Item 1. Business The Company and the Banks Incorporated in 1981,Trans Financial Bancorp, Inc. ("the company") is a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956 and the Home Owners' Loan Act, which has four commercial bank subsidiaries: Trans Financial Bank, National Association, headquartered in Bowling Green, Kentucky ("TFB-KY"), Trans Financial Bank, headquartered in Pikeville, Kentucky ("TFB-Pikeville"), Trans Financial Bank Tennessee, National Association, headquartered in Cookeville, Tennessee ("TFB-TN, NA"), and Trans Financial Bank of Martin, National Association, headquartered in Martin, Kentucky, ("TFB-Martin") and two thrift subsidiaries: Trans Financial Bank, Federal Savings Bank, headquartered in Russellville, Kentucky, ("TFB, FSB") and Trans Financial Bank of Tennessee, F.S.B., headquartered in Tullahoma, Tennessee, ("TFB-TN, FSB"). Collectively, these six institutions are referred to in this report as "the banks". On December 31, 1994, the company had total consolidated assets of $1.618 billion, total loans of $1.144 billion, total deposits of $1.336 billion and shareholders' equity of $111.6 million. The company acquired its first thrift subsidiary, TFB, FSB, in November 1990. Effective January 1, 1991, the company's two former bank subsidiaries were consolidated into one national banking institution, TFB-KY. On August 30, 1991, as the result of a joint bid with PNC Bank for certain deposits and assets of Future Federal Savings Bank, Louisville, Kentucky, under the Accelerated Resolution Program of the Resolution Trust Corporation, TFB-KY assumed approximately $75.9 million in deposits and acquired approximately $11 million in consumer loans and received approximately $64.3 million in cash (net of a $1.0 million premium), all related to the Glasgow, Kentucky and Tompkinsville, Kentucky branches of Future Federal Savings Bank. Effective March 26, 1992, the company acquired First Federal Savings Bank of Tennessee, Tullahoma, Tennessee, and effective March 27, 1992, the company acquired Maury Federal Savings Bank, Columbia, Tennessee. These two Tennessee thrift institutions were merged on November 27, 1992, to form TFB-TN,FSB. On August 7, 1992, the company acquired (through First Federal Savings Bank of Tennessee) the deposits and branch operations of five middle Tennessee branches of Heritage Federal Bank for Savings, a Tennessee-based savings bank. In this transaction, the company's Tullahoma-based affiliate assumed approximately $55 million in deposits, acquired approximately $2.3 million in premises and equipment and received approximately $52 million in cash (net of a premium). On December 31, 1992, the company merged with Dawson Springs Bancorp, Inc., the holding company for Kentucky State Bank, Scottsville, Kentucky, and Commercial Bank of Dawson Springs, Dawson Springs, Kentucky. These banks were merged into TFB-KY on December 31, 1992. On July 6, 1993, in a transaction accounted for as a purchase, the company acquired Trans Kentucky Bancorp, Pikeville, Kentucky, the holding company for The Citizens Bank of Pikeville. At the acquisition date, TFB-Pikeville (the former Citizens Bank of Pikeville) had total assets of $188.7 million, net loans of $107.6 million and total deposits of $163.9 million. The aggregate cost, including consideration and acquisition costs, totaled $18.8 million. On February 1, 1995 TFB-Pikeville was converted to a national bank and its name was changed to Trans Financial Bank of Pikeville, National Association. On February 15, 1994, the company merged with Kentucky Community Bancorp. Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of approximately $175 million. Under the terms of the merger the shares of KCB common stock outstanding were converted into 1,374,962 shares of common stock of the company. These three banks were consolidated into the operations of TFB-KY on March 31, 1994. On April 22, 1994, the company merged with Peoples Financial Services, Inc. ("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and Trust of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank ("Citizens"), with combined assets of approximately $120 million. Under the terms of the merger the shares of PFS common stock outstanding were converted into 1,302,254 shares of common stock of the company. Peoples Bank became TFB- TN, NA and Citizens was consolidated into the operations of TFB-TN, FSB on July 31, 1994. On August 31, 1994, the company merged with FGC Holding Company ("FGC") of Martin, Kentucky, the holding company for First Guaranty National Bank, with approximately $125 million in assets. Under the terms of the merger, the shares of FGC common stock outstanding were converted into 1,050,000 shares of common stock of the company and the shares of FGC preferred stock were retired. First Guaranty became TFB-Martin on September 30, 1994. The transactions described in the preceding three paragraphs have been accounted for using the pooling of interests method of accounting and, accordingly, all financial data has been restated as if the entities were combined for all periods presented. In January 1994, Trans Travel, Inc, a full-service travel agency, was introduced. Trans Financial Investment Services, Inc. , a full-service securities broker-dealer, began operations in August 1994. Then, in the fourth quarter of 1994, Trans Financial Mortgage Company, a mortgage banking company, was formed. All mortgage banking activities of TFB-TN, FSB are expected to be transferred to Trans Financial Mortgage Company in the second quarter of 1995. Interest on domestic, commercial and mortgage loans constitutes the largest contribution to the operating revenues of the banks. TFB-KY, TFB-Pikeville, TFB- TN, NA, and TFB-Martin provide a full range of corporate and retail banking services, including the acceptance of deposits for checking, savings and time deposit accounts; making of secured and unsecured loans to corporations, individuals and others; issuance of letters of credit; rental of safe deposit boxes; and financial counseling for individuals and institutions. In addition, TFB-KY is an equity partner in Quest, a partnership of several Kentucky banks engaged in the development and operation of a regional automated teller machine network. TFB-KY and TFB-Pikeville provide a wide variety of personal and corporate trust and trust-related services, including serving as executor of estates; as trustee under testamentary and inter vivos trusts; as guardian of the estates of minors and incompetents; as escrow agent under various agreements; and as financial advisor to and custodian for individuals, corporations and others. Corporate trust services include serving as registrar and transfer agent for corporate securities and as corporate trustee under corporate trust indentures. At December 31, 1994, approximately $436 million in assets were managed by the trust department of TFB-KY. Historically, the principal business of TFB, FSB and TFB-TN, FSB has been the acceptance of savings deposits from the general public and the origination and purchase of mortgage loans for the purpose of constructing, financing or refinancing one- to four-family dwellings. Since its acquisition of TFB, FSB in November 1990 and TFB-TN, FSB in March 1992, the company has introduced a variety of additional products and services designed to attract a more diverse customer base, including checking accounts, consumer, installment and commercial loans, trust and brokerage services. Trans Financial Investment Services, Inc. offers a wide range of investment products and services, including financial planning, mutual funds, annuities, and individual stocks and bonds to customers of the banks and others. Trans Travel offers travel services to customers of the banks and others. Customers can make travel arrangements by visiting a bank branch office or by using a tollfree 800 number. In addition to taking care of travel arrangements for individual and corporate customers, Trans Travel is packaging its own domestic and international tours. TFB-KY has eighteen offices; six located in Bowling Green, Kentucky, two located in Glasgow, Kentucky, two located in Scottsville, Kentucky, two located in Morehead, Kentucky, two located in Maysville, Kentucky, and one located in each of Augusta, Cave City, Dawson Springs, and Tompkinsville in Kentucky. TFB- KY also has a loan production office in Elizabethtown, Kentucky. TFB-Pikeville has seven offices; three located in Pikeville, Kentucky, and one each in Elkhorn City, Meta, Belfry and Virgie, Kentucky. TFB, FSB has two offices; one located in Russellville, Kentucky, and one in Auburn, Kentucky. TFB-TN, FSB has nine branch locations; two in Columbia, Tennessee, and one each in the Tennessee communities of Tullahoma, Mt. Pleasant, Manchester, Rockwood, Kingston, Shelbyville, and Winchester. In addition to its full service branches, TFB-TN, FSB has a mortgage operations center in Tullahoma and loan production offices in Nashville, Chattanooga, Knoxville, and Jackson. TFB-TN, NA has nine offices; two located in Cookeville, Tennessee, and one located in each of Clarksville, Crossville, Franklin, Lebanon, McMinnville, Murfreesboro, and Sparta. TFB- Martin has two offices; one located in Martin, Kentucky, and one located in Prestonsburg, Kentucky.
Competition The deregulation of the banking industry and the enactment in Kentucky and other states of legislation permitting multi-bank holding companies as well as interstate banking has created a highly competitive environment for banking in the company's market area. As of June 30, 1994 (the latest date for which competitive information is available), TFB-KY is the largest financial institution in the Bowling Green area with 33% of bank deposits and 29% of total deposits for all financial institutions. TFB-KY is also the largest financial institution in Glasgow/Cave City with 46% of bank deposits and 38% of total deposits for all financial institutions. In the Dawson Springs area, TFB-KY is the fifth largest financial institution with 7% of total bank deposits and 6% of total deposits for all financial institutions. In the Tompkinsville area, TFB-KY is the third largest financial institution with 18% of total bank deposits and 18% of total deposits for all financial institutions. In the Maysville area, TFB-KY is the largest financial institution with 46% of total bank deposits and 38% of total deposits for all financial institutions. In the Morehead area, TFB-KY ranks second with 40% of total bank deposits and 30% of total deposits for all financial institutions. In the Augusta area, TFB-KY is the second largest financial institution with 30% of total bank deposits and 30% of total deposits for all financial institutions. TFB-Pikeville is the third largest financial institution in Pikeville as of June 30, 1994, with 22% of total bank deposits and 21% of total deposits for all financial institutions. TFB, FSB is the third largest financial institution in Russellville with 20% of total bank deposits and 17% of total deposits for all financial institutions. TFB-Martin is the second largest financial institution in Floyd County with 29% of total bank deposits and 28% of total deposits for all financial institutions. TFB-TN, NA is the fifth largest financial institution in Cookeville with 8% of total bank deposits and 8% of total deposits for all financial institutions. TFB-TN, FSB is the largest financial institution in Tullahoma, Tennessee with 34% of total bank deposits and 13% of total deposits for all financial institutions. The company actively competes in its markets with other commercial banks and financial institutions for all types of deposits, loans, trust accounts and the provision of financial, trust, and other services. The company also competes generally with insurance companies, savings and loan associations, credit unions, brokerage firms, other financial institutions, and institutions which have expanded into the quasi-financial market. Many of these competitors have resources substantially in excess of those of the company, have broader geographic markets and higher lending limits than the banks and, therefore, are able to make larger loans, sell a broader product line, and make more effective use of advertising than can the company or the banks.
Supervision and Regulation Bank holding companies, commercial banks and savings banks are extensively regulated under both federal and state law. Any change in applicable law or regulation may have a material effect on the businesses and prospects of the company and the banks. The company, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. Also, as a registered savings and loan holding company, the company is subject to the supervision of and regulation by the Office of Thrift Supervision ("OTS"). In addition, the company is subject to the provisions of Kentucky's and Tennessee's banking laws regulating bank acquisitions and certain activities of controlling bank shareholders. TFB-KY, TFB-TN, NA, TFB-Pikeville, and TFB-Martin are subject to the supervision of, and regular examination by, the Office of the Comptroller of the Currency. TFB, FSB and TFB-TN, FSB are subject to the supervision of, and regular examination by, the OTS. The Federal Deposit Insurance Corporation insures the deposits of the banks to the current maximum of $100,000 per depositor. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Act"), when fully phased in, will remove state law barriers to interstate bank acquisitions and will permit the consolidation of interstate banking operations. Under the Act, effective September 29, 1995, adequately capitalized and managed bank holding companies may acquire banks in any state, subject to (i) Community Reinvestment Act compliance, (ii) federal and state antitrust laws and deposit concentration limits, and (iii) state laws restricting the acquisition of a bank that has been in existence for less than a minimum period of time (up to five years). The Act's interstate consolidation and branching provisions will become operative on June 1, 1997, although any state can, prior to that time, adopt legislation to accelerate interstate branching or prohibit it completely. The Act's interstate consolidation and branching provisions will permit banks to merge across state lines and, if state laws permit de novo branching, to establish a new branch as its initial entry into a state.
Statistical Information Certain statistical information is included in a separate section of the report on pages 17 through 29 and on page 40, and those pages are incorporated herein by reference.
Description of Statistical Information Page
Average Consolidated Balance Sheets and Net Interest Analysis 17 Analysis of Year-to-Year Changes in Net Interest Income 18 Loans Outstanding 20 Loan Maturities and Interest Rate Sensitivity 21 Nonperforming Assets (Including Potential Problem Loans) 21 Summary of Loan Loss Experience 23 Allocation of Allowance for Loan Losses 23 Allocation of Year-End Allowance for Loan Losses and Percentage of Each Type of Loan to Total Loans 24 Carrying Value of Securities 25 Maturity Distribution of Securities 25 Maturity of Time Deposits of $100,000 or More 26 Short-Term Borrowings 26 Consolidated Statistical Information 29 Impact of Nonaccrual Loans on Interest Income 40
Item 2.
Item 2. Properties The main banking office of TFB-KY, which also serves as the principal office of the company, is located at 500 East Main Street, Bowling Green, Kentucky 42101. In addition, TFB-KY operates seventeen branches. All branches offer a full range of banking services and most are equipped with an automated teller machine for 24-hour banking services. TFB-KY owns all of the properties at which it conducts its business except the Ashley Circle and Nashville Road branches in Bowling Green and the Elizabethtown loan production office. TFB-KY also leases property in Bowling Green for its operations center. TFB, FSB owns its main banking office at 135 West Fourth Street, Russellville, Kentucky and leases its branch facility at 107 West Main, Auburn, Kentucky. TFB-TN, FSB owns all the properties at which it conducts business except the Chattanooga, Nashville, Jackson, and Knoxville loan production offices and the Blythewood branch office. TFB-TN, FSB also leases office spaces in Nashville, Tennessee for certain administrative personnel. TFB-Pikeville owns all the properties at which it conducts business except the Virgie branch and one of its Pikeville branches (the North Mayo Trail branch). TFB-TN, NA owns all the properties at which it conducts business except the Franklin branch. TFB-Martin owns all the properties at which it conducts business. Note 7 to the company's consolidated financial statements included on page 41 of this report contains additional information relating to amounts invested in premises and equipment.
Item 3.
Item 3. Legal Proceedings In the ordinary course of operations, the banks are defendants in various legal proceedings. In the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of the company or the banks.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the last quarter of the period covered by this report.
Item 4a. Executive Officers of the Registrant The following table sets forth the name, age and position with the company and the banks of the executive officers of the company as of December 31, 1994. Officers of the company and the banks are elected annually.
Served as an Executive Position with the Name Officer Since Age Company and the Banks
Douglas M. Lester 1984 52 Chairman of the Board, President and Chief Executive Officer of the company; Chairman of the Board, President, and Chief Executive Officer of TFB-KY; Director of TFB-KY and TFB-Pikeville Vince A. Berta 1993 36 Executive Vice President, Treasurer, and Chief Financial Officer of the company; Chief Financial Officer of each of the banks; Director of TFB-TN, FSB Barry D. Bray 1984 48 Executive Vice President, Chief Credit Officer and Director of the company; Chief Credit Officer and Director of TFB-KY Roger E. Lundin 1987 50 Senior Vice President and Director of Human Resources of the company Michael J. Moser 1994 48 Senior Vice President and Director of Marketing for the company John T. Perkins 1984 51 Senior Vice President and Chief Operations Officer of the company; Director of TFB, FSB Dena R. Schaaf 1992 38 Senior Vice President of Risk Management and Compliance of the company Jay B. Simmons 1993 38 Senior Vice President, General Counsel and Secretary of the company; Director of TFB-TN, FSB
Mr. Lester joined TFB-KY as its President and Chief Executive Officer in 1984, prior to the time the company became the holding company of TFB-KY. Mr. Berta joined the company in April 1993. Prior to that he was Vice President and Manager of Functional Control with PNC Bank. Mr. Bray joined TFB-KY in 1982 and has served as Chief Credit Officer since 1984. Mr. Bray was President of TFB-KY from December 1991 through March 1994. He was elected Executive Vice President of the company in 1988. Mr. Lundin, until joining TFB-KY in 1986, was employed by a division of PACCAR, Inc., an automotive-related company, as Manager of Employee Relations. Mr. Moser joined the company in July 1994. Prior to that, he was Senior Vice President and Director of Corporate Marketing for West One Bancorp in Boise, Idaho. Mr. Perkins joined TFB-KY in 1973 and has served as Chief Operations Officer since 1981. Ms. Schaaf joined the company in November 1992. Prior to that, she was Examiner-In-Charge of Asset Quality for regional banks with the Office of Comptroller of Currency. Mr. Simmons joined the company in November 1993. Prior to that, he was a partner in a Denver law firm, specializing in financial institutions law, and was a vice president on the legal staff of Colorado National Bankshares, Inc. None of the above officers is related to another and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of the company acting solely in their capacities as such, and other than the employment agreement between Mr. Lester and the company and TFB-KY, which became effective January 1, 1991.
Part II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters The registrant's common stock is traded on the NASDAQ National Market System under the symbol TRFI. As of December 31, 1994, there were 1,907 shareholders of record. Following is a summary of market prices and dividends declared for the registrant's common stock for the quarterly periods indicated:
Stock Price High Low Dividend First quarter, 1993 $24.00 $14.625 $.1275 Second quarter, 1993 23.75 19.25 .1275 Third quarter, 1993 20.25 17.00 .1275 Fourth quarter, 1993 18.75 14.50 .1275 First quarter, 1994 17.25 14.75 .14 Second quarter, 1994 16.00 12.75 .14 Third quarter, 1994 16.25 15.25 .14 Fourth quarter, 1994 15.9375 12.75 .14
Additional information for this item is included in Note 10 to the consolidated financial statements on page 44 of this report.
Item 6.
Item 6. Selected Financial Data The information for this item is included in the section entitled "Consolidated Statistical Information" on page 29 of this report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information for this item is included in the section entitled "Management's Discussion and Analysis," on pages 14 through 28 of this report.
Item 8.
Item 8. Financial Statements and Supplementary Data The following consolidated financial statements of the registrant and report of independent auditors are included in a separate section of this report on pages 30 through 51: Report of KPMG Peat Marwick LLP, Independent Auditors Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Income - Years ended December 31, 1994, 1993 and Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows - Years ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements
Additional information for this item is included in the table entitled "Quarterly Results of Operations" on page 28 of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant The information set out in the sections entitled "Voting Securities and Ownership Thereof" and "Election of Directors" of the registrant's Proxy Statement on pages 2 through 8 and the information set out in the section entitled "Executive Officers of the Registrant" on page 7 of Part I of this report are incorporated herein by reference.
Item 11.
Item 11. Executive Compensation The information set out in the section entitled "Executive Compensation and Other Information" of the registrant's Proxy Statement at pages 8 through 16 is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management The information set out in the section entitled "Voting Securities and Ownership Thereof" of the registrant's Proxy Statement at pages 2 through 4 is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions The information set out in the sections entitled "Transactions with Management and Others" and "Compensation Committee Interlocks and Insider Participation" of the registrant's Proxy Statement on pages 14 through 16 is incorporated herein by reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial statements filed The list of consolidated financial statements together with the report thereon of KPMG Peat Marwick LLP, as set forth in Part II, Item 8 of this report is incorporated herein by reference. (2) Financial statement schedules Schedules to the consolidated financial statements are omitted, as the required information is not applicable. (3) List of exhibits The list of exhibits listed on the Exhibit Index on pages 52 and 53 of this report is incorporated herein by reference. The management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 14(c) are noted by asterisk (*) in the Exhibit Index.
(b) Reports on Form 8-K (1)The registrant filed on November 14, 1994, an amended report on Form 8-K dated August 31, 1994 reporting the merger of FGC Holding Company ("FGC") with and into the registrant, and the issuance of 1,050,000 shares of common stock of the registrant, pursuant to an Agreement and Plan of Reorganization and Plan of Merger dated January 28, 1994.
The following consolidated financial statements of FGC, notes related thereto and independent auditors' report thereon were filed as a part of the report: (a) Independent Auditors' Report; (b) Consolidated Balance Sheets as of December 31, 1993 and 1992; (c) Consolidated Statements of Income for the years ended December 31, 1993 and 1992; (d) Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993 and 1992; (e) Consolidated Statements of Cash Flows for the years ended December 31, 1993 and 1992; and (f) Notes to Consolidated Financial Statements.
The following unaudited consolidated financial statements of FGC were filed as a part of the report: (a) Consolidated Balance Sheet as of June 30, 1994 (unaudited); (b) Consolidated Statement of Income for the six months ended June 30, 1994 (unaudited); and (c) Consolidated Statement of Cash Flows for the six months ended June 30,1994 (unaudited).
The following unaudited pro forma consolidated financial statements of Trans Financial Bancorp, Inc. and notes related thereto were filed as a part of the report: (a) Pro Forma Balance Sheet as of June 30, 1994 (unaudited); (b) Pro Forma Income Statement for the six months ended June 30, 1994 (unaudited); (c) Pro Forma Income Statement for the year ended December 31, 1993 (unaudited); (d) Pro Forma Income Statement for the year ended December 31, 1992 (unaudited); (e) Pro Forma Income Statement for the year ended December 31, 1991 (unaudited); and (f) Notes to Pro Forma Financial Statements (unaudited).
(2) The registrant filed on December 6, 1994, a report on Form 8-K which included financial statements of Kentucky Community Bancorp, Inc. and supplemental consolidated financial statements of Trans Financial Bancorp, Inc.
The following consolidated financial statements of Kentucky Community Bancorp, Inc., notes related thereto and independent auditors' report thereon were filed as a part of the report: (a) Independent Auditors' Report; (b) Consolidated Balance Sheets as of December 31, 1993 and 1992; (c) Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991; (d) Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991; (e) Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991; and (f) Notes to Consolidated Financial Statements.
The following supplemental consolidated financial statements of Trans Financial Bancorp, Inc., notes related thereto and independent auditors' report thereon were filed as a part of the report: (a) Independent Auditor's Report; (b) Supplemental Consolidated Balance Sheets as of December 31, 1993 and 1992; (c) Supplemental Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991; (d) Supplemental Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991; (e) Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991; and (f) Notes to Supplemental Consolidated Financial Statements.
(c) Exhibits The exhibits listed on the Exhibit Index on pages 52 and 53 of this Form 10-K are filed as a part of this report.
(d) Financial statement schedules No financial statement schedules are required to be filed as a part of this report. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Trans Financial Bancorp, Inc. (Registrant)
By: /s/ Douglas M. Lester
Douglas M. Lester Chairman of the Board, President and Chief Executive Officer
Date: March 20, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 20, 1995, by the following persons on behalf of the registrant and in the capacities indicated.
(a) Principal Executive Officer:
/s/ Douglas M. Lester Douglas M. Lester Chairman of the Board, President and Chief Executive Officer
(b) Principal Financial Officer:
/s/ Vince A. Berta Vince A. Berta Executive Vice President and Chief Financial Officer
(c) Principal Accounting Officer:
/s/ Edward R. Matthews Edward R. Matthews Controller
(d) Directors:
/s/ Barry D. Bray /s/ Carroll F. Knicely Barry D. Bray Carroll F. Knicely
/s/ Mary D. Cohron /s/ Douglas M. Lester Mary D. Cohron Douglas M. Lester
/s/ Floyd H. Ellis /s/ C. Cecil Martin Floyd H. Ellis C. Cecil Martin
/s/ J. David Francis /s/ Frank Mastrapasqua J. David Francis Frank Mastrapasqua
/s/ Roy E. Gaddie /s/ Joseph I. Medalie Roy E. Gaddie Joseph I. Medalie
/s/ John B. Gaines /s/ James D. Scott John B. Gaines James D. Scott
/s/ David B. Garvin /s/ Charles M. Stewart David B. Garvin Charles M. Stewart
/s/ Wayne Gaunce /s/ William B. Van Meter ayne Gaunce William B. Van Meter
/s/ C.C. Howard Gray /s/ Thomas R. Wallingford C.C. Howard Gray Thomas R. Wallingford
/s/ Charles A. Hardcastle /s/ Roland D. Willock Charles A. Hardcastle Roland D. Willock
Trans Financial Bancorp, Inc. Annual Report on Form 10-K For the Year Ended December 31, 1994
Items 1, 2, 5, 6, 7, 8 and 14 (a)(1)
Financial Statements and Supplementary Data Market for the Registrant's Common Equity and Related Shareholder Matters Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis
FINANCIAL OVERVIEW Trans Financial Bancorp, Inc., ("the company") is a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956 and the Home Owners' Loan Act, which has four commercial bank subsidiaries: Trans Financial Bank, National Association, headquartered in Bowling Green, Kentucky ("TFB-KY"), Trans Financial Bank, headquartered in Pikeville, Kentucky ("TFB-Pikeville"), Trans Financial Bank Tennessee, National Association, headquartered in Cookeville, Tennessee ("TFB-TN, NA"), and Trans Financial Bank of Martin, National Association, headquartered in Martin, Kentucky, ("TFB-Martin") and two thrift subsidiaries: Trans Financial Bank, Federal Savings Bank, headquartered in Russellville, Kentucky, ("TFB, FSB") and Trans Financial Bank of Tennessee, F.S.B., headquartered in Tullahoma, Tennessee, ("TFB-TN, FSB"). Collectively, these six institutions are referred to in this report as "the banks." In addition, the company has a full-service securities broker/dealer, Trans Financial Investment Services, Inc.; a mortgage banking company, Trans Financial Mortgage Company; and a full-service travel agency, Trans Travel Agency, Inc. At December 31, 1994, the company had total consolidated assets of $1.6 billion, total loans of $1.1 billion, total deposits of $1.3 billion and shareholders' equity of $111.6 million. The company's net income increased 2.6% in 1994, to $14.4 million, from $14.1 million in 1993, and earnings per share increased 3.2% to $1.28 per common share, from $1.24 in 1993. Over the past several years, the company has expanded through mergers and acquisitions. These mergers and acquisitions are more fully described below. The company merged with Kentucky Community Bancorp, Inc. ("KCB") on February 15, 1994, with Peoples Financial Services, Inc. ("PFS") on April 22, 1994, and with FGC Holding Company ("FGC") on August 31, 1994. KCB, of Maysville, Kentucky, was the holding company for The State National Bank, Peoples First Bank, and Farmers Liberty Bank, with combined assets of approximately $175 million. These three banks were consolidated into the operations of TFB-KY on March 31, 1994. Under the terms of the merger with KCB, all shares of KCB common stock outstanding were converted into 1,374,962 shares of common stock of the company. PFS, of Cookeville, Tennessee, was the holding company for Peoples Bank and Trust of the Cumberlands ("Peoples Bank") and Citizens Federal Savings Bank ("Citizens"), with combined assets of approximately $123 million. Peoples Bank became TFB-TN, NA and Citizens was consolidated into the operations of TFB-TN, FSB on July 31, 1994. Under the terms of the merger with PFS, all shares of PFS common stock were converted into 1,302,254 shares of common stock of the company. FGC, of Martin, Kentucky, was the holding company for First Guaranty National Bank ("First Guaranty"), with approximately $127 million in assets. First Guaranty became TFB-Martin on September 30, 1994. Under the terms of the merger with FGC, all shares of FGC common stock were converted into 1,050,000 shares of common stock of the company and the shares of FGC preferred stock were retired. Each of these three mergers has been accounted for using the pooling-of- interests method of accounting and, accordingly, financial statements for all periods have been restated to reflect the results of operations of these companies on a combined basis from the earliest period presented except for dividends per share. On July 6, 1993, in a transaction accounted for using the purchase method of accounting, the company acquired Trans Kentucky Bancorp, Pikeville, Kentucky, the holding company for The Citizens Bank of Pikeville. At the acquisition date, TFB-Pikeville (the former Citizens Bank of Pikeville) had total assets of $207 million, net loans of $108 million and total deposits of $164 million. The aggregate cost, including consideration and acquisition costs, totaled $19 million. Effective March 26, 1992, the company acquired First Federal Savings Bank of Tennessee, Tullahoma, Tennessee, in a combination stock and cash purchase valued at $11 million. On March 27, 1992, the company acquired Maury Federal Savings Bank, Columbia, Tennessee, for $11 million in cash. These two thrift institutions had combined assets of $279 million, net loans of $185 million and deposits of $252 million. On August 7, 1992, the company, through its Tullahoma affiliate, acquired the deposits and branch operations of five middle Tennessee branches of Heritage Federal Bank for Savings ("Heritage Federal"). The five acquired branches had approximately $55 million in deposits and $2 million in premises and equipment, and the company received approximately $52 million in cash (net of an $800 thousand premium). These three acquisitions were consolidated on November 27, 1992, to create TFB-TN, FSB, and were accounted for using the purchase method of accounting. On December 31, 1992, the company merged with Dawson Springs Bancorp, Inc. ("DSB"), the holding company for Kentucky State Bank, Scottsville, Kentucky, and Commercial Bank of Dawson, Dawson Springs, Kentucky, by issuing 560,088 shares of common stock of the company. These two banks, with combined assets of approximately $73 million, were merged into TFB-KY on December 31, 1992. The DSB merger was accounted for using the pooling-of-interests method of accounting and, accordingly, all financial data has been restated as if the entities were combined for all periods presented. Over the past three years, the company has emphasized investment in infrastructure in order to control operating risks, support internal growth and future acquisitions, and facilitate the introduction of new products. Investments have been made in data processing hardware and software upgrades, which enable the company to process transactions more efficiently, to realize economies of scale and to maintain quality control. Management believes that these expenditures have enhanced the company's franchise and positioned it for future acquisitions and entry into new lines of business. The discussion that follows is intended to provide insight into the company's results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report. As previously discussed, the company consummated several business acquisitions prior to 1994 which were accounted for using the purchase method of accounting. Accordingly, the results of operations of those acquired entities prior to the acquisition dates have not been included in the results of operations. Therefore, ratios or analyses for periods before and after these purchase acquisitions may not be comparable. In this discussion and analysis some comparisons exclude the effect of the TFB-Pikeville acquisition. These comparisons are not intended to imply that it is more appropriate to compare the company's financial condition and results of operations without including TFB- Pikeville, but rather to quantify a significant factor affecting the comparability of the periods presented. The DSB, KCB, PFS and FGC mergers were accounted for using the pooling-of-interests method of accounting and, accordingly, all financial data for prior periods were restated as if the entities had been combined for all periods presented. See note 3 to the consolidated financial statements for additional information regarding business combinations. All per share data in this report has been adjusted to give effect to stock splits.
Income Statement Review
Net income was $14.4 million in 1994, compared with $14.1 million in 1993, and $13.5 million in 1992. On a per share basis, net income was $1.28 in 1994, $1.24 in 1993 and $1.25 in 1992. Earnings per share decreased in 1993 versus 1992 because of the increased number of average shares outstanding - a result of a 1993 public stock offering by Citizens and the full-year impact of the 1992 public stock offering and stock issued in connection with the TFB-TN, FSB acquisition. The increases in net income were due to (in thousands): 1994 vs. 1993 1993 vs. 1992 -The TFB-Pikeville acquisition net of the related interest on debt) $ 228 $ 874 Excluding TFB-Pikeville from all periods: -Increased net interest income 4,874 6,917 -A lower (higher) provision for loan losses 702 (176) -Increased (decreased) non-interest income (398) 2,360 -Higher non-interest expenses (3,989) (10,169) -Lower (higher) income taxes (1,047) 779 Total increase in net income $ 370 $ 585 Each of these components of income and expense is discussed separately in the sections that follow.
Net Interest Income Net interest income (the difference between interest income on interest- earning assets and interest expense on interest-bearing liabilities) totaled $66.6 million in 1994, compared with $58.6 million in 1993 and $48.6 million in 1992. This represents a 13.7% increase in 1994 over 1993. The increase from 1992 to 1993 was 20.6%.
Net Interest Analysis Summary (1) For the years ended December 31 Basis Basis Point Point 1994 Change 1993 Change 1992
Average yield on interest-earning 7.81 % 22 7.59 % (87) 8.46 % assets Average rate on interest-bearing 3.65 (3) 3.68 (92) 4.60 liabilities Net interest-rate spread 4.16 25 3.91 5 3.86 Impact of non-interest-bearing sources and other changes in balance sheet composition 0.41 - 0.41 (4) 0.45 Net interest margin 4.57 % 25 4.32 % 1 4.31 %
(1)Refer to the tables on pages 17 and 18 for additional data regarding net interest income.
The increase in net interest income in both 1994 and 1993 was primarily a result of a higher level of interest-earning assets due to loan growth, which was further enhanced by an increase in the net interest margin. Average interest earning assets for 1994 increased $104 million over 1993, while the net interest margin increased 25 basis points. The higher margin in 1994 reflects the positive impact of increases in the prime rate as well as a more favorable mix of earning assets due to continued loan growth and the maturity of lower-rate investment securities. The increase in average interest-earning assets in 1993 over 1992 was due to the TFB-Pikeville acquisition (providing an $89 million increase in the company's average interest-earning assets), loan growth ($99 million excluding TFB-Pikeville) and the full-year impact of investment securities purchased from funds provided in the Heritage Federal branch acquisition. The net interest margin and net interest-rate spread increased in 1993 and 1992 due to the company's interest-bearing liabilities repricing downward more rapidly than yields on interest-earning assets. During that time, the market spread between the prime rate and the federal funds rate increased. A significant amount of the company's loans are tied to the prime rate and funded by relatively short-term deposits. Short-term deposits tend to follow movements in short-term U.S. Treasury securities, which move up or down more quickly than the prime rate. Accordingly, as the spread between the prime rate and shorter-term rates widened, so did the company's net interest margin and net interest-rate spread.
Analysis of Year-to-Year Changes in Net Interest Income The following table shows changes in interest income and interest expense resulting from changes in volume and interest rates for the years ended December 31, 1994 and 1993, as compared to the previous year.
The change in interest income and expense due to both rate and volume has been allocated to changes in average volume and changes in average rates in proportion to the relationship of absolute dollar amounts of change in each.
Provision for Loan Losses The provision for loan losses was $2.2 million (.21% of average loans) in 1994 down from $2.8 million (.31% of average loans) in 1993 and $2.6 million (.36% of average loans) in 1992. Net loan charge-offs were $2.2 million in 1994, compared with $2.3 million in 1993 and $1.7 million in 1992. As a percentage of average loans, net charge-offs were .20% in 1994, down from .26% in 1993, .24% in 1992 and an average of .28% for the five year period 1990-1994. The provision for loan losses and the level of the allowance for loan losses reflect the quality of the loan portfolio and result from management's evaluation of the risks in the loan portfolio. Further discussion on loan quality and the allowance for loan losses is included later in this review in the Asset Quality discussion.
Non-Interest Income Non-interest income for 1994 increased less than 1% over 1993, after increasing 24% from 1992 to 1993. The increases in non-interest income were due to (in thousands): 1994 vs. 1993 1993 vs. 1992 - The TFB-Pikeville acquisition $ 536 $ 879 Excluding TFB-Pikeville from all periods: - Increase in service charges on deposit accounts 570 997 - Increase (decrease) in gains on sales of securities (893) 259 - Increase in loan servicing fees 785 655 - Decrease in gains on sales of mortgage loans held for sale (1,149) (417) - Increase in trust service fees 108 180 - Increase in brokerage income 416 204 - Increase (decrease) in all other non-interest income (235) 482 Total increase in non-interest income $ 138 $3,239 In early 1994, the company employed an outside consulting firm to review its products and services. As an outcome of this review, the company implemented a new product and fee structure which resulted in additional service charges on deposit accounts. The company also grew its portfolio of mortgage loans serviced for others. The portfolio has grown from $637 million at December 31, 1992, to $690 million at the end of 1993, to $1.3 billion at December 31, 1994, primarily by in-house originations and by acquiring servicing portfolios. The result of these acquisitions has been an increase in mortgage servicing fees from $1.5 million in 1992, to $2.2 in 1993 and to $3.0 million in 1994. The company realized gains on the sale of mortgage loans of $949 thousand in 1993, during a declining interest rate environment, and a loss of $200 thousand in 1994 as the interest rate trend reversed. In late 1994, the company established a securities brokerage subsidiary, the positive effect of which can be seen in additional brokerage income for the year.
Non-Interest Expenses Non-interest expenses for 1994 increased 14% over 1993, after increasing 32% from 1992 to 1993. The increases in non-interest expense were due to (in thousands): 1994 vs. 1993 1993 vs. 1992 - The TFB-Pikeville acquisition $3,251 $ 2,771 Excluding TFB-Pikeville from all periods: - Increase in compensation and employee benefits 1,434 4,112 - Increase in occupancy and equipment expense 1,097 1,523 - Increase in deposit insurance premiums 198 236 - Increase in professional fees 1,228 691 - Increase in postage, printing and supplies 536 469 - Increase in communications expense 50 282 - Increase (decrease) in other non-interest expenses (554) 2,856 Total increase in non-interest expenses $7,240 $12,940 Professional fees increased $1.3 million in 1994 ($1.2 million excluding TFB- Pikeville) and $.7 million in 1993 ($.7 million excluding TFB-Pikeville). These expenses, principally related to mergers and acquisitions and the development of new lines of business, coupled with other expenses related to the relocation to a new operation center, were the underlying causes of the higher non-interest expenses in 1994 and 1993. The majority of the increases in 1993 over 1992 were related to the purchase acquisitions consummated in 1992 and 1993. In general, the remaining increases in both 1993 and 1994 were related to an effort to build the company's infrastructure to accommodate future growth, requiring investments in staff as well as in buildings, equipment and information systems. Compensation and benefits increased $3.1 million in 1994 ($1.4 million excluding TFB-Pikeville), after increasing $5.4 million in 1993 ($4.1 million excluding TFB-Pikeville) - the result of an expansion of the professional staff as well as 1993 being the first full year in which TFB-TN, FSB was included in the company's operating results. Occupancy and furniture and equipment costs increased $1.5 million in 1994 ($1.1 million excluding TFB-Pikeville) compared with 1993. In 1993 these costs were up $2.1 million ($1.5 million excluding TFB-Pikeville). Depreciation, the renovation of TFB, FSB branches and corporate offices, and the relocation to a new operation center comprised the remaining portion of the increase in 1993 over 1992. All other non-interest expenses (including deposit insurance, communications, and postage, printing and supplies) were up $1.3 million in 1994 over 1993 ($.2 million excluding TFB-Pikeville). Other non-interest expenses increased $4.8 million in 1993 ($3.8 million excluding TFB-Pikeville), of which $.5 million was attributable to the consolidation and conversion of mortgage loan operations, $.2 million to amortization of intangible assets related to purchase acquisitions, $.5 million to FDIC and other insurance, $.2 million related to the prepayment of mortgage loans serviced for others, and $.2 million related to foreclosed and repossessed assets.
Income Taxes In the first quarter of 1993 the company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, resulting in a $296 thousand increase in net income. Excluding the effect of adopting Statement 109, the company had income tax expense of $7.1 million in 1994, compared with $6.2 million in 1993, and $6.4 million in 1992. These represent effective tax rates of 32.9%, 31.2% and 32.2%, respectively. Further information on the company's income tax position can be found in note 11 to the consolidated financial statements.
Balance Sheet Review Assets at year-end 1994 totaled $1.6 billion, compared with $1.6 billion at December 31, 1993, and $1.4 billion at the end of 1992. Average total assets increased $124 million in 1994 to $1.6 billion, after increasing $243 million in 1993. Average interest-earning assets increased 8% to $1.5 billion in 1994, after increasing 20% in 1993. The TFB-Pikeville acquisition contributed $193 million to total assets at year-end 1993 and $89 million to the increase in average interest-earning assets for that year. Loans Total loans, excluding mortgages held for sale, averaged $1,074 million in 1994, compared with $899 million in 1993 and $719 million in 1992. At year-end 1994, loans totaled $1,144 million, compared with $1,007 million at December 31, 1993 and $781 million at the end of 1992. TFB-Pikeville's loan portfolio at December 31, 1993, represents $121 million of the increase from year-end 1992 to 1993. The company continues to experience strong loan growth throughout its markets, with particular strength in middle market commercial lending products. The following table presents a summary of the loan portfolio by category for each of the last five years. Much of the increase in both commercial and commercial real estate loans represents loans to finance the operations of corporate customers. While many of these loans are structured as mortgages, in nearly every case the company is relying on the borrower's cash flow to service the loan and very few are dependent on the operation or sale of the collateral. Other than the categories noted, there is no concentration of loans in any industry greater than 5% of the total loan portfolio. The company has no foreign loans or highly leveraged transactions in its loan portfolio.
The following table sets forth the maturity distribution and interest rate sensitivity of selected loan categories at December 31, 1994. Maturities are based upon contractual terms. The company's policy is to specifically review and approve all loans renewed; loans are not automatically rolled over. The table excludes residential real estate and consumer loans.
Loan Maturities and Interest Rate Sensitivity December 31, 1994 In thousands One Year One Through Over Total or Less Five Years Five Years Loans Commercial $243,860 $48,140 $26,970 $318,970 Commercial real estate 238,374 57,700 38,493 334,567 Total $482,234 $105,840 $65,463 $653,537
Fixed rate loans $42,147 $98,720 $65,463 $206,330 Floating rate loans 440,087 7,120 - 447,207 Total $482,234 $105,840 $65,463 $653,537
Asset Quality With respect to asset quality, management considers three categories of assets to warrant constant scrutiny. These categories include (a) loans which are currently nonperforming, (b) other real estate and loans classified as in-substance foreclosures, and (c) loans which are currently performing but which management believes require special attention. Nonperforming loans, which include non-accrual loans, accruing loans past due over 90 days and restructured loans, totaled $7.9 million at the end of 1994, a decrease of $2.0 million from 1993. The ratio of nonperforming loans to year-end loans was .69%, compared with .98% at year-end 1993 and 1.15% at December 31, 1992. Nonperforming assets, which include nonperforming loans, other real estate, loans classified as in-substance foreclosures, and other foreclosed property, totaled $13.1 million at year-end 1994, and the ratio of total nonperforming assets to total assets decreased from .99% at December 31, 1993, to .81% at year-end 1994. The following table presents information concerning nonperforming assets, including nonaccrual and restructured loans. Management classifies a loan as nonaccrual when principal or interest is past due 90 days or more and the loan is not adequately collateralized and in the process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Consumer installment loans are charged off after 120 days of delinquency unless adequately secured and in the process of collection. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain. Loans are categorized as restructured if the original interest rate, repayment terms, or both were restructured due to a deterioration in the financial condition of the borrower. However, restructured loans that demonstrate performance under the restructured terms and that yield a market rate of interest may be removed from restructured status in the year following the restructure.
Nonperforming Assets December 31 Dollars in thousands 1994 1993 1992 1991 1990 Nonaccrual loans $4,375 $5,926 $3,986 $2,770 $4,694 Accruing loans which are contractually past due 90 days or more 3,514 2,377 4,262 2,255 3,035 Restructured loans 30 1,591 718 5,587 1,615 Total nonperforming and 7,919 9,894 8,966 10,612 9,344 restructured loans Other real estate and in- 4,998 5,869 9,036 6,455 6,207 substance foreclosures Other foreclosed property 199 113 - - - Total nonperforming and restructured loans and foreclosed property $13,116 $15,876 $18,002 $17,067 $15,551
Nonperforming and restructured loans as a percentage of loans 0.69% 0.98% 1.15% 1.87% 1.74% net of unearned income Nonperforming and restructured loans and other real estate as a 0.81% 0.99% 1.30% 1.75% 1.84% percentage of total assets
Two credit relationships account for $2.2 million, or 51%, of the December 31, 1994, nonaccrual balance. The first of these loans is to a manufacturing concern and is secured by commercial real estate and equipment. The loan has been on nonaccrual since 1992. During 1993, $775,000 of the loan balance was charged off, reducing the carrying value of the loan to $1.5 million. In the second quarter of 1994, the borrower resumed making partial principal payments and, at December 31, 1994, the carrying value of the loan was $1,456,000. Appropriate amounts have been specifically allocated in the evaluation of the allowance for loan losses for this credit exposure. The second loan has an outstanding balance of $783,000 and is secured by a first mortgage on an apartment complex. The borrowers experienced cash flow difficulties due to high vacancy rates and the loan was placed on nonaccrual in 1994, when it became apparent that payments would not remain timely. The property is expected to be sold in the first quarter of 1995, at a price sufficient to liquidate the principal balance. The remaining December 31, 1994, nonaccrual balance consists of various commercial and consumer loans, with no single loan exceeding $200,000. Other real estate and in-substance foreclosures at December 31, 1994, includes two properties with an aggregate book value of $2.7 million, or 55% of the outstanding balance. The first property was acquired through foreclosure in 1986 with an unsatisfied loan balance at the time of $1.8 million. In order to facilitate the disposal of the property, the company entered into a joint venture with a real estate developer and developed the land for industrial and other commercial use. During 1993, the company dissolved the joint venture and retained title to the property. Several parcels have been sold above carrying value. The book value of the property at December 31, 1994, including capitalized development costs, was $1.2 million. Based on an appraisal of the property and previous sales experience, management does not anticipate any significant loss to be incurred on disposition. The second property included in other real estate and in-substance foreclosures relates to a wood products manufacturing facility. Based on an appraisal of the property, the company wrote down its carrying value by $210 thousand in the third quarter of 1994, reducing it to its current balance of $1.5 million. The facility was closed in 1992 and is presently listed for sale with a commercial real estate firm. Management is of the opinion that no significant additional loss will be incurred in the disposal of the property. As of December 31, 1994, the company had $2.3 million of loans which were not included in the past due, nonaccrual or restructured categories, but for which known information about possible credit problems caused management to have doubts as to the ability of the borrowers to comply with the present loan repayment terms. Based on management's evaluation, including current market conditions, cash flow generated and recent appraisals, no significant losses are anticipated to be incurred in connection with these loans. These loans are subject to continuing management attention and are considered in determining the level of the allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance represents an amount which, in management's judgment, will be adequate to absorb probable losses on existing loans. At December 31, 1994, the allowance was $12.5 million, compared with $12.5 million at December 31, 1993, and $9.6 million at year-end 1992. The allowance as a percentage of nonperforming loans (an indication of the relative ability to cover future loan losses with existing reserves) increased to 158% at year-end 1994, from 126% at December 31, 1993, and 107% at December 31, 1992. The ratio of the allowance for loan losses to total loans (excluding mortgage loans held for sale) at December 31, 1994, was 1.10%, compared with 1.24% at December 31, 1993, and 1.23% at the end of 1992. Following is a summary of the changes in the allowance for loan losses for each of the past five years.
Summary of Loan Loss Experience For the years ended December 31 Dollars in thousands 1994 1993 1992 1991 1990 Balance at beginning of $12,505 $9,596 $7,700 $7,183 $6,312 year Provision for loan 2,212 2,794 2,618 2,242 3,416 losses Balance of allowance for loan losses of acquired - 2,433 1,016 - 48 subsidiaries at acquisition date Amounts charged off: Commercial and 1,873 2,195 1,623 1,322 1,904 commercial real estate Residential real 80 315 138 119 602 estate Consumer 838 936 738 996 1,073 Total loans charged 2,791 3,446 2,499 2,437 3,579 off Recoveries of amounts previously charged off: Commercial and 232 615 323 364 439 commercial real estate Residential real 41 115 106 21 249 estate Consumer 330 398 332 327 298 Total recoveries 603 1,128 761 712 986 Net charge-offs 2,188 2,318 1,738 1,725 2,593 Balance at end of year $12,529 $12,505 $9,596 $7,700 $7,183
Total loans, net of unearned income: Average $1,073,718 $898,834 $719,184 $553,549 $503,035 At December 31 1,143,716 1,006,796 780,846 567,954 538,518 As a percentage of average loans: Net charge-offs 0.20 % 0.26 % 0.24 % 0.31 % 0.52 % Provision for loan 0.21 % 0.31 % 0.36 % 0.41 % 0.68 % losses Allowance as a 1.10 % 1.24 % 1.23 % 1.36 % 1.33 % percentage of year-end loans Allowance as a multiple 5.7X 5.4X 5.5X 4.5X 2.8X of net charge-offs
The adequacy of the allowance for loan losses is determined on an ongoing basis through analysis of the overall quality of the loan portfolio, historical loan loss experience, loan delinquency trends and the economic conditions within the company's market area. Additional allocations of the allowance are based on specifically identified potential loss situations. These potential loss situations are identified by account officers' evaluation of their own portfolios as well as by an independent loan review function. The tables below set forth an allocation of the allowance for loan losses by category of loan and a percentage distribution of the allowance allocation. In making the allocation, consideration was given to such factors as management's evaluation of risk in each category, current economic conditions and charge-off experience. An allocation of the allowance for loan losses is an estimate of the portion of the allowance which will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan from being used to absorb losses of another loan type.
Allocation of Allowance for Loan Losses December 31 In thousands 1994 1993 1992 1991 1990 Commercial $7,529 $6,870 $4,813 $3,856 $3,560 Commercial real estate 1,883 1,718 1,203 964 890 Residential real estate 977 1,358 1,720 1,318 1,217 Consumer 2,140 2,559 1,860 1,562 1,516 Total $12,529 $12,505 $9,596 $7,700 $7,183
Securities, Federal Funds Sold and Resale Agreements Securities, including those classified as held to maturity and available for sale, increased slightly from $378 million at December 31, 1992, to $386 million at year-end 1993, and then decreased to $314 million at December 31, 1994. TFB- Pikeville provided an initial securities portfolio of $61 million, indicating a net decrease of $53 million in 1993. The decline in the securities portfolio in both 1994 and 1993 was the result of maturities, prepayments and calls. Funds provided by the reduction in securities were utilized to fund growth in the loan portfolio. During 1993, due to the declining interest rate environment, the mortgage-backed securities portfolio experienced a high level of prepayments. To a large extent, the proceeds of these prepayments were invested in commercial and consumer loans and mortgages held for sale. Effective December 31, 1993, the company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, all debt securities in which the company does not have the ability or management does not have the positive intent to hold to maturity are classified as securities available for sale and are carried at market value, as are all equity securities. Beginning December 31, 1993, unrealized gains and losses on securities available for sale are reported as a separate component of shareholders' equity, net of tax. The percentage of collateralized mortgage obligations ("CMO's") and mortgage- backed securities to total securities declined to 31% at December 31, 1994, from 39% at December 31, 1993, and 58% at December 31, 1992. This decline was due to the significant refinancing of residential mortgages and the resulting prepayment of mortgage-related securities, coupled with management's desire to decrease the company's exposure to mortgage-related securities. Due to the unpredictable nature of residential mortgage prepayments, the average and final maturities of the related securities vary. In a rising rate environment these securities have a longer expected life, while in a declining rate environment they have a shorter expected life. Management limits this prepayment and payment extension risk principally by investing in planned amortization class CMO's, which have less volatility than other mortgage-backed securities and have an average life of three to five years. The tables below present the carrying value of securities for each of the past three years and the maturities and yield characteristics of securities as of December 31, 1994.
Carrying Value of Securities December 31 In thousands 1994 1993 1992 U.S. Treasury and federal agencies: Available for sale $146,484 $123,677 $51,925 Held to maturity 3,081 51,759 66,525 Collateralized mortgage obligations and mortgage-backed securities: Available for sale 70,895 105,273 - Held to maturity 26,372 45,660 217,575 State and municipal obligations: Available for sale - - - Held to maturity 49,752 42,162 28,318 Other securities: Available for sale 12,264 11,086 - Held to maturity 5,553 6,031 13,800 Total securities: Available for sale 229,643 240,036 51,925 Held to maturity 84,758 145,612 326,218 Total securities $314,401 $385,648 $378,143
Federal funds sold and securities purchased under agreements to resell declined from $68 million at December 31, 1992, to $33 million at December 31, 1993. At the end of 1994, the company was in a net federal funds purchased position of $26 million. Average federal funds sold and resale agreements were $13 million for 1994, $36 million for 1993 and $23 million for 1992. As with the decline in the size of the securities portfolio, these short-term assets have been used to fund the loan growth the company has experienced over the past two years, as the growth in deposits has not kept pace with loan demand in the company's markets. The unusually high balance at December 31, 1992, was attributed to a large inflow of short-term deposits at the end of that year.
Deposits and Borrowed Funds Total deposits averaged $1.350 billion in 1994, a 6% increase over 1993. Most of the increase was in interest-bearing accounts, which increased $47 million, or 4%. However, excluding TFB-Pikeville from both years, interest-bearing accounts decreased $20 million, or 2%. Non-interest-bearing accounts increased $23 million, or 16%, year-to-year ($14 million, or 10%, excluding TFB- Pikeville). Total deposits averaged $1.279 billion in 1993, an increase of $204 million, or 19%, over 1992. Most of the increase was attributable to interest-bearing accounts, as in 1994. Time deposits of $100,000 or more totaled $163,646,000 at December 31, 1994, and $168,550,000 at December 31, 1993. Interest expense on time deposits of $100,000 or more was $6,260,000 in 1994, $6,663,000 in 1993 and $3,869,000 in 1992. The table below provides information on the maturities of time deposits of $100,000 or more at December 31, 1994.
Maturity of Time Deposits of $100,000 or More December 31, 1994 In thousands Three months or less $53,544 Over three through six months 27,867 Over six through twelve months 40,287 Over twelve months 41,948 Total $163,646
Information regarding short-term borrowings is presented below.
Short-term Borrowings Dollars in thousands 1994 1993 1992 Federal funds purchased and repurchase agreements: Balance at year end $74,553 $29,704 $26,993 Weighted average rate at year end 3.50% 2.38% 2.87% Average balance during the year 40,303 28,084 26,483 Weighted average rate during the 3.11% 2.40% 3.47% year Maximum month-end balance 74,553 35,784 43,073 Other short-term borrowings: Balance at year end 48,033 15,000 600 Weighted average rate at year end 6.36% 3.45% 6.00% Average balance during the year 36,669 6,624 506 Weighted average rate during the 4.68% 3.59% 12.45% year Maximum month-end balance 48,840 15,000 600 Total short-term borrowings: Balance at year end 122,586 44,704 27,593 Weighted average rate at year end 4.62% 2.74% 2.94% Average balance during the year 76,972 34,708 26,989 Weighted average rate during the 3.86% 2.63% 3.64% year Maximum month-end balance 122,586 50,784 43,073
Substantially all federal funds purchased and repurchase agreements mature in one business day. Other short-term borrowings principally represent Federal Home Loan Bank ("FHLB") advances to TFB-TN, FSB and TFB-KY (with varying maturity dates), which are funding residential mortgage and commercial loans. The company has a $3 million unsecured operating line of credit with an unaffiliated commercial bank that is used from time-to-time to supplement the company's cash requirements. The line was not in use at December 31, 1994 or 1993. Long-term debt averaged $40.8 million in 1994, compared with $34.0 million in 1993 and $13.1 million from 1992. The 1993 increase is the result of the issuance of $33 million of 7.25% Subordinated Notes in a public offering during the third quarter of 1993. The 1994 increase is due to an FHLB advance to TFB-KY which had an original maturity exceeding one year. The advance, which was drawn upon in order to fund fixed-rate commercial loans, was rewritten during 1994 and reclassified as a short-term borrowing. The company's leveraged ESOP obtained additional financing from an unaffiliated commercial bank in 1992. Total ESOP debt was $3.7 million at December 31, 1994, and $3.9 million at December 31, 1993. See note 8 to the consolidated financial statements for a further description of the terms of these borrowings.
Capital Resources and Liquidity At December 31, 1994, the aggregate retained earnings of the banks was $52.9 million, of which $19.7 million was available for the payment of dividends to the parent company. The company issued on September 16, 1993, $33 million of 7.25% Subordinated Notes in a public offering. The net proceeds were approximately $32 million, of which $12 million was used to repay debt incurred in the TFB-Pikeville transaction and the balance was used for general corporate purposes, including augmenting the capital of the banks, as needed. The company's capital ratios at December 31, 1994 and 1993 (calculated in accordance with regulatory guidelines) were as follows: December 31 1994 1993 Tier 1 risk based 9.50% 9.37% Regulatory minimum 4.00 4.00 Total risk based 13.35 13.51 Regulatory minimum 8.00 8.00 Leverage 6.97 6.48 Regulatory minimum 3.00 3.00
Capital ratios of all of the company's subsidiaries are in excess of applicable minimum regulatory capital ratio requirements at December 31, 1994. The increase in equity capital during 1993 and 1994 was nearly all provided by retained earnings and common stock issued in connection with the company's Dividend Reinvestment and Stock Purchase Plan, offset in 1994 by an unrealized loss on the portfolio of securities available for sale. Generally speaking, the company relies upon net inflows of cash from financing activities, supplemented by net inflows of cash from operating activities, to provide cash used in its investing activities. As is typical of most banking companies, significant financing activities include issuance of common stock and long-term debt, deposit gathering, and the use of short-term borrowing facilities, such as federal funds purchased, repurchase agreements, FHLB advances and lines of credit. The company's primary investing activities include purchases of securities and loan originations, offset by maturities, prepayments and sales of securities, and loan payments.
Asset/Liability Management Managing interest rate risk is fundamental to the financial services industry. The company manages the inherently different maturity and repricing characteristics of the lending and deposit acquisition lines of business to achieve a desired interest sensitivity position and to limit exposure to interest rate risk. The maturity and repricing characteristics of the company's lending and deposit activities create a naturally asset-sensitive structure. By using a combination of on- and off-balance-sheet financial instruments, the company manages interest rate sensitivity within established policy guidelines. The company's Asset/Liability Committee approves policy guidelines, provides oversight to the asset/liability management process, and monitors and adjusts exposure to interest rates in response to loan and deposit flows. Asset/liability activity is reviewed monthly by the company's board of directors. An earnings simulation model is used to monitor and evaluate the exposure and impact of changing interest rates on earnings. In today's interest rate environment, which includes a complex array of both on- and off-balance-sheet financial instruments, traditional static interest rate gap tables do not provide the most comprehensive and informative disclosures about interest-rate risks. The simulation model used by the company reflects the dynamics of all interest-earning assets, interest-bearing liabilities and off-balance-sheet financial instruments. It combines the various factors affecting rate sensitivity into a two-year earnings outlook that incorporates management's view of the most likely interest rate environment. The model is updated at least monthly for multiple interest rate scenarios, projected changes in balance sheet categories and other relevant assumptions. In developing multiple rate scenarios, an econometric model is employed to forecast key rates, based on the cyclical nature of those rates, with a probability assigned to potential future events which might affect those rates. Among the factors the model utilizes which traditional interest rate gap tables do not are rate of change differentials, such as federal funds rates versus savings account rates, maturity effects, such as calls on securities, and rate barrier effects, such as caps or floors on loans. It also captures changing balance sheet levels, such as loans and investment securities, and floating rate loans that may be tied or related to prime, treasury notes, CD rates or other rate indices, which do not necessarily move identically as rates change. In addition, it captures leads and lags that occur as rates move away from current levels, and the effects of prepayments on various fixed rate assets such as residential mortgages, mortgage-backed securities and consumer loans. These, and certain other effects, are evaluated to develop multiple scenarios from which the sensitivity of earnings to changes in interest rates is determined. The following illustrates the effects on net interest income of multiple rate environments compared to the rate environment of December 1994 (the "flat" scenario). For example, in the scenario considered "most likely" the company assumed that the federal funds rate and prime rate would be 6.00% and 9.00%, respectively, at the end of 1995, and would be slightly higher for ten of the twelve months from December 31, 1994 to December 31, 1995.
Flat Most Likely Rising Declining Assumptions: Federal funds rate, December 1995 5.50% 6.00% 8.00% 4.75% Prime rate, December 1995 8.50% 9.00% 11.00% 7.75%
Increase (decrease) in net interest income -0-% 4.86% 7.85% (0.31)%
Management concludes that the company is asset sensitive at December 31, 1994, which indicates that net interest income is expected to be positively impacted during a period of rising interest rates; however a uniform period of decreasing rates would adversely impact the company. It should be noted, however, these results do not take into account any future actions which could be undertaken to reduce an adverse impact if there were a change in interest rate expectations or in the actual level of interest rates.
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of Trans Financial Bancorp, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trans Financial Bancorp, Inc., and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, in 1993 the company adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
KPMG PEAT MARWICK LLP Louisville, Kentucky January 16, 1995
Trans Financial Bancorp, Inc. Consolidated Balance Sheets December 31 - In thousands, except share data 1994 1993 Assets Cash and due from banks (note 4) $80,828 $68,533 Interest-bearing deposits with banks 197 447 Federal funds sold and resale agreements - 32,778 Mortgage loans held for sale 6,541 45,178 Securities available for sale (amortized cost of $242,079 as of December 31, 1994, and $238,861 as of December 31, 1993) (note 5) 229,643 240,036 Securities held to maturity (market value of $81,209 as of December 31, 1994, and $148,931 as of December 31, 1993) (note 5) 84,758 145,612 Loans, net of unearned income (notes 6 and 8) 1,143,716 1,006,796 Less allowance for loan losses 12,529 12,505 Net loans 1,131,187 994,291 Premises and equipment, net (note 7) 36,440 33,393 Other assets (note 3) 48,241 37,185 Total assets $1,617,835 $1,597,453
Liabilities and Shareholders' Equity Deposits: Non-interest bearing $192,433 $169,828 Interest bearing 1,143,076 1,206,399 Total deposits 1,335,509 1,376,227 Federal funds purchased and repurchase agreements 74,553 29,704 Other short-term borrowings (note 8) 48,033 15,000 Long-term debt (note 8) 37,334 54,217 Other liabilities 10,774 10,269 Total liabilities 1,506,203 1,485,417 Commitments and contingencies (notes 3, 12 and 13) Shareholders' equity: Preferred stock (note 9) - 1,010 Common stock, no par value. Authorized 25,000,000 shares; issued and outstanding 11,203,247 and 11,149,722 shares, respectively 21,006 20,906 Additional paid-in capital 42,810 42,256 Retained earnings (note 10) 59,587 51,006 Unrealized net gain (loss) on securities available for sale, net of tax (note 5) (8,073) 719 Employee Stock Ownership Plan shares purchased with debt (notes 8 and 12) (3,698) (3,861) Total shareholders' equity 111,632 112,036 Total liabilities and shareholders' equity $1,617,835 $1,597,453
See accompanying notes to consolidated financial statements.
Trans Financial Bancorp, Inc. Consolidated Statements of Income Years Ended December 31 In thousands, except per share data 1994 1993 1992
Interest income Loans, including fees $94,020 $78,812 $68,683 Federal funds sold and resale agreements 540 976 867 U.S. Treasury and federal agency 15,444 19,856 22,737 securities State and municipal obligations 2,770 2,211 1,941 Other securities 1,104 844 809 Interest-bearing deposits with banks 104 120 306 Total interest income 113,982 102,819 95,343 Interest expense Deposits 41,724 41,486 44,745 Federal funds purchased and repurchase agreements 1,253 673 919 Long-term debt and other borrowings (note 8) 4,398 2,091 1,099 Total interest expense 47,375 44,250 46,763 Net interest income 66,607 58,569 48,580 Provision for loan losses (note 6) 2,212 2,794 2,618 Net interest income after provision for loan losses 64,395 55,775 45,962 Non-interest income Service charges on deposit accounts 7,384 6,351 4,954 Loan servicing fees 2,952 2,183 1,519 Gains on sales of securities, net 257 1,149 890 (note 5) Gains (losses) on sales of mortgage loans held for sale, net (200) 949 1,366 Trust services 1,247 1,133 943 Brokerage income 1,305 849 644 Other 4,225 4,418 3,477 Total non-interest income 17,170 17,032 13,793 Non-interest expenses Compensation and benefits (note 12) 26,330 23,218 17,838 Net occupancy expense 4,572 4,071 3,012 Furniture and equipment expense 5,284 4,243 3,205 Deposit insurance 3,183 2,778 2,365 Professional fees 3,742 2,418 1,749 Postage, printing & supplies 3,516 2,957 2,327 Communications 1,131 1,024 690 Other 12,312 12,121 8,704 Total non-interest expenses 60,070 52,830 39,890 Income before income taxes and cumulative effect of change in accounting principle 21,495 19,977 19,865 Income tax expense (note 11) 7,075 6,223 6,400 Income before cumulative effect of change in accounting principle 14,420 13,754 13,465 Cumulative effect of change in accounting principle (note 11) - 296 - Net income $14,420 $14,050 $13,465 Net income applicable to common stock $14,366 $13,969 $13,328 Primary earnings per common share (note 1): Before cumulative effect of change in accounting principle $1.28 $1.22 $1.25 Based on net income applicable to 1.28 1.24 1.25 common stock Fully-diluted earnings per common share (note 1): Before cumulative effect of change in accounting principle $1.28 $1.22 $1.25 Based on net income applicable to 1.28 1.24 1.25 common stock
See accompanying notes to consolidated financial statements.
Trans Financial Bancorp, Inc. Consolidated Statements of Changes in Shareholders' Equity In thousands, except share and per share data
Preferred Stock Common Stock Additional Number Number Paid-in of shares Amount of shares Amount Capital
Balance, December 31, 1991, as previously 14,077 $2,285 3,401,494 $8,493 $15,905 reported Adjustments for acquisitions accounted for using the pooling-of- interests method of accounting (note 3): Kentucky 1,022,756 2,557 (394) Community Bancorp, Inc. Peoples 847,903 2,120 3,019 Financial Services, Inc. FGC Holding 1,010 1,010 787,500 1,969 (469) Company Balance, December 31, 1991, as restated 15,087 $3,295 6,059,653 $15,139 $18,061
Net income for the year Cash dividends declared: Common stock, $.44 per share Preferred stock Redemption of preferred stock: Class A, 1990 (333) (999) Series Other (13,744) (1,286) Common stock 1,265,000 3,172 13,944 issued in public offering Common stock issued in connection with business combination accounted for as a 412,389 1,031 4,984 purchase (note 3) Stock options 1,914 5 15 exercised Common stock issued in connection with dividend reinvestment and stock purchase plans 37,102 93 498 and other issuances Conversion of 415,462 1,039 3,411 debentures Increase in unrealized loss on marketable equity securities ESOP shares - - - - - purchased with debt
Balance, December 1,010 $1,010 8,191,520 $20,479 $40,913 31, 1992
Net income for the year Cash dividends declared: Common stock, $.51 per share Preferred stock Stock options 8,577 16 36 exercised Common stock issued in connection with dividend reinvestment and stock purchase plans 47,613 89 738 and other issuances Four-for-three 2,730,025 (6) stock split Common stock 171,738 322 572 issued in public offering Decrease in unrealized loss on marketable equity securities Net unrealized gain on securities available for sale, net of tax ESOP debt reduction Reissue treasury - - 249 - 3 stock
Balance, December 1,010 $1,010 11,149,722 $20,906 $42,256 31, 1993 Net income for the year Cash dividends declared: Common stock, $.56 per share Preferred stock Redemption of (1,010) (1,010) preferred stock Stock options 22,018 41 178 exercised Common stock issued in connection with dividend reinvestment and stock purchase plan 31,507 59 376 and other issuances Net unrealized loss on securities available for sale, net of tax ESOP debt - - - - - reduction, net
Balance, December - $- 11,203,247 $21,006 $42,810 31, 1994 See accompanying notes to consolidated financial statements.
Trans Financial Bancorp, Inc. Consolidated Statements of Changes in Shareholders' Equity In thousands, except share Unrealized and per share data Net Gain Employee Unrealized (Loss) on Stock Loss on Securities Ownership Marketable Available Plan Shares Retained Equity for Sale , Purchased Earnings Securities Net of Tax With Debt Total
Balance, December 31, 1991, as previously $15,169 $(114) $- $(1,205) $40,533 reported Adjustments for acquisitions accounted for using the pooling-of- interests method of accounting (note 3): Kentucky 8,586 (47) 10,702 Community Bancorp, Inc. Peoples 2,777 7,916 Financial Services, Inc. FGC Holding 4,509 - - - 7,019 Company Balance, December 31, 1991, as restated $31,041 $(161) $- $(1,205) $66,170
Net income for 13,465 13,465 the year Cash dividends declared: Common stock, (3,330) (3,330) $.44 per share Preferred (137) (137) stock Redemption of preferred stock: Class A, 1990 (999) Series Other (1,286) Common stock 17,116 issued in public offering Common stock issued in connection with business combination accounted for as a 6,015 purchase (note 3) Stock options 20 exercised Common stock issued in connection with dividend reinvestment and stock purchase 591 plans and other issuances Conversion of 4,450 debentures Increase in unrealized loss on marketable (2) (2) equity securities ESOP shares - - - (2,667) (2,667) purchased with debt
Balance, $41,039 $(163) $- $(3,872) $99,406 December 31,
Net income for 14,050 14,050 the year Cash dividends declared: Common stock, (4,002) (4,002) $.51 per share Preferred (81) (81) stock Stock options 52 exercised Common stock issued in connection with dividend reinvestment and stock purchase 827 plans and other issuances Four-for-three (6) stock split Common stock 894 issued in public offering Decrease in unrealized loss on marketable 163 163 equity securities Net unrealized gain on securities available for 719 719 sale, net of tax ESOP debt 11 11 reduction Reissue - - - - 3 treasury stock
Balance, $51,006 $- $719 $(3,861) $112,036 December 31, Net income for 14,420 14,420 the year Cash dividends declared: Common stock, (5,785) (5,785) $.56 per share Preferred (54) (54) stock Redemption of (1,010) preferred stock Stock options 219 exercised Common stock issued in connection with dividend reinvestment and stock purchase plan 435 and other issuances Net unrealized loss on securities available for (8,792) (8,792) sale, net of tax ESOP debt - - - 163 163 reduction, net
Balance, $59,587 $- $(8,073) $(3,698) $111,632 December 31, See accompanying notes to consolidated financial statements.
Trans Financial Bancorp, Inc. Consolidated Statements of Cash Flows Years Ended December 31 In thousands 1994 1993 1992
Cash flows from operating activities: Net income $14,420 $14,050 $13,465 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 2,212 2,794 2,618 Deferred tax expense (882) (522) (152) Gains on sales of securities: Available for sale (257) (1,149) - Held to maturity - - (890) Loss (gains) on sales of mortgage 200 (949) (1,366) loans Loss (gains) on sale of premises (231) 14 (12) and equipment Depreciation and amortization of 5,032 3,466 2,582 fixed assets Amortization of intangible assets 1,087 1.085 688 Amortization of premium on securities and loans, net 2,094 2,090 668 Increase in accrued interest (1,593) (1,370) (1,118) receivable Decrease (increase) in other assets (9,924) 2,170 2,776 Increase (decrease) in accrued 114 (449) (244) interest payable Increase (decrease) in other 4,197 (2,331) (3,703) liabilities Sale of mortgage loans held for sale 133,598 201,840 128,267 Originations of mortgage loans held (95,161) (221,072) (123,729) for sale Net cash provided by (used in) 54,906 (333) 19,850 operating activities
Cash flows from investing activities: Net decrease in interest-bearing deposits with banks 250 8,460 13,658 Net decrease (increase) in federal funds sold and resale agreements 32,778 36,888 (44,384) Proceeds from sales of securities: Available for sale 5,183 23,787 8,226 Held to maturity - - 47,928 Proceeds from prepayment and call of securities: Available for sale 50,975 3,872 - Held to maturity 12,363 111,270 75,937 Proceeds from maturities of securities: Available for sale 20,412 12,920 - Held to maturity 9,492 44,854 37,990 Purchases of securities: Available for sale (21,566) (49,965) (2,522) Held to maturity (20,047) (94,514) (196,896) Net increase in loans (140,434) (117,798) (56,540) Proceeds from sales of foreclosed 1,950 2,949 1,302 assets Purchases of premises and equipment (9,785) (5,423) (6,625) Proceeds from disposals of premises 1,569 112 635 and equipment Net cash and cash equivalents inflow (outflow) from acquisitions (note 3) - (7,996) 39,835 Net cash provided by investing (56,860) (30,584) (81,456) activities
Cash flows from financing activities: Net increase (decrease) in deposits (40,718) (9,707) 56,708 Net increase (decrease) in federal funds purchased and repurchase agreements 44,849 (431) 4,111 Net increase (decrease) in other short- 23,033 14,400 (1,987) term borrowings Proceeds from issuance of long-term - 36,603 11,938 debt Repayment of long-term debt (6,720) (4,332) (6,121) Proceeds from issuance of common stock 654 1,770 17,727 Redemption of preferred stock (1,010) - (2,285) Dividends paid (5,839) (4,083) (3,467) Net cash provided by (used in) 14,249 34,220 76,624 financing activities Net increase in cash and cash 12,295 3,303 15,018 equivalents Cash and cash equivalents at beginning 68,533 65,230 50,212 of year Cash and cash equivalents at end of $80,828 $68,533 $65,230 year (note 2)
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. A description of the more significant accounting policies follows. Basis of Presentation The consolidated financial statements give retroactive effect to the merger of Trans Financial Bancorp, Inc. ("the company") with Kentucky Community Bancorp, Inc. on February 15, 1994, Peoples Financial Services, Inc. on April 22, 1994, and FGC Holding Company on August 31, 1994 each of which has been accounted for as a pooling of interests, as described in note 3 to the consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of Trans Financial Bancorp, Inc. and its subsidiaries, all of which are wholly owned. The company's principal subsidiaries are: Trans Financial Bank, National Association; Trans Financial Bank; Trans Financial Bank Tennessee, National Association; Trans Financial Bank of Martin, National Association; Trans Financial Bank of Tennessee, F.S.B.; and Trans Financial Bank, Federal Savings Bank. Collectively, these six institutions are referred to in this report as "the banks." In addition, the company has a securities broker/dealer, Trans Financial Investment Services, Inc.; a mortgage banking company, Trans Financial Mortgage Company; and a travel agency, Trans Travel Agency, Inc. Significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with 1994 presentations. Securities Effective December 31, 1993, the company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, all debt securities in which the company does not have the ability or management does not have the positive intent to hold to maturity are classified as securities available for sale and are carried at market value. All equity securities are classified as available for sale beginning December 31, 1993. Unrealized gains and losses on securities available for sale are reported as a separate component of shareholders' equity (net of income taxes) beginning December 31, 1993. Securities classified as available for sale prior to December 31, 1993, are reported at the lower of aggregate cost or market value. Securities classified as held to maturity are carried at amortized cost. The company has no securities classified as trading securities. Amortization of premiums and accretion of discounts are recorded by a method which approximates a level yield and which, in the case of mortgage-backed securities, considers prepayment risk. The specific identification method is used to determine the cost of securities sold. Loans Loans are stated at the unpaid principal balance. Interest income on loans is recorded on the accrual basis except for those loans in a nonaccrual income status. Loans are placed in nonaccrual status when principal or interest is past due 90 days or more and the loan is not adequately collateralized and in the process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain. Unearned income, arising principally from consumer installment loans or the deferral of certain loan fees, is recognized as income using a method that approximates the interest method. Allowance for Loan Losses The allowance for loan losses is maintained at a level that adequately provides for estimated losses in the loan portfolio. The level of the allowance is based on an evaluation of the loan portfolio which includes reviews of individual credits, consideration of past loan loss experience, loan delinquency trends, changes in the composition of the loan portfolio and the impact of current and anticipated future economic conditions. The allowance for loan losses is increased by the provision for loan losses and reduced by net charge-offs. The level of the allowance and the amount of the provision for loan losses involve uncertainties and matters of judgment and therefore, cannot be determined with precision. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market value, as determined by outstanding loan commitments from investors or current yield requirements. Gain or loss is recorded at the time of sale in an amount reflecting the difference between the contractual interest rates of the loans sold and the current market rate. Interest Rate Swaps The company uses interest rate swaps to manage its sensitivity to interest rate risk. For interest-rate-risk swaps, interest income and expense is accrued over the terms of the agreements, and transaction fees are deferred and amortized through interest income and expense over the terms of the agreements. The fair market value of these instruments is not included in the financial statements. Premises and Equipment Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the term of the related lease or over the useful life of the improvements, whichever is shorter. Leasing commitments are insignificant. Purchased Mortgage Servicing Rights and Excess Service Fees The cost of purchased mortgage loan servicing rights ("PMSR's") ($9,166,000 and $3,050,000 at December 31, 1994 and 1993, respectively, net of accumulated amortization), which is included in other assets, is amortized against service fee income in proportion to, and over the period of, estimated net servicing revenues. The carrying value of PMSR's and the related amortization are periodically evaluated using a discounted valuation method, in relation to estimated future net servicing revenues. The company evaluates the carrying value of the PMSR's by estimating the future net servicing income of the rights based on management's best estimate of remaining loan lives. The normal agency (GNMA, FNMA or FHLMC) servicing fee is used in the capitalization of any excess service fees. When participating interests in loans sold have an average contractual interest rate, as adjusted for normal servicing costs, which differs from the agreed yield to the purchaser, gains or losses are recognized equal to the present value of such differential over the estimated remaining life of such loans. Amortization of capitalized excess servicing fees is reflected as a reduction of loan servicing income using the interest method over the estimated remaining life of such loans, adjusted for actual prepayments. Other Assets Included in other assets is real estate acquired in settlement of loans and loans classified as in-substance foreclosures, which are carried at the lower of cost or fair value less estimated selling costs. The excess of cost over fair value less estimated costs to sell at the time of foreclosure is charged to the allowance for loan losses. Provisions for subsequent declines in fair value are included in other non-interest expense. Other costs relating to holding real estate acquired in settlement of loans and in-substance foreclosures are charged to other non-interest expense as incurred. Costs related to real estate in the process of development are capitalized. Income Taxes The company adopted as of January 1, 1993, Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this statement, a current or deferred income tax liability is recognized, subject to certain limitations, for the current or deferred tax consequences of all events that have been recognized in the financial statements. The deferred income tax liability or asset is measured by the provisions of enacted tax laws. Income taxes for prior years were determined in accordance with Accounting Principles Board Opinion No. 11. The cumulative effect of this change in accounting principle, determined as of January 1, 1993, is reported separately in the consolidated statement of income for the year ended December 31, 1993. Earnings Per Common Share Primary earnings per share is computed by dividing net income applicable to common stock by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Fully diluted earnings per share is computed based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period, with common stock equivalents calculated based on the ending market price, if higher than the average market price. Net income applicable to common stock is net income reduced by dividends on preferred stock. The weighted average number of shares outstanding after giving effect to these stock splits were as follows:
In thousands 1994 1993 1992 Primary 11,258 11,245 10,633 Fully diluted 11,258 11,245 10,633
(2) Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. The following summarizes supplemental cash flow data for the years ended December 31, 1994, 1993 and 1992:
In thousands 1994 1993 1992 Cash paid for interest $47,261 $44,309 $47,225 Cash paid for income taxes 8,537 7,163 6,609
Certain non-cash investing and financing transactions are summarized as follows:
Conversion of debentures $ - $ - $4,450 Issuance of stock in business combination - - 6,015 Decrease in unrealized loss on marketable equity securities - - 2 Change in unrealized gain (loss) on securities available for sale, net of tax (8,792) 882 - Debt reductions (increases) of Employee Stock Ownership Plan (net) 163 11 (2,667) Loans transferred to other real estate and other foreclosed assets 1,326 1,019 4,834 Other assets transferred to loans - 274 - Investment securities transferred to securities available for sale: Upon adoption of SFAS No. 115 - 171,530 - Related to business combinations 58,641 - - Other transfers - 7,359 53,900 Reclassification of debt from long-term to short-term 10,000 - -
(3) Business Combinations Combinations Consummated through December 31, 1994 On February 15, 1994, Trans Financial merged with Kentucky Community Bancorp, Inc. ("KCB") of Maysville, Kentucky, the holding company for The State National Bank, Peoples First Bank, and Farmers Liberty Bank. As of the date of consummation, KCB had consolidated assets of approximately $175 million, year-to date net interest income of approximately $915 thousand, and year-to-date net income of approximately $325 thousand. Under the terms of the merger the shares of KCB common stock outstanding were converted into 1,374,962 shares of common stock of the company. On April 22, 1994, Trans Financial merged with Peoples Financial Services, Inc. ("PFS") of Cookeville, Tennessee, the holding company for Peoples Bank and Trust of the Cumberlands and Citizens Federal Savings Bank. As of the date of consummation, PFS had consolidated assets of approximately $123 million, year- to-date net interest income of approximately $1,520 thousand, and year-to-date net income of approximately $330 thousand. Under the terms of the merger, the shares of PFS common stock were converted into 1,302,254 shares of common stock of the company. On August 31, 1994, Trans Financial merged with FGC Holding Company ("FGC"), of Martin, Kentucky, the holding company for First Guaranty National Bank. As of the date of consummation, FGC had consolidated assets of approximately $127 million, year-to-date net interest income of approximately $3,420 thousand, and year-to-date net income of approximately $1,290 thousand. Under the terms of the merger, the shares of FGC common stock were converted into 1,050,000 shares of common stock of the company and the shares of FGC preferred stock were retired. The consolidated financial statements of the company give effect to these three mergers, each of which has been accounted for as a pooling of interests. Accordingly, financial statements for all periods have been restated to reflect the results of operations of these companies on a combined basis from the earliest period presented, except for dividends per share. Certain reclassifications of the historical results of these companies have been made to conform to the current presentation. There were no material intercompany transactions and no material differences in accounting policies and procedures. The company's consolidated financial data for the years ended December 31, 1993 and 1992 has been restated as follows:
In thousands, except per share data Trans Year ended December 31, 1993 Financial KCB PFS FGC Restated Net interest income $40,586 $7,240 $5,230 $5,513 $58,569 Provision for loan losses 1,662 441 241 450 2,794 Net income 9,316 964 1,847 1,923 14,050 Fully diluted earnings per common share $1.24 $1.24
Year ended December 31, 1992 Net interest income $31,396 $7,202 $4,762 $5,220 $48,580 Provision for loan losses 1,216 838 264 300 2,618 Net income 9,060 1,349 1,229 1,827 13,465 Fully diluted earnings per common share $1.30 $1.25
On July 6, 1993, Trans Financial acquired all of the outstanding stock of Trans Kentucky Bancorp, Inc., the holding company for The Citizens Bank of Pikeville, now Trans Financial Bank. The aggregate costs, including consider ation and acquisition costs were approximately $19 million. The excess of the costs over the fair value of net assets acquired of $117,000 was recorded as goodwill. This acquisition has been accounted for using the purchase method of accounting and, accordingly, the results of operations and cash flows of this entity have been included in the consolidated financial statements since the date of acquisition. On February 1, 1993, PFS sold 31,225 shares (equivalent to 171,738 shares of common stock of the company, based on the exchange ratio of 5.5 shares of common stock of the company for each share of PFS common stock) of newly-issued common stock in connection with its acquisition of Citizens Federal Savings Bank, Rockwood, Tennessee, ("Citizens") pursuant to a definitive agreement entered into by PFS and Citizens in May, 1992. In connection with the acquisition, PFS and Citizens adopted a Plan of Conversion/Acquisition ("Plan") whereby Citizens was converted from a federally-chartered mutual institution to a federally- chartered stock institution. Pursuant to the Plan, shares of capital stock of PFS were offered initially for subscriptions to eligible members of Citizens and to certain other persons as of specified dates and subject to various subscription priorities as provided by the Plan. The capital stock was offered at a price determined by PFS's Board of Directors based upon an appraisal made by an independent appraisal firm. The offering raised gross proceeds of approximately $1,405,000, all of which was used in the acquisition of Citizens. PFS incurred costs of $511,000 associated with the offering. All costs incurred associated with the sale of stock and acquisition were deducted from the proceeds of the sale of stock. The transaction was accounted for as a pooling of interests and, accordingly, all financial data has been restated as if the entities were combined for all periods presented. On March 26, 1992, the company acquired First Federal Savings Bank of Tennessee and its wholly-owned subsidiaries, now Trans Financial Bank of Tennessee, F.S.B., for cash and common stock of the company. The aggregate costs, including consideration and acquisition costs, were $11,270 thousand. The 412,389 shares of common stock issued were valued at $6.0 million. The excess of costs over the fair value of net assets acquired of $17,000 was recorded as goodwill. On March 27, 1992, the company acquired Maury Federal Savings Bank for cash of $10,989 thousand. Aggregate consideration and acquisition costs totaled $11,110 thousand. The excess of the fair value of net assets over costs of $468,000 was allocated to reduce the values assigned to premises and equipment. On November 27, 1992, this entity was merged with Trans Financial Bank of Tennessee, F.S.B. These two acquisitions have been accounted for using the purchase method of accounting and, accordingly, the results of operations and cash flows of these two entities have been included in the consolidated financial statements since the dates of acquisition. On August 7, 1992, the company acquired five middle Tennessee branches of Heritage Federal Bank for Savings. In this transaction the company's wholly-owned subsidiary, Trans Financial Bank of Tennessee, F.S.B., assumed approximately $55 million in deposits, acquired approximately $2.3 million in premises and equipment, and received approximately $52 million in cash, net of an $800 thousand premium. On December 31, 1992, the company merged with Dawson Springs Bancorp, Inc. ("DSB"), the holding company for Kentucky State Bank and Commercial Bank of Dawson. Under the terms of the merger all shares of DSB common stock outstanding were converted into 560,088 shares of Trans Financial Bancorp, Inc. common stock. The transaction was accounted for as a pooling of interests and, accordingly, all financial data has been restated as if the entities were combined for all periods presented. On December 31, 1992 these banks were merged into Trans Financial Bank, National Association. Intangibles (goodwill and deposit base premium) from the above transactions, as well as acquisitions consummated in prior years, are being amortized over periods ranging from ten to twenty years using straight-line and accelerated methods and had a combined unamortized balance of $7,409,000 and $8,373,000 at December 31, 1994 and 1993, respectively.
Pending Business Combination On November 16, 1994, the company entered into an agreement to purchase from Fifth Third Bank of Kentucky, Inc. approximately $400 thousand of consumer loans, certain branch facilities and to assume approximately $40 million of deposits related to Fifth Third's Bowling Green and Scottsville, Kentucky branches. The acquisition is expected to be consummated during the first quarter of 1995.
(4) Cash and Due from Banks Regulatory authorities require the banks to maintain reserve balances on customer deposits. The amounts of required reserves totaled approximately $21,911,000 at December 31, 1994, and $18,972,000 at December 31, 1993.
(5) Securities Effective December 31, 1993, the company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, all debt securities in which the company does not have the ability or management does not have the positive intent to hold to maturity are classified as securities available for sale and are carried at market value. All equity securities are classified as available for sale beginning December 31, 1993. In conjunction with the adoption of Statement No. 115, $171.5 million of investment securities were transferred to securities available for sale. Unrealized gains and losses on securities available for sale are reported as a separate component of shareholders' equity (net of tax) beginning December 31, 1993. Securities available for sale prior to December 31, 1993, were carried at the lower of aggregate cost or market value. The following summarizes securities available for sale at December 31, 1994 and 1993.
Amortized Unrealized Market December 31, 1994 (In Cost Gains Losses Value thousands) U.S. Treasury and federal $153,535 $- $7,051 $146,484 agency securities Collateralized mortgage obligations and mortgage-backed 75,855 - 4,960 70,895 securities Equity securities 12,689 27 452 12,264 Total securities available $242,079 $27 $12,463 $229,643 for sale
Amortized Unrealized Market December 31, 1993 (In Cost Gains Losses Value thousands) U.S. Treasury and federal $123,023 $1,108 $454 $123,677 agency securities Collateralized mortgage obligations and mortgage-backed 104,633 1,086 446 105,273 securities Equity securities 11,205 42 161 11,086 Total securities available $238,861 $2,236 $1,061 $240,036 for sale
The amortized cost and approximate market values of securities held to maturity as of December 31, 1994 and 1993, follows:
Amortized Unrealized Market December 31, 1994 (In Cost Gains Losses Value thousands) U.S. Treasury and federal $3,081 $- $356 $2,725 agency securities Collateralized mortgage obligations and mortgage-backed 26,372 - 954 25,418 securities State and municipal 49,752 254 2,130 47,876 obligations Corporate debt securities 5,553 - 363 5,190 Total securities held to $84,758 $254 $3,803 $81,209 maturity
Amortized Unrealized Market December 31, 1993 (In Cost Gains Losses Value thousands) U.S. Treasury and federal $51,759 $565 $114 $52,210 agency securities Collateralized mortgage obligations and mortgage-backed 45,660 1,122 75 46,707 securities State and municipal 42,162 1,945 209 43,898 obligations Corporate debt securities 6,031 104 19 6,116 Total securities held to $145,612 $3,736 $417 $148,931 maturity
Included in equity securities at December 31, 1994, are Federal Home Loan Bank and Federal Reserve Bank stock of $5,617,000 and $1,533,000, respectively. At December 31, 1993, these stock investments were $4,572,000 and $1,176,000, respectively. The amortized cost and approximate market value of debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed obligations generally have contractual maturities in excess of ten years, but shorter expected maturities as a result of prepayments.
Securities Held Securities to Maturity Available for Sale Amortized Market Amortized Market In thousands Cost Value Cost Value Due in one year or less $4,047 $4,076 $32,902 $32,510 Due after on year through five years 16,361 15,940 80,181 77,492 Due after five years through ten years 28,988 27,174 40,452 36,482 Due after ten years 8,990 8,601 - - 58,386 55,791 153,535 146,484 Collateralized mortgage obligations and mortgage-backed 26,372 25,418 75,855 70,895 securities $84,758 $81,209 $229,390 $217,379
Securities with a carrying value of approximately $148,348,000 and $147,174,000 at December 31, 1994 and 1993, respectively, were pledged to secure public funds, trust funds and for other purposes. Gross gains of $257,000; $1,236,000; and $1,086,000; and gross losses of $-0-; $87,000; and $196,000 were realized on sales of securities in 1994, 1993, and 1992, respectively.
(6) Loans The company extends credit in the form of commercial loans, real estate loans and consumer loans to customers primarily in the immediate market areas of its subsidiaries. The composition of loans at December 31, 1994 and 1993 follows:
In thousands 1994 1993 Commercial $318,970 $320,952 Commercial real estate 334,567 234,308 Residential real estate 339,488 304,990 Consumer 153,754 150,202 Unearned income (3,063) (3,656) Loans net of unearned income $1,143,716 $1,006,796
The principal balance of nonaccrual and restructured loans at December 31, 1994 and 1993 was $4,405,000 and $7,517,000, respectively. The interest that would have been recorded if all those loans were in an accrual status in accordance with their original terms was approximately $519,000 in 1994, $452,000 in 1993, and $505,000 in 1992. The amount of interest income that was actually recorded for those loans was approximately $81,000 in 1994, $37,000 in 1993, and $134,000 in 1992. Loans to executive officers and directors and their associates, including loans to affiliated companies for which these individuals are principal owners, amounted to approximately $42,127,000 at December 31, 1994 and $26,750,000 at December 31, 1993. During 1994, new loans of $49,389,000 were made and repayments of $32,950,000 were received. Other changes include increases for changes in executive officers and directors of $8,605,000 and decreases related to participations sold of $9,667,000. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for other customers. Included in the balance of loans to executive officers and directors at December 31, 1994, is a loan to a director of a subsidiary bank totaling $1.6 million which is considered to be a potential problem loan. An analysis of the changes in the allowance for loan losses follows:
In thousands 1994 1993 1992
Balance at January 1 $12,505 $9,596 $7,700 Provision for loan losses 2,212 2,794 2,618 Balance of allowance for loan losses of acquired subsidiaries - 2,433 1,016 Loans charged off (2,791) (3,446) (2,499) Recoveries of loans previously charged off 603 1,128 761 Net charge-offs (2,188) (2,318) (1,738) Balance at December 31 $12,529 $12,505 $9,596
During 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"). This statement must be adopted on a prospective basis by January 1, 1995. SFAS 114 requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. Management has determined that the adoption of SFAS 114 in 1995 will not have a material adverse effect on the company's consolidated financial statements.
(7) Premises and Equipment A summary of premises and equipment at December 31, 1994 and 1993, follows:
In thousands 1994 1993 Land and improvements $5,827 $5,703 Buildings and improvements 30,561 31,591 Furniture and equipment 31,714 23,918 68,102 61,212 Less accumulated depreciation and amortization 31,662 27,819 Total premises and equipment $36,440 $33,393
(8) Long-Term Debt and Other Short-Term Borrowings Long-term debt consisted of the following at December 31, 1994 and 1993:
In thousands 1994 1993 7.25% Subordinated Notes; due September 15, 2003; interest payable quarterly $32,930 $33,000 Advance from the Federal Home Loan Bank; due May 9, 1994; interest at 4.50%, payable monthly - 10,000 Employee Stock Ownership Plan ("ESOP") note payable to bank; due September 30, 2000; interest at the lender's base rate; principal and interest payable quarterly 3,223 3,106 Employee Stock Ownership Plan ("ESOP") note payable to bank; due July 31, 1996; interest at 82.5% of the prime rate, principal and interest payable quarterly 475 755 Secured note payable to bank; due May 1998; interest at 6.7%, principal and interest payable quarterly - 2,818 Unsecured note; due 1994; interest at 6-5/8%, payable annually - 42 Debentures payable; due January 2000; interest at the prime rate, payable quarterly - 3,790 Unsecured demand notes; interest at the prime rate, payable quarterly 706 706 Total long-term debt $37,334 $54,217
Other short-term borrowings consisted of the following at December 31, 1994 and 1993:
In thousands 1994 1993 Advance from the Federal Home Loan Bank; due January 20, 1994; interest at 3.45%, payable monthly $- $15,000 Advance from the Federal Home Loan Bank; due March 27,1995; interest at 6.45%, payable monthly 15,000 - Advance from the Federal Home Loan Bank; due December 27, 1995; interest at 7.7%, payable monthly 3,000 - Advance from the Federal Home Loan Bank; due January 13, 1995; interest at 5.6%, payable monthly 20,000 - Advance from the Federal Home Loan Bank; due December 1, 1995; interest at 7.35%, payable monthly 10,000 - All other short-term borrowings 33 - Total other short-term borrowings $48,033 $15,000
The prime interest rate and base rate associated with certain of the above obligations was 8.5% at December 31, 1994, and 6.0% at December 31, 1993. The company has a $3,000,000 unsecured operating line of credit with an unaffiliated bank. This obligation has substantially the same restrictive covenants as the ESOP loan due September 30, 2000, as described below. The line was not in use at December 31, 1994 or 1993. The advances from the Federal Home Loan Bank are collateralized by the company's Federal Home Loan Bank stock and certain first mortgage loans in the approximate amount of 150% of the debt. The ESOP note payable due September 30, 2000, is guaranteed by the company. The related loan agreement has a number of restrictive covenants, including maintaining capital levels of the company and the banks at least at the minimum levels required by applicable regulatory agencies; maintaining the company's risk-weighted capital ratio, as defined, at not less than 9.25%; maintaining the company's leverage ratio, as defined, at not less than 5.25%; maintaining the company's annualized return on assets at the date of financial reports required by regulations at no less than .50%; maintaining nonperforming loans, as defined, at less than 2.50% of gross loans at the date of required financial reports; and maintaining on a consolidated basis an allowance for loan losses of at least .75% of gross loans. The ESOP note payable due July 31, 1996, is also guaranteed by the company. The loan obligations of the ESOP are recorded on the consolidated balance sheet with a corresponding amount recorded as a reduction of the company's shareholders' equity. Both the loan obligation and the reduction of shareholders' equity are reduced by the amount of any loan repayments made by the ESOP. The company's Employee Stock Ownership Plan is described in note 12 to the consolidated financial statements. Principal payments required for the years 1994 through 1999 on long-term debt at December 31, 1994, are as follows:
Year ended December 31 In thousands 1995 $669 1996 578 1997 604 1998 672 1999 671 Later years 34,140
(9) Shareholders' Equity Common Stock The company has stock option plans which permit options to be granted for a maximum of 857,888 shares of common stock of the company. Under the terms of the plans, options with ten-year terms may be granted to certain key employees to purchase common stock at not less than fair value of the common stock at the date of grant. A summary of share data related to the option plan, adjusted for stock splits, follows:
Number Option price of shares per share Options outstanding December 31, 1991 225,141 $4.55-$11.53 Granted 11,236 $6.13 Exercised (2,451) $8.44-$9.375 Terminated or canceled (19,671) - Options outstanding December 31, 1992 214,255 $4.55-$11.53 Granted 79,673 $16.00 Exercised (8,577) $6.13-$8.16 Terminated or canceled (28,374) - Options outstanding December 31, 1993 256,977 $4.55-$16.00 Granted 141,550 $15.25-$16.50 Exercised (18,018) $6.13-$11.53 Terminated or canceled (32,852) - Options outstanding December 31, 1994 347,657 $4.55-$16.50
Of the options outstanding, 108,725 were exercisable as of December 31, 1994.
Preferred Stock and Rights Plan During 1992, the company's Articles of Incorporation were amended to eliminate two series of Class A Preferred Stock, designated the 1988 and 1990 Series, and to authorize 5,000,000 shares of Class B Preferred Stock, Series 1992. Series 1992 Class B Preferred Stock is issuable in connection with the company's Shareholder Rights Plan and carries the right to cumulative annual dividends of $6.00 per share or 133 times dividends per common share (subject to adjustment), whichever is greater. FGC had authorized, issued and outstanding two classes of preferred stock, Class A and Class B, which were redeemed on September 1, 1994. At December 31, 1993, there were no dividends in arrears on preferred stock. On January 20, 1992, the company's Board of Directors adopted a Shareholder Rights Plan. Under the plan, the Board declared a dividend of one right for each outstanding share of common stock. In addition, the company will issue one right with respect to each share of common stock issued subsequent to that date. Each right, when and if it becomes exercisable, will entitle the registered holder to purchase from the company 1/100 of a share of Series 1992 Preferred Stock, subject to adjustment, at an exercise price of $45. The description and terms of the rights are set forth in a Rights Agreement, dated as of January 20, 1992, between the company and First Union National Bank, as Rights Agent. The Board may redeem the rights in whole, but not in part, at a price of $.01 per right. The rights become exercisable only if a person or group acquires, or obtains the right to acquire, beneficial ownership of 15% or more of the company's outstanding common stock, the Board determines that a beneficial owner of at least 10% of the company's outstanding common stock has a detrimental effect on the company or its shareholders, or a tender or exchange offer is commenced for 25% or more of the outstanding common stock. After the rights become exercisable, if any person becomes the beneficial owner of more than 15% of the outstanding common stock, or the Board determines that a beneficial owner of at least 10% of the company's outstanding common stock has a detrimental effect on the company or its shareholders, then the rights will entitle each holder of a right to purchase, for the exercise price, the number of shares of preferred stock which at the time of the transaction would have a market value twice the exercise price.
(10) Dividend Restrictions Payment of dividends by the company's subsidiaries is restricted by national and state banking and thrift laws and regulations. Also, certain notes payable described in note 8 include restrictive covenants related to the maintenance of minimum capital ratios by the banks, which effectively restrict the payment of dividends. At December 31, 1994, the aggregate retained earnings of the company's subsidiaries was approximately $52.9 million, of which approximately $19.7 million is available as of January 1, 1995, for the payment of dividends under the most restrictive of the above restrictions. Certain notes payable described in note 8 include restrictive covenants related to the maintenance of minimum capital ratios, which effectively restrict the payment of dividends by the company. Also, minimum regulatory capital requirements effectively limit the payment of dividends. At December 31, 1994, the most restrictive of the covenants limited the payment of dividends by the company to approximately $27.8 million.
(11) Income Taxes As discussed in note 1, the company adopted in 1993 Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect of this change in accounting for income taxes, determined as of January 1, 1993, was an increase in net income of $296,000 and is reported separately in the consolidated statement of income for 1993. Financial statements for prior years have not been restated to apply the provisions of Statement 109. Total income tax expense (benefit) for the years ended December 31, 1994 and 1993 was allocated as follows:
In thousands 1994 1993 Income before income tax and cumulative effect of change in accounting principle $7,075 $6,223 Shareholders' equity, for unrealized net gain (loss) on securities available for sale (4,818) 455 $2,257 $6,678
The components of income tax expense (benefit) were as follows:
In thousands 1994 1993 1992 Current $7,957 $6,745 $6,551 Deferred (882) (522) (152) $7,075 $6,223 $6,399 An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:
1994 1993 1992 U.S. federal income tax rate 35.0 % 35.0 % 34.0 % Changes from the statutory rate: Tax exempt investment income (5.1) (4.5) (4.0) Amortization of goodwill 0.8 0.8 0.7 Acquisition costs 1.2 0.0 (0.1) State income taxes, net of federal tax benefit 1.2 1.0 1.1 Statutory bad debt deduction - - (0.6) Surtax exemption - (0.5) - Other, net (0.2) (0.6) 1.1 32.9 % 31.2 % 32.2 %
The sources of timing differences and the resulting deferred income tax expense (benefit) for 1992 follows:
In thousands 1992 Loan loss provision in excess of amount allowed for tax purposes $(308) Tax gains on sales of loans (80) Loan fees (101) Other, net 337 $(152)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993, are presented below:
In thousands 1994 1993 Deferred tax assets: Allowance for loan losses $3,200 $2,410 Deferred compensation 293 301 Investment securities 4,480 - Differences due to purchase accounting adjustments related to the following: Accrued expenses 505 545 Mortgage servicing 167 179 Other 73 79 Total gross deferred tax assets 8,718 3,514 Less valuation allowance (108) (108) Net deferred tax asset 8,610 3,406
Deferred tax liabilities: Differences due to purchase accounting adjustments related to the following: Investments and other assets 870 916 Premises and equipment 415 422 FHLB stock 449 449 Amortization of intangibles 58 99 Deferred loan fees 239 509 Depreciation 228 209 Investment securities - 279 FHLB stock 178 40 Other 21 31 Total deferred tax liabilities 2,458 2,954 Net deferred tax asset $6,152 $452
The valuation allowance for deferred tax assets as of January 1, 1993, was $108,000. There was no change in the total valuation allowance for the years ended December 31, 1994 and 1993. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 1994. Shareholder's equity of Trans Financial Bank of Tennessee, F.S.B., and Trans Financial Bank, Federal Savings Bank, at December 31, 1994, include $5,101,000 for which no deferred federal income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carrying back net operating losses to prior years may create income for tax purposes only, which would be subject to the then current corporate income tax rate.
(12) Employee Benefit Plans The company has an employee stock ownership plan ("ESOP") under which the company and its subsidiaries will contribute to the ESOP an amount determined by the respective Boards of Directors at their discretion. In November 1993 Statement of Position ("SOP") 93-6, Employers' Accounting for Employee Stock Ownership Plans, was issued by the American Institute of Certified Public Accountants. The SOP prescribes changes in the accounting for the company's ESOP once all unallocated shares held by the ESOP on December 31, 1992, are exhausted. Shares acquired after December 31, 1992, will be subject to the accounting prescribed in the SOP. The changes include recognition of compensation cost, accounting for dividends on allocated and unallocated shares and the inclusion in earnings per share calculations of shares committed to be released from the ESOP. As debt is repaid, shares are released from collateral and allocated to active employees based on total debt service for the year. At December 31, 1994, the ESOP owned 257,108 allocated and 304,236 unallocated shares. The company recognized expenses related to the ESOP based on cash contributions, with such amounts exceeding the amount computed under the shares allocated method. The interest incurred on the ESOP note payable, the amount contributed by the company to the ESOP, and the amount of dividends on ESOP shares used for debt service by the ESOP for 1994, 1993, and 1992 were as follows:
In thousands 1994 1993 1992 Interest incurred $263 $236 $100 Contributions 894 597 400 Dividends used for debt service 118 6 67
The company has a profit sharing plan qualified under Section 401(k) of the Internal Revenue Code. Under the amended profit sharing plan, the company and its subsidiaries will provide funds to match the contribution made by the participating employee up to a maximum of 4% of the employee's salary. Contribu tions in accordance with the profit sharing plan were approximately $509,000 in 1994, $360,000 in 1993, and $214,000 in 1992. KCB was the sponsor of a profit-sharing plan qualified under Section 401(k) of the Internal Revenue Code. Under the profit sharing plan, KCB provided funds to match the contributions made by the participating employees up to a maximum of 6% of the employee's salary. Contributions in accordance with the profit-sharing plan were approximately $9,000 in 1994, $31,000 in 1993, and $29,000 in 1992. Former full-time employees of Kentucky State Bank who meet certain requirements as to age and length of service are covered by a defined benefit pension plan. Pension expense for this plan was $5,000 in 1994, $2,000 in 1993, and $14,000 in 1992. The plan's funded status at December 31, 1994, was composed of plan assets of $453,000 and a projected benefit obligation of approximately $586,000. Full-time employees of KCB who meet certain requirements as to age and length of service are covered by a defined benefit pension plan. On May 31, 1993, KCB froze the plan, thereby eliminating the accrual of benefits for participants after that date. The consolidated financial statements for 1993 include the recognition of the cost of curtailment of the plan for the freezing in 1993 ($45,000) and recognition of prior unrecognized loss in anticipation of plan termination ($309,000). Net pension expense for this plan was $-0- in 1994, $367,000 in 1993, and $58,000 in 1992. The plan's funded status at December 31, 1994, was composed of plan assets of $1,088,000 and a projected benefit obligation of approximately $1,343,000. Former full-time employees of PFS who meet certain requirements as to age and length of service are covered by a defined benefit pension plan. PFS was a member of the Financial Institutions Retirement Fund, which is a nonprofit pension trust through which the Federal Home Loan Bank, savings banks and similar institutions may cooperate in providing for the retirement of their employees. No contributions were required in 1994, 1993, or 1992. The company has no significant commitments to pay post-retirement or post- employment benefits other than as described above. Stock options granted to key employees are described in note 9 to the consolidated financial statements.
(13) Commitments and Contingent Liabilities Off-Balance-Sheet Financial Instruments The company's consolidated financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business to meet the financing needs of customers. These include commitments to extend credit, standby letters of credit, and derivative financial instruments. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk in excess of the amount recognized in the consolidated balance sheet. The extent of the company's involvement in various commitments is expressed by the contract amount of such instruments. Commitments to extend credit, which amounted to $247,621,000 at December 31, 1994, and $201,634,000 at December 31, 1993, are agreements to lend to a customer as long as all conditions established in the contract are fulfilled. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Market risk arises on fixed rate commitments if interest rates have moved adversely subsequent to the extension of credit. The company believes that market risk related to these commitments is not significant. Since many of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements. The company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based upon management's credit evaluation of the customer. Collateral varies but may include accounts receivable, inventory, property, plant, equipment, residential properties, income-producing commercial properties, marketable securities and interest-bearing time deposits. Standby letters of credit are conditional commitments issued by the company guaranteeing the performance of a customer to a third party. Those guarantees primarily consist of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. Most guarantees are for one year or less. The risk to the company arises from its obligation to make payment in the event of the customer's contractual default and is essentially the same as that involved in extending loan commitments to customers. The amount of collateral obtained, if deemed necessary, is based upon management's credit evaluation of the customer. Collateral held varies. The company believes the market risk related to the standby letters of credit is not significant. The company had standby letters of credit outstanding totaling $35,759,000 and $33,776,000 at December 31, 1994 and 1993, respectively. Commercial letters of credit are short-term commitments generally used to finance a commercial contract for the shipment of goods from seller to buyer. At December 31, 1994 and 1993, the company had $-0- and $4,861,000, respectively, in commercial letters of credit outstanding. Derivative financial instruments are financial instruments whose values and characteristics are derived from those of other financial instruments. A necessary component of the company's overall interest rate risk management strategy is the use of off-balance-sheet derivatives. Utilizing off-balance- sheet derivatives allows the company to manage earnings volatility and is a cost and capital- efficient way to modify the repricing or maturity characteristics of on-balance sheet assets and liabilities. Off-balance sheet derivative transactions used for interest rate sensitivity management could include swaps, futures and options with indices that directly relate to the pricing of specific assets and liabilities of the company. The company believes there is minimal risk that the derivatives used for rate sensitivity management will have any significant unintended effect on the company's financial condition or results of operations. As of December 31, 1994, the company was in an asset sensitive position because the repricing characteristics of the asset and liability portfolio were such that an increase in interest rates would have a positive effect on earnings and a decrease in interest rates would have a negative effect on earnings. To assist in achieving a desired level of interest rate sensitivity the company, in 1994, entered into a $20 million notional amount interest rate swap which effectively converts certain certificates of deposit from fixed interest rates to floating rates. The company pays a variable interest rate and receives a fixed rate of 4.38%. The variable rate at December 31, 1994 was 5.64%. This instrument expires on May 3, 1996. Interest income and expense is accrued over the term of the agreement. The related fair value of the off-balance sheet instrument (the discounted present value of the difference between the current market rate and the actual swap rate) was $(.9) million at December 31, 1994. The increased contribution to net interest income in a higher interest rate environment from on-balance sheet assets will substantially offset the negative impact on net interest income of any interest payments made by the company in an increasing rate environment. Although off-balance sheet derivative instruments do not expose the company to credit risk equal to the notional amount, the company is exposed to credit risk equal to the fair value gain in an off-balance sheet derivative instrument if the counterparty fails to perform. The company minimizes the credit risk in these instruments by dealing only with high quality counterparties and each transaction is specifically approved for applicable credit exposure. The credit exposure of each outstanding off-balance sheet derivative instrument is either collateralized with U.S. Government or agency securities or is with a counterparty who has credit ratings of at least investment grade from one of the major rating agencies. Further, the company's policy is to require all transactions be governed by an International Swap Dealers Association Master Agreement and be subject to bilateral collateral arrangements. In addition, the company requires all off-balance sheet transactions be employed solely with respect to asset/liability management or transaction/inventory hedging purposes, not for general speculative trading activity. Other Off-Balance-Sheet Risks With respect to mortgage loans sold to investors, such loans are generally sold with servicing rights retained, with only the normal legal representations and warranties regarding recourse to the company. Management believes that any liabilities which may result from such recourse provisions are not significant. Legal Proceedings As of December 31, 1994, there were various pending legal actions and proceedings against the company in which claims for damages are asserted. Management, after discussion with legal counsel, believes that the ultimate result of these legal actions and proceedings will not have a material adverse effect upon the consolidated financial statements of the company.
(14) Fair Value of Financial Instruments
The estimated fair values of the company's financial instruments are as follows:
December 31, 1994 December 31, 1993 Carrying Fair Carrying Fair In thousands Amount Value Amount Value Financial assets: Cash and short-term $81,025 $81,025 $101,758 $101,758 investments Securities 314,401 310,852 385,648 388,967 Loans 1,137,728 1,126,713 1,039,469 1,050,353 Financial liabilities: Deposits 1,335,509 1,328,893 1,376,227 1,382,549 Federal funds purchased and repurchases 74,553 74,553 29,704 29,704 Long-term debt and other short-term 85,367 82,613 69,217 69,142 borrowings
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, Short-Term Investments, Federal Funds Purchased and Repurchases For these short-term instruments, the financial statement carrying amount approximates fair value. Securities The fair value of securities is based on quoted market prices or, if market prices are not available, is estimated by discounting future cash flows using current rates at which investments would be made in similar instruments with similar credit ratings and equivalent remaining maturities. Loans The fair value of loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Long-term Debt and Other Short-term Borrowings Rates currently available to the company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Off-Balance-Sheet Financial Instruments The fair values of loan commitments and letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The value of these financial instruments was not material at December 31, 1994 and 1993. Limitations on Fair Value Reporting The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Because no market exists for a significant portion of the company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The fair value estimates are based on financial instruments only. The company has not attempted to estimate the value of assets and liabilities not considered to be financial instruments, such as premises and equipment, the mortgage banking operation and the intangible value of its core deposits and branch system. Accordingly, the fair value estimates do not represent a fair value for the company as a whole.
(15) Parent Company Financial Statements Condensed financial data for Trans Financial Bancorp, Inc. (parent company only) as of December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993 and 1992 are as follows:
Condensed Balance Sheets December 31 - In thousands 1994 1993 Assets Cash on deposit with subsidiaries $2,507 $15,977 Investment in subsidiaries 143,303 137,507 Other investments 74 342 Other assets 4,346 3,522 Total assets $150,230 $157,348
Liabilities and Shareholders' Equity Long-term debt and other notes payable $37,334 $44,191 Other liabilities 1,264 1,121 Shareholders' equity 111,632 112,036 Total liabilities and shareholders' equity $150,230 $157,348
Condensed Statements of Income Years Ended December 31 In thousands 1994 1993 1992 Income Dividends from subsidiaries $15,860 $12,675 $13,546 Other interest and dividends 285 146 34 Management fees from subsidiaries and other income 3,732 4,620 4,359 Total income 19,877 17,441 17,939 Expenses Interest on long-term debt and other notes payable 2,657 1,400 883 Other expenses 10,071 8,478 6,362 Total expenses 12,728 9,878 7,245 Income before income tax benefit and equity in undistributed earnings of subsidiaries 7,149 7,563 10,694 Federal income tax benefit 2,621 1,661 774 Income before equity in undistributed earnings of subsidiaries 9,770 9,224 11,468 Equity in undistributed earnings of 4,650 4,826 1,997 subsidiaries Net income $14,420 $14,050 $13,465
Condensed Statements of Cash Flows Years Ended December 31 In thousands 1994 1993 1992 Cash flows from operating activities: Net income $14,420 $14,050 $13,465 Adjustments to reconcile net income to cash provided by operating activities: Amortization 932 526 663 Equity in undistributed earnings of (4,650) (4,826) (1,997) subsidiaries Gain on sales of investments - - (119) Increase in other assets (986) (2,351) (508) Increase (decrease) in other liabilities 143 (102) 51 Net cash provided by operating activities 9,859 7,297 11,555
Cash flows from investing activities: Investments in and acquisitions of (10,440) (22,716) (23,077) subsidiaries Net decrease in interest-bearing deposits with banks - - 500 Purchases of other investments - - - Proceeds from maturities and sales of other investments - - 1,946 Net cash used in investing activities (10,440) (22,716) (20,631)
Cash flows from financing activities: Proceeds from issuance of long-term debt - 36,129 1,938 Repayment of long-term debt and other notes (6,694) (4,542) (4,716) payable Proceeds from issuance of common stock 654 1,770 17,727 Redemption of preferred stock (1,010) - (2,285) Dividends paid (5,839) (4,083) (3,467) Net cash provided by (used in) financing (12,889) 29,274 9,197 activities Net increase (decrease) in cash and cash (13,470) 13,855 121 equivalents Cash and cash equivalents at beginning of 15,977 2,122 2,001 year Cash and cash equivalents at end of year $2,507 $15,977 $2,122
Supplemental information: Cash paid for interest $2,710 $1,402 $971 Non-cash transactions (note 2) (8,629) 893 7,798
Exhibits Sequentially Numbered Pages 4(a)Restated Articles of Incorporation of the registrant are incorporated by reference to Exhibit 3 of the registrant's report on Form 10-Q for the quarter ended March 31, 1992.
4(b)Restated Bylaws of the registrant are incorporated by reference to Exhibit 4(b) of the registrant's report on Form 10-K for the year ended December 31, 1993.
4(c)Rights Agreement dated January 20, 1992 between Manufacturers Hanover Trust Company and Trans Financial Bancorp, Inc. is incorporated by reference to Exhibit 1 to the registrant's report on Form 8-K dated January 24, 1992.
4(d)Form of Indenture (including Form of Subordinated Note) dated as of September 1, 1993, between the registrant and First Tennessee Bank National Association as Trustee, relating to the issuance of 7.25% Subordinated Notes due 2003, is incorporated by reference to Exhibit 4 of Registration Statement on Form S-2 of the registrant (File No. 33-67686).
10(a)Trans Financial Bancorp, Inc. 1987 Stock Option Plan is incorporated by reference to Exhibit 4(a) of Registration Statement on Form S-8 of the registrant (File No. 33-43046).*
10(b)Trans Financial Bancorp, Inc. 1990 Stock Option Plan is incorporated by reference to Exhibit 10(d) of the registrant's Report on Form 10-K for the year ended December 31, 1990.*
10(c)Trans Financial Bancorp, Inc. 1992 Stock Option Plan is incorporated by reference to Exhibit 28 of the registrant's Report on Form 10-Q for the quarter ended March 31, 1992.*
10(d)Trans Financial Bancorp, Inc. 1994 Stock Option Plan is incorporated by reference to the registrant's Proxy Statement dated March 18, 1994, for the April 25, 1994 Annual Meeting of Shareholders.*
10(e)Employment Agreement between Douglas M. Lester and Trans Financial Bancorp, Inc. is incorporated by reference to Exhibit 10(c) of the registrant's Report on Form 10-K for the year ended December 31, 1990.*
10(f)Employment Agreement between Harold T. Matthews and Trans Financial Bank, National Association is incorporated by reference to Exhibit 10(e) of the registrant's Report on Form 10-K for the year ended December 31, 1992.*
Sequentially Numbered Pages 10(g)Description of the registrant's Performance Incentive Plan .* 54 10(h)Form of Deferred Compensation Agreement between registrant and certain officers of the registrant is incorporated by reference to Exhibit 10(g) of the registrant's Report on Form 10-K for the year ended December 31, 1992.*
10(i)Trans Financial Bancorp, Inc. Dividend Reinvestment and Stock Purchase Plan is incorporated by reference to Registration Statement on Form S-3 of the registrant dated May 15, 1991 (File No. 33-40606).
10(j)Warrant dated as of February 13, 1992 between Morgan Keegan & Company, Inc. and Trans Financial Bancorp, Inc. incorporated by reference to Exhibit 10(m) of Registration Statement on Form S-2 of the registrant (File No. 33-45483).
10(k)Share Exchange Agreement dated March 25, 1993 between Trans Financial Bancorp, Inc. and Trans Kentucky Bancorp is incorporated by reference to Exhibit 1 of the registrant's Report on Form 8-K dated April 8, 1993.
10(l)Loan Agreement dated as of July 6, 1993 between First Tennessee Bank National Association and Trans Financial Bancorp, Inc. is incorporated by reference to Exhibit 10(p) to the Registration Statement on Form S-2 of the registrant (File No. 33-67686).
10(m)Underwriting Agreement dated as of September 9, 1993 among Morgan Keegan & Company, Inc., J.C. Bradford and Company, and Trans Financial Bancorp, Inc. incorporated by reference to Exhibit (1) to Registration Statement on Form S-2 of the registrant (File No. 33-67686).
10(n)Subordinated Note dated as of September 16, 1993, by Trans Financial Bancorp, Inc. is incorporated by reference to Exhibit 1 to Registration Statement on Form S-2 of the registrant (File No. 33-67686).
10(o)Agreement and Plan of Reorganization dated November 9, 1993, as amended January 6, 1994, among Trans Financial Bancorp, Inc., Trans Financial Acquisition Corporation and Kentucky Community Bancorp, Inc. is incorporated by reference to Exhibit 2 to the Registration Statement on Form S-4 of the registrant (File No. 33-51575).
10(p)Agreement and Plan of Reorganization and Plan of Merger dated December 27, 1993 between Trans Financial Bancorp, Inc. and Peoples Financial Services, Inc. is incorporated by reference to Exhibit 2 of the registrant's Report on Form 8-K dated January 10, 1994.
Sequentially Numbered Pages 10(q)Agreement and Plan of Reorganization and Plan of Merger dated January 28, 1994 between Trans Financial Bancorp, Inc. and FGC Holding Company is incorporated by reference to Exhibit 2(a) and 2(b) of the registrant's Report on Form 8-K dated February 18, 1994.
11 Statement of Computation of Per Share Earnings 55
21 List of Subsidiaries of the Registrant 56
23 Consent of Independent Auditors 57
*Denotes a management contract or compensatory plan or arrangement of the registrant required to be filed as an exhibit pursuant to Item 601 (10) (iii) of Regulation S-K.
Exhibit 11
Statement Regarding Computation of Per Share Earnings Years ended December 31 In thousands, except per share data 1994 1993 1992 Primary earnings per common share: (1) Average common shares outstanding 11,175 11,124 10,633 Common stock equivalents 83 121 - Average shares and share equivalents 11,258 11,245 10,633
Income before cumulative effect of change in accounting principle $14,420 $13,754 $13,465 Primary earnings per common share before cumulative effect of change in accounting principle $1.28 $ 1.22 $ 1.27 Net income $14,420 $14,050 $13,465 Less preferred stock dividends (54) (81) (137) Income available for common stock $14,366 $13,969 $13,328 Primary net income per share $1.28 $ 1.24 $ 1.25 Fully-diluted earnings per common share: (1) Average common shares outstanding 11,175 11,124 10,633 Common stock equivalents 83 121 - Average shares and share equivalents 11,258 11,245 10,633 Income before cumulative effect of change in accounting principle $14,420 $13,754 $13,465 Fully-diluted earnings per common share before cumulative effect of change in accounting principle $1.28 $ 1.22 $ 1.27 Net income $14,420 $14,050 $13,465 Less preferred stock dividends (54) (81) (137) Income available for common stock $14,366 $13,969 $13,328
Fully-diluted net income per share $1.28 $ 1.24 $ 1.25 (1)All common share and per share data have been adjusted to reflect the 4-for- 3 stock split effected February 1, 1993. Exhibit 21 List of Subsidiaries of the Registrant
Trans Financial Bank, National Association Real Estate Holding Company Trans Financial Mortgage Company Trans Financial Investment Services, Inc.
Trans Financial Bank, Federal Savings Bank Trans Financial Bank Service Corporation
Trans Financial Bank of Tennessee, F.S.B. General Service Corporation
Trans Financial Bank Tennessee, National Association
Trans Kentucky Bancorp, Inc. Trans Financial Bank of Pikeville, National Association Trans Travel Agency, Inc.
Trans Financial Bank of Martin, National Association
Cracker Jack Aviation, Inc.
Exhibit 23
Consent of Independent Auditors
The Board of Directors Trans Financial Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statements No. 33- 40606, No. 33-60844 and No. 33-56761 on Forms S-3, and Registration Statements No. 33-21517, No. 33-43046, No. 33-53960 and No. 33-72492 on Forms S-8 of Trans Financial Bancorp, Inc. of our report dated January 16, 1995, relating to the consolidated balance sheets of Trans Financial Bancorp, Inc. and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, which report appears in the December 31, 1994 annual report on Form 10-K of Trans Financial Bancorp, Inc. Our report refers to changes in the methods of accounting for income taxes and certain investments in debt and equity securities in 1993.
/s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP
Louisville, Kentucky March 24, 1995