description of Junior Subordinated
Debentures -- Option To Extend Interest Payment Period" and "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders
of the Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Preferred Securities. The payment
of Distributions and other amounts payable on the Preferred Securities (if and
to the extent the Issuer Trust has funds legally available for and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Description of Guarantee."
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Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date") and the related amount of the premium, if any, paid by the Company upon
the concurrent redemption of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Redemption." If less than all
the Junior Subordinated Debentures are to be repaid or redeemed on a Redemption
Date, then the proceeds from such repayment or redemption shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The amount of premium, if any, paid by the Company upon the redemption of all or
any part of the Junior Subordinated Debentures to be repaid or redeemed on a
Redemption Date shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures
(i) on or after June 30, 2002, in whole at any time or in part from time to
time, or (ii) in whole, but not in part, at any time within 90 days following
the occurrence and during the continuation of a Tax Event, Investment Company
Event or Capital Treatment Event (each as defined below), in each case subject
to possible regulatory approval. See "-- Liquidation Distribution Upon
Dissolution." A redemption of the Junior Subordinated Debentures would cause a
mandatory redemption of a Like Amount of the Preferred Securities and Common
Securities at the Redemption Price.
"25% Capital Limitation" means the limitation imposed by the Federal
Reserve that the proceeds of certain qualifying securities like the Trust
Securities will qualify as Tier 1 capital of the issuer up to an amount not to
exceed 25% of the Issuer's Tier 1 capital, or any subsequent limitation adopted
by the Federal Reserve.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a
day on which banking institutions in the Commonwealth of Kentucky or the City of
New York are authorized or required by law or executive order to remain closed,
or (c) a day on which the Property Trustee's Corporate Trust Office or the
Corporate Trust Office of the Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount (as defined below)
equal to that portion of the principal amount of Junior Subordinated Debentures
to be contemporaneously redeemed in accordance with the Junior Subordinated
Indenture, allocated to the Common Securities and to the Preferred Securities
based upon the relative Liquidation Amounts of such classes and (ii) with
respect to a distribution of Junior Subordinated Debentures to holders of Trust
Securities in connection with a dissolution or liquidation of the Issuer Trust,
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Trust Securities of the holder to whom such Junior
Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including
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any announced prospective change) in, the laws (or any regulations thereunder)
of the United States or any political subdivision or taxing authority thereof or
therein, or as a result of any official or administrative pronouncement or
action or judicial decision interpreting or applying such laws or regulations,
which amendment or change is effective or which pronouncement or decision is
announced on or after the date of issuance of the Preferred Securities, there is
more than an insubstantial risk that (i) the Issuer Trust is, or will be within
90 days of the delivery of such opinion, subject to United States federal income
tax with respect to income received or accrued on the Junior Subordinated
Debentures, (ii) interest payable by the Company on the Junior Subordinated
Debentures is not, or within 90 days of the delivery of such opinion, will not
be, deductible by the Company, in whole or in part, for United States federal
income tax purposes or (iii) the Issuer Trust is, or will be within 90 days of
the delivery of such opinion, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"Investment Company Event" means the receipt by the Issuer Trust of an
opinion of counsel to the Company experienced in such matters to the effect
that, as a result of the occurrence of a change in law or regulation or a
written change (including any announced prospective change) in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, there is more than an insubstantial risk that
the Issuer Trust is or will be considered an "investment company" that is
required to be registered under the Investment Company Act, which change or
prospective change becomes effective or would become effective, as the case may
be, on or after the date of the issuance of the Preferred Securities.
"Capital Treatment Event" means the reasonable determination by the
Company that, as a result of the occurrence of any amendment to, or change
(including any announced prospective change) in, the laws (or any rules or
regulations thereunder) of the United States or any political subdivision
thereof or therein, or as a result of any official or administrative
pronouncement or action or judicial decision interpreting or applying such laws
or regulations, which amendment or change is effective or such pronouncement,
action or decision is announced on or after the date of issuance of the
Preferred Securities, there is more than an insubstantial risk that the Company
will not be entitled to treat an amount equal to the Liquidation Amount of the
Preferred Securities as "Tier 1 Capital" (or the then equivalent thereof),
except as otherwise restricted under the 25% Capital Limitation, for purposes of
the risk-based capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to the Company.
If a Tax Event described in clause (i) or (iii) of the definition of
Tax Event above has occurred and is continuing and the Issuer Trust is the
holder of all the Junior Subordinated Debentures, the Company will pay
Additional Sums (as defined below), if any, on the Junior Subordinated
Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Issuer Trust
on the outstanding Preferred Securities and Common Securities of the Issuer
Trust will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
Redemption Procedures
Preferred Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be
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payable on each Redemption Date only to the extent that the Issuer Trust has
funds on hand available for the payment of such Redemption Price. See also "--
Subordination of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are available, in the case of Preferred Securities
held in book-entry form, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of the Preferred Securities. With respect to Preferred Securities not
held in book-entry form, the Property Trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the applicable Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
shall be payable to the holders of the Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. If
any date fixed for redemption of Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer Trust or by the Company pursuant to
the Guarantee as described under "Description of Guarantee," Distributions on
such Preferred Securities will continue to accumulate at the then applicable
rate, from the Redemption Date originally established by the Issuer Trust for
such Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to
be redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a Global Preferred Security (as defined
below), in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Preferred Securities selected for redemption and, in the case of
any Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of Preferred Securities which has been or is to be redeemed.
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Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution in respect of, the Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of such Preferred Securities and Common Securities. However, if on any
Distribution Date or Redemption Date a Debenture Event of Default has occurred
and is continuing as a result of any failure by the Company to pay any amounts
in respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Redemption Price of, or Liquidation Distribution in respect
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all the outstanding Preferred Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the Redemption
Price the full amount of such Redemption Price on all the outstanding Preferred
Securities then called for redemption, shall have been made or provided for, and
all funds available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions on, or Redemption Price of, the
Preferred Securities then due and payable.
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "-- Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Preferred Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $25 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
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The Federal Reserve's risk-based capital guidelines currently provide
that redemptions of permanent equity or other capital instruments before stated
maturity could have a significant impact on a bank holding company's overall
capital structure and that any organization considering such a redemption should
consult with the Federal Reserve before redeeming any equity or capital
instrument prior to maturity if such redemption could have a material effect on
the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a like
amount of a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption).
In the event the Company, while a holder of Common Securities,
dissolves the Issuer Trust prior to the stated maturity of the Preferred
Securities and the dissolution of the Issuer Trust is deemed to constitute the
redemption of capital instruments by the Federal Reserve under its risk-based
capital guidelines or policies, the dissolution of the Issuer Trust by the
Company may be subject to the prior approval of the Federal Reserve. Moreover,
any changes in applicable law or changes in the Federal Reserve's risk-based
capital guidelines or policies could impose a requirement on the Company that it
obtain the prior approval of the Federal Reserve to dissolve the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have given written direction to
the Property Trustee to dissolve the Issuer Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion of the
holders of Common Securities), (iii) the repayment of all the Preferred
Securities in connection with the redemption of all the Trust Securities as
described under "-- Redemption" and (iv) the entry of an order for the
dissolution of the Issuer Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i),
(ii) or (iv) above, the Issuer Trust will be liquidated by the Property Trustee
as expeditiously as the Property Trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the Issuer Trust
as provided by applicable law, to the holders of such Trust Securities a Like
Amount of the Junior Subordinated Debentures, unless such distribution is not
practical, in which event such holders will be entitled to receive out of the
assets of the Issuer Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Issuer Trust as provided by
applicable law, an amount equal to, in the case of holders of Preferred
Securities, the aggregate of the Liquidation Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Issuer Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Issuer Trust on its Preferred Securities shall be paid on a pro rata basis. The
holders of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that if a Debenture Event of Default has occurred and is continuing as a
result of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities shall have a priority
over the Common Securities. See "-- Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to
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Preferred Securities held by DTC or its nominee and (iii) any certificates
representing the Preferred Securities not held by DTC or its nominee will be
deemed to represent the Junior Subordinated Debentures having a principal amount
equal to the stated Liquidation Amount of the Preferred Securities and bearing
accrued and unpaid interest in an amount equal to the accumulated and unpaid
Distributions on the Preferred Securities until such certificates are presented
to the security registrar for the Trust Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior
to maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Issuer Trust, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution
when it becomes due and payable, and continuation of such default for a period
of 30 days; or
(iii) default by the Issuer Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust Agreement (other
than a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clause (ii) or (iii) above), and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Issuer Trustees and the Company by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Preferred Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has not been
appointed within 90 days thereof.
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Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a
result of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior
Subordinated Debentures -- Debenture Events of Default."
Removal of Issuer Trustees; Appointment of Successors
The holders of at least a majority in aggregate Liquidation Amount of
the outstanding Preferred Securities may remove an Issuer Trustee for cause or,
if a Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25% in Liquidation Amount of Preferred Securities. If an Issuer Trustee resigns,
such Trustee will appoint its successor. If an Issuer Trustee fails to appoint a
successor, the holders of at least 25% in Liquidation Amount of the outstanding
Preferred Securities may appoint a successor. If a successor has not been
appointed by the holders, any holder of Preferred Securities or Common
Securities or the other Issuer Trustee may petition a court in the State of
Delaware to appoint a successor. Any Delaware Trustee must meet the applicable
requirements of Delaware law. Any Property Trustee must be a national or
state-chartered bank, and at the time of appointment have securities rated in
one of the three highest rating categories by a nationally recognized
statistical rating organization and have capital and surplus of at least
$50,000,000. No resignation or removal of an Issuer Trustee and no appointment
of a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any entity into which the Property Trustee or the Delaware Trustee may
be merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Issuer Trust
The Issuer Trust may not merge with or into, consolidate, amalgamate,
or be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the
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Preferred Securities or (b) substitutes for the Preferred Securities other
securities having substantially the same terms as the Preferred Securities (the
"Successor Securities") so long as the Successor Securities have the same
priority as the Preferred Securities with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) a trustee of such successor
entity, possessing the same powers and duties as the Property Trustee, is
appointed to hold the Junior Subordinated Debentures, (iii) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, if then
rated, (iv) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not adversely affect the rights, preferences and
privileges of the holders of the Preferred Securities (including any Successor
Securities) in any material respect, (v) such successor entity has a purpose
substantially identical to that of the Issuer Trust, (vi) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Issuer Trust has received an opinion from independent counsel experienced in
such matters to the effect that (a) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, neither
the Issuer Trust nor such successor entity will be required to register as an
investment company under the Investment Company Act, and (vii) the Company or
any permitted successor or assignee owns all the common securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, the Issuer Trust may not, except with the consent
of holders of 100% in aggregate Liquidation Amount of the Preferred Securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to, any
other entity or permit any other entity to consolidate, amalgamate, merge with
or into, or replace it if such consolidation, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Issuer Trust or the successor
entity to be taxable as a corporation for United States federal income tax
purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided above and under "-- Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee -- Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of
a majority of the Common Securities and the Property Trustee, without the
consent of the holders of the Preferred Securities, (i) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, provided that
any such amendment does not adversely affect in any material respect the
interests of any holder of Trust Securities, or (ii) to modify, eliminate or add
to any provisions of the Trust Agreement to such extent as may be necessary to
ensure that the Issuer Trust will not be taxable as a corporation for United
States federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any amendments
of the Trust Agreement will become effective when notice of such amendment is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the holders of a majority of the Common Securities and the Property Trustee with
(i) the consent of holders representing not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred
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Securities and (ii) receipt by the Issuer Trustees of an opinion of counsel to
the effect that such amendment or the exercise of any power granted to the
Issuer Trustees in accordance with such amendment will not affect the Issuer
Trust's not being taxable as a corporation for United States federal income tax
purposes or the Issuer Trust's exemption from status as an "investment company"
under the Investment Company Act, except that, without the consent of each
holder of Trust Securities affected thereby, the Trust Agreement may not be
amended to (i) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date or (ii)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer
Trust, the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior Subordinated Debentures, (ii) waive any past default that is waivable
under Section 5.13 of the Junior Subordinated Indenture, (iii) exercise any
right to rescind or annul a declaration that the Junior Subordinated Debentures
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of at least a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities, except that, if a
consent under the Junior Subordinated Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
will be given by the Property Trustee without the prior consent of each holder
of the Preferred Securities. The Property Trustee may not revoke any action
previously authorized or approved by a vote of the holders of the Preferred
Securities except by subsequent vote of the holders of the Preferred Securities.
The Property Trustee will notify each holder of Preferred Securities of any
notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the Preferred
Securities, before taking any of the foregoing actions, the Property Trustee
will obtain an opinion of counsel experienced in such matters to the effect that
the Issuer Trust will not be taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given
at a meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of Preferred Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each registered holder of Preferred Securities in the manner set
forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be
required to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Issuer Trustees or any
affiliate of the Company or any Issuer Trustees, will, for purposes of such vote
or consent, be treated as if they were not outstanding.
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Issuer Trust
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(including costs and expenses relating to the organization of the Issuer Trust,
the fees and expenses of the Issuer Trustees and the costs and expenses relating
to the operation of the Issuer Trust) and to pay any and all taxes and all costs
and expenses with respect thereto (other than United States withholding taxes)
to which the Issuer Trust might become subject. The foregoing obligations of the
Company under the Indenture are for the benefit of, and shall be enforceable by,
any person to whom any such debts, obligations, costs, expenses and taxes are
owed (a "Creditor") whether or not such Creditor has received notice thereof.
Any such Creditor may enforce such obligations of the Company directly against
the Company, and the Company has irrevocably waived any right or remedy to
require that any such Creditor take any action against the Issuer Trust or any
other person before proceeding against the Company. The Company has also agreed
in the Indenture to execute such additional agreements as may be necessary or
desirable to give full effect to the foregoing.
Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more
fully registered global securities which will be deposited with, or on behalf
of, DTC and registered in the name of DTC's nominee. Unless and until it is
exchangeable in whole or in part for the Preferred Securities in definitive
form, a global security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of such Depository or a nominee of such
successor.
Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Company expects that,
upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries on
the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Junior
Subordinated Indenture. Accordingly, each person owning a beneficial interest in
such a global security must rely on the procedures of DTC and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest, to exercise any rights of a holder of Preferred
Securities under the Junior Subordinated Indenture. The Company understands
that, under DTC's existing practices, in the event that the Company requests any
action of holders, or an owner of a beneficial interest in such a global
security desires to take any action which a holder is entitled to take under the
Junior Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the
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Company understands that it is DTC's existing practice to determine by lot the
amount of the interest of each Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Issuer Trustees, the Administrators, any Paying Agent
or any other agent of the Company or the Issuer Trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Issuer
Trustees, the Paying Agent or any other agent of the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository
with respect to the Preferred Securities at any time by giving reasonable notice
to the Company or the Issuer Trustees. If DTC notifies the Company that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the
Underwriters in immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day
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Funds Settlement System, and secondary market trading activity in the Preferred
Securities will therefore be required by DTC to settle in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on trading activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Paying Agent will be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee and the Administrators. If
the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrators) to act as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected
without charge by or on behalf of the Issuer Trust, but upon payment of any tax
or other governmental charges that may be imposed in connection with any
transfer or exchange. The Issuer Trust will not be required to register or cause
to be registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreement and, after such Event of Default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby.
For information concerning the relationships between Bankers Trust
Company, the Property Trustee, and the Company, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
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Miscellaneous
The Administrators and the Property Trustee are authorized and directed
to conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar
rights.
The Issuer Trust may not borrow money, issue debt or mortgage or pledge
any of its assets.
Governing Law
The Trust Agreement will be governed by and construed in accordance
with the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Junior Subordinated Indenture, including the definitions
therein of certain terms. Whenever particular defined terms of the Junior
Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
General
Concurrently with the issuance of the Preferred Securities, the Issuer
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures
issued by the Company. The Junior Subordinated Debentures will bear interest,
accruing from June 6, 1997, at the annual rate of 9.75% of the principal amount
thereof, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year (each, an "Interest Payment Date"), commencing
September 30, 1997, to the person in whose name each Junior Subordinated
Debenture is registered at the close of business on the 15th day of March, June,
September or December (whether or not a Business Day) next preceding such
Interest Payment Date. It is anticipated that, until the liquidation, if any, of
the Issuer Trust, each Junior Subordinated Debenture will be registered in the
name of the Issuer Trust and held by the Property Trustee in trust for the
benefit of the holders of the Trust Securities. The amount of interest payable
for any period less than a full interest period will be computed on the basis of
a 360-day year of twelve 30-day months and the actual days elapsed in a partial
month in such period. The amount of interest payable for any full interest
period will be computed by dividing the rate per annum by four.
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If any date on which interest is payable on the Junior Subordinated Debentures
is not a Business Day, then payment of the interest payable on such date will be
made on the next succeeding day that is a Business Day (without any interest or
other payment in respect of any such delay), with the same force and effect as
if made on the date such payment was originally payable. Accrued interest that
is not paid on the applicable Interest Payment Date will bear additional
interest on the amount thereof (to the extent permitted by law) at the rate per
annum of 9.75%, compounded quarterly and computed on the basis of a 360-day year
of twelve 30-day months and the actual days elapsed in a partial month in such
period. The amount of additional interest payable for any full interest period
will be computed by dividing the rate per annum by four. The term "interest" as
used herein includes quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional Sums
(as defined below), as applicable.
The Junior Subordinated Debentures will mature on June 30, 2027,
subject to the Maturity Adjustment (such date, as it may be shortened by the
Maturity Adjustment is referred to herein as the Stated Maturity). The Maturity
Adjustment represents the right of the Company to shorten the maturity date once
at any time to any date not earlier than June 30, 2002, subject to the Company
having received prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. In the event
the Company elects to shorten the Stated Maturity of the Junior Subordinated
Debentures, it will give notice to the registered holders of the Junior
Subordinated Debentures, the Debenture Trustee and the Issuer Trust of such
shortening no less than 90 days prior to the effectiveness thereof. The Property
Trustee must give notice to the holders of the Trust Securities of the
shortening of the Stated Maturity at least 30 but not more than 60 days before
such date.
The Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Indebtedness of the
Company. The Junior Subordinated Debentures will not be subject to a sinking
fund. The Junior Subordinated Indenture does not limit the incurrence or
issuance of other secured or unsecured debt by the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination."
Option to Extend Interest Payment Period
So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right at any time during the term of the Junior
Subordinated Debentures to defer the payment of interest at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. During any
such Extension Period the Company shall have the right to make partial payments
of interest on any interest payment date. At the end of such Extension Period,
the Company must pay all interest then accrued and unpaid (together with
interest thereon at the annual rate of 9.75%, compounded quarterly and computed
on the basis of a 360-day year of twelve 30-day months and the actual days
elapsed in a partial month in such period, to the extent permitted by applicable
law). The amount of additional interest payable for any full interest period
will be computed by dividing the rate per annum by four. During an Extension
Period, interest will continue to accrue and holders of Junior Subordinated
Debentures (or holders of Preferred Securities while outstanding) will be
required to accrue interest income for United States federal income tax
purposes. See "Certain Federal Income Tax Consequences -- Interest Income and
Original Issue Discount."
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During any such Extension Period, the Company may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period, (b) as a
result of an exchange or conversion of any class or series of the Company's
capital stock (or any capital stock of a subsidiary of the Company) for any
class or series of the Company's capital stock or of any class or series of the
Company's indebtedness for any class or series of the Company's capital stock,
(c) the purchase of fractional interests in shares of the Company's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged, (d) any declaration of a dividend in
connection with any stockholder's rights plan, or the issuance of rights, stock
or other property under any stockholders rights plan, or the redemption or
repurchase of rights pursuant thereto, or (e) any dividend in the form of stock,
warrants, options or other rights where the dividend stock or the stock issuable
upon exercise of such warrants, options or other rights is the same stock as
that on which the dividend is being paid or ranks pari passu with or junior to
such stock). Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest, provided that no Extension Period may
exceed 20 consecutive quarterly periods or extend beyond the Stated Maturity of
the Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all amounts then due, the Company may elect to begin a
new Extension Period subject to the above conditions. No interest shall be due
and payable during an Extension Period, except at the end thereof. The Company
must give the Issuer Trustees notice of its election of such Extension Period at
least one Business Day prior to the earlier of (i) the date the Distributions on
the Preferred Securities would have been payable but for the election to begin
such Extension Period and (ii) the date the Property Trustee is required to give
notice to holders of the Preferred Securities of the record date or the date
such Distributions are payable, but in any event not less than one Business Day
prior to such record date. The Property Trustee will give notice of the
Company's election to begin a new Extension Period to the holders of the
Preferred Securities. There is no limitation on the number of times that the
Company may elect to begin an Extension Period.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company (i) on or after June 30, 2002, in whole at any time or
in part from time to time, or (ii) in whole, but not in part, at any time within
90 days following the occurrence and during the continuation of a Tax Event,
Investment Company Event or Capital Treatment Event (each as defined under
"Description of Preferred Securities -- Redemption"), in each case at the
redemption price described below. The proceeds of any such redemption will be
used by the Issuer Trust to redeem the Preferred Securities.
The Federal Reserve's risk-based capital guidelines, which are subject
to change, currently provide that redemptions of permanent equity or other
capital instruments before stated maturity could have a significant impact on a
bank holding company's overall capital structure and that any organization
considering such a redemption should consult with the Federal Reserve before
redeeming any equity or capital instrument prior to maturity if such redemption
could have a material effect on
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the level or composition of the organization's capital base (unless the equity
or capital instrument were redeemed with the proceeds of, or replaced by, a like
amount of a similar or higher quality capital instrument and the Federal Reserve
considers the organization's capital position to be fully adequate after the
redemption).
The redemption of the Junior Subordinated Debentures by the Company
prior to their Stated Maturity would constitute the redemption of capital
instruments under the Federal Reserve's current risk-based capital guidelines
and may be subject to the prior approval of the Federal Reserve. The redemption
of the Junior Subordinated Debentures also could be subject to the additional
prior approval of the Federal Reserve under its current risk-based capital
guidelines.
The redemption price for Junior Subordinated Debentures is the
outstanding principal amount of the Junior Subordinated Debentures plus accrued
interest (including any Additional Interest or any Additional Sums) thereon to
but excluding the date fixed for redemption.
Additional Sums
The Company has covenanted in the Junior Subordinated Indenture that,
if and for so long as (i) the Issuer Trust is the holder of all Junior
Subordinated Debentures and (ii) the Issuer Trust is required to pay any
additional taxes, duties or other governmental charges as a result of a Tax
Event, the Company will pay as additional sums on the Junior Subordinated
Debentures such amounts as may be required so that the Distributions payable by
the Issuer Trust will not be reduced as a result of any such additional taxes,
duties or other governmental charges. See "Description of Preferred Securities
- -- Redemption."
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Issuer Trust. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description of
Preferred Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in New York, New
York or at the offices of any Paying Agent or transfer agent appointed by the
Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto. However,
a holder of $1 million or more in aggregate principal amount of Junior
Subordinated Debentures may receive payments of interest
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(other than interest payable at the Stated Maturity) by wire transfer of
immediately available funds upon written request to the Debenture Trustee not
later than 15 calendar days prior to the date on which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations, and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as
provided above, and may be presented for registration of transfer (with the form
of transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
Restrictions on Certain Payments; Certain Covenants of the Company
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the applicable Extension Period or other event
referred to below, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the
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issuance of rights, stock or other property under any stockholder's rights plan,
or the redemption or repurchase of rights pursuant thereto, or (e) any dividend
in the form of stock, warrants, options or other rights where the dividend stock
or the stock issuable upon exercise of such warrants, options or other rights is
the same stock as that on which the dividend is being paid or ranks pari passu
with or junior to such stock), if at such time (i) there has occurred any event
(a) of which the Company has actual knowledge that with the giving of notice or
the lapse of time, or both, would constitute a Debenture Event of Default and
(b) that the Company has not taken reasonable steps to cure, (ii) if the Junior
Subordinated Debentures are held by the Issuer Trust, the Company is in default
with respect to its payment of any obligations under the Guarantee or (iii) the
Company has given notice of its election of an Extension Period as provided in
the Junior Subordinated Indenture and has not rescinded such notice, or such
Extension Period, or any extension thereof, is continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
Modification of Junior Subordinated Indenture
From time to time, the Company and the Debenture Trustee may, without
the consent of any of the holders of the outstanding Junior Subordinated
Debentures, amend, waive or supplement the provisions of the Junior Subordinated
Indenture to: (1) evidence succession of another corporation or association to
the Company and the assumption by such person of the obligations of the Company
under the Junior Subordinated Debentures, (2) add further covenants,
restrictions or conditions for the protection of holders of the Junior
Subordinated Debentures, (3) cure ambiguities or correct the Junior Subordinated
Debentures in the case of defects or inconsistencies in the provisions thereof,
so long as any such cure or correction does not adversely affect the interest of
the holders of the Junior Subordinated Debentures in any material respect, (4)
change the terms of the Junior Subordinated Debentures to facilitate the
issuance of the Junior Subordinated Debentures in certificated or other
definitive form, (5) evidence or provide for the appointment of a successor
Debenture Trustee, or (6) qualify, or maintain the qualification of, the Junior
Subordinated Indentures under the Trust Indenture Act. The Junior Subordinated
Indenture contains provisions permitting the Company and the Debenture Trustee,
with the consent of the holders of not less than a majority in principal amount
of the Junior Subordinated Debentures, to modify the Junior Subordinated
Indenture in a manner affecting the rights of the holders of the Junior
Subordinated Debentures, except that no such modification may, without the
consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the Junior Subordinated Debentures,
or reduce the principal amount thereof, the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the currency in which, any such amount is payable or impair the right
to institute suit for the enforcement of any Junior Subordinated Debenture or
(ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Junior Subordinated Indenture. Furthermore, so long as any
of the Preferred Securities remain outstanding, no such modification may be made
that adversely affects the holders of such Preferred Securities in any
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material respect, and no termination of the Junior Subordinated Indenture may
occur, and no waiver of any Debenture Event of Default or compliance with any
covenant under the Junior Subordinated Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities unless and until the principal of
(and premium, if any, on) the Junior Subordinated Debentures and all accrued and
unpaid interest thereon have been paid in full and certain other conditions are
satisfied.
Debenture Events of Default
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated
Debentures when due and continuance of such default for a
period of 30 days (subject to the deferral of any due date in
the case of an Extension Period); or
(ii) failure to pay any principal of or premium, if any,
on the Junior Subordinated Debentures when due whether at
the Stated Maturity; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture
for 90 days after written notice to the Company from the
Debenture Trustee or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) the Company consents to the appointment of a receiver or other
similar official in any liquidation, insolvency or similar
proceeding with respect to the Company or all or substantially
all its property.
For purposes of the Trust Agreement and this Prospectus, each such
Event of Default under the Junior Subordinated Debenture is referred to as a
"Debenture Event of Default." As described in "Description of Preferred
Securities -- Events of Default; Notice," the occurrence of a Debenture Event of
Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25% in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25% in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities shall have such right.
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The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee) or a default in respect of a covenant
or provision which under the Junior Subordinated Indenture cannot be modified or
amended without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby. See "-- Modification of Junior
Subordinated Indenture." The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
Direct Action against the Company for enforcement of payment to such holder of
an amount equal to the amount payable in respect of Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities held by such holder. The Company may not amend the
Junior Subordinated Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all the Preferred
Securities. The Company will have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
The holders of the Preferred Securities are not able to exercise
directly any remedies available to the holders of the Junior Subordinated
Debentures except under the circumstances described in the preceding paragraph.
See "Description of Preferred Securities -- Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would constitute a Debenture
Event of Default, has occurred and is continuing; and (iii) certain other
conditions as prescribed in the Junior Subordinated Indenture are satisfied.
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The provisions of the Junior Subordinated Indenture do not afford
holders of the Junior Subordinated Debentures protection in the event of a
highly leveraged or other transaction involving the Company that may adversely
affect holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Junior Subordinated Indenture provides that when, among other
things, all Junior Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable, (ii) will
become due and payable at the Stated Maturity within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal (and premium, if any)
and interest to the date of the deposit or to the Stated Maturity, as the case
may be, then the Junior Subordinated Indenture will cease to be of further
effect (except as to the Company's obligations to pay all other sums due
pursuant to the Junior Subordinated Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Junior Subordinated Indenture.
Subordination
The Junior Subordinated Debentures will be subordinate and junior in
right of payment, to the extent set forth in the Junior Subordinated Indenture,
to all Senior Indebtedness (as defined below) of the Company. If the Company
defaults in the payment of any principal, premium, if any, or interest, if any,
or any other amount payable on any Senior Indebtedness when the same becomes due
and payable, whether at maturity or at a date fixed for redemption or by
declaration of acceleration or otherwise, then, unless and until such default
has been cured or waived or has ceased to exist or all Senior Indebtedness has
been paid, no direct or indirect payment (in cash, property, securities, by
setoff or otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all
or a portion of the assets of the Company and whether or not contingent, (i)
every obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person and all dividends of another person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise; provided
that Senior Indebtedness shall not include (i) any obligations which, by their
terms, are expressly stated to rank pari passu in right of payment with, or to
not be superior in right of payment to, the Junior Subordinated Debentures, (ii)
any Senior Indebtedness of the Company which when incurred and without respect
to any election under Section 1111(b) of the United States Bankruptcy Code of
1978, as amended, was without recourse to the Company, (iii) any indebtedness of
the Company to any of
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its subsidiaries, (iv) indebtedness to any executive officer or director of the
Company, or (v) any indebtedness in respect of debt securities issued to any
trust, or a trustee of such trust, partnership or other entity affiliated with
the Company that is a financing entity of the Company in connection with the
issuance of such financing entity of securities that are similar to the
Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors or
(iv) any other marshalling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or other property, shall be made on account of the
Junior Subordinated Debentures. In such event, any payment or distribution on
account of the Junior Subordinated Debentures, whether in cash, securities or
other property, that would otherwise (but for the subordination provisions) be
payable or deliverable in respect of the Junior Subordinated Debentures will be
paid or delivered directly to the holders of Senior Indebtedness in accordance
with the priorities then existing among such holders until all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention of
any of the terms hereof and before all the Senior Indebtedness has been paid in
full, such payment or distribution or security will be received in trust for the
benefit of, and must be paid over or delivered and transferred to, the holders
of the Senior Indebtedness at the time outstanding in accordance with the
priorities then existing among such holders for application to the payment of
all Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness in full. By reason of such subordination, in the event of
the insolvency of the Company, holders of Senior Indebtedness may receive more,
ratably, and holders of the Junior Subordinated Debentures may receive less,
ratably, than the other creditors of the Company. Such subordination will not
prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
Information Concerning the Debenture Trustee
The Debenture Trustee, other than during the occurrence and continuance
of a default by the Company in performance of its obligations under the Junior
Subordinated Debenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture
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Trustee is not required to expend or risk its own funds or otherwise incur
personal financial liability in the performance of its duties if the Debenture
Trustee reasonably believes that repayment or adequate indemnity is not
reasonably assured to it.
Bankers Trust Company, the Debenture Trustee, may serve from time to
time as trustee under other indentures or trust agreements with the Company or
its subsidiaries relating to other issues of their securities. In addition, the
Company and certain of its affiliates may have other banking relationships with
Bankers Trust Company and its affiliates.
Governing Law
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company
concurrently with the issuance of Preferred Securities by the Issuer Trust for
the benefit of the holders from time to time of the Preferred Securities.
Bankers Trust Company will act as Guarantee Trustee under the Guarantee. This
summary of certain provisions of the Guarantee does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all the
provisions of the Guarantee, including the definitions therein of certain terms.
A copy of the form of Guarantee is available upon request from the Guarantee
Trustee. The Guarantee Trustee will hold the Guarantee for the benefit of the
holders of the Preferred Securities.
General
The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth in the Guarantee and described herein, the
Guarantee Payments (as defined below) to the holders of the Preferred
Securities, as and when due, regardless of any defense, right of set-off or
counterclaim that the Issuer Trust may have or assert other than the defense of
payment. The following payments with respect to the Preferred Securities, to the
extent not paid by or on behalf of the Issuer Trust (the "Guarantee Payments"),
will be subject to the Guarantee: (i) any accrued and unpaid Distributions
required to be paid on such Preferred Securities, to the extent that the Issuer
Trust has funds on hand available therefor at such time, (ii) the Redemption
Price with respect to any Preferred Securities called for redemption, to the
extent that the Issuer Trust has funds on hand available therefor at such time,
and (iii) upon a voluntary or involuntary dissolution, termination, winding up
or liquidation of the Issuer Trust (unless the Junior Subordinated Debentures
are distributed to holders of the Preferred Securities), the lesser of (a) the
aggregate of the Liquidation Amount and all accumulated and unpaid Distributions
to the date of payment, to the extent that the Issuer Trust has funds on hand
available therefor at such time, and (b) the amount of assets of the Issuer
Trust remaining available for distribution to holders of the Preferred
Securities on liquidation of the Issuer Trust. The Company's obligation to make
a Guarantee Payment may be satisfied by direct payment of the required amounts
by the Company to the holders of the Preferred Securities or by causing the
Issuer Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee of payment on a
subordinated basis of the Issuer Trust's obligations under the Preferred
Securities, but will apply only to the extent that the Issuer Trust has funds
sufficient to make such payments, and is not a guarantee of collection.
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If the Company does not make payments on the Junior Subordinated
Debentures held by the Issuer Trust, the Issuer Trust will not be able to pay
any amounts payable in respect of the Preferred Securities and will not have
funds legally available therefor. The Guarantee will rank subordinate and junior
in right of payment to all Senior Indebtedness of the Company. See "-- Status of
the Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Preferred Securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company
and will rank subordinate and junior in right of payment to all Senior
Indebtedness of the Company in the same manner as the Junior Subordinated
Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no
consent will be required), the Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee
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Trustee in respect of the Guarantee or to direct the exercise of any trust or
power conferred upon the Guarantee Trustee under the Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after the occurrence of an event of default with respect to the Guarantee, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Guarantee at the request of any holder of the Preferred Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
For information concerning the relationship between Bankers Trust
Company, as Guarantee Trustee, and the Company, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable with respect to the Preferred Securities upon
liquidation of the Issuer Trust or upon distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in exchange for all of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Issuer Trust has funds available for such payment)
are irrevocably guaranteed, on a subordinated basis, by the Company as and to
the extent set forth under "Description of Guarantee." Taken together, the
Company's obligations under the Junior Subordinated Debentures, the Junior
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Subordinated Indenture, the Trust Agreement and the Guarantee provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
Distributions and other amounts due on the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Issuer Trust will not have
sufficient funds to pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of amounts payable with respect
to the Preferred Securities when the Issuer Trust does not have sufficient funds
to pay such amounts. In such event, the remedy of a holder of the Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of the Company's obligations under Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Preferred Securities held by such holder.
The obligations of the Company under the Junior Subordinated Debentures
and the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Preferred
Securities and Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Preferred Securities;
(iii) the Company will pay for any and all costs, expenses and liabilities of
the Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited purposes
of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
Trust or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the
Company would not constitute a default or Event of Default in respect of the
Preferred Securities. However, in the event of payment defaults under, or
acceleration of, Senior Indebtedness of the Company, the subordination
provisions of the Junior Subordinated Indenture provide that no payments may be
made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. See "Description of Junior Subordinated Debentures --
Subordination."
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Limited Purpose of Issuer Trust
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and the Issuer Trust exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of a Preferred Security and a holder
of a Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive from the Company payments on Junior
Subordinated Debentures held, while a holder of Preferred Securities is entitled
to receive Distributions or other amounts distributable with respect to the
Preferred Securities from the Issuer Trust (or from the Company under the
Guarantee) only if and to the extent the Issuer Trust has funds available for
the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Issuer Trust,
other than any such dissolution involving the distribution of the Junior
Subordinated Debentures, after satisfaction of liabilities to creditors of the
Issuer Trust as required by applicable law, the holders of the Preferred
Securities will be entitled to receive, out of assets held by the Issuer Trust,
the Liquidation Distribution in cash. See "Description of Preferred Securities
- -- Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary
liquidation or bankruptcy of the Company, the Issuer Trust, as registered holder
of the Junior Subordinated Debentures, would be a subordinated creditor of the
Company, subordinated and junior in right of payment to all Senior Indebtedness
as set forth in the Junior Subordinated Indenture, but entitled to receive
payment in full of all amounts payable with respect to the Junior Subordinated
Debentures before any stockholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and has
agreed under the Junior Subordinated Indenture to pay for all costs, expenses
and liabilities of the Issuer Trust (other than the Issuer Trust's obligations
to the holders of the Trust Securities), the positions of a holder of the
Preferred Securities and a holder of such Junior Subordinated Debentures
relative to other creditors and to stockholders of the Company in the event of
liquidation or bankruptcy of the Company are expected to be substantially the
same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
In the opinion of Malizia, Spidi, Sloane & Fisch, P.C., Washington,
D.C., in its capacity as special tax counsel to the Company ("Tax Counsel"), the
following discussion summarizes the material United States federal income tax
consequences of the purchase, ownership and disposition of the Preferred
Securities.
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
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Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance (an "Initial Holder") at their
original offering price and (ii) is a US Holder (as defined below). This summary
does not address all the tax consequences that may be relevant to a US Holder,
nor does it address the tax consequences, except as stated below, to holders
that are not US Holders ("Non-US Holders") or to holders that may be subject to
special tax treatment (such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, other financial institutions,
tax-exempt organizations, persons holding the Preferred Securities as a position
in a "straddle," or as part of a "synthetic security," "hedging," as part of a
"conversion" or other integrated investment, persons having a functional
currency other than the U.S. Dollar and certain United States expatriates).
Further, this summary does not address (a) the income tax consequences to
shareholders in, or partners or beneficiaries of, a holder of the Preferred
Securities, (b) the United States federal alternative minimum tax consequences
of the purchase, ownership or disposition of the Preferred Securities, or (c)
any state, local or foreign tax consequences of the purchase, ownership and
disposition of Preferred Securities.
A "US Holder" is a holder of the Preferred Securities who or which is
(i) a citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated as created or organized for income
tax purposes) in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in its
gross income for United States federal income tax purposes without regard to its
source, or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and (b) one or
more United States trustees have the authority to control all substantial
decisions of the trust.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US Holders
Characterization of the Issuer Trust. In connection with the issuance
of the Preferred Securities, Tax Counsel will render its opinion generally to
effect that, under then current law and based on the representations, facts and
assumptions set forth in this Prospectus, and assuming full compliance with the
terms of the Trust Agreement (and other relevant documents), and based on
certain assumptions and qualifications referenced in the opinion, the Issuer
Trust will be characterized for United States federal income tax purposes as a
grantor trust and will not be characterized as an association taxable as a
corporation. Accordingly, for United States federal income tax purposes, each
holder of the Preferred Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures owned by the Issuer
Trust, and each US Holder will be required to include all income or gain
recognized for United States federal income tax purposes with respect to its
allocable share of the Junior Subordinated Debentures on its own income tax
return.
Characterization of the Junior Subordinated Debentures. The Company and
the Issuer Trust will agree to treat the Junior Subordinated Debentures as
indebtedness for all United States federal income tax purposes. In connection
with the issuance of the Junior Subordinated Debentures, Tax Counsel will render
its opinion generally to the effect that, under then current law and based on
the representations, facts and assumptions set forth in this Prospectus, and
assuming full compliance
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with the terms of the Junior Subordinated Indenture (and other relevant
documents) and based on certain assumptions and qualifications referenced in the
opinion, the Junior Subordinated Debentures will be characterized for United
States federal income tax purposes as debt of the Company.
Interest Income and Original Issue Discount. Under the terms of the
Junior Subordinated Debentures, the Company has the ability to defer payments of
interest from time to time by extending the interest payment period for a period
not exceeding 20 consecutive quarterly periods, but not beyond the maturity of
the Junior Subordinated Debentures. Treasury regulations under Section 1273 of
the Code provide that debt instruments like the Junior Subordinated Debentures
will not be considered issued with original issue discount ("OID") by reason of
the Company's ability to defer payments of interest if the likelihood of such
deferral is "remote."
The Company has concluded, and this discussion assumes, that, as of the
date of this Prospectus, the likelihood of deferring payments of interest under
the terms of the Junior Subordinated Debentures is "remote" within the meaning
of the applicable Treasury regulations, in part because exercising that option
would prevent the Company from declaring dividends on its stock and would
prevent the Company from making any payments with respect to debt securities
that rank pari passu with or junior to the Junior Subordinated Debentures.
Therefore, the Junior Subordinated Debentures should not be treated as issued
with OID by reason of the Company's deferral option. Rather, stated interest on
the Junior Subordinated Debentures will generally be taxable to a US Holder as
ordinary income when paid or accrued in accordance with that holder's method of
accounting for income tax purposes. It should be noted, however, that these
Treasury regulations have not yet been interpreted in any rulings or any other
published authorities of the IRS. Accordingly, it is possible that the IRS could
take a position contrary to the interpretation described herein.
In the event the Company exercises its option to defer payments of
interest, the Junior Subordinated Debentures would be treated as redeemed and
reissued for OID purposes and the sum of the remaining interest payments (and
any de minimis OID) on the Junior Subordinated Debentures would thereafter be
treated as OID, which would accrue, and be includible in a US Holder's taxable
income, on an economic accrual basis (regardless of the US Holder's method of
accounting for income tax purposes) over the remaining term of the Junior
Subordinated Debentures (including any period of interest deferral), without
regard to the timing of payments under the Junior Subordinated Debentures.
(Subsequent distributions of interest on the Junior Subordinated Debentures
generally would not be taxable.) The amount of OID that would accrue in any
period would generally equal the amount of interest that accrued on the Junior
Subordinated Debentures in that period at the stated interest rate.
Consequently, during any period of interest deferral, US Holders will include
OID in gross income in advance of the receipt of cash, and a US Holder which
disposes of a Preferred Security prior to the record date for payment of
distributions on the Junior Subordinated Debentures following that period will
be subject to income tax on OID accrued through the date of disposition (and not
previously included in income), but will not receive cash from the Issuer Trust
with respect to the OID.
If the possibility of the Company's exercise of its option to defer
payments of interest is not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
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Characterization of Income. Because the income underlying the Preferred
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Preferred Securities.
Market Discount and Bond Premium. Holders of the Preferred Securities
other than Initial Holders may be considered to have acquired their undivided
interests in the Junior Subordinated Debentures with market discount or
acquisition premium (as each phrase is defined for United States federal income
tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
the Issuer Trust. Under certain circumstances described herein (See "Description
of the Preferred Securities-- Liquidation Distribution Upon Dissolution"), the
Issuer Trust may distribute the Junior Subordinated Debentures to holders in
exchange for the Preferred Securities and in liquidation of the Issuer Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in its Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would likely constitute a taxable
event to US Holders of the Preferred Securities for United States federal income
tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
it had sold the Preferred Securities for cash. See "--Sales of Preferred
Securities" below.
Sales of Preferred Securities. A US Holder that sells Preferred
Securities will recognize gain or loss equal to the difference between its
adjusted basis in the Preferred Securities and the amount realized on the sale
of such Preferred Securities. A US Holder's adjusted basis in the Preferred
Securities generally will be its initial purchase price, increased by OID
previously included (or currently includible) in such holder's gross income to
the date of disposition, and decreased by payments received on the Preferred
Securities (other than any interest received with respect to the period prior to
the effective date of the Company's first exercise of its option to defer
payments of interest). Any such gain or loss generally will be capital gain or
loss, and generally will be a long-term capital gain or loss if the Preferred
Securities have been held for more than one year prior to the date of
disposition.
A holder who disposes of his Preferred Securities between record dates
for payments of distributions thereon will be required to include accrued but
unpaid interest (or OID) on the Junior Subordinated Debentures through the date
of disposition in its taxable income for United States federal income tax
purposes (notwithstanding that the holder may receive a separate payment from
the purchaser with respect to accrued interest), and to deduct that amount from
the sales proceeds received (including the separate payment, if any, with
respect to accrued interest) for the Preferred Securities (or as to OID only, to
add such amount to such holder's adjusted tax basis in its Preferred
Securities). To the extent the selling price is less than the holder's adjusted
tax basis (which will include accrued but unpaid OID, if any), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes.
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Proposed Tax Law Changes
On February 6, 1997, President Clinton released his budget proposals
for fiscal year 1998. One of the tax proposals therein (the "Tax Proposal")
would generally deny corporate issuers a deduction for interest related to
certain debt obligations that have a maximum term in excess of 15 years and are
not shown as indebtedness on the separate balance sheet of the issuer or, where
the instrument is issued to a related party (other than a corporation), where
the holder of some other related party issues a related instrument that is not
shown as indebtedness on the issuer's consolidated balance sheet. As currently
drafted, the Tax Proposal would be effective generally for instruments issued on
or after the date of first Congressional committee action. Although it is not
clear from the President's proposals as to what constitutes Congressional
"committee action" with respect to the Tax Proposal, it appears that, as
drafted, the Tax Proposal would not apply retroactively to the Junior
Subordinated Debentures. However, the Company and the Issuer Trust have been
advised by Tax Counsel that, if the Tax Proposal (or similar legislation) is
enacted into law with retroactive effect with respect to the Junior Subordinated
Debentures, the Company would not be entitled to a deduction with respect to the
interest payable on the Junior Subordinated Debentures. There can be no
assurance that the Tax Proposal, if enacted, will not apply retroactively to the
Junior Subordinated Debentures or that other legislation enacted after the date
hereof will not otherwise adversely affect the ability of the Company to deduct
the interest payable on the Junior Subordinated Debentures. Accordingly, there
can be no assurance that a Tax Event will not occur. See "Description of
Preferred Securities -- Redemption."
Non-US Holders
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder
will generally not be subject to withholding of income tax, provided that (a)
the beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Preferred Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Preferred Securities certifies to the Issuer Trust or
its agent, under penalties of perjury, that it is a Non-US Holder and provides
its name and address, or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Security in such capacity, certifies to the Issuer Trust or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or by another Financial Institution between it and the
beneficial owner in the chain of ownership, and furnishes the Issuer Trust or
its agent with a copy thereof.
As discussed above (see "--Proposed Tax Law Changes"), changes in
legislation affecting the income tax consequences of the Junior Subordinated
Debentures are possible, and could adversely affect the ability of the Company
to deduct the interest payable on the Junior Subordinated Debentures. Moreover,
any such legislation could adversely affect Non-US Holders by characterizing
income derived from the Junior Subordinated Debentures as dividends, generally
subject to a 30% income tax (on a withholding basis) when paid to a Non-US
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a Non-US Holder.
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<PAGE>
A Non-US Holder of a Preferred Security will generally not be subject
to withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
A Non-US Holder which holds the Preferred Securities in connection with
the active conduct of a United States trade or business will be subject to
income tax on all income and gains recognized with respect to its proportionate
share of the Junior Subordinated Debentures.
Information Reporting
In general, information reporting requirements will apply to payments
made on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its Non-United States status
or otherwise establishes an exemption from information reporting and backup
withholding. See "--Backup Withholding." Taxable income on the Preferred
Securities for a calendar year should be reported to US Holders on the
appropriate forms by the following January 31st.
Backup Withholding
Payments made on, and proceeds from the sale of, the Preferred
Securities may be subject to a "backup" withholding tax of 31% unless the holder
complies with certain identification or exemption requirements. Any amounts so
withheld will be allowed as a credit against the holder's income tax liability,
or refunded, provided the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to a particular holder of the purchase, ownership and disposition
of the Preferred Securities. Potential holders of the Preferred Securities are
urged to contact their own tax advisors to determine their particular tax
consequences.
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be
considered a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or a "disqualified person"
within the meaning of Section 4975 of the Code with respect to many employee
benefit plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975(e)(1) of the
Code and with respect to which the Company, or any affiliate of the Company is a
service provider (or otherwise is a party in interest or a disqualified person)
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Code, unless the Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any Preferred Securities should consult with its
counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
"Underwriting Agreement") dated June 5, 1997, among the Company, the Issuer
Trust and the underwriters named therein (the "Underwriters"), the Issuer Trust
has agreed to sell to the Underwriters, and the
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Underwriters have severally agreed to purchase from the Issuer Trust, the
following respective aggregate Liquidation Amount of Preferred Securities at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this Prospectus:
Liquidation Amount of
Underwriter: Preferred Securities:
- ------------ ---------------------
Advest, Inc........................................ $17,500,000
J.C. Bradford & Co................................. 1,250,000
EVEREN Securities, Inc............................. 1,250,000
Ferris, Baker Watts, Inc........................... 1,250,000
First of Michigan Corporation...................... 1,250,000
Friedman, Billings, Ramsey & Co., Inc.............. 1,250,000
Stifel, Nicolaus & Company, Incorporated........... 1,250,000
----------
Total.............................................. $25,000,000
==========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Preferred Securities offered hereby if any
of such Preferred Securities are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Preferred Securities to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $0.50 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per Preferred Security to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $3,750,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price. To the extent that the Underwriters exercise such
option, the Company will be obligated, pursuant to the option, to sell such
Preferred Securities to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Preferred Securities offered hereby. If purchased, the Underwriters will offer
such additional Preferred Securities on the same terms as those on which the
$25,000,000 aggregate Liquidation Amount of the Preferred Securities are being
offered.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriters may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
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preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriters also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriters repurchase shares distributed by
that Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriters are not required to engage
in any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $1.00 per Preferred Security (or $1,000,000 ($1,150,000 if
the over-allotment option is exercised in full) in the aggregate) and an
advisory fee equal to $25,000 for the account of the Representative.
Because the National Association of Securities Dealers, Inc. ("NASD")
is expected to view the Preferred Securities as interests in a direct
participation program, the offering of the Preferred Securities is being made in
compliance with the applicable provisions of Rule 2810 of the NASD's Conduct
Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Issuer Trust have been advised
by the Underwriters that they intend to make a market in the Preferred
Securities. However, the Underwriters are not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the sole
discretion of each of the Underwriters. Application has been made by the Company
to list the Preferred Securities in the Nasdaq National Market, but one of the
requirements for listing and continuing listing is the presence of two market
makers for the Preferred Securities, and the presence of a second market maker
cannot be assured. Accordingly, no assurance can be given as to the development
or liquidity of any market for the Preferred Securities.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Underwriters may in the future perform various services to the
Company, including investment banking services, for which it has or may receive
customary fees for such services.
VALIDITY OF SECURITIES
The validity of the Guarantee and the Junior Subordinated Debentures
and certain tax matters will be passed upon for the Company by David W. Harper,
Esq., Louisville, Kentucky, general counsel to the Company and Malizia, Spidi,
Sloane & Fisch, P.C., Washington, D.C., special counsel to the Company, and
certain legal matters will be passed upon for the Underwriters by Arnold &
Porter, Washington, D.C. and New York, New York. Certain matters of Delaware law
relating to the validity of the Preferred Securities, the enforceability of the
Trust Agreement and the creation of the Issuer Trust will be passed upon by
Richards, Layton & Finger, special Delaware counsel to the Company and the
Issuer Trust. Malizia, Spidi, Sloane & Fisch, P.C. and Arnold &
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Porter will rely as to certain matters of Kentucky law on the opinion of David
W. Harper, Esq. and will rely as to certain matters of Delaware law on the
opinion of Richards, Layton & Finger.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1995, and for the years ended December 31, 1996 and 1995, included in
this Prospectus have been audited by Eskew & Gresham, PSC, independent certified
public accountants, as stated in their report appearing in this Prospectus, or
in the Registration Statement of which this Prospectus forms a part, and have
been included in reliance upon such report of Eskew & Gresham, PSC given upon
their authority as experts in accounting and auditing. The consolidated
financial statements of the Company for the year ended December 31, 1994,
included in this Prospectus have been audited by McNeal, Williamson & Co.,
certified public accountants, as indicated in their report with respect thereto
and have been included herein in reliance upon the authority of said firm as
experts in giving said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov. This Prospectus does not contain all the
information set forth in the Registration Statement and exhibits thereto, which
the Company has filed with the Commission under the Securities Act and to which
reference is hereby made.
No separate financial statements of the Issuer Trust have been included
or incorporated by reference herein. The Company and the Issuer Trust do not
consider that such financial statements would be material to holders of the
Preferred Securities because the Issuer Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged in
and does not propose to engage in any activity other than holding as trust
assets the Junior Subordinated Debentures and issuing the Trust Securities. See
"PFBI Capital Trust," "Description of Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Guarantee." In addition, the
Company does not expect that the Issuer Trust will be filing reports under the
Exchange Act with the Commission.
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PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Certified Public Accountants........................................................ F-2
Consolidated Balance Sheets as of March 31, 1997 (unaudited), and as of December 31, 1996
and 1995................................................................................................... F-4
Consolidated Statements of Income for the three months ended March 31, 1997 and 1996
(unaudited) and for each of the years in the three year period ended December 31, 1996..................... F-5
Consolidated Statements of Stockholders' Equity for the three months ended March
31, 1997 (unaudited) and each of the years in the three year period ended
December 31, 1996.......................................................................................... F-6
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited) and for each of the years in the three year period
ended December 31, 1996.................................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Board of Directors
Premier Financial Bancorp, Inc.
Georgetown, Kentucky
We have audited the accompanying consolidated balance sheets of Premier
Financial Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements of Premier Financial Bancorp, Inc. and Subsidiaries for the
year ended December 31, 1994 were audited by other auditors whose report dated
February 10, 1995 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Premier
Financial Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995 and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Eskew & Gresham, PSC
------------------------
Eskew & Gresham, PSC
Lexington, Kentucky
February 20, 1997
F-2
<PAGE>
Independent Auditors Report
To the Board of Directors and Stockholders of Premier Financial Bancorp, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Premier Financial
Bancorp, Inc. and Subsidiaries as of December 31, 1994, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the year in the period ended December 31, 1994. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. and Subsidiaries as of December 31, 1994, and the consolidated
results of their operations and their cash flows for the year in the period
ended December 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994.
/s/McNeal, Williamson & Co.
- ---------------------------
McNeal, Williamson & Co.
Logan, West Virginia
February 10, 1995
F-3
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
------------------ ---------------------------------------------
1997 1996 1995
------ ------ ----
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks......................................... $ 6,897,668 $ 7,134,025 $ 6,339,777
Federal funds sold.............................................. 8,285,000 10,635,000 6,340,000
Investment securities:
Available-for-sale............................................ 22,851,984 21,827,049 15,972,018
Held-to-maturity.............................................. 21,795,160 20,993,089 8,665,217
Loans........................................................... 225,196,647 219,631,723 113,775,359
Unearned income............................................... (2,104,894) (2,045,219) (710,653)
Allowance for loan losses..................................... (2,669,286) (2,522,502) (1,735,482)
------------ ------------ ------------
Net loans................................................... 220,422,467 215,064,002 111,329,224
Federal Home Loan Bank stock.................................... 1,754,300 1,542,900 291,300
Premises and equipment, net..................................... 4,314,611 3,800,331 2,129,049
Interest receivable............................................. 3,831,608 4,059,812 1,622,774
Real estate and other property acquired through foreclosure..... 524,383 485,003 131,661
Income taxes refundable......................................... - 12,346 152,938
Deferred income taxes........................................... 533,822 495,580 648,763
Goodwill........................................................ 5,456,066 5,490,210 247,799
Other assets.................................................... 1,391,639 1,025,337 1,604,119
----------- ----------- -----------
TOTAL ASSETS.................................................... $298,058,708 $292,564,684 $155,474,639
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Non-interest-bearing.......................................... $ 24,656,985 $ 25,031,198 $ 16,000,676
Time deposits, $100,000 and over.............................. 32,787,547 33,650,498 20,237,290
Other interest-bearing........................................ 182,423,053 176,892,272 100,008,471
----------- ----------- -----------
Total deposits.............................................. 239,867,585 235,573,968 136,246,437
Securities sold under agreements to repurchase.................. 5,779,432 5,599,420 747,118
Federal Home Loan Bank advances................................. 9,483,545 9,377,456 755,000
Interest payable................................................ 1,458,560 1,333,601 1,147,986
Income taxes payable............................................ 463,013 - -
Other liabilities............................................... 597,286 816,853 362,786
Debt............................................................ - - 5,000,000
----------- ----------- -----------
Total liabilities ............................................ 257,649,421 252,701,298 144,259,327
----------- ----------- -----------
Stockholders' Equity:
Preferred stock, no par value; 1,000,000 shares
authorized; none issued or outstanding ...................... - - -
Common stock, no par value; 10,000,000 shares
authorized; 4,209,090 shares at March 31, 1997 and
December 31, 1996 (954,545 shares at December 31, 977,545 977,545 954,545
1995) issued and outstanding.................................
Surplus......................................................... 32,940,927 32,940,927 5,897,585
Retained earnings .............................................. 6,743,081 6,111,715 4,493,184
Net unrealized losses on securities available-for-sale.......... (252,266) (166,801) (130,002)
----------- ----------- -----------
Total stockholders' equity.................................... 40,409,287 39,863,386 11,215,312
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $298,058,708 $292,564,684 $155,474,639
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------------ ----------------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees.............................. $5,469,518 $2,948,735 $ 16,968,515 $ 9,487,756 $ 7,700,113
Investment securities-
Taxable.......................................... 414,668 313,495 1,620,651 903,515 827,449
Tax-exempt....................................... 239,029 83,469 672,405 397,404 274,612
Federal funds sold................................. 145,325 128,722 387,605 279,673 144,515
Other interest income.............................. 41,583 - 24,711 34,896 15,486
---------- ---------- ------------ ------------ ------------
Total interest income............................ 6,310,123 3,474,421 19,673,887 11,103,244 8,962,175
INTEREST EXPENSE:
Deposits......................................... 2,644,328 1,528,500 8,249,084 4,767,554 3,384,338
Other borrowings................................. 200,403 22,027 420,527 60,030 26,066
Debt............................................. - 103,125 167,413 252,999 28,006
--------- ---------- ------------ --------- -----------
Total interest expense......................... 2,844,731 1,653,652 8,837,024 5,080,583 3,438,410
--------- --------- ------------ ---------- -----------
Net interest income................................ 3,465,392 1,820,769 10,836,863 6,022,661 5,523,765
Provision for loan losses.......................... 183,605 72,500 574,831 85,950 207,000
--------- ---------- --------- ----------- -----------
Net interest income after provision for
loan losses.................................... 3,281,787 1,748,269 10,262,032 5,936,711 5,316,765
NON-INTEREST INCOME:
Service charges.................................. 231,235 147,105 816,594 530,178 395,835
Insurance commissions............................ 119,965 43,867 308,690 155,968 92,051
Investment securities gains (losses)............. - - 1,459 (6,026) 69,716
Other............................................ 207,381 127,663 357,447 145,108 126,820
--------- ---------- ------------ ------------ ------------
558,581 318,635 1,484,190 825,228 684,422
NON-INTEREST EXPENSES:
Salaries and employee benefits................... 1,228,207 817,181 3,764,716 2,309,307 1,982,111
Occupancy and equipment expenses................. 290,179 128,404 1,068,272 857,039 659,264
FDIC insurance................................... 6,081 12,624 31,558 123,965 222,142
Professional fees................................ 48,705 31,207 188,758 139,593 234,769
Taxes, other than payroll, property and income... 84,307 39,008 228,086 145,619 109,100
Acquisition expenses............................. - - - 110,296 37,139
Amortization of goodwill......................... 94,548 5,478 197,357 2,553 -
Other expenses................................... 431,078 363,195 1,314,185 804,093 760,002
--------- ---------- ------------ ---------- ----------
2,183,105 1,397,097 6,792,932 4,492,465 4,004,527
Income before income taxes......................... 1,657,263 669,807 4,953,290 2,269,474 1,996,660
Provision for income taxes......................... 499,761 171,496 1,517,714 112,992 483,213
--------- ---------- ----------- ---------- -----------
NET INCOME......................................... $1,157,502 $ 498,311 $ 3,435,576 $ 2,156,482 $ 1,513,447
========= ========= =========== =========== ===========
Primary earnings per share......................... $ .28 $ .26 $ 1.05 $ 1.13 $ .80
========= ========= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 (Unaudited) and
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized Unrealized
Loss on Gain (Loss)
Common Stock Marketable on Securities
------------------------ Retained Equity Available-
Shares Amount Surplus Earnings Securities for-Sale Total
-------------- ---------- ------------ ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1994........... 752,080 $752,080 $5,959,425 $2,222,346 $ (65,388) $ - $8,868,463
Issuance of 125 shares of Georgetown
Bancorp, Inc. common stock........ 1,284 1,284 14,341 15,625
Cumulative effect of change in the
method of accounting for investment
securities........................ 175,595 175,595
Decrease in unrealized loss on
marketable equity securities...... 65,388 65,388
Net change in unrealized losses on
securities available-for-sale..... (645,881) (645,881)
Net income.......................... 1,513,447 1,513,447
Dividends ($.36 per share).......... (540,000) (540,000)
---------- ---------- ------------ ----------- ---------- --------- -----------
BALANCES, December 31, 1994 753,364 753,364 5,973,766 3,195,793 - (470,286) 9,452,637
Issuance of 1,000 shares of
Georgetown Bancorp, Inc.
common stock...................... 10,272 10,272 114,728 125,000
Net change in unrealized losses on
securities available-for-sale..... 340,284 340,284
5-for-4 common stock split.......... 190,909 190,909 (190,909)
Net income.......................... 2,156,482 2,156,482
Dividends ($.45 per share).......... (859,091) (859,091)
---------- ---------- ------------ ----------- ---------- ---------- ----------
BALANCES, December 31, 1995......... 954,545 954,545 5,897,585 4,493,184 - (130,002) 11,215,312
2-for-1 common stock split.......... 954,545
Issuance of 2,300,000 shares of
Premier Financial Bancorp,
Inc. common stock................. 2,300,000 23,000 27,043,342 27,066,342
Net change in unrealized losses on
securities available-for-sale..... (36,799) (36,799)
Net income.......................... 3,435,576 3,435,576
Dividends ($.50 per share).......... (1,817,045) (1,817,045)
---------- ---------- ------------ ---------- ---------- ---------- -----------
BALANCES, December 31, 1996......... 4,209,090 977,545 32,940,927 6,111,715 - (166,801) 39,863,386
Net income for three months ended
March 31, 1997 (unaudited)........ 1,157,502 1,157,502
Dividends ($.125 per share)......... (526,136) (526,136)
Net change in unrealized losses on
securities available-for-sale..... (85,465) (85,465)
---------- ---------- ---------- ----------- ---------- ---------- -----------
BALANCES, March 31, 1997
(unaudited)....................... 4,209,090 $ 977,545 $32,940,927 $6,743,081 $ - $ (252,266) $40,409,287
========= ========= ========== ========= ========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------------ -----------------------------------------
1997 1996 1996 1995 1994
------------ --------------- ------------- ------------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income............................................ $ 1,157,502 $ 498,311 $3,435,576 $2,156,482 $1,513,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation..................................... 78,806 42,389 264,362 218,178 164,796
Amortization, net................................ 127,742 5,478 188,367 24,338 6,681
Provision for loan losses........................ 183,605 72,500 574,831 85,950 207,000
Deferred income taxes............................ (1,004) 14,278 5361 (221,516) (85,323)
FHLB stock dividends............................. (26,200) (4,900) (38,900) (4,100) (900)
Investment securities losses (gains), net........ - - (1,459) 6,026 (69,716)
Changes in:
Interest receivable............................ 228,204 (69,863) (381,446) (120,900) 45,907
Other assets................................... (436,617) (61,125) 732,955 (397,836) (685,872)
Interest payable............................... 124,959 22,635 (200,975) 273,338 47,072
Other liabilities.............................. (219,567) (24,152) 391,015 54,384 (129,491)
Income taxes refundable........................ (12,346) 152,938 211,407 (261,102) 37,230
Income taxes payable........................... 463,013 4,285 - - -
---------- ---------- ----------- ----------- -----------
Net cash provided by operating activities.... 1,668,097 652,774 5,181,094 1,813,242 1,050,831
---------- ---------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of deposits held in other banks.............. - - - - (523,609)
Proceeds from maturity of deposits held
in other banks...................................... - - - 523,609 -
Purchases of securities available-for-sale............ (1,800,625) (7,702,439) (10,886,829) (13,082,611) (5,637,170)
Proceeds from sales of securities available-
for-sale............................................ - 1,800,000 2,499,125 7,553,462 4,452,459
Proceeds from maturities and calls of securities
available-for-sale.................................. 650,000 1,600,000 8,100,125 4,350,000 3,300,000
Purchases of investment securities held-to-
maturity............................................ (1,148,426) (89,459) (2,741,799) (1,673,728) (1,081,135)
Proceeds from maturities and calls of
securities held-to-maturity......................... 350,751 - 2,241,255 1,212,544 723,045
Proceeds from sales of investment securities
held-to-maturity.................................... - 721,000 - 1,000,000 -
Purchases of FHLB stock............................... (185,200) - (723,800) (227,300) (59,000)
Net change in federal funds sold...................... 2,350,000 1,670,000 (2,945,000) (395,000) (108,000)
Proceeds from sale of real estate acquired
through foreclosure................................. - - 131,701 291,760 32,000
Net change in loans................................... (5,581,450) (1,980,471) (22,402,722) (16,725,288) (7,411,964)
Purchases of premises and equipment................... (593,086) (27,379) (972,976) (1,327,066) (391,664)
Proceeds from sale of premises and equipment.......... - - 20,085 437,132 73,685
Cash payment related to acquisition, net of
cash received....................................... - - (10,576,808) (999,742) -
---------- ---------- ----------- ----------- ------------
Net cash used in investing activities............. (5,958,036) (4,008,748) (38,257,643) (19,062,228) (6,631,353)
---------- ---------- ----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
------------------------------ ------------------------------------------
1997 1996 1996 1995 1994
------------ --------------- ------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits................................ $ 4,293,617 $ 2,617,244 $12,536,403 $15,134,179 $ 3,874,639
Advances from Federal Home Loan Bank.................. 1,000,000 - 6,800,000 - 755,000
Repayment of Federal Home Loan Bank advances.......... (893,911) - (2,067,206) - -
Debt proceeds......................................... - - - 3,500,000 1,500,000
Repayment of debt..................................... - - (6,850,000) - -
Net proceeds from issuance (repayment) of
agreements to repurchase securities................. 180,012 (103,118) (1,797,697) 747,118 -
Proceeds from issuance of common stock................ - - 27,066,342 125,000 -
Dividends paid........................................ (526,136) (238,637) (1,817,045) (859,091) (540,000)
---------- ----------- ---------- ---------- ---------
Net cash provided by financing activities........... 4,053,582 2,275,489 33,870,797 18,647,206 5,589,639
--------- ---------- ---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents.. (236,357) (1,080,485) 794,248 1,398,220 9,117
Cash and cash equivalents at beginning of period...... 7,134,025 6,339,777 6,339,777 4,941,557 4,932,440
---------- ---------- ---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD............................................. $6,897,668 $5,259,292 $7,134,025 $6,339,777 $ 4,941,557
========= ========= ========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for -
Interest.......................................... $ 2,719,772 $ 1,631,017 $ 9,037,999 $ 4,807,245 $ 3,391,338
Income taxes...................................... - - 990,000 644,234 698,027
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Non-cash transfer from securities held-to-
maturity to securities available-for-sale......... - - - 500,000 12,036,169
Change in unrealized loss on marketable
equity securities................................. - - - - 65,388
Change in unrealized loss on securities
available-for-sale................................ (122,475) (154,212) (36,799) 340,284 (470,286)
Loans transferred to real estate acquired
through foreclosure............................... 39,380 - 80,849 16,000 382,675
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements include
the accounts of Premier Financial Bancorp, Inc. (the Company) and its
wholly-owned subsidiaries, Georgetown Bancorp, Inc., Georgetown, Kentucky;
Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Bank of Germantown,
Germantown, Kentucky; Citizens Bank, Sharpsburg, Kentucky; and Farmers Deposit
Bancorp, Eminence, Kentucky (the Banks). In addition, the Company has a data
processing service subsidiary, Premier Data Services, Inc., Vanceburg, Kentucky.
All material intercompany transactions and balances have been eliminated.
Certain prior year amounts have been reclassified to conform with 1996
presentations.
On March 24, 1995, the Company acquired Georgetown Bancorp, Inc. and its
wholly-owned subsidiary, Georgetown Bank and Trust Co., Georgetown, Kentucky, in
a business combination accounted for as a pooling of interests. The accompanying
consolidated financial statements for 1995 are based on the assumption that the
Companies were combined for the full year, and the financial statements of the
prior year have been restated to give effect to the combination as if it
occurred at the beginning of the earliest year presented.
B. Nature of Operations - The Banks operate under state bank charters and
provide full banking services, including trust services. As state banks, the
Banks are subject to regulation by the Kentucky Department of Financial
Institutions and the Federal Deposit Insurance Corporation (FDIC).
The Company is also subject to regulation by the Federal Reserve Bank.
C. Estimates in the Financial Statements - The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
D. Cash and Cash Equivalents - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand and amounts due from banks.
E. Investment Securities - The Company classifies its investment
securities portfolio into three categories: trading, securities
available-for-sale and securities held-to-maturity. Fair value adjustments are
made to the securities based on their classification with the exception of the
held-to- maturity category. The Company has no investments classified as
trading.
Investment securities available-for-sale are carried at fair value.
Adjustments from amortized cost to fair value are recorded in stockholders'
equity, net of related income tax, under net unrealized gains (losses) on
securities available-for-sale. The adjustment is computed on the difference
between fair value and cost adjusted for amortization of premiums and accretion
of discounts which are recorded as adjustments to interest income using the
constant yield method.
Investment securities for which the Banks have the positive intent and
ability to hold to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts which are recorded as adjustments to
interest income using the constant yield method.
Gains or losses on dispositions are based on the net proceeds and
adjusted carrying amount of the securities sold using the specific
identification method.
F-9
<PAGE>
F. Loans - Loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan losses. Interest income on loans is
recognized on the accrual basis except for those loans in a nonaccrual income
status. The accrual of interest on impaired loans is discontinued when
management believes, after consideration of economic and business conditions and
collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful. When interest accrual is discontinued,
interest income is subsequently recognized only to the extent cash payments are
received.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance is an amount that management believes
will be adequate to absorb losses on existing loans that may become
uncollectible based on evaluations of the collectibility of loans and prior loan
loss experience. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions that may
affect the borrowers' ability to pay. Loans are charged against the allowance
for loan losses when management believes that the collection of the principal is
unlikely.
The allowance for loan losses on impaired loans is determined using the
present value of estimated future cash flows of the loan, discounted at the
loan's effective interest rate or the fair value of the underlying collateral. A
loan is considered to be impaired when it is probable that all principal and
interest amounts will not be collected according to the loan contract. The
entire change in present value of expected cash flows is reported as provision
for loan losses in the same manner in which impairment initially was recognized
or as a reduction in the amount of provision for loan losses that otherwise
would be reported.
Certain loan origination fees and direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
G. Premises and Equipment - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is recorded principally by the
straight-line method over the estimated useful lives of the premises and
equipment.
H. Real Estate Acquired Through Foreclosure - Real estate acquired
through foreclosure is carried at the lower of the recorded investment in the
property or its fair value. The value of the underlying loan is written down to
the fair value of the real estate to be acquired by a charge to the allowance
for loan losses, if necessary. Any subsequent write-downs are charged to
operating expenses. Certain parcels of real estate are being leased to third
parties to offset holding period costs. Operating expenses of such properties,
net of related income, and gains and losses on their disposition are included in
other expenses.
I. Purchase Method of Accounting - Net assets of subsidiaries acquired in
purchase transactions are recorded at the fair value at the date of acquisition.
The excess of cost over net assets acquired is included in goodwill on the
consolidated balance sheets and is being amortized by the straight-line method
over fifteen years.
J. Income Taxes - The Company and its subsidiaries file a consolidated
federal income tax return. The Subsidiaries are charged or credited an amount
equal to the income tax that would have been applicable on a separate return
basis.
F-10
<PAGE>
The Company uses the liability method for computing deferred income
taxes. Under the liability method, deferred income taxes are based on the change
during the year in the deferred tax liability or asset established for the
expected future tax consequences of differences in the financial reporting and
tax bases of assets and liabilities. The differences relate principally to
premises and equipment, unrealized gains and losses on investment securities
available-for-sale, net operating loss carryforwards, changes in tax methods of
accounting, FHLB stock, and the allowance for loan losses.
K. Per Share Information - Primary earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding and the number of shares of common stock which would be assumed
outstanding under the treasury-stock method.
L. Effect of New Accounting Standards - The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires the recognition of a loss on impaired
assets when the carrying value of an asset exceeds its fair value and the
carrying amount of the asset may not be recoverable. The Statement was adopted
by the Company, as required, on January 1, 1996. The effect of adopting the new
guidance was not material to the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation", which defines the methods of accounting available for employee
stock compensation plans. The Statement was adopted by the Company, as required,
on January 1, 1996. The effect of adopting the new guidance was not material to
the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides accounting and reporting guidance regarding various financial
instruments and related transactions. The Statement was effective for
transactions occurring after December 31, 1996 and was adopted by the Company,
as required, on January 1, 1997. The effect of adopting the new guidance was not
material to the Company's consolidated financial statements.
M. Marketing Expense - The Company charges all marketing expenses to
operations when incurred. No amounts have been established for any future
benefits relative to these expenditures.
F-11
<PAGE>
2. BUSINESS COMBINATIONS
On July 1, 1996, the Company acquired all of the outstanding shares of
Farmers Deposit Bancorp, Eminence, Kentucky (Farmers Deposit), a one-bank
holding company owning all of the shares of Farmers Deposit Bank, for cash. The
total acquisition cost was $12,588,000, which exceeded the fair value of
tangible net assets acquired by approximately $5,400,000. The combination was
accounted for as a purchase and the results of operations of Farmers Deposit are
included in the consolidated financial statements from July 1, 1996.
The major categories of assets acquired and liabilities assumed from
Farmers Deposit as of the acquisition date are as follows:
(In thousands)
Cash and due from banks...................... $ 2,011
Investment securities........................ 19,263
Net loans.................................... 81,988
Intangibles and other assets................. 9,035
Deposits..................................... 86,791
Other borrowings............................. 10,540
Debt......................................... 1,850
Other liabilities............................ 528
-------
Total acquisition cost..................... $12,588
======
Unaudited pro forma condensed results of operations for the years ended
December 31, 1996 and 1995, as though the above subsidiary had been acquired
January 1, 1995, in a debt financed transaction are listed below. The results
are not necessarily indicative of future consolidated operations.
Year Ended
December 31,
-------------------------------------
1996 1995
------------------ ----------------
(In thousands)
Net interest income after
provision for loan losses............ $11,062 $7,894
Other operating income................. 1,761 1,336
Other operating expenses............... 8,178 7,025
Net income............................. 3,202 2,133
Earnings per share..................... 0.97 1.12
F-12
<PAGE>
On October 31, 1995, the Company acquired all of the outstanding shares
of Citizens Bank of Sharpsburg, Kentucky, for cash. The total acquisition cost
was $1,496,387, which exceeded the fair value of tangible net assets acquired by
approximately $248,000. This combination was accounted for as a purchase and the
results of operations of Citizens Bank are included in the consolidated
financial statements from November 1, 1995.
The major categories of assets acquired and liabilities assumed from
Citizens Bank as of the acquisition date are as follows:
(In thousands)
Cash and due from banks...................... $ 497
Investment securities........................ 3,976
Net loans.................................... 14,316
Intangibles and other assets................. 1,365
Deposits..................................... 18,273
Other liabilities............................ 385
-------
Total acquisition cost................... $ 1,496
======
On March 24, 1995, the Company acquired Georgetown Bancorp, Inc. and its
wholly-owned subsidiary, Georgetown Bank and Trust, Georgetown, Kentucky, in a
business combination accounted for as a pooling of interests. All of the
outstanding shares of Georgetown Bancorp were exchanged for 409,090 shares, as
adjusted or subsequent stock splits, of the Company's common stock. The
accompanying consolidated financial statements for 1995 are based on the
assumption that the companies were combined for the full year, and financial
statements of prior years have been restated to give effect of the combination.
Georgetown Bancorp, Inc. had consolidated total assets of approximately
$20,930,000 at the date of acquisition.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest-bearing
deposits that are held at the Federal Reserve or maintained in vault cash in
accordance with average balance requirements specified by the Federal Reserve
Board of Governors. The average balance requirement was $936,000 and $549,000 at
December 31, 1996 and 1995, respectively.
F-13
<PAGE>
4. INVESTMENT SECURITIES
Amortized cost and fair value of investment securities, by category, at
March 31, 1997, and December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1997
-----------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ------ ----------
(Unaudited)
Available-for-sale:
<S> <C> <C> <C> <C>
U.S. Treasury securities ... $ 3,696,319 $ 2,562 $ (8,409) $ 3,690,472
U.S. agency securities ..... 14,890,600 5,630 (224,978) 14,671,252
Obligations of states and
political subdivisions ... 1,682,715 35,662 (2,795) 1,715,582
Preferred stock ............ 2,000,000 -- -- 2,000,000
Other equity securities .... 900,007 -- (125,329) 774,678
----------- ----------- ----------- -----------
Total available-for-sale . $23,169,641 $ 43,854 $ (361,511) $22,851,984
=========== =========== =========== ===========
Held-to-maturity:
U.S. Treasury securities ... $ 1,855,451 $ 4,624 $ (6,075) $ 1,854,000
U.S. agency securities ..... 6,128,347 16,514 (23,256) 6,121,605
Obligations of states and
political subdivisions ... 13,424,612 215,102 (94,779) 13,544,935
Asset-backed securities .... 386,750 2,738 (4,158) 385,330
----------- ----------- ----------- -----------
Total held-to-maturity ... $21,795,160 $ 238,978 $ (128,268) $21,905,870
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------------
1996 1995
------------------------------------------------------ -----------------------------------------------------
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
--------- ---------- ------ ---------- --------- ---------- ------ ----------
Available-
for-sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasury
securities .... $ 4,097,702 $ 4,691 $ (8,566) $ 4,093,827 $ 2,546,872 $ 10,051 $ (1,241) $ 2,555,682
U.S.
agency
securities .... 13,440,767 40,445 (157,678) 13,323,534 10,680,473 17,575 (100,892) 10,597,156
Obligations
of states
and
political
subdivisions .. 1,583,755 39,797 (2,165) 1,621,387
Preferred
stock ......... 2,000,000 -- -- 2,000,000 2,000,000 -- -- 2,000,000
Other
equity
securities .... 900,007 -- (111,706) 788,301 900,000 -- (80,820) 819,180
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
available-
for-sale ...... $22,022,231 $ 84,933 $ (280,115) $21,827,049 $16,127,345 $ 27,626 $ (182,953) $15,972,018
=========== =========== =========== =========== =========== =========== =========== ===========
Held-to-
maturity:
U.S.
Treasury
securities .... $ 2,058,469 $ 5,787 $ (9,366) $ 2,054,890 $ -- $ -- $ -- $ --
U.S.
agency
securities .... 6,328,804 18,482 (26,209) 6,321,077 2,300,000 -- (41,110) 2,258,890
Obligations
of states
and
political
subdivisions .. 12,190,012 249,553 (59,327) 12,380,238 6,347,298 86,434 (45,521) 6,388,211
Asset-
backed
securities .... 415,804 3,933 (4,045) 415,692 17,919 560 -- 18,479
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
held-
to-
maturity .... $20,993,089 $ 277,755 $ (98,947) $21,171,897 $ 8,665,217 $ 86,994 $ (86,631) $ 8,665,580
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
The amortized cost and fair value of investment securities at March 31,
1997, and December 31, 1996, by category and contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------------------------------- --------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ ------------------ ------------------ ---------------
(Unaudited)
<S> <C> <C> <C> <C>
Available-for-sale:
Due in one year or less................... $ 8,150,114 $ 7,999,239 $ 5,984,146 $ 5,982,638
Due after one year through five years..... 10,790,306 10,756,744 10,343,229 10,281,226
Due after five years through ten years.... 1,329,214 1,321,323 2,794,849 2,774,884
Other securities.......................... 2,900,007 2,774,678 2,900,007 2,788,301
---------- ---------- ---------- ----------
Total available-for-sale................ $23,169,641 $22,851,984 $22,022,231 $21,827,049
========== ========== ========== ==========
Held-to-maturity:
Due in one year or less................... $ 2,895,218 $ 3,551,420 $ 2,981,261 $2,983,913
Due after one year through five years..... 9,311,678 8,799,129 9,615,010 9,665,471
Due after five years through ten years.... 6,107,875 6,125,611 5,852,879 5,953,674
Due after ten years....................... 3,093,639 3,044,380 2,128,135 2,153,147
Asset-backed securities................... 386,750 385,330 415,804 415,692
---------- ---------- ----------- -----------
Total held-to-maturity.................. $21,795,160 $21,905,870 $20,993,089 $21,171,897
========== ========== ========== ==========
</TABLE>
Proceeds from sales of investment securities during 1996, 1995 and 1994
were $2,499,125, $8,553,462 and $4,452,459, respectively. Gross gains of $70,
$25,650 and $73,990 and gross losses of $611, $31,676 and $4,274, respectively,
were realized on those sales. Proceeds from maturities and calls of investment
securities during 1996, 1995 and 1994 were $9,541,380, $5,562,544 and
$4,023,045, respectively. Gross gains of $2,000 and no losses were realized on
those calls during 1996. No gains or losses were realized on calls during 1995
and 1994.
During 1995, the Company sold a security classified as held-to-maturity,
with an amortized cost of $1,000,000 and a fair value of $1,000,000. The Company
was notified by the issuer that the security was being called. The Company
disposed of the security approximately five months prior to the call date in
order to utilize the funds for reinvestment.
During December, 1995, the Company made a one time transfer of
investment securities from held-to-maturity to available-for-sale of $500,000,
as allowed under the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115", issued in November, 1995. The investments were
transferred at fair value at the date of transfer. This transfer did not have a
material effect on the Company's stockholders' equity.
At December 31, 1995, the Company's investment in noncumulative
perpetual preferred stock of First Guaranty Bank, Hammond, Louisiana, exceeded
10% of stockholders' equity. The market
F-15
<PAGE>
value of these investments approximates their book value which totaled
$2,000,000 at December 31, 1996 and 1995. The dividend rate on the preferred
stock is 2% over the prevailing prime rate.
Investment securities with an approximate carrying value of $23,836,619
and $8,015,000 at December 31, 1996 and 1995, respectively, were pledged to
secure public deposits, trust funds, securities sold under agreements to
repurchase and for other purposes as required or permitted by law.
5. LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------------ ---------------------------------------
1997 1996 1995
------------------ ----------------- -------------------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Commercial, secured by real estate......... $ 60,214 $59,834 $39,357
Commercial, other.......................... 37,388 33,908 17,889
Real estate construction................... 3,315 4,138 2,119
Real estate mortgage....................... 78,595 76,600 32,678
Agricultural............................... 9,731 10,050 5,216
Consumer................................... 35,504 33,751 16,087
Other...................................... 450 1,351 429
------- -------- --------
225,197 219,632 113,775
Unearned interest.......................... (2,105) (2,045) (711)
Allowance for loan losses.................. (2,669) (2,523) (1,735)
------- ------- -------
$220,423 $215,064 $111,329
======= ======= =======
</TABLE>
F-16
<PAGE>
Certain directors and executive officers of the Banks, including their
immediate families and companies in which they have beneficial ownership, were
loan customers of the Banks during 1996 and 1995. Total loans to these persons
at December 31, 1996 and 1995 amounted to $3,726,218 and $4,067,191,
respectively. Such loans were made in the ordinary course of business at the
Banks' normal credit terms and interest rates. An analysis of the 1996 activity
with respect to all director and executive officer loans is as follows:
Balance, December 31, 1995...................... $4,067,191
Additions, including loans now
meeting disclosure requirements................ 1,821,817
Amounts collected, including loans
no longer meeting disclosure requirements...... (2,162,790)
---------
Balance, December 31, 1996...................... $3,726,218
=========
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
---------------------- ---------------- --------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period....................... $2,522,502 $1,735,482 $1,735,482 $ 886,175 $884,079
Allowance related to
acquired subsidiaries........ - - 812,000 803,177 -
Loans charged off.............. (90,174) (80,472) (759,453) (91,212) (309,874)
Recoveries..................... 53,353 62,175 159,642 51,392 104,970
Provision for loan losses...... 183,605 72,500 574,831 85,950 207,000
---------- ---------- --------- --------- -------
Balance, end of period......... $2,669,286 $1,789,685 $2,522,502 $1,735,482 $886,175
========= ========= ========= ========= =======
</TABLE>
The Company's recorded investment in impaired loans was approximately
$565,305 and $886,000 at December 31, 1996 and 1995, respectively, as measured
using the value of the underlying collateral. Of those amounts, $272,799 and
$401,000 represent loans for which an allowance for loan losses, in the amount
of $180,159 and $101,000, respectively, has been established. The average
recorded investment of impaired loans was approximately $489,500 and $424,000
for the years ended December 31, 1996 and 1995, respectively. Interest income
recognized on impaired loans totaled approximately $2,000 and $26,000 for the
years ended December 31, 1996 and 1995, respectively, which represented actual
cash payments received on impaired loans.
F-17
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------- --------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
(Unaudited)
<S> <C> <C> <C>
Land............................................... $1,073,750 $1,073,750 $ 223,118
Building and leasehold improvements................ 2,957,595 2,594,185 1,939,142
Furniture and equipment............................ 3,053,167 2,823,491 2,424,905
--------- --------- ---------
7,084,512 6,491,426 4,587,165
Less: accumulated depreciation.................... (2,769,901) (2,691,095) (2,458,116)
--------- --------- ---------
$4,314,611 $3,800,331 $2,129,049
========= ========= =========
</TABLE>
Depreciation expense was $264,362, $218,178 and $164,796 in 1996, 1995
and 1994, respectively.
7. DEPOSITS
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
1997....................................... $101,148,226
1998....................................... 30,938,967
1999....................................... 11,479,698
2000....................................... 3,306,873
2001 and thereafter........................ 937,611
-----------
$147,811,375
===========
Certain directors and executive officers of the Banks and companies in
which they have beneficial ownership are deposit customers of the Banks. The
amount of these deposits was approximately $7,902,000 at December 31, 1996.
F-18
<PAGE>
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within
one to ninety days from the transaction date. Information concerning securities
sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------- -----------------------------------------
1997 1996 1995
--------------------- --------------- ----------------------
(Unaudited)
<S> <C> <C> <C>
Average balance during the year........................ $5,733,000 $3,582,000 $400,000
Average interest rate during the year.................. 5.12% 5.14% 3.85%
Maximum month-end balance during the year.............. $5,953,000 $6,495,743 $747,118
========= ========= =======
</TABLE>
U.S. Treasury and agency securities underlying the agreements are as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
--------------------- ---------------------------------------------
1997 1996 1995
--------------------- -------------------- ----------------------
(Unaudited)
<S> <C> <C> <C>
Carrying value......................................... $6,034,265 $6,221,104 $861,377
Estimated fair value................................... 5,994,133 6,216,000 862,000
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES
The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati,
Ohio. This stock allows the Banks to borrow advances from the FHLB which the
Banks use to fund long-term fixed rate mortgages.
At December 31, 1996 and 1995, $9,377,456 and $755,000, respectively,
represented the balance due on the above advances from the FHLB. All advances
are paid either on a monthly basis or at maturity, over remaining terms of one
to nineteen years, with interest rates ranging from 4.65% to 8.45%. Advances are
secured by the FHLB stock with a cost of $1,452,900, and all single family first
mortgage loans of the participating Banks. Scheduled principal payments due on
advances during the five years subsequent to December 31, 1996, are as follows:
1997 - $7,785,997; 1998 - $174,259; 1999 - $480,367; 2000 - $105,050; 2001 and
years thereafter - $831,783.
F-19
<PAGE>
10. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995
------------------ -------------------
<S> <C> <C>
Revolving note, $5,000,000 maximum limit, secured by
100% of the common stock of the subsidiary Banks,
interest at prime rate, payable monthly, principal due at
maturity, June 30, 1996.............................................. $ - $5,000,000
</TABLE>
The revolving note described above was paid off from proceeds of the
Company's initial public offering in May 1996.
11. LINE OF CREDIT
In February 1997, the Company received approval for a two year, $20
million revolving line of credit from a financial institution. The line of
credit is available for general corporate purposes, including acquisitions. The
credit agreement contains certain covenants and performance terms. The common
stock of the subsidiary banks is pledged to secure the revolving line of credit.
12. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------------------------------ -------------------------------------------------------
1997 1996 1996 1995 1994
-------------------- ------------------- ---------------- ---------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current................... $500,765 $157,223 $1,512,353 $334,508 $568,536
Deferred.................. (1,004) 14,273 5,361 282,659 (92,463)
Change in valuation
allowance............... - - - (504,175) 7,140
--------- --------- ------------- ------- --------
$499,761 $171,496 $1,517,714 $112,992 $483,213
======= ======= ========= ======= =======
</TABLE>
The Company's deferred tax assets and liabilities at March 31, 1997 and
December 31, 1996 and 1995, are shown below. Based upon the level of historical
taxable income over the three years prior to December 31, 1995, and projections
for future taxable income over the three years subsequent to December 31, 1995,
in which deferred tax assets were expected to become deductible, management
believed it more likely than not that the Company would realize the benefits of
these deductible differences; therefore, no valuation allowance for the
realization of deferred tax assets was considered necessary at December 31,
1995. Additionally, no valuation allowance is considered necessary at December
31, 1996.
F-20
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
--------------------- -----------------------------------------------
1997 1996 1995
--------------------- --------------------- -----------------------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses................... $ 387,511 $337,871 $287,852
NOL carryforwards........................... 297,463 330,426 435,116
Unrealized loss on investment
securities................................ 65,620 28,382 25,325
Other....................................... 21,593 19,093 -
-------- -------- ----------
Total deferred tax assets................. 772,187 715,772 748,293
Deferred tax liabilities:
Change in accounting method................. (10,477) (12,874) (22,461)
Depreciation................................ (134,555) (127,755) (44,820)
Federal Home Loan Bank dividends............ (53,040) (43,520) (1,020)
Other....................................... (40,293) (36,043) (31,229)
-------- -------- -------
Total deferred tax liabilities............ (238,365) (220,192) (99,530)
-------- ------- -------
$ 533,822 $495,580 $648,763
======== ======= =======
</TABLE>
At December 31, 1996, two of the subsidiary Banks had net operating
loss carryforwards totaling approximately $972,000, which begin expiring in
2005. The utilization of these net operating loss carryforwards is subject to
limitations imposed by Section 382 of the Internal Revenue Code.
F-21
<PAGE>
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- ----------------------------------------------------------------
1997 1996 1996 1995 1994
---------- -------- --------------------- ------------------- --------------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. federal income tax rate .... $ 564 $ 228 $ 1,684 34.0% $ 772 34.0% $ 679 34.0%
Changes from the statutory rate:
Tax-exempt investment income .. (81) (40) (240) (4.8) (141) (6.2) (100) (5.0)
Non-deductible interest expense
related to carrying tax-
exempt investments .......... 9 5 28 0.5 15 0.7 12 0.6
Tax credits ................... (18) (18) (70) (1.4) (69) (3.0) (18) (0.9)
Change in valuation allowance . - - - - (504) (22.2) 7 0.3
Goodwill amortization ......... 32 2 67 1.3 1 - - -
Other ......................... (6) (5) 49 1.0 39 1.7 (97) (4.8)
------- ------- ------- ------ ------- ------ ------- ------
$ 500 $ 172 $ 1,518 30.6% $ 113 5.0% $ 483 24.2%
======= ======= ======= ====== ======= ====== ======= ======
</TABLE>
Income taxes (benefits) applicable to investment securities gains
(losses) were $496, $(2,049) and $23,703 for 1996, 1995 and 1994, respectively.
13. OPERATING LEASE COMMITMENTS
The Company has entered into lease agreements for certain premises and
equipment.
Future minimum lease payments under the leases during the five years
subsequent to December 31, 1996, are as follows:
1997.................. $ 149,179
1998.................. 145,496
1999.................. 142,865
2000.................. 138,600
2001.................. -
Total rental expense incurred amounted to approximately $156,091, $19,000
and $80,000 in 1996, 1995 and 1994, respectively.
14. EMPLOYEE BENEFIT PLANS
The Company has qualified profit sharing plans which cover
substantially all employees. Profit sharing contributions are at the discretion
of the Company's Board of Directors. Profit sharing contributions were $171,500,
$103,744 and $88,730 in 1996, 1995 and 1994, respectively.
On March 15, 1996, the shareholders approved adoption of the Premier
Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (the Plan),
whereby certain employees of the Company are eligible to receive incentive stock
options under the Plan. The Plan is accounted for in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Under the Plan, a maximum of 100,000
shares, as adjusted for the 2-for-1 stock split effective March 20, 1996, of the
Company's common stock may be issued through the exercise of these incentive
stock options. The option price is the fair market value of the
F-22
<PAGE>
Company's shares at the date of the grant. The options are exercisable ten years
from the date of grant. At December 31, 1996, the Company had granted options to
certain key employees to purchase 40,000 shares at an option price of $13.00 per
share, of which 14,000 are currently eligible for exercise.
Although the Company has elected to follow APB No. 25, Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation" requires pro forma disclosure of net income and earnings per share
as if the Company had accounted for its employee stock options under that
Statement. The fair value of each option grant was estimated on the grant date
using an option-pricing model.
Under SFAS No. 123, compensation cost is recognized in the amount of
the estimated fair value of the options and amortized to expense over the
options' vesting period. The pro forma effect on 1996 net income and earnings
per share of this statement are as follows:
Net income:
As reported........................ $ 3,435,576
Pro forma.......................... 3,410,628
Primary earnings per share:
As reported........................ $1.05
Pro forma.......................... 1.04
15. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996, 1995 and 1994, the Company
paid approximately $241,000, $65,000 and $53,000, respectively, for printing and
supplies from a company affiliated by common ownership. The Company also paid
this affiliate approximately $317,000, $223,000 and $185,000 in 1996, 1995 and
1994, respectively, to permit the Company's employees to participate in its
employee medical benefit plan.
The Company has purchased and currently holds noncumulative perpetual
preferred stock with a carrying value of $2,000,000 in a bank in Louisiana
controlled by the Company's largest shareholder. The dividend rate on the
preferred stock is 2% over the prevailing prime rate.
16. DIVIDEND LIMITATIONS
The Company's principal source of funds for dividend payments is
dividends received from the subsidiary Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, as defined,
combined with the retained net profits of the preceding two years, subject to
the capital requirements as defined below. During 1997, the Banks could, without
prior approval, declare dividends of approximately $2,764,000 plus any 1997 net
profits retained to the date of the dividend declaration.
F-23
<PAGE>
17. STOCKHOLDERS' EQUITY
On May 22, 1996, the Company completed its initial public offering by
selling 2,000,000 common shares at an offering price of $13.00 per share and on
June 19, 1996, the Company completed the sale of an additional 300,000 common
shares (which represented the Underwriters' over-allotment option) at a price of
$13.00 per share. Total proceeds to the Company, net of the underwriting
discount and issuance costs, were $27,066,342.
On March 15, 1996, the shareholders approved a 2-for-1 stock split
effective March 29, 1996, in the form of a dividend of the Company's common
stock to shareholders of record on February 22, 1996. Additionally, the
shareholders approved an increase in the number of common stock shares
authorized from 1,800,000 to 10,000,000, approved a change in the par value of
the common shares from $1 to no par value and approved the authorization of
1,000,000 preferred shares, without par value.
On September 12, 1995, the Board of Directors approved a 5-for-4 stock
split effective September 30, 1995, in the form of a dividend of the Company's
common stock to shareholders of record on September 15, 1995. All references in
the accompanying financial statements to the number of average shares and per
share data have been restated to reflect the stock splits except for the number
of shares issued and outstanding at December 31, 1995, as reflected on the
consolidated balance sheets.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Federal Funds Sold - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Investment Securities - For investment securities, fair values are
based on quoted market prices or dealer quotes.
Loans - Fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Federal Home Loan Bank Stock - For FHLB stock, carrying value is
a reasonable estimate of fair value.
Deposit Liabilities - The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable on
demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting future cash flows
using the rates currently offered for deposits of similar remaining
maturities.
Securities Sold Under Agreements to Repurchase - For these short-term
instruments, the carrying amount is a reasonable estimate of fair
value.
F-24
<PAGE>
Federal Home Loan Bank Advances - Rates currently available to the
company for advances with similar terms and remaining maturities are
used to estimate fair value of existing debt.
Debt - The carrying value of variable rate borrowed funds is a
reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit -
Commitments to extend credit and standby letters of credit represent
agreements to lend to a customer at the market rate when the loan is
extended, thus the commitments and letters of credit are not considered
to have fair value.
The fair values of the Company's financial instruments at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- ---------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ --------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............ $ 7,134,025 $ 7,134,000 $ 6,339,777 $ 6,340,000
Federal funds sold................... 10,635,000 10,635,000 6,340,000 6,340,000
Investment securities................ 42,820,138 42,704,000 24,637,235 24,638,000
Federal Home Loan Bank
stock............................... 1,542,900 1,543,000 291,300 291,000
Loans................................ 217,586,504 217,618,000 113,064,706 114,631,000
Less: allowance for loan
losses.............................. (2,522,502) (2,523,000) (1,735,482) (1,735,000)
---------- ---------- ---------- ----------
277,196,065 277,111,000 148,937,536 150,505,000
Financial liabilities:
Deposits............................. 235,573,968 237,354,000 136,246,437 137,729,000
Securities sold under
agreements to repurchase........... 5,599,420 5,604,000 747,118 747,000
Federal Home Loan Bank
advances............................ 9,377,456 9,412,000 755,000 755,000
Debt................................. - - 5,000,000 5,000,000
----------- ----------- ----------- -----------
$250,550,844 $252,370,000 $142,748,555 $144,231,000
=========== =========== =========== ===========
</TABLE>
F-25
<PAGE>
19. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include standby letters of credit and
commitments to extend credit in the form of unused lines of credit. The Banks
use the same credit policies in making commitments and conditional obligations
as they do for on-balance sheet instruments.
At March 31, 1997 and December 31, 1996 and 1995, the Banks had the
following financial instruments whose approximate contract amounts represent
credit risk:
<TABLE>
<CAPTION>
At At
March 31, December 31,
--------------------- --------------------------------------------
1997 1996 1995
--------------------- --------------------- --------------------
(Unaudited)
<S> <C> <C> <C>
Standby letters of credit................. $ 1,480,000 $ 1,081,875 $ 953,900
Commitments to extend credit.............. 12,976,000 9,667,341 4,571,904
</TABLE>
Standby letters of credit represent conditional commitments issued by
the Banks to guarantee the performance of a third party. The credit risk
involved in issuing these letters of credit is essentially the same as the risk
involved in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and income
producing properties.
20. CONCENTRATION OF CREDIT RISK
The Banks grant residential, commercial and consumer related loans to
customers primarily located in Lewis, Bracken, Scott, Bath, Henry and adjoining
counties in Kentucky. Although they have diverse loan portfolios, a substantial
portion of their debtors' ability to perform is somewhat dependent on the
economic conditions of the counties in which they operate.
21. LEGAL PROCEEDINGS
Legal proceedings involving the Company and its subsidiaries
periodically arise in the ordinary course of business, including claims by
debtors and their related interests against the Company's subsidiaries following
initial collection proceedings. These legal proceedings sometimes can involve
claims for substantial damages. At December 31, 1996, management is unaware of
any legal proceedings, of which the ultimate result would have a material
adverse effect upon the consolidated financial statements of the Company.
F-26
<PAGE>
22. REGULATORY MATTERS
The Company and the subsidiary Banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct 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 guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications 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 Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve Bank categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
Company's category.
F-27
<PAGE>
The Company's and the Banks' capital amounts and ratios as of March 31,
1997, are presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------------------------ ----------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ------------ --------- ------------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
Consolidated................. $37,731,000 17.13% $17,623,000 8.0% $22,029,000 10.0%
Citizens Deposit Bank........ 8,493,000 12.40 5,478,000 8.0 6,848,000 10.0
Farmers Deposit Bank......... 11,414,000 13.43 6,818,000 8.0 8,522,000 10.0
Georgetown Bancorp........... 4,191,000 14.63 2,292,000 8.0 2,865,000 10.0
Citizens Bank................ 2,501,000 14.92 1,341,000 8.0 1,676,000 10.0
Bank of Germantown........... 2,203,000 15.79 1,116,000 8.0 1,396,000 10.0
Tier 1 Capital
(to Risk-Weighted Assets):
Consolidated................. 35,061,000 15.92 8,812,000 4.0 13,218,000 6.0
Citizens Deposit Bank........ 7,763,000 11.34 2,739,000 4.0 4,109,000 6.0
Farmers Deposit Bank......... 10,469,000 12.28 3,409,000 4.0 5,113,000 6.0
Georgetown Bancorp........... 3,889,000 13.58 1,146,000 4.0 1,719,000 6.0
Citizens Bank................ 2,288,000 13.65 670,000 4.0 1,006,000 6.0
Bank of Germantown........... 2,027,000 14.52 558,000 4.0 837,000 6.0
Tier 1 Capital
(to Average Assets):
Consolidated................. 35,061,000 12.25 11,650,000 4.0 14,562,000 5.0
Citizens Deposit Bank........ 7,763,000 8.74 3,553,000 4.0 4,442,000 5.0
Farmers Deposit Bank......... 10,469,000 9.28 4,514,000 4.0 5,643,000 5.0
Georgetown Bancorp........... 3,889,000 9.67 1,608,000 4.0 2,010,000 5.0
Citizens Bank................ 2,288,000 9.12 1,003,000 4.0 1,254,000 5.0
Bank of Germantown........... 2,027,000 9.98 812,000 4.0 1,015,000 5.0
</TABLE>
F-28
<PAGE>
The Company's and the Banks' capital amounts and ratios as of December
31, 1996, are presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
------------------------------ ----------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- ------------ --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets):
Consolidated..................... $36,887,000 17.12% $17,235,000 8.0% $21,544,000 10.0%
Citizens Deposit Bank............ 8,085,000 11.75 5,505,000 8.0 6,882,000 10.0
Farmers Deposit Bank............. 10,878,000 13.20 7,012,000 8.0 8,765,000 10.0
Georgetown Bancorp............... 4,007,000 15.38 2,084,000 8.0 2,605,000 10.0
Citizens Bank.................... 2,335,000 14.64 1,276,000 8.0 1,596,000 10.0
Bank of Germantown............... 2,102,000 15.75 1,068,000 8.0 1,334,000 10.0
Tier 1 Capital
(to Risk-Weighted Assets):
Consolidated..................... 34,364,000 15.95 8,618,000 4.0 12,926,000 6.0
Citizens Deposit Bank............ 7,375,000 10.72 2,753,000 4.0 4,129,000 6.0
Farmers Deposit Bank............. 10,003,000 12.14 3,506,000 4.0 5,259,000 6.0
Georgetown Bancorp............... 3,724,000 14.29 1,042,000 4.0 1,563,000 6.0
Citizens Bank.................... 2,136,000 13.39 638,000 4.0 957,000 6.0
Bank of Germantown............... 1,940,000 14.54 534,000 4.0 801,000 6.0
Tier 1 Capital
(to Average Assets):
Consolidated..................... 34,364,000 12.04 11,704,000 4.0 14,631,000 5.0
Citizens Deposit Bank............ 7,375,000 8.73 3,379,000 4.0 4,223,000 5.0
Farmers Deposit Bank............. 10,003,000 8.95 4,685,000 4.0 5,857,000 5.0
Georgetown Bancorp............... 3,724,000 10.51 1,417,000 4.0 1,771,000 5.0
Citizens Bank.................... 2,136,000 8.88 937,000 4.0 1,216,000 5.0
Bank of Germantown............... 1,940,000 9.86 787,000 4.0 984,000 5.0
</TABLE>
F-29
<PAGE>
23. PARENT COMPANY FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
------------------ ---------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
(Unaudited)
<S> <C> <C> <C>
Assets:
Cash......................................................... $ 1,729,565 $ 1,653,723 $ 361,651
Interest-bearing deposits in subsidiary banks................ 2,996,675 4,047,000 -
--------- ---------- ----------
Total cash and cash equivalents............................ 4,726,240 5,700,723 361,651
Investment in subsidiaries................................... 32,108,926 30,988,028 12,952,170
Other investments............................................ 2,000,000 2,000,000 2,000,000
Premises and equipment....................................... 1,561,537 1,186,609 596,639
Other assets................................................. 171,458 114,219 400,133
-------- ---------- ----------
Total Assets............................................... $40,568,161 $39,989,579 $16,310,593
========== ========== ==========
Liabilities and Stockholders' Equity:
Debt......................................................... $ - $ - $ 5,000,000
Other liabilities............................................ 158,874 126,193 95,281
---------- ---------- ----------
Total liabilities.......................................... 158,874 126,193 5,095,281
Stockholders' equity:
Preferred stock, no par value; 1,000,000 shares
authorized; none issued or outstanding................... - - -
Common stock, no par value; 10,000,000 shares
authorized; 4,209,090 shares in 1996 (954,545
shares in 1995) issued and outstanding................... 977,545 977,545 954,545
Surplus.................................................... 32,940,927 32,940,927 5,897,585
Retained earnings.......................................... 6,743,081 6,111,715 4,493,184
Net unrealized losses on securities available-for-sale..... (252,266) (166,801) (130,002)
---------- ---------- ----------
Total stockholders' equity............................... 40,409,287 39,863,386 11,215,312
---------- ---------- ----------
Total Liabilities and Stockholders' Equity................... $40,568,161 $39,989,579 $16,310,593
========== ========== ==========
</TABLE>
F-30
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Three
Months Ended For the Years Ended
March 31, December 31,
----------------- -----------------------------------------------------------
1997 1996 1995 1994
----------------- ------------------ ------------------ -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Income:
Dividends from subsidiary banks.............. $ - $ 596,745 $1,825,000 $ 553,002
Other income................................. 100,026 433,674 176,794 28,671
--------- --------- --------- ---------
Total income............................... 100,026 1,030,419 2,001,794 581,673
Expenses:
Interest expense............................. - 167,413 252,999 28,006
Other expenses............................... 184,429 472,558 341,627 127,315
--------- --------- --------- ---------
Total expenses............................. 184,429 639,971 594,626 155,321
Income before income taxes and equity in
undistributed income of subsidiaries......... (84,403) 390,448 1,407,168 426,352
Applicable income tax benefits................. 40,627 95,222 178,065 30,157
--------- --------- --------- ---------
Income before equity in undistributed income
of subsidiaries.............................. (43,776) 485,670 1,585,233 456,509
Equity in undistributed income of subsidiaries. 1,201,278 2,949,906 571,249 1,056,938
--------- --------- --------- ---------
Net Income................................. $1,157,502 $3,435,576 $2,156,482 $1,513,447
========= ========= ========= =========
</TABLE>
F-31
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three
Months Ended For the Years Ended
March 31, December 31,
------------------- ------------------------------------------------------
1997 1996 1995 1994
------------------- ------------------ --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income......................................... $1,157,502 $ 3,435,576 $ 2,156,482 $ 1,513,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 8,540 27,704 10,632 -
Equity in undistributed income of subsidiaries... (1,201,278) (2,949,906) (571,249) (1,056,938)
Change in other assets........................... (57,239) 285,914 (258,633) (16,866)
Change in other liabilities...................... 32,681 30,912 88,681 6,600
---------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities......................... (59,794) 830,200 1,425,913 446,243
---------- ----------- ---------- ----------
Cash Flows from Investing Activities:
Purchase of subsidiary banks....................... - (12,622,751) (1,496,387) -
Capital contributed to subsidiaries................ (5,085) (2,500,000) (1,401,000) -
Purchase of other investments...................... - - (500,000) (1,500,000)
Purchase of premises and equipment................. (383,468) (617,674) (607,341) -
--------- ----------- ---------- -----------
Net cash used in investing activities............ (388,553) (15,740,425) (4,004,728) (1,500,000)
Cash Flows from Financing Activities:
Dividends paid..................................... (526,136) (1,817,045) (859,091) (540,000)
Proceeds from issuance of common stock............. - 27,066,342 - -
Proceeds from debt................................. - - 3,500,000 1,500,000
Repayment of debt.................................. - (5,000,000) - -
----------- ----------- ------------- -------------
Net cash provided by (used in)
financing activities........................... (526,136) 20,249,297 2,640,909 960,000
----------- ---------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents................................... (974,483) 5,339,072 62,094 (93,757)
Cash and cash equivalents at beginning of period..... 5,700,723 361,651 299,557 393,314
--------- ---------- ----------- -----------
Cash and cash equivalents at end of period........... $4,726,240 $ 5,700,723 $ 361,651 $ 299,557
========= ========== =========== ==========
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
=================================================== ===================================================
No person has been authorized in connection with
the offering made hereby to give any information
or to make any representation not contained in
this prospectus and, if given or made, such
information or representation must not be relied
upon as having been authorized by the company or
any underwriter. This prospectus does not consti-
tute an offer to sell or a solicitation of any offer to
buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it $25,000,000
is unlawful to make such offer or solicitation.
Neither the delivery of this prospectus nor any sale PFBI CAPITAL TRUST
made hereunder shall, under any circumstances,
create any implication that the information con-
tained herein is correct as of any date subsequent 9.75% Preferred Securities
to the date hereof. (Liquidation Amount $25 per
Preferred Security)
TABLE OF CONTENTS guaranteed, as described herein, by
PAGE
----
Summary......................................... 5 PREMIER FINANCIAL
Selected Consolidated Financial Data............ 10 BANCORP, INC.
Risk Factors.................................... 11
PFBI Capital Trust.............................. 20
Use of Proceeds................................. 21
The Sabina Acquisition.......................... 21
Capitalization.................................. 22 -------------------
Accounting Treatment............................ 23 PROSPECTUS
Management's Discussion and Analysis -------------------
of Financial Condition and Results
of Operations................................. 23
Business of the Company......................... 48
Management...................................... 50
Certain Relationships and Related Advest, Inc.
Transactions.................................. 54
Supervision and Regulation...................... 56
Description of Preferred Securities............. 60
Description of Junior Subordinated June 5, 1997
Debentures.................................... 75
Description of Guarantee........................ 86
Relationship Among the Preferred
Securities, the Junior Subordinated
Debentures and the Guarantee.................. 88
Certain Federal Income Tax
Consequences.................................. 90
Certain ERISA Considerations.................... 95
Underwriting.................................... 95
Validity of Securities.......................... 97
Experts......................................... 98
Available Information........................... 98
Financial Statements............................ F-1
=================================================== ===================================================
</TABLE>
