SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST SECURITY BANCORP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Kentucky 6712/551111 61-1364206
- - -------------------------------------------------------------------------------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number/ Identification
North American Industry Number)
Classification System Number)
400 East Main Street, Lexington, Kentucky 40507 (606) 367-3700
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
James R. Burkholder, Vice-President,
First Security Bancorp, Inc., 400 East Main Street, Lexington, Kentucky 40507
(606) 367-3700
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(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. _x_
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ___
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ___
CALCULATION OF REGISTRATION FEE
Title of Proposed Proposed
Each Class Of Amount Maximum Maximum Amount of
Securities To To Be Offering Aggregate Registration
Be Registered Registered Price Per Unit Offering Price Fee
Common stock, no par
value 1,000,000 $14.5 (1) $14,500,000 (2) $3,828
(1) Represents 50% (in order to reflect the two-for-one exchange under the
subject holding company reorganization) of the last reported sales
price on March 22, 2000 of common stock of First Security Bank of
Lexington, Inc. which are the shares to be received by the registrant
under the subject reoganization.
(2) Estimated solely for the purpose of determining the registration fee.
PROXY STATEMENT
FOR THE ANNUAL MEETING PROSPECTUS
OF SHAREHOLDERS OF FIRST SECURITY BANCORP, INC.
FIRST SECURITY BANK
OF LEXINGTON, INC.
BANK HOLDING COMPANY MERGER PROPOSED
The board of directors of First Security Bank of Lexington, Inc. (the
"Bank") has approved a bank holding company reorganization of the Bank under
such reorganization New First Security Bank of Lexington, Kentucky, Inc., a
wholly-owned subsidiary of First Security Bancorp, Inc. ("Bancorp"), would be
merged into the Bank. In the proposed merger, Bancorp (which has been formed by
the board of directors of the Bank and will become a bank holding company by
virtue of its ownership of the Bank) will issue shares of Bancorp common stock
in exchange for shares of Bank common stock. At the annual meeting, Bank
shareholders will be asked to approve (among other things) the Plan of Merger
which sets out the terms of the merger. The merger cannot be completed unless
shareholders holding a majority of the shares of Bank common stock approve it.
If the merger is completed, you will receive two shares of Bancorp
common stock for each of your shares of Bank common stock. If the exchange
results in your owning any fraction of a share of Bancorp common stock, you will
receive cash (without interest) instead of stock for that fraction. Bancorp
common stock is not traded on any exchange currently though Bancorp hopes to
have its stock traded on the NASD OTC Bulletin Board following the merger. The
market value of the Bancorp stock you will receive in the merger will go up or
down depending on the future market price of Bancorp common stock.
This proxy statement-prospectus provides you with detailed information
about the proposed merger and the other items on the Bank annual meeting agenda.
In addition, you may obtain information about Bancorp from documents filed with
the Securities and Exchange Commission. You are encouraged to carefully read
this entire document and the other documents that are referred to in this
document.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the shares of Bancorp common stock to
be issued in the merger or determined if this proxy statement-prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this proxy statement-prospectus is April 17, 2000. It is
first being mailed to shareholders on April 17, 2000.
-v-
FIRST SECURITY BANK OF LEXINGTON, INC.
400 East Main Street
Lexington, Kentucky 40507
Notice of Annual Meeting of Shareholders
to be held May 16, 2000
The Annual Meeting of Shareholders of First Security Bank of Lexington,
Inc. (the "Bank") will be held in the Theatre of the Lexington Public Library,
140 East Main Street, Lexington, Kentucky, on Tuesday, May 16, 2000 at 10:00
a.m., local time, for the following purposes:
1. To elect eight directors for three-year terms ending in
2003 or until their successors have been elected and
qualified;
2. To consider and act upon a Plan of Merger pursuant to which
(a) New First Security Bank of Lexington, Inc., a state
banking corporation in organization which will be a
wholly-owned subsidiary of First Security Bancorp, Inc. (a
Kentucky corporation which will become a bank holding
company), will be merged into the Bank, (b) each issued and
outstanding share of common stock of the Bank will be
converted into two shares of common stock of First Security
Bancorp, Inc. and (c) authorization of such further action by
the Board of Directors and any of the executive or other
proper officers of the Bank as may be necessary or appropriate
to carry out the objects, intents and purposes of the Plan of
Merger;
3. To consider and act upon the First Security Bank of Lexington,
Inc. Stock Award Plan;
4. To consider and act upon a proposal to ratify the
appointment of Crowe, Chizek and Company LLP as the
Bank's independent public accountants for 2000; and
5. To transact such other business as may properly come before
the meeting and all adjournments thereof.
Only shareholders of record at the close of business on the record
date, April 3, 2000, will be entitled to receive notice of and to vote at this
meeting, or any adjournment thereof.
It is desirable that as many shareholders as possible be represented at
the meeting. Consequently, whether or not you now expect to be present, please
date, sign and return the accompanying form of proxy which is solicited by the
board of directors of the Bank or their appointees and which will be voted as
indicated in the accompanying proxy statement-prospectus and form of proxy. A
return envelope is provided which requires no postage. You may revoke the proxy
at any time before the authority therein is exercised in the manner described in
the accompanying proxy statement-prospectus.
By order of the board of directors
R. Greg Kessinger,
Secretary
Lexington, Kentucky
April 17, 2000
TABLE OF CONTENTS
Page
A WARNING ABOUT FORWARD-LOOKING STATEMENTS.....................................1
SUMMARY........................................................................2
Annual Meeting of Bank Shareholders...................................2
Voting Rights at the Annual Meeting...................................2
Election of Directors.................................................3
The Merger............................................................3
The Companies.........................................................4
What Bank Shareholders Will Receive in the Merger.....................4
Dissenters' Rights....................................................4
Certain Federal Income Tax Consequences of the Merger.................4
Comparison of Bancorp Common Stock to Bank Common Stock...............5
Market Value of Bank Common Stock and Bancorp Common Stock............5
Regulatory Matters....................................................5
Material Contacts Between Bancorp and the Bank........................5
Reasons for the Merger................................................5
Shareholder Vote Required to Approve the Annual Meeting Agenda Matters6
Share Ownership of Management and Certain Shareholders................6
Interests of Certain Persons in the Merger That May Be Different From
Yours................................................................6
Effective Time........................................................6
Exchange of Stock Certificates........................................6
Conditions to Consummation of the Merger..............................7
Waiver, Amendment and Termination.....................................7
Accounting Treatment..................................................7
The Stock Award Plan..................................................8
Recommendation to Shareholders........................................8
Selected Financial Data...............................................8
Pro Forma Financial Data
RISK FACTORS..................................................................10
ANNUAL MEETING OF BANK SHAREHOLDERS...........................................10
Date, Place, Time and Purpose........................................10
Record Date, Voting Rights, Required Vote and Revocability
of Proxies..........................................................10
Solicitation of Proxies..............................................11
Dissenters' Rights...................................................12
Recommendation.......................................................14
ANNUAL MEETING AGENDA ITEM NUMBER 1
ELECTION OF DIRECTORS.........................................................15
ANNUAL MEETING AGENDA ITEM NUMBER 2
THE MERGER....................................................................16
General..............................................................16
Parties to the Plan of Merger........................................17
Reasons for the Merger...............................................17
Description of Transaction and Exchange Ratio........................18
Effect of the Merger on Stock Award Plan.............................18
Certain Federal Income Tax Consequences of the Merger................18
Effective Time of the Merger.........................................21
Distribution of Bancorp Stock Certificates...........................22
Conditions to Consummation of the Merger.............................23
Regulatory Approval..................................................23
Waiver, Amendment and Termination....................................24
Management and Operations After the Merger...........................25
Interests of Certain Persons in the Merger...........................25
General.....................................................25
Shropshire Agreement........................................25
Warrants....................................................26
Stock Options...............................................27
Accounting Treatment.................................................27
Expenses and Fees....................................................28
Resales of Bancorp Common Stock......................................28
Comparison of Bank Common Stock and Bancorp Common Stock.............29
Anti-Takeover Provisions Generally..........................29
Authorized Capital Stock....................................30
Preemptive Rights...........................................30
Amendment of Articles of Incorporation and Bylaws...........30
Classified Board of Directors and Cumulative Voting.........31
Director Removal............................................31
Limitations on Director Liability...........................32
Indemnification.............................................32
Special Meetings of Shreholders.............................33
Actions by Shareholders Without a Meeting...................33
Shareholder Nominations and Proposals.......................33
Business Combinations.......................................33
Limitations on Ability to Vote Stock........................34
Dissenters' Rights of Appraisal.............................34
Shareholders' Rights to Examine Books and Records...........34
Dividends...................................................34
Purchase of Own Stock.......................................35
Taxation....................................................35
Information Respecting Bancorp.......................................36
Dividends...................................................36
Price Ranges of Bancorp Common Stock........................37
Management..................................................37
Standing Committees.........................................41
Meetings of the Board of Directors..........................41
Pending Legal Proceedings...................................41
Compensation................................................41
Information Respecting the Bank......................................42
Business of the Bank........................................42
Dividends...................................................42
Price Ranges of Bank Common Stock...........................43
Principal Holders of Voting Securities......................43
Management..................................................44
Committees of the Board of Directors........................46
Board and Board Committee Meetings..........................47
Stock Ownership of Executive Officers and Directors.........47
Compensation of Executive Officers and Directors............48
Transactions with Management................................49
Management's Discussion and Analysis of Financial Condition
and Results of Operation...........................49
SUPERVISION AND REGULATION....................................................65
Bancorp..............................................................65
General.....................................................65
Restrictions on Activities..................................67
Capital Adequacy............................................70
Reporting Obligations.......................................71
Support of Subsidiary Institutions..........................71
The Bank.............................................................72
General.....................................................72
Interstate Banking..........................................73
State Regulation............................................73
Dividend Restrictions.......................................74
Prompt Corrective Action for Capital Deficiencies...........74
Deposit Insurance...........................................77
Effects of Governmental Policies and Economic Conditions....77
Monetary Policy.............................................78
ANNUAL MEETING AGENDA ITEM NUMBER 3
APPROVAL OF THE STOCK AWARD PLAN..............................................78
Purpose..............................................................78
Description of the Stock Award Plan..................................79
Certain Federal Income Tax Consequences..............................82
ANNUAL MEETING AGENDA ITEM NUMBER 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.................84
OTHER MATTERS.................................................................85
EXPERTS.......................................................................85
LEGAL MATTERS.................................................................85
WHERE YOU CAN FIND MORE INFORMATION...........................................85
APPENDIX A - PLAN OF MERGER..................................................A-1
APPENDIX B - FINANCIAL STATEMENTS OF FIRST SECURITY
BANK OF LEXINGTON, INC..........................................B-1
APPENDIX C - SUBTITLE 13 OF THE KENTUCKY BUSINESS CORPORATION
ACT.............................................................C-1
APPENDIX D - FIRST SECURITY BANK OF LEXINGTON, INC.
STOCK AWARD PLAN................................................D-1
PLEASE NOTE
We have not authorized anyone to provide you with any information other
than the information included in this document and the documents we refer you
to. If someone provides you with other information, please do not rely on it as
being authorized by us.
THIS NOTICE OF MEETING AND PROXY STATEMENT ALSO CONSTITUTE A PROSPECTUS
COVERING THE SHARES OF COMMON STOCK OF FIRST SECURITY BANCORP, INC. TO BE ISSUED
IN CONNECTION WITH THE MERGER DESCRIBED HEREIN.
THE SHARES OF FIRST SECURITY BANCORP, INC. STOCK OFFERED HEREBY ARE NOT
SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR OTHER FINANCIAL
INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
As used in this proxy statement-prospectus, the terms "Bank",
"New Bank" and "Bancorp" refer to First Security Bank of Lexington, Inc.,
New First Security Bank of Lexington, Inc. and First Security Bancorp, Inc.,
respectively.
HOW TO OBTAIN ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business and
financial information about Bancorp and the Bank that is not included in or
delivered with this document. You can obtain free copies of this information by
writing or calling:
James R. Burkholder
Executive Vice-President
First Security Bank of Lexington, Inc.
400 East Main Street
Lexington, Kentucky 40507
In order to obtain timely delivery of the documents, you must request
the information by May 10, 2000.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements about the Bank and
Bancorp following the merger. These statements can be identified by the use of
words like "expect", "may", "could", "intend", "project", "estimate" or
"anticipate". These forward-looking statements reflect the current views of the
Bank and Bancorp, but they are based on assumptions and are subject to risks,
uncertainties and other factors, including the following:
>> deposit attrition, customer loss or revenue loss following the merger
is greater than expected;
>> competitive pressure in the banking industry increases significantly
in part due to recent legislation allowing statewide branching by banks
in Kentucky;
>> changes in the interest rate environment reduce margins;
>> general economic conditions, either nationally or regionally,are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality of the Bank's loan portfolio;
>> changes occur in the regulatory environment;
>> changes occur in business conditions and inflation; and
>> changes occur in the securities markets.
The forward-looking earnings estimates included in this proxy
statement-prospectus have not been examined or compiled by the independent
public accountants of the Bank or Bancorp, nor have the independent accountants
of the Bank or Bancorp applied any procedures to such estimates. Accordingly,
such accountants do not express an opinion or any other form of assurance on
them.
SUMMARY
Bancorp and the Bank are furnishing this proxy statement-prospectus to
holders of Bank common stock, no par value per share, in connection with a proxy
solicitation by the Bank's board of directors and the issuance of shares of
Bancorp common stock under the proposed merger. The Bank's board of directors
will use the proxies at the annual meeting of shareholders of the Bank to be
held on May 16, 2000, and at any adjournments.
At the annual meeting, holders of Bank common stock will be asked to
vote upon proposals to elect eight persons as Bank directors for three year
terms, approve the merger between the Bank and the New Bank and the Plan of
Merger, approve a Bank Stock Award Plan and approve Crowe, Chizek and Company
LLP as independent public accountants for the Bank in 2000.
This summary highlights selected information from this proxy
statement-prospectus and may not contain all of the information that is
important to you. You should carefully read this entire document and the other
documents referred to in this document. These will give you a more complete
description of the transactions being proposed. For more information, see "WHERE
YOU CAN FIND MORE INFORMATION" on page 87. Page references have been included in
this summary to direct you to other places in this proxy statement-prospectus
where you can find a more complete description of the topics summarized.
Annual Meeting of Bank Shareholders (See Page 10)
The annual meeting of the Bank will be held in the theater of the
Lexington Public Library located at 140 East Main Street, Lexington, Kentucky at
10:00 a.m., local time, on May 16, 2000. At the annual meeting, you will be
asked:
>> to approve the election of eight directors to three-year terms;
>> to approve the merger and the Plan of Merger;
>> to approve the Bank Stock Award Plan;
>> to ratify the appointment of Crowe, Chizek and Company LLP as the
Bank's independent public accountants for 2000; and
>> to act on any other matters that may be put to a vote at the annual
meeting.
In order for the annual meeting to be held, a quorum must be present. A
quorum is established when a majority of shares of Bank common stock are
represented at the annual meeting either in person or by proxy.
Voting Rights at the Annual Meeting (See Page 10)
You are entitled to vote at the annual meeting if you owned shares as
of the close of business on April 3, 2000, the record date. On the record date,
there were 500,000 shares of Bank common stock outstanding. You will be entitled
to one vote for each share of Bank common stock that was validly issued and
outstanding and that you owned on the record date, though with respect to the
election of directors, voting rights are cumulative. You may vote either by
attending the annual meeting and voting your shares or by completing the
enclosed proxy card and mailing it in the enclosed envelope. Dennis R. Anderson
and D. Woodford Webb, Jr. have been designated as proxies by the Bank board of
directors.
The Bank board of directors is seeking your proxy to use at the annual
meeting. This proxy statement-prospectus has been prepared to assist you in
deciding how to vote and whether or not to grant your proxy. If you have elected
not to attend the annual meeting, please indicate on your proxy card how you
want to vote. Then sign, date and mail it as soon as possible so that your
shares will be represented at the annual meeting. If you sign, date and mail
your proxy card without indicating how you wish to vote, your proxy will be
counted as a vote for the persons nominated to be directors, for the merger and
the related Plan of Merger, for the Stock Award Plan and for the ratification of
Crowe, Chizek and Company LLP as the Bank's accountants. If you fail to return
your proxy card and fail to vote at the annual meeting, the effect will be a
vote against these matters. If you sign a proxy, you may revoke it at any time
before the annual meeting or by attending and voting at the annual meeting. You
cannot vote shares held in "street name"; only your broker can. If you do not
provide your broker with instructions on how to vote your shares, your broker
will not be permitted to vote them, and your shares will be treated as votes
against the matters on the agenda at the annual meeting.
Election of Directors (See Page 16)
Eight Bank directors are to be elected at the annual meeting to hold
offices for three-year terms ending in 2003 or until their successors have been
elected and qualified.
The Merger (See Page 17)
The merger described in this proxy statement-prospectus is a part of a
reorganization by which the shareholders of the Bank will become shareholders
(in the same proportions) of a new one bank holding company which will in turn
own 100% of the Bank following the merger, following which merger the Bank will
carry on its business in the same manner as it is presently being conducted. In
order to accomplish this reorganization under applicable law the Bank is merging
with an interim bank as herein described.
The Plan of Merger appended hereto as Appendix A (the "Plan of Merger")
provides for a merger in which the New Bank, which is being organized as a state
banking corporation in contemplation of the proposed merger, will be merged into
the Bank. The New Bank will be a wholly-owned subsidiary of Bancorp, a Kentucky
corporation which will become a bank holding company by virtue of its ownership
(upon consummation of the merger) of 100% of the outstanding shares of the Bank
as the surviving bank under the merger. The Bank's former shareholders will own
all of the issued and outstanding shares of Bancorp common stock.
The Companies (See Page 37 for Bancorp and Page 43 for the Bank)
First Security Bank of Lexington, Inc.
400 East Main Street
Lexington, Kentucky 40507
(606) 367-3700
The Bank was organized in 1997 under the laws of the Commonwealth of
Kentucky and is a state banking corporation engaged in providing a wide variety
of financial services to corporate and institutional customers, governments and
individuals. These services include acceptance of demand and time deposits and
the making of commercial, consumer, agricultural and mortgage loans.
First Security Bancorp, Inc.
400 East Main Street
Lexington, Kentucky 40507
(606) 367-3700
Bancorp is a business corporation which was incorporated on February
11, 2000, under the laws of the Commonwealth of Kentucky, for the purposes of
(i) becoming a bank holding company under the Bank Holding Company Act of 1956,
as amended, through its acquisition of the Bank by means of the merger and (ii)
transacting any and all lawful business for which corporations may be
incorporated under the Kentucky Business Corporation Act (Chapter 271B of the
Kentucky Revised Statutes), subject however to the limitations imposed upon bank
holding companies under the Bank Holding Company Act. Upon consummation of the
merger, the activities of Bancorp will be subject to the supervision of the
Board of Governors of the Federal Reserve System.
What Bank Shareholders Will Receive in the Merger (See Page 19)
If the merger is completed, each share of the Bank's common stock of no
par value will be automatically converted into two shares of Bancorp common
stock of no par value, except for those shares of Bank common stock owned by
shareholders exercising dissenters' rights.
Dissenters' Rights (See Page 12)
Under Kentucky law, certain rights of dissent are available to Bank
shareholders who do not vote their shares in favor of the Plan of Merger and
deliver to the Bank, before the vote is taken, written notice of intent to
demand payment for their Bank common stock if the merger is consummated.
Certain Federal Income Tax Consequences of the Merger (See Page 19)
It is expected that, for federal income tax purposes, you will not
recognize any gain or loss upon the exchange of your Bank shares solely for
shares of Bancorp common stock. But you may recognize taxable gain or loss
related to any cash you receive in lieu of a fractional share of Bancorp common
stock. You may also recognize taxable gain or loss related to cash you receive
if you exercise your dissenters' rights. Before the merger can be completed,
Bancorp and the Bank expect to receive an opinion of Stoll, Keenon & Park, LLP,
substantially to this effect. Tax matters are very complicated and the tax
consequences of the merger to you will depend on your own situation. You should
consult your own tax advisors to determine the effect of the merger on you under
federal, state, local and foreign tax laws.
Comparison of Bancorp Common Stock to Bank Common Stock (See Page 30)
The rights and interests of the holders of Bancorp common stock being
offered pursuant to the merger will be substantially the same as the rights and
interests of holders of Bank common stock prior to the merger, and Bancorp will
have substantially the same assets and liabilities, on a consolidated basis, as
the Bank had prior to the merger.
Market Value of Bank Common Stock and Bancorp Common Stock (See Page 44)
The last sale of Bank common stock with regard to which the Bank has
information was made at a price of $____ per share on March --, 2000, which sale
involved ___ shares of Bank common stock. No shares of Bancorp common stock have
been issued to date.
No established public trading market exists (or has existed) for Bank
common stock and no assurance can be provided as to the development of such a
market for Bancorp common stock (or the market price of Bancorp common stock)
following the merger.
Regulatory Matters (See Page 24)
Consummation of the merger requires the approval of the Kentucky
Department of Financial Institutions, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. The Bank and Bancorp
have filed applications in order to procure the requisite regulatory approvals.
It is expected that such regulatory approvals will be obtained before the annual
meeting.
Material Contacts Between Bancorp and the Bank (See Page 26)
There are certain material contacts and relationships which exist
between Bancorp and the Bank, chief of which is the fact that the directors of
the Bank are also members of the Board of Directors of Bancorp.
Reasons for the Merger (See Page 18)
The proposed transaction was undertaken in order to place the Bank in a
better position to respond to the competitive environment in which it operates.
That environment, at both the local and national levels, is characterized in
large part by the activities of numerous bank holding companies. Bancorp, unlike
the Bank, can participate in certain activities (such as the purchase of its own
stock) forbidden to the Bank. Moreover, conversion to holding company status
will permit the Bank, through Bancorp, to respond affirmatively to past and
potential changes in federal and state laws governing the permissible activities
of banks and bank holding companies.
Shareholder Vote Required to Approve the Annual Meeting Agenda Matters
(See Page 10)
Assuming that a quorum is present at the annual meeting, to approve the
merger, shareholders who own a majority of the outstanding shares of Bank common
stock must vote for the merger. If you do not vote, this will have the same
effect as a vote against the merger. Approval of the other matters on the annual
meeting agenda will require the approval of shareholders owning a majority of
the shares of Bank common stock present at the meeting.
Share Ownership of Management and Five Percent Shareholders (See Page 48)
On the record date, the Bank's directors and executive officers, their
immediate family members and entities they control owned 199,312 shares, or
approximately 39.86% of the outstanding shares of Bank common stock. In addition
to the Harold Glenn Campbell Trust for the benefit of Bank director Harold Glenn
Campbell, Donald K. Poole was known to management to own more than five percent
of the outstanding shares of Bank common stock (i.e.51,950 shares or 10.39%, of
Bank common stock). These numbers do not include stock that certain employees,
directors and advisory directors of the Bank may acquire through exercising
stock options to be issued by Bancorp following the merger if the Stock Award
Plan is adopted at the annual meeting nor does it include stock that certain of
the Bank directors may acquire through exercising outstanding stock warrants for
Bank common stock. On the record date, Bancorp directors and executive officers
owned no shares of Bank common stock and Bancorp held no shares of Bank common
stock in a fiduciary capacity for others, or as a result of debts previously
contracted.
Interests of Certain Persons in the Merger That May Be Different From Yours
(See Page 26)
One of the Bank's executive officers has an employment agreement,
certain of the Bank's officers, directors and advisory directors will likely be
awarded stock options (if the Stock Award Plan is approved) respecting Bancorp
common stock following the merger and other benefit plans and other arrangements
may provide certain executive officers with interests in and benefits from the
merger that are different from yours. In addition, certain persons (including
certain of the Bank's directors) hold warrants entitling them to purchase shares
of Bank common stock. The board of directors of the Bank was aware of these
interests and considered them in approving and recommending the merger.
Effective Time (See Page 21)
The merger will become final when Articles of Merger are filed with the
Secretary of State of the Commonwealth of Kentucky. If Bank shareholders approve
the merger at the annual meeting, and all required regulatory approvals are
obtained, it is currently anticipated that the merger will be completed on or
about May 31, 2000, although delays could occur. The Bank and Bancorp cannot
assure you that they can obtain the necessary shareholder and regulatory
approvals or that the other conditions precedent to the merger can or will be
satisfied.
Exchange of Stock Certificates (See Page 22)
Promptly after the merger is completed, you will receive a letter and
instructions on how to surrender your Bank stock certificates in exchange for
Bancorp stock certificates. You will need to carefully review and complete these
materials and return them as instructed along with your stock certificates for
Bank common stock. Please do not send the Bank's transfer agent any stock
certificates until you receive these instructions. If you do not have stock
certificates but hold shares of Bank common stock in the form of a book entry
with the Bank's transfer agent, the transfer agent will automatically exchange
the shares, unless you have elected to exercise your dissenters' rights. If you
elected dissenters' rights, you should follow the procedures outlined in the
"Dissenters' Rights" section beginning on page 12 of this proxy
statement-prospectus.
Do not send in your stock certificates until you receive a letter and
instructions on how to surrender your Bank certificates.
Conditions to Consummation of the Merger (See Page 23)
In addition to the required regulatory approvals, the merger will be
completed only if certain conditions, including, but not limited to, the
following, are met or waived, if waivable:
>> Bank shareholders approve the merger at the annual meeting;
>> the receipt of an opinion from Stoll, Keenon & Park, LLP that the
merger will qualify as a tax-free reorganization; and
>> neither Bancorp nor the Bank has breached any of its obligations under
the Plan of Merger.
In addition to these conditions, the Plan of Merger, attached to this
proxy statement-prospectus as Appendix A, describes other conditions that must
be met before the merger may be completed.
Waiver, Amendment, and Termination (See Page 24)
The Bank and Bancorp may agree to terminate the Plan of Merger and
elect not to complete the merger at any time before the merger is completed.
Each of the parties also can terminate the merger in certain other
circumstances, including if the merger is not completed by December 31, 2000.
The parties may also terminate the merger if other conditions occur which are
described in the Plan of Merger, attached to this proxy statement-prospectus as
Appendix A.
The Plan of Merger may be amended by the written agreement of Bancorp
and the Bank. The parties can amend the Agreement without shareholder approval,
even if the Bank shareholders have already approved the merger; provided,
however, that after such approval by the Bank shareholders, no amendments may be
made which modify in any material respect the consideration to be received by
the holders of Bank common stock without further approval of such shareholders.
Accounting Treatment (See Page 28)
As permited by applicable accounting standards, Bancorp intends to
reflect this merger as an internal reorganization for which the Bank's
historical basis will carry over. Accordingly, the transaction as planned will
not result in the recording of intangibles such as goodwill or core deposits.
The Stock Award Plan (See Page 79)
The Stock Award Plan is being proposed as a means of providing the Bank
(and following the merger, Bancorp) with greater flexibility in the compensation
of incentive awards for, and in order to secure the continued efforts of,
employees, directors and advisory directors who are important to the success and
growth of the business of the Bank and (as the case may be) Bancorp. If the
Stock Award Plan is adopted and the merger is completed, Bancorp will assume the
rights and obligations of the Stock Award Plan. Each option which would then be
issued under the Stock Award Plan would be an option to purchase Bancorp common
stock. If the Stock Award Plan is approved at the annual meeting, Bancorp will
be permitted under the Stock Award Plan assumed by it under the merger to make
stock option awards to Bank or Bancorp employees with respect to an aggregate of
100,000 shares of Bancorp common stock following the merger.
Recommendation to Shareholders (See Page 14)
The Bank's board of directors approved the Plan of Merger in the belief
that the proposed merger is fair to you and in your best interests. The Bank
board of directors also proposed the eight nominees for Bank directors, the
Stock Award Plan and the appointment of Crowe, Chizek and Company LLP.
Accordingly, the Bank board of directors recommends that you vote to approve the
matters on the annual meeting agenda.
Selected Financial Data
The following table sets forth the Bank's selected historical financial
information as of and for the years ending December 31, 1999 and 1998 and as of
and for the period November 17, 1997 (date of commencement) through December 31,
1997. This information should be read in conjunction with the financial
statements of the Bank attached to this proxy statement-prospectus as Appendix B
and related notes as well as "THE MERGER - Information Respecting the Bank:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 50.
Historical results do not necessarily indicate the results that you can
expect for any future period.
FIRST SECURITY BANK OF LEXINGTON, INC.
SELECTED FINANCIAL DATA
As of and for
the period from
November 17,
1997 (date of
As of and for the years ending commencement)
December 31, to December 31,
1999 1998 1997
Income Statement Data(1):
Interest income $ 5,386,777 $ 2,117,685 $ 92,122
Interest expense 3,010,181 1,093,202 11,604
Net interest income 2,376,596 1,024,483 80,518
Provision for loan losses 486,745 328,948 15,154
Non-interest income 139,156 41,581 4,550
Non-interest expense 2,007,161 1,844,916 323,794
Net income 21,846 (1,260,582) (253,880)
Balance Sheet Data:
Total assets $ 94,514,548 $ 47,134,586 $ 13,736,200
Total securities 4,331,573 5,014,085 1,746,162
Total loans, net 77,377,696 34,067,540 1,500,290
Allowance for loan losses 819,051 334,872 15,154
Total deposits 83,411,724 38,612,839 4,159,317
Repurchase agreements 2,381,968 -- --
Total shareholders' equity 8,214,522 8,280,897 9,549,004
Per Share Data(1):
Earnings per share - basic $ 0.04 $ (2.52) $ (0.51)
Earnings per share - diluted 0.04 (2.52) (0.51)
Book value 16.43 16.56 19.10
Performance Ratios(1):
Return on average assets 0.03% (4.01)% (0.70)%
Return on average equity 0.27 (14.13) (0.65)
Net interest margin 3.45 3.44 0.18
Efficiency ratio 80 173 381
Asset Quality Ratios:
Nonperforming assets to total loans --- 0.02 ---
Net loan charge-offs to average loans --- 0.06 ---
Allowance for loan losses to total loans 1.05 0.97 1.00
Capital Ratios:
Leverage ratio 9.39% 19.40% 77.50%
Tier 1 risk-based capital ratio 10.47 22.40 257.30
Total risk-based capital ratio 11.50 23.30 257.70
<FN>
(1)Information for the 1997 period includes $133,185 of pre-opening expenses
reimbursed to the organizers upon the commencement of Bank operations.
</FN>
Pro Forma Financial Data
The merger is intended to be accounted for as an internal reorganization
for which the Bank's historical basis will carry over. The only asset of Bancorp
upon completion of the transaction will be the investment in the Bank and will
not result in recognition of intangible assets such as goodwill or core
deposits. The only impact to the financial information presented herein as a
result of the merger is per share data. Whereas per share data is currently
based on 500,000 shares of Bank common stock, following the transaction, per
share data will be reported on a consolidated basis on 1,000,000 shares of
Bancorp common stock. The tables below present the per share data as reported
and on a pro forma basis as if the transaction were completed. The pro forma
data is presented without respect to the potential that Bank shareholders may
choose to exercise their dissenters rights (See Page 12).
As Reported
As of and for the period from Date of
As of and for the November 17, 1997 Initial Public Offering
years ending December 31, (date of commencement) July 4, 1997
1999 1998 to December 31, 1997
Share Data:
Weighted average shares
common stock outstanding:
Basic 500,000 500,000 500,000
Diluted 509,740 500,000 500,000
Shares available under common
stock warrants 44,220 44,220 44,220
Per Share Data:
Earnings per share - basic $ .04 $ (2.52) $ (0.51)
Earnings per share - diluted .04 (2.52) (0.51)
Book Value 16.43 16.56 19.10
Offering Price $20.00
Pro Forma Basis
As of and for the period from Date of
As of and for the November 17, 1997 Initial Public Offering
years ending December 31, (date of commencement) July 4, 1997
1999 1998 to December 31, 1997
Share Data:
Weighted average shares
common stock outstanding:
Basic 1,000,000 1,000,000 1,000,000
Diluted 1,019,480 1,000,000 1,000,000
Shares available under common
stock warrants 88,440 88,440 88,440
Per Share Data:
Earnings per share - basic $ 0.02 $ (1.26) $ (0.26)
Earnings per share - diluted 0.02 (1.26) (0.26)
Book Value 8.21 8.28 9.55
Offering Price $10.00
RISK FACTORS
If the merger is consummated, you will receive shares of Bancorp common
stock in exchange for your Bank common stock. Since Bancorp's sole asset
following the merger will be the Bank, the Bank and Bancorp are not aware of any
particular risks and uncertainties that are applicable to an investment in
Bancorp common stock. There are nonetheless risks and uncertainties that bear on
Bancorp's and the Bank's future financial results and that may cause Bancorp's
and the Bank's future earnings and financial condition to be less than expected.
Generally speaking, these risks and uncertainties relate to economic
conditions generally and would affect other financial institutions in similar
ways. Certain of these risks are discussed on page 1 under the heading "A
WARNING ABOUT FORWARD-LOOKING STATEMENTS." In addition, the fact that the Bank
was chartered in 1997 and has only recently begun to generate a profit increases
the risks associated with an investment in the Bank (and hence in Bancorp).
ANNUAL MEETING OF BANK SHAREHOLDERS
Date, Place, Time and Purpose
The annual meeting of the Bank's shareholders will be held in the
theater of the Lexington Public Library located at 140 East Main Street,
Lexington, Kentucky at 10:00 a.m., local time, on May 16, 2000. The persons
named as proxies in the accompanying form of proxy, Dennis R. Anderson and D.
Woodford Webb, Jr., have been designated as proxies by the Bank board of
directors. At the annual meeting, holders of Bank common stock will be asked to
vote to approve the agenda matters outlined in this proxy statement-prospectus.
Record Date, Voting Rights, Required Vote and Revocability of Proxies
The Bank's board of directors fixed the close of business on April 3,
2000, as the record date for determining those Bank shareholders who are
entitled to notice of and to vote at the annual meeting. Only holders of Bank
common stock of record on the books of the Bank at the close of business on the
record date have the right to receive notice of and to vote at the annual
meeting. On the record date, there were 500,000 shares of Bank common stock
issued and outstanding and held by approximately 383 persons or entities
(including beneficial holders as well as holders of record).
At the annual meeting, Bank shareholders will have one vote for each
share of Bank common stock owned on the record date except that voting rights
are cumulative in connection with the election of directors. In the election of
directors, each shareholder is entitled to as many votes as are equal to the
number of such shareholder's shares of Bank common stock held at the close of
business on the record date multiplied by the number of directors to be elected,
and the shareholder may cast all such votes for a single nominee or distribute
such votes among two or more nominees as the shareholder sees fit. For example,
since eight directors are to be elected at the annual meeting, if you own 100
shares of Bank common stock you can give each of the eight nominees for director
100 votes, one of the nominees all 800 votes or apportion your 800 votes among
the nominees as you see fit. A shareholder may withhold votes from any or all
nominees. Except to the extent a shareholder withholds votes from any or all
nominees, the persons named in the form of proxy will, in their sole discretion,
vote such proxy for, and if necessary exercise cumulative voting rights to
secure the election of, the nominees listed on page 16 as directors of the Bank.
If a quorum is present, the eight individuals who receive the largest number of
votes will be elected as Bank directors.
The holders of a majority of the outstanding shares of Bank common
stock entitled to vote at the annual meeting must be present in order for a
quorum to exist. To determine if a quorum is present, Bank intends to count the
following:
>> shares of Bank common stock present at the annual meeting either
in person or by proxy;
>> shares of Bank common stock present in person at the annual meeting
but not voting; and
>> shares of Bank common stock for which it has received proxies but with
respect to which holders of such shares have abstained on any matter.
>>
Approval of the merger at the annual meeting requires the affirmative
vote of a majority of all outstanding shares of Bank common stock. Approval of
the other agenda items at the annual meeting requires the affirmative vote of a
majority of the shares of Bank common stock present at the meeting.
Brokers who hold shares in street name for customers who are the
beneficial owners of such shares may not give a proxy to vote those shares
without specific instructions from their customers. Any abstention, non-voting
share or "broker non-vote" will have the same effect as a vote against the
approval of the agenda items at the annual meeting.
Properly executed proxies that the Bank receives before the vote at the
annual meeting that are not revoked will be voted in accordance with the
instructions indicated on the proxies. If no instructions are indicated, such
proxies will be voted FOR the proposal to elect the eight persons nominated as
directors, FOR the approval of the Plan of Merger, FOR the Bank Stock Award Plan
and FOR the ratification of the appointment of Crowe, Chizek and Company LLP as
the Bank's independent public accountants, and the proxy holders may vote the
proxies in their discretion as to any other matter which may come properly
before the annual meeting. If necessary, the proxy holders may vote in favor of
a proposal to adjourn the annual meeting in order to permit further solicitation
of proxies if there are not sufficient votes to approve an agenda item at the
time of the annual meeting. However, no proxy holder will vote any proxies voted
against approval of the Plan of Merger in favor of a proposal to adjourn the
annual meeting.
A Bank shareholder who has given a proxy solicited by the Bank's
board of directors may revoke it at any time prior to its exercise at the
annual meeting by (1) giving written notice of revocation to the Bank,
(2) properly submitting to the Bank a duly executed proxy bearing a later date
or (3) attending the annual meeting and voting in person. All written notices
of revocation and other communications with respect to revocation of proxies
should be sent to: First Security Bank of Lexington, Inc., 400 East Main
Street, Lexington, Kentucky 40507, Attn: R. Greg Kessinger, Secretary.
On the record date, the Bank's directors and executive officers (who
are also the directors and executive officers of Bancorp), including their
immediate family members and affiliated entities, owned 199,312 shares or
approximately 39.86% of the outstanding shares of Bank common stock, not
including shares subject to warrants to purchase Bank common stock.
As of the record date, Bancorp held no shares of Bank common stock,
whether outright, in a fiduciary capacity for others, or as a result of debts
previously contracted.
Solicitation of Proxies
Directors, officers and employees of the Bank may solicit proxies by
mail, in person or by telephone or facsimile. They will receive no additional
compensation for such services. The Bank may make arrangements with brokerage
firms and other custodians, nominees and fiduciaries, if any, for the forwarding
of solicitation materials to the beneficial owners of Bank common stock held of
record by such persons. The Bank will reimburse any such brokers, custodians,
nominees and fiduciaries for the reasonable out-of-pocket expenses incurred by
them for such services. The Bank will bear all expenses associated with the
solicitation of proxies, other expenses associated with the annual meeting and
one-half of the expenses related to the printing and mailing of this proxy
statement-prospectus. See "THE MERGER -- Expenses and Fees" on page 29.
Dissenters' Rights
Under Kentucky law, a Bank shareholder entitled to vote on the merger
may dissent and obtain payment of the fair value of his or her shares if the
merger is approved by the shareholders of the Bank. Generally, dissenter's
rights are a shareholder's sole remedy for objecting to the merger. The
following summary is not intended to and does not constitute a complete
statement or summary of each provision of the Kentucky Revised Statutes relating
to the rights of dissenting shareholders and is qualified in its entirety by
reference to Subtitle 13 of the Kentucky Business Corporation Act which is
attached as Appendix C hereto. Accordingly, any holder of Bank common stock
intending to exercise dissenters' rights is urged to review Appendix C carefully
and to consult his or her own legal counsel. Each step must be taken in strict
compliance with the applicable provisions of the statutes in order for a holder
of Bank common stock to perfect dissenters' rights.
A shareholder wishing to exercise dissenter's rights must deliver to
the Bank, prior to the vote on the Plan of Merger at the annual meeting, a
written notice of intent to demand payment for his or her shares if the merger
is consummated and must refrain from voting in favor of the Plan of Merger. The
written notice of intent must be given in addition to and separate from any
vote, in person or by proxy, against approval of the Plan of Merger; a vote, in
person or by proxy, against approval of the Plan of Merger will not constitute
such a written notice. The written notice of intent must be sent to R. Greg
Kessinger, First Security Bank of Lexington, Inc., 400 East Main Street,
Lexington, Kentucky 40507.
Bank shareholders electing to exercise their dissenters' rights under
Subtitle 13 of the Kentucky Business Corporation Act must not vote for approval
of the Plan of Merger. A vote by a shareholder against approval of the Plan of
Merger is not required in order for that shareholder to exercise dissenters'
rights. However, if a shareholder returns a signed proxy form but does not
specify a vote against approval of the Plan of Merger or a direction to abstain,
the proxy form, if not revoked, will be voted for approval of the Plan of
Merger, which will have the effect of waiving that shareholder's dissenters'
rights.
If the merger is approved, within ten days after the annual meeting (or
any adjournment thereof), the Bank, as the surviving corporation under the
merger, will send to all shareholders who notified the Bank of their intent to
demand payment for their shares and who did not vote any of their shares in
favor of the Plan of Merger, a dissenters' notice which will (i) state where the
shareholder must send a demand for payment and where and when his or her share
certificates must be deposited; (ii) enclose a form for demanding payment to be
completed by the dissenter and returned to the Bank, which form will require the
shareholder to certify whether or not he or she beneficially owned the shares
prior to April 14, 2000 (the date of the first announcement to the media of the
merger); (iii) establish the date (not less than 30 no more than 60 days after
the delivery of the dissenters' notice) by which the Bank must receive the
demand for payment from the shareholder; and (iv) enclose a copy of Subtitle 13
of the Kentucky Business Corporation Act. After a shareholder receives the
dissenters' notice, he or she must deliver the demand for payment to the Bank
and deposit his or her shares in accordance with the dissenters' notice or he or
she will not be entitled to payment under Subtitle 13 and will instead receive
two shares of Bancorp common stock for each share of Bank common stock held by
him or her.
Upon its receipt of a properly executed and completed demand for
payment, accompanied by such shareholder's stock certificates, the Bank will
send payment to each dissenting shareholder of the amount the Bank estimates to
be the fair value of the dissenters' shares as of the day before the date of the
annual meeting, excluding any appreciation or depreciation in anticipation of
the merger (unless exclusion would be inequitable), and accrued interest. The
payment will be accompanied by an explanation of how interest was calculated
along with the balance sheet of the Bank as of the end of the most recent fiscal
year, an income statement for that year, a statement of changes in shareholders'
equity for that year and the latest available interim financial statements. In
addition, the dissenter will be informed of his or her right to demand payment
according to the dissenter's own estimate of the fair value of such shares.
The Bank is not required to send payment as described above to a
dissenter who was not a beneficial owner of the shares prior to April 14, 2000
(the time of the first public announcement of the merger), but rather may offer
to purchase the shares based on the Bank's estimate of their fair value. Any
such owner must either accept that amount in full satisfaction or proceed with
the exercise of his or her dissenters' rights.
Within 30 days after the Bank has delivered payment based upon its
estimate of fair value, a dissenting shareholder may notify the Bank of his or
her own estimate of the fair value of the shares and demand payment of the
balance due under such shareholder's estimate.
If an agreement is not reached as to the fair value of the shares, the
Bank must file a petition in the Circuit Court of Fayette County, Kentucky,
within 60 days after receiving the dissenter's payment demand for the balance
due such shareholder under his or her estimate of fair value. Such petition must
request the court to determine the fair value of the shares and the accrued
interest. If the Bank fails to institute such a proceeding, it will be required
to pay each dissenter whose demand remains unsettled the amount demanded.
Each dissenting Bank shareholder who is a party to the proceeding is
entitled to the amount, if any, by which the court finds the fair value of his
or her shares, plus interest, exceeds the amount paid by the Bank. In an
appraisal proceeding, the Fayette Circuit Court will determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court will assess costs against the Bank, except
that the court may assess costs against all or some of the dissenters, in
amounts the court find equitable, to the extent the court finds the dissenters
acted arbitrarily, vexatiously or not in good faith in demanding payment. The
court may also assess the fees and expenses of counsel and experts for the
respective parties, in amounts the court finds equitable, as follows:(i) against
the Bank and in favor of any of the dissenters if the court finds the Bank did
not substantially comply with the statutory requirements set forth in Subtitle
13 of the Kentucky Revised Statutes; or (ii) against the Bank or a dissenter, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by Subtitle 13 of the Kentucky
Business Corporation Act. If the court finds that the services of counsel for
any dissenter were of substantial benefit to other dissenters similarly
situated, and that the fees for those services should not be assessed against
the Bank, the court may award to such counsel reasonable fees to be paid out of
the amounts awarded the dissenters who benefitted.
If for whatever reason the merger is not consummated within 60 days
after the deadline for demanding payment and depositing certificates, the Bank
must return all deposited shares. If the Bank fails to do so, a dissenter may
nevertheless proceed with the exercise of his or her dissenters' rights, and the
Bank will have no further right to terminate dissenters' rights by returning
deposited shares.
A record shareholder may dissent as to less than all of the shares
registered in his or her name only if he or she dissents with respect to all of
the shares beneficially owned by any one person and notifies the Bank in writing
of the name and address of each person on whose behalf the shareholder is
asserting dissenters' rights. In that event, such dissenters' rights shall be
determined as if the shares as to which the shareholder has dissented and the
shareholder's other shares were registered in the names of different
shareholders.
A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if he or she submits to the Bank the record
shareholder's written consent to the dissent no later than the time such
beneficial shareholder asserts his or her dissenters' rights, and he or she
dissents as to all shares of which he or she is the beneficial owner or over
which he or she has the power to direct the vote.
YOU SHOULD BE AWARE THAT FAILURE TO PROCEED IN ACCORDANCE WITH THE
PROVISIONS OF SUBCHAPTER 13 OF THE KENTUCKY BUSINESS CORPORATION ACT WILL RESULT
IN A LOSS OF ALL DISSENTERS' RIGHTS AND RESULT IN YOUR BEING BOUND BY THE PLAN
OF MERGER AND THE MERGER.
Recommendation
The Bank's board of directors has approved (i) the eight persons
nominated to serve as directors of Bank, (ii) the Plan of Merger and the merger,
(iii) the Bank Stock Award Plan and (iv) the appointment of Crowe, Chizek and
Company LLP as the Bank's independent public accountants and believes such
matters are in the best interests of Bank and its shareholders. The Bank's board
of directors recommends that the Bank shareholders vote FOR approval of such
matters.
ANNUAL MEETING AGENDA ITEM NUMBER 1
ELECTION OF DIRECTORS
Eight directors are to be elected at the annual meeting to hold office
as Bank directors for three-year terms ending in 2003 or until their successors
have been elected and qualified.
The accompanying form of proxy will be voted for the election of the
nominees listed in the table below as Bank directors, each of whom (other than
Mr. Shropshire who was recently appointed as a director)is currently serving a
one-year term as Bank director. If any of the nominees has become unavailable
for any reason at the time of the annual meeting, it is intended that, pursuant
to the accompanying proxy, votes will be cast for such substitute nominee or
nominees as the Bank's board of directors shall designate. The board of
directors of the Bank currently knows of no reason why any of the nominees
listed below is likely to become unavailable. If considered desirable,
cumulative voting will be exercised to elect as many of such nominees as
possible.
Year First Business Experience
Nominee Elected Positions with During the Past
and Age Director the Bank Five Years
R. Greg Kessinger 1997 Director; Secretary to the Executive Vice-President and
(50) Board of Directors; Chief Credit Officer of Bank
Executive Vice-President since 1997; Previously
and Chief Credit Officer President and Chief Executive
Officer of Whitaker Bank,
N.A. from 1994
Dennis R. Anderson 1997 Director Owner, Dennis Anderson Real
(48) Estate, Inc. (real estate
development and investment
company)
John D. Barlow 1997 Director President, Barlow Homes, Inc.
(40) (home builder)
Erle L. Levy 1997 Director Owner, Kentucky Lighting and
(66) Supply, Inc.
David R. McCulloch 1997 Director Director of Sales, Schaefer
(36) Systems International
(industrial packaging company)
Dr. Ira P. Mersack 1997 Director Dermatologist (Dermatology
(59) Associates of Kentucky,
P.S.C.)
John S. Shropshire 2000 President and Chief Community Trust Bancorp, Inc.
(51) Executive Officer [President, Chief Executive
(effective March 1,2000); Officer and Director,
Director (effective Flemingsburg, Kentucky
March 21, 2000) affiliate (1995-1997);
Executive Vice-President and
Senior Lending Officer,
Pikeville, Kentucky
(1997-1998); President and
Chief Executive Officer,
Central Kentucky Region
(1998-2000)]
D. Woodford Webb, Jr. 1997 Director Attorney (Webb, Hoskins,
(31) Glover & Thompson, P.S.C.)
The Bank Board of Directors recommends a vote "FOR" each of the persons
nominated to serve as directors of the Bank.
ANNUAL MEETING AGENDA ITEM NUMBER 2
THE MERGER
The following information describes material aspects of the merger.
This description does not provide a complete description of all the terms and
conditions of the Plan of Merger. It is qualified in its entirety by the
Appendices hereto, including the text of the Plan of Merger, which is attached
as Appendix A to this proxy statement-prospectus. The Plan of Merger is
incorporated herein by reference. You are urged to read the Appendices in their
entirety.
General
The Plan of Merger provides for the acquisition of the Bank by Bancorp
pursuant to the merger of the New Bank with and into the Bank. The New Bank, a
Kentucky corporation and a wholly-owned subsidiary of Bancorp, has been formed
for the sole purpose of effecting the merger. The Bank will be the surviving
corporation resulting from the merger. At the time the merger becomes effective,
each share of Bank common stock then issued and outstanding will be converted
into and exchanged for the right to receive two shares of Bancorp common stock.
No fractional shares of Bancorp common stock will be issued. Rather,
Bancorp will pay cash (without interest) in an amount equal to such fractional
part of a share of Bancorp common stock multiplied by $_________.
On the record date, the Bank had 500,000 shares of common stock issued
and outstanding. In addition, warrants were outstanding as of such date for the
purchase of 44,220 shares of Bank common stock (which, under the merger, will be
converted into the right to purchase 88,440 shares of Bancorp common stock).
Moreover, assuming the adoption at the annual meeting of the Stock Award Plan,
and given the two-for-one exchange under the merger, Bancorp currently expects
(after it assumes the obligations of such Stock Award Plan under the merger) to
issue options for the purchase of 100,000 shares of Bancorp common stock. Based
on an exchange ratio of two shares of Bancorp common stock for each share of
Bank common stock, upon completion of the merger, Bancorp will issue
approximately 1,000,000 shares of its common stock to Bank shareholders, not
including shares subject to currently outstanding warrants or future option
awards.
Parties to the Plan of Merger
The Bank is chartered as a state banking corporation under the laws of
the Commonwealth of Kentucky and is engaged in the general banking business in
Fayette County, Kentucky. See "Information Respecting the Bank - Business of the
Bank", below. The New Bank is being chartered as a state banking corporation
under the laws of the Commonwealth of Kentucky, and is being organized by
Bancorp for the sole purpose of implementing the proposed Merger. In order to
capitalize the New Bank as required by law, Bancorp will acquire 2,500 shares of
New Bank common stock for $2,500,000, which amount Bancorp will borrow on a
short-term basis from another financial institution. Under the Plan of Merger,
the 2,500 shares of New Bank common stock held by Bancorp will be converted into
750,000 shares of Bank common stock. Immediately following the Effective Time of
the Merger (as defined below), the Bank will redeem 250,000 shares of Bank
common stock for $2,500,000, and repay the $2,500,000 to Bancorp which will in
turn repay the short-term loan. The New Bank has not conducted, and will not
conduct prior to consummation of the merger, any banking or other business
operations.
Reasons for the Merger
The board of directors of the Bank has approved the Plan of Merger as
being in the best interests of the Bank's shareholders and recommends that the
shareholders vote for ratification and confirmation of the Plan of Merger. The
principal reason for the Merger is to convert the Bank into a wholly-owned
subsidiary of Bancorp in order to place the Bank in a better position to respond
to the competitive environment in which it operates. That environment, at both
the local and national levels, is characterized in large part by the activities
of numerous bank holding companies. In addition, it is anticipated that
conversion to holding company status will permit the Bank, through Bancorp, to
respond affirmatively to recent and potential changes in federal and state laws
governing the permissible activities of banks and bank holding companies. See
"SUPERVISION AND REGULATION- Bancorp". The Bank board of directors has, however,
no present plans, arrangements or commitments with respect to acquisitions.
While there can be no certainty that such will be the case, the Bank
board of directors believes that Bancorp common stock may perhaps be more
readily tradeable than Bank common stock because of its registration with the
Securities and Exchange Commission and because Bancorp, unlike the Bank, can
purchase its own stock. Bancorp will have the legal ability (which the Bank does
not have) to buy Bancorp common stock which will be issued in the merger.
Bancorp will not have a legal obligation to purchase its stock and none of its
shareholders will have any legal obligation to sell their stock, but, when a
shareholder wishes to sell and Bancorp wishes to buy, and the price is agreed
upon, Bancorp will be legally able to purchase the stock.
In general, the Bank board of directors believes that conversion to
bank holding company status will better serve the interests of the banking
public and the shareholders of the Bank by improving the Bank's capabilities for
service in a highly competitive market.
Description of Transaction and Exchange Ratio
At the Effective Time of the Merger (as defined below), the corporate
existence of the Bank and the New Bank will be merged into and continued in
Bank. All assets and liabilities of the Bank (apart from, if adopted at the
annual meeting, the Stock Award Plan which will be assumed by Bancorp under the
merger) and the New Bank, respectively, will become assets and liabilities of
the Bank. The Bank will carry on its business as heretofore conducted. At the
Effective Time of the Merger, each issued and outstanding share of Bank common
stock, which is held by a Bank shareholder not dissenting from the merger, will
be converted into and become two shares of Bancorp common stock. Bancorp will
own all outstanding shares of New Bank common stock prior to the merger and,
following the merger, will own the entirety of the outstanding shares of Bank
common stock. The shareholders of the Bank will thus own all of the outstanding
shares of Bancorp common stock in lieu of their respective ownership of shares
of Bank common stock. See "Comparison of Bank Common Stock and Bancorp Common
Stock," below.
Shareholders dissenting from the merger shall have the dissenters'
rights provided under the Kentucky Revised Statutes. See "ANNUAL MEETING OF BANK
SHAREHOLDERS - Dissenters' Rights".
Effect of the Merger on Stock Award Plan
When the merger becomes effective, the rights and obligations of the
Bank under the Stock Award Plan (if approved at the annual meeting) will be
assumed by Bancorp. After the merger becomes effective, options issued under the
Stock Award Plan would be options to purchase Bancorp common stock. Bancorp and
its board of directors (or a committee appointed from the members of the Bancorp
board of directors) will be substituted for the Bank and its board of directors
in administering the Stock Award Plan and granting options thereunder.
For information with respect to stock options which (assuming the
approval of the Stock Award Plan at the annual meeting) are expected to be
awarded by Bancorp following the merger, see "Interests of Certain Persons in
the Merger", below.
Certain Federal Income Tax Consequences of the Merger
The following is a summary of the material anticipated federal income
tax consequences of the merger to Bank shareholders who hold their Bank common
stock as a capital asset (generally, property held for investment). This summary
is based on the federal income tax laws as now in effect and as currently
interpreted. No assurance can be given that future changes in such laws or
interpretations, including amendments to applicable statutes or regulations or
changes in judicial or administrative rulings, some of which may have
retroactive effect, will not affect the accuracy of any statement in this proxy
statement-prospectus. This summary does not purport to address all aspects of
the possible federal income tax consequences of the merger that may be relevant
to United States shareholders of the Bank. The tax discussion set forth below is
included for general information only and should not be construed as tax advice
to a particular shareholder of the Bank.
Bancorp and the Bank have not and do not intend to seek a ruling from
the Internal Revenue Service as to the federal income tax consequences of the
merger. Instead, Bancorp and the Bank have obtained the opinion of counsel,
Stoll, Keenon & Park, LLP, as to certain of the expected federal income tax
consequences of the merger. A copy of this opinion is attached as an exhibit to
the registration statement to which this proxy statement-prospectus is a part.
The tax opinion which Bancorp obtained does not address, among other
matters:
>> state, local, estate, foreign or other federal tax consequence
of the merger not specifically addressed in the opinion;
>> federal income tax consequences to Bank shareholders who are
subject to special rules under the Internal Revenue Code, such
as foreign persons, corporations, tax-exempt organizations,
insurance companies, financial institutions, dealers in stocks
and securities and persons who do not own such stock as a
capital asset;
>> federal income tax consequences affecting shares of Bank
common stock acquired upon the exercise of stock options,
stock purchase plan rights or otherwise as compensation;
>> federal income tax consequences, affecting shares of Bank
common stock acquired as part of a hedge, straddle or
conversion transaction;
>> the tax consequences for Bancorp, the Bank and the New Bank of
the inclusion in income of the amount of the bad-debt reserve
maintained by the Bank and any other amounts resulting from
any required change in accounting methods; and
>> the tax consequences for Bancorp, the the Bank and the New
Bank of any income and deferred gain recognized pursuant to
Treasury Regulations issued under Section 1502 of the Internal
Revenue Code.
Subject to the conditions, qualifications, representations and
assumptions contained herein, and in the tax opinion, Stoll, Keenon & Park, LLP
has opined that:
>> The acquisition by Bancorp of substantially all of the assets
of the Bank in exchange for shares of Bancorp common stock and
the assumption of liabilities of the Bank pursuant to the
merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code.
>> The Bank, Bancorp and the New Bank will each be "a party to a
reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code.
>> No gain or loss will be recognized by the Bank as a result of
the merger.
>> No gain or loss will be recognized by the New Bank or Bancorp
as a result of the merger.
>> No gain or loss will be recognized by the shareholders of the
Bank as a result of the exchange of Bank common stock for
Bancorp common stock pursuant to the merger, except that a
gain or loss will be recognized on the receipt of any cash in
lieu of a fractional share. Assuming that the Bank common
stock is a capital asset in the hands of the respective Bank
shareholders, any gain or loss recognized as a result of the
receipt of cash in lieu of a fractional share will be a
capital gain or loss equal to the difference between the cash
received and that portion of the holder's tax basis in the
Bank common stock allocable to the fractional share.
>> The tax basis of Bancorp common stock to be received by the
shareholders of the Bank will be the same as the tax basis of
the Bank common stock surrendered in exchange therefor
(reduced by any amount allocable to a fractional share
interest for which cash is received).
>> The holding period of Bancorp common stock to be received by
shareholders of the Bank will include the holding period of
the Bank common stock surrendered in exchange therefor,
provided the Bank shares were held as a capital asset by the
shareholders of the Bank on the date of the exchange.
>> A shareholder of the Bank who perfects his dissenters' rights
and who receives payment of the fair market value of his
shares of Bank common stock will be treated as having received
such payment in redemption of such stock. Such redemption will
be subject to the conditions and limitations of Section 302 of
the Internal Revenue Code.
The tax opinion is based on the Internal Revenue Code, the Treasury
Regulations promulgated under the Internal Revenue Code by the Internal Revenue
Service, judicial decisions and administrative pronouncements of the Internal
Revenue Service, all existing and in effect on the date of this proxy
statement-prospectus and all of which are subject to change at any time,
possibly retroactively. Any such change could have a material impact on the
conclusions reached in the opinion. The opinion represents only such counsel's
best judgment as to the expected federal income tax consequences of the merger
and is not binding on the Internal Revenue Service or the courts. The Internal
Revenue Service may challenge the conclusions stated in the opinion and
shareholders of the Bank may incur the cost and expense of defending positions
taken by them with respect to the merger. A successful challenge by the Internal
Revenue Service could have material adverse consequences to the parties to the
merger, including shareholders of the Bank and Bancorp.
In rendering the tax opinion, Stoll, Keenon & Park, LLP has relied, as
to factual matters, solely on the continuing accuracy of (1) the description of
the facts relating to the merger contained in the Plan of Merger and this proxy
statement-prospectus and (2) certain factual matters addressed by
representations made by certain executive officers of the Bank, Bancorp and the
New Bank, as further described in the opinion. Events occurring after the date
of the opinion could alter the facts upon which the opinion is based. In such
case, the conclusions reached in the opinion and in this summary could be
materially impacted.
Accordingly, for all of the above reasons, you are urged to consult
your own tax advisor as to the specific tax consequences to you of the merger,
including the applicability and effect of federal, state, local and other tax
laws, and the implications of any proposed changes in the tax laws.
The obligation of Bancorp and the Bank to complete the merger is
conditioned on, among other things, receipt by Bancorp and the Bank of an
opinion of Stoll, Keenon & Park, LLP, substantially to the foregoing effect. The
conditions relating to the receipt of the tax opinion may be waived by both
Bancorp and the Bank. Neither Bancorp nor the Bank currently intends to waive
the conditions relating to the receipt of the tax opinion. If the conditions
relating to the receipt of the tax opinion were waived and the material federal
income tax consequences of the merger were substantially different from those
described in this proxy statement-prospectus, the Bank would resolicit the
approval of its shareholders prior to completing the merger.
Effective Time of the Merger
Subject to the satisfaction of the conditions to the merger, the merger
will become effective when Articles of Merger reflecting the merger become
effective with the Secretary of State of the Commonwealth of Kentucky. Unless
Bancorp and the Bank agree otherwise, they will use reasonable efforts to cause
the merger to become effective on the date designated by Bancorp that is within
15 days after the last to occur of:
>> the effective date of the last consent of any regulatory
authority having authority over and approving or exempting the
merger (taking into account any required waiting period);
>> the date on which the Bank's shareholders approve the Plan of
Merger; and
>> the date on which all other conditions precedent, other than
those conditions which relate to those actions to be taken at
closing, to each party's obligations under the Plan of Merger
have been satisfied or waived.
Bancorp and the Bank anticipate that the merger will become effective
on or about May 31, 2000. However, delays could occur.
Bancorp and the Bank cannot assure that the necessary shareholder and
regulatory approvals of the merger will be obtained or that other conditions
precedent to the merger can or will be satisfied. Either Bank's or Bancorp's
board of directors may terminate the Plan of Merger if the merger is not
completed by December 31, 2000, unless it is not completed because of the
willful breach of the Agreement by the party seeking termination. See "
Conditions to Consummation of the Merger" and "Waiver, Amendment and
Termination", below.
Distribution of Bancorp Stock Certificates
Promptly after the merger is completed, each former Bank shareholder
will be mailed a letter of transmittal and instructions for the exchange of the
certificates representing shares of Bank common stock for certificates
representing shares of Bancorp common stock. The Bank's stock transfer agent,
Registrar and Transfer Company, will serve as exchange agent.
You should not send in your certificates until you receive a letter of
transmittal and instructions.
After you surrender to the exchange agent certificates for Bank common
stock with a properly completed letter of transmittal, the exchange agent will
mail you a certificate or certificates representing the number of shares of
Bancorp common stock to which you are entitled and a check for the amount to be
paid in lieu of any fractional share (without interest), if any, together with
all undelivered dividends or distributions in respect of the shares of Bancorp
common stock (without interest thereon), if any. Bancorp will not be obligated
to deliver the consideration to you, as a former Bank shareholder, until you
have surrendered your Bank common stock certificates.
Whenever a dividend or other distribution is declared by Bancorp on
Bancorp common stock with a record date after the date on which the merger
became effective, the declaration will include dividends or other distributions
on all shares of Bancorp common stock that may be issued in the merger. However,
Bancorp will not pay any dividend or other distribution that is payable after
the effective date of the merger to any former Bank shareholder who has not
surrendered his or her Bank common stock certificate until the holder surrenders
the certificate. If any Bank shareholder's common stock certificate has been
lost, stolen or destroyed, the exchange agent will issue the shares of Bancorp
common stock and any cash in lieu of fractional shares upon the shareholder's
submission of an affidavit claiming the certificate to be lost, stolen or
destroyed by the shareholder of record and the posting of a bond in such amount
as Bancorp may reasonably direct as indemnity against any claim that may be made
against Bancorp with respect to the certificate.
At the time the merger becomes effective, the stock transfer books of
the Bank will be closed to Bank shareholders and no transfer of shares of Bank
common stock by any shareholder will thereafter be made or recognized. If
certificates for shares of Bank common stock are presented for transfer after
the merger becomes effective, they will be canceled and exchanged for shares of
Bancorp common stock, a check for the amount due in lieu of fractional shares,
if any, and any undelivered dividends on Bancorp common stock.
Conditions to Consummation of the Merger
Bancorp and the Bank are required to complete the merger only after the
satisfaction of various conditions. These conditions include:
>> the approval of the Plan of Merger by the holders of a majority of the
outstanding shares of Bank common stock;
>> the receipt by Bancorp and the Bank of certain required regulatory
approvals;
>> the receipt by Bancorp and the Bank of a written opinion of
Stoll, Keenon & Park, LLP as to the tax-free nature of the
merger;
>> the declaration by the Securities and Exchange Commission that the
registration statement registering the shares of Bancorp common stock
to be issued to Bank shareholders in the merger has become effective
under the Securities Act of 1933, as amended;
>> the performance of all agreements and the compliance with all
covenants of the Bank and Bancorp as set forth in the Plan of
Merger;
>> the receipt of all other consents that may be required to complete the
merger or to prevent any default under any contract or permit which
would be reasonably likely to have, individually or in the aggregate, a
material adverse effect on the Bank or Bancorp; and
>> the absence of any law or order or any action taken by any court,
governmental, or regulatory authority of competent jurisdiction
prohibiting or restricting the merger or making it illegal.
Neither Bancorp nor the Bank can assure Bank shareholders as to when or
if all of the conditions to the merger can or will be satisfied or waived by the
party permitted to do so. If the merger is not effected on or before December
31, 2000, the board of directors of either the Bank or Bancorp may terminate the
Agreement and abandon the merger. See "Waiver, Amendment and Termination",
below.
Regulatory Approval
Bancorp and the Bank must receive certain regulatory approvals before
the merger can be completed. There is no assurance that these regulatory
approvals will be obtained or when they will be obtained.
It is a condition to the completion of the merger that Bancorp and Bank
receive all necessary regulatory approvals to the merger, without the imposition
by any regulator of any condition that, in the reasonable judgment of Bancorp's
board of directors, would so materially adversely impact the financial or
economic benefits of the merger that, had such condition or requirement been
known, Bancorp would not have entered into the Plan of Merger. There can be no
assurance that the regulatory approvals of the merger will not contain terms,
conditions or requirements which would have such an impact.
The Bank and Bancorp are not aware of any material governmental
approvals or actions that are required to complete the merger, except as
described below. Should any other approval or action be required, the Bank and
Bancorp contemplate that they would seek such approval or action.
The organization of the New Bank is subject to the approval of the
Kentucky Department of Financial Institutions.The merger is subject to a
notification obligation to the Board of Governors of the Federal Reserve System
and to the prior approval of the Federal Deposit Insurance Corporation, pursuant
to Section 7 of the Bank Merger Act. The merger may not be consummated until the
30th day following the date of the Federal Deposit Insurance Corporation
approval, although the Federal Deposit Insurance Corporation may reduce that
period to 15 days. During this period, the United States Department of Justice
is given the opportunity to challenge the transaction on antitrust grounds. The
commencement of any antitrust action would stay the effectiveness of the
approval of the agencies, unless a court of competent jurisdiction specifically
ordered otherwise. As of the date of this proxy statement-prospectus, the
Federal Deposit Insurance Corporation had not advised the Bank that it had
approved the merger.
Waiver, Amendment and Termination
To the extent permitted by law, the boards of directors of Bancorp and
the Bank may agree in writing to amend the Plan of Merger, whether before or
after the Bank shareholders have approved the Plan of Merger; provided, however,
that after such approval by the Bank shareholders, no amendments may be made
which modify in any material respect the consideration to be received by the
holders of Bank common stock without further approval of such shareholders. In
addition, before or at the time the merger becomes effective, either the Bank or
Bancorp, or both, may waive any default in the performance of any term of the
Plan of Merger by the other party or may waive or extend the time for the
compliance or fulfillment by the other party of any and all of its obligations
under the Plan of Merger. In addition, either Bancorp or the Bank may waive any
of the conditions precedent to its obligations under the Plan of Merger, unless
a violation of any law or governmental regulation would result. To be effective,
a waiver must be in writing and signed by a duly authorized officer of the Bank
or Bancorp, as the case may be.
At any time before the merger becomes effective, the boards of
directors of Bancorp and Bank may agree to terminate the Plan of Merger. In
addition, either the Bank board of directors or the Bancorp board of directors
may terminate the Plan of Merger in the following circumstances:
>> if a material breach by the other party of any covenant or
agreement contained in the Plan of Merger cannot be or has not
been cured within 30 days after the giving of written notice
to the breaching party of such breach (provided that the
terminating party is not then in breach of any representation
and warranty contained in the Plan of Merger under the
applicable standards set forth in the Plan of Merger or in
material breach of any covenant or other agreement contained
in the Plan of Merger);
>> if any consent of any regulatory authority required to
complete the merger or other transactions contemplated by the
Plan of Merger has been denied by final nonappealable action,
or if any action taken by such authority is not appealed
within the time limit for appeal;
>> if the shareholders of the Bank fail to approve the Plan of
Merger and the merger at the annual meeting; or
>> if the merger is not consummated by December 31, 2000,
provided that the failure to consummate is not caused by any
willful breach of the Plan of Merger by the party electing to
terminate.
If the merger is terminated, the Plan of Merger will become void and
have no effect, except that certain understandings made in connection with
the Plan of Merger, including those relating to the obligations to share certain
expenses and maintain the confidentiality of certain information obtained, will
survive. Termination of the Agreement will not relieve any breaching party from
liability for any uncured willful breach of a representation, warranty,
covenant, or agreement. See "Expenses and Fees", below.
Management and Operations After the Merger
The merger will not change the present management team or board of
directors of Bancorp. Information concerning the management of Bancorp is
included in this proxy statement-prospectus in the section entitled "Information
Respecting Bancorp: Management" below.
The current officers and directors of the Bank will continue to serve
in their respective capacities on behalf of the Bank following the merger.
Bancorp, as the sole shareholder of the Bank after the merger, may change the
composition of the board of directors of the Bank. For additional information
regarding the interests of certain persons in the merger, see "Interests of
Certain Persons in the Merger", below.
Interests of Certain Persons in the Merger
General. In addition to the fact that each director of the Bank is also
a director of Bancorp, certain members of Bank management may be deemed to have
certain interests in the merger that are in addition to their interests as
shareholders of the Bank generally. The Bank board of directors was aware of
these interests and considered them, among other matters, in approving the Plan
of Merger and the merger.
Shropshire Agreement. John S. Shropshire was appointed as President and
Chief Executive Officer of the Bank effective March 1, 2000, replacing Julian E.
Beard who announced his retirement from active service with the Bank effective
February, 2001. The Bank has an agreement with Mr. Shropshire to provide him the
following benefits:
>> Annual base salary of $125,000.
>> Annual cash incentive bonus tied to the growth in the Bank's
assets and net income.
>> Options for the purchase of up to 10,000 shares of Bank common
stock granted at the rate of 2,000 shares per year for a five
year period. Such options are to be exercised within seven
years of being awarded and the option price for such shares
will be the market price of Bank common stock at the time of
the award. [Assuming the approval at the annual meeting of the
Stock Award Plan, and in light of the two-for-one exchange
under the Plan of Merger, these options would be issued
following the merger by Bancorp with respect to 20,000 shares
of Bancorp common stock.]
>> Health, dental and disability insurance, and 401(k) and
vacation benefits, in accordance with the Bank's plans
generally available to Bank employees.
>> Term life insurance with a death benefit of $200,000 (subject
to Mr. Shropshire's satisfaction of eligibility requirements).
>> Use of a corporate Country Club membership to be owned by the
Bank.
>> Severance pay of $156,250 upon a change in control of the
Bank or $62,500 in the event of termination of employment
other than for cause.
Warrants. The following persons hold warrants for the purchase of Bank
common stock, as indicated:
Eligible Shares
Name from Warrants
Julian E. Beard 1,340
Dennis R. Anderson 1,340
John D. Barlow 1,340
William A. Combs, Jr. 1,340
Joe E. Coons 1,340
William Patrick Davey, M.D. 1,340
A. F. Dawahare 2,948
Kenneth L. Gerson, M.D. 1,340
Tommy R. Hall 1,340
Timothy L. Haymaker 1,340
Erle L. Levy 1,340
Michael Lischin 1,340
David R. McCulloch 1,340
Ira P. Mersack, M.D. 2,747
Donald K. Poole 5,896
Fon Rogers, II 2,948
Robert J. Rosenstein 4,422
Warren W. Rosenthal 2,948
Howard A. Settle 1,340
Richard S. Trontz 2,211
William T. Vennes 1,340
D. Woodford Webb, Jr. 1,340
TOTAL: 44,220
The warrants entitle the holders thereof to purchase during 2003 the
subject number of shares of Bank common stock at a per share purchase price of
$20.00. The warrants were issued in 1997 to the aforesaid persons for their role
as initial investors who incurred risk in advancing monies for the organization
of the Bank. The warrants contain conversion provisions that will entitle
warrant holders; following the merger, by virtue of the two-for-one exchange
ratio of Bancorp common stock for Bank common stock, to exercise in 2003 the
warrants for the purchase of Bancorp common stock (i) in amounts double the
amounts reflected above and (ii) at a price of $10.00 per share.
Stock Options. If the Stock Award Plan is approved at the annual
meeting, upon consummation of the merger, pursuant to Section 7 of the Plan of
Merger, all rights and obligations of the Bank under the Stock Award Plan shall
become the rights and obligations of Bancorp. Bancorp currently anticipates
that, following the merger, it will award options under the Stock Award Plan to
certain Bank or Bancorp employees, directors and advisory directors for the
purchase in the aggregate of 100,000 shares of Bancorp common stock (including
the options for 20,000 shares expected to be awarded John S. Shropshire as
described above).
Accounting Treatment
Accounting standards permit the planned merger to be treated as an internal
reorganization, a manner similar to pooling of interests. Accounting for a
transaction in this manner is appropriate because the sole asset of Bancorp
following the merger will be the common stock of the Bank. Additionally, the
ownership interest of individual shareholders will remain virtually unchanged.
An internal reorganization permits Bancorp to record its investment in the Bank
at the Bank's historical basis which results in no intangibles unlike other
forms of business combinations that are required to be recorded at fair value.
Future financial statements will be presented in the name of Bancorp on a
consolidated basis, with intercompany amounts eliminated, and as if Bancorp had
historically existed and owned the Bank.
Expenses and Fees
Bancorp and the Bank will each pay its own expenses in connection with
the merger, including filing, registration and application fees, printing fees,
and fees and expenses of its own financial or other consultants, investment
bankers, accountants, and counsel, except that each of Bancorp and Bank will
bear and pay equally the printing and mailing costs incurred in connection with
the printing and mailing of the registration statement and this proxy
statement-prospectus.
Resales of Bancorp Common Stock
Bancorp common stock to be issued to shareholders of the Bank in the
merger will be registered under the Securities Act of 1933, as amended. All
shares of Bancorp common stock received by shareholders of Bank in the merger
will be freely transferable after the merger by those shareholders of the Bank
who are not considered to be "affiliates" of the Bank or Bancorp. "Affiliates"
generally are defined as persons or entities who control, are controlled by, or
are under common control with the Bank or Bancorp at the time of the special
meeting (generally, executive officers, directors and 10% or greater
shareholders).
Rule 145 promulgated under the Securities Act of 1993, as amended,
restricts the sale of Bancorp common stock received in the merger by affiliates
of the Bank and certain of their family members and related entities. Under the
rule, during the first calendar year after the merger becomes effective,
affiliates of the Bank or Bancorp may resell publicly Bancorp common stock they
receive in the merger but only within certain limitations as to the amount of
Bancorp common stock they can sell in any three-month period and as to the
manner of sale. After the one-year period, affiliates of the Bank who are not
affiliates of Bancorp may resell their shares without restriction. Bancorp must
continue to satisfy its reporting requirements under the Securities Exchange Act
of 1934, as amended, in order for affiliates to resell, under Rule 145, shares
of Bancorp common stock received in the merger. Affiliates also would be
permitted to resell Bancorp common stock received in the merger pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
or an available exemption from the Securities Act of 1933, as amended,
registration requirements. This proxy statement-prospectus does not cover any
resales of Bancorp common stock received by persons who may be deemed to be
affiliates of the Bank or Bancorp.
The Securities and Exchange Commission's guidelines regarding
qualifying for the "pooling-of-interests" method of accounting could also be
deemed to limit sales of shares of Bancorp and the Bank by their affiliates in
connection with the merger. The Securities and Exchange Commission guidelines
indicate that the "pooling-of-interests" method of accounting generally will not
be challenged on the basis of sales by affiliates of the acquiring or acquired
company if such affiliates do not dispose of any of the shares of the
corporation they own, or shares of a corporation they receive in connection with
a merger, during the period beginning 30 days before the merger is consummated
and ending when financial results covering at least 30 days of post-merger
operations of the combined companies have been published.
The stock certificates representing Bancorp common stock issued to
affiliates in the merger may bear a legend summarizing these restrictions on
transfer.
Comparison of Bank Common Stock and Bancorp Common Stock
In the merger, shareholders of the Bank will exchange their shares of
the Bank for shares of Bancorp. The Bank and Bancorp are Kentucky corporations
governed by Kentucky law and their respective articles of incorporation and
bylaws.
The following is a summary of the principal differences between the
current rights of Bank shareholders and those of Bancorp shareholders. The
following summary is not intended to be complete and is qualified in its
entirety by reference to the Kentucky Revised Statutes as well as the Bank's and
Bancorp's articles of incorporation and bylaws.
Anti-Takeover Provisions Generally. Bancorp's articles of incorporation
and bylaws contain certain provisions designed to assist the Bancorp board of
directors in playing a role if any group or person attempts to acquire control
of Bancorp so that the Bancorp board of directors can further protect the
interests of Bancorp and its shareholders under the circumstances. These
provisions may help the Bancorp board of directors determine that a sale of
control is in the best interests of Bancorp's shareholders, or enhance the
Bancorp board of directors' ability to maximize the value to be received by the
shareholders upon a sale of control of Bancorp.
Although Bancorp's management believes that these provisions are
beneficial to Bancorp's shareholders, they also may tend to discourage some
takeover bids. As a result, Bancorp shareholders may be deprived of
opportunities to sell some or all of their shares at prices that represent a
premium over prevailing market prices. On the other hand, defeating undesirable
acquisition offers can be a very expensive and time-consuming process. To the
extent that these provisions discourage undesirable proposals, Bancorp may be
able to avoid those expenditures of time and money.
These provisions also may discourage open market purchases by a company
that may desire to acquire Bancorp. Those purchases may increase the market
price of Bancorp common stock temporarily, and enable shareholders to sell their
shares at a price higher than that they might otherwise obtain. In addition,
these provisions may decrease the market price of Bancorp common stock by making
the stock less attractive to persons who invest in securities in anticipation of
price increases from potential acquisition attempts. The provisions also may
make it more difficult and time consuming for a potential acquiror to obtain
control of Bancorp through replacing the board of directors and management.
Furthermore, the provisions may make it more difficult for Bancorp's
shareholders to replace the board of directors or management, even if a majority
of the shareholders believe that replacing the board of directors or management
is in the best interests of Bancorp. Because of these factors, these provisions
may tend to perpetuate the incumbent board of directors and management. For more
information about these provisions, see the subsections "Amendment of Articles
of Incorporation and Bylaws," "Classified Board of Directors and Cumulative
Voting," "Director Removal," "Limitations on Director Liability,"
"Indemnification," and "Business Combinations", below.
The Bank's articles of incorporation contain no anti-takeover
provisions apart from its classified board of directors.
Authorized Capital Stock. Bancorp is authorized to issue 5,000,000
shares of common stock, none of which have been (or are expected prior to the
merger to be) issued. Bancorp's board of directors may authorize the issuance of
additional shares of common stock without further action by its shareholders,
unless applicable laws or regulations or a stock exchange on which Bancorp's
capital stock is listed requires shareholder action.
The authority to issue additional shares of common stock provides
Bancorp with the flexibility necessary to meet its future needs without the
delay resulting from seeking shareholder approval. The authorized but unissued
shares of common stock may be issued from time to time for any corporate
purpose, including, stock splits, stock dividends, employee benefit and
compensation plans (including awards under the Stock Award Plan), acquisitions
and public or private sales for cash as a means of raising capital. The shares
could be used to dilute the stock ownership of persons seeking to obtain control
of Bancorp. The sale of a substantial number of shares of voting stock to
persons who have an understanding with Bancorp concerning the voting of such
shares, or the distribution or declaration of a dividend of shares of voting
stock (or the right to receive voting stock) to its shareholders, may have the
effect of discouraging or increasing the cost of unsolicited attempts to acquire
control of Bancorp.
The Bank is authorized to issue 1,000,000 shares of common stock, of
which 500,000 shares were issued and outstanding as of April 3, 2000. The Bank
board of directors may authorize the issuance of additional shares of common
stock without further action by its shareholders unless applicable laws or
regulations require shareholder action.
Preemptive Rights. The Kentucky Business Corporation Act provides that,
unless a Kentucky corporation's articles of incorporation expressly provides for
preemptive rights, shareholders of a Kentucky corporation do not have a
preemptive right to acquire proportional amounts of the corporation's unissued
shares upon a decision of the board of directors to issue shares. The Articles
of Incorporation of neither Bancorp nor the Bank provide for preemptive rights
to their shareholders.
Amendment of Articles of Incorporation and Bylaws. Bancorp may amend
its articles of incorporation in any manner permitted by Kentucky law. The
Kentucky Business Corporation Act provides that a corporation's charter may be
amended by a majority of votes entitled to be cast on an amendment, subject to
any condition the board of directors may place on its submission of the
amendment to the shareholders. Bancorp's articles of incorporation require a
vote of eighty percent (80%) or more of the shares of capital stock entitled to
vote in an election of directors to amend, alter or repeal the articles of the
articles of incorporation governing directors, the removal of a director from
office without cause and business combinations.
Bancorp board of directors may adopt, amend or repeal Bancorp's
bylaws by a majority vote of the entire board of directors. The bylaws may also
be amended or repealed by action of Bancorp's shareholders.
Bancorp's articles of incorporation provides that Bancorp board of
directors must exercise all powers unless otherwise provided by law. The board
of directors may designate an executive committee and may authorize that
committee to exercise all of the authority of the board of directors.
The articles of incorporation of the Bank require a majority of the
votes entitled to be cast on an amendment in order to amend, alter, modify or
repeal any provision of the Bank's articles of incorporation.
The Bank board of directors may adopt, amend or repeal the Bank bylaws
by a vote of a majority of the entire board of directors, subject always to the
power of the Bank shareholders to change or repeal such bylaws.
Classified Board of Directors and Cumulative Voting. The articles of
incorporation of both Bancorp and the Bank provide that the respective board of
directors is to be divided into three classes, with each class to be as nearly
equal in number as possible. The directors in each class serve three-year terms
of office. The effect of having a classified board of directors is that only
approximately one-third of the members of the board of directors in question are
elected each year. As a result, two annual meetings are required for
shareholders to change a majority of the members of the Bank or Bancorp board of
directors.
The purpose of dividing the board of directors into classes is to
facilitate continuity and stability of leadership by ensuring that experienced
personnel familiar with the Bank or Bancorp, as the case may be, will be
represented on the board of directors at all times, and to permit management to
plan for the future for a reasonable amount of time. However, by potentially
delaying the time within which an acquirer could obtain working control of the
Bank or Bancorp board of directors, such provisions may discourage some
potential mergers, tender offers or takeover attempts.
Pursuant to the articles of incorporation of both the Bank and Bancorp,
each holder of Bank or Bancorp common stock is entitled to one vote for each
share of common stock held in the election of directors, and is entitled to
cumulative voting rights in the election of directors. With cumulative voting, a
shareholder has the right to cast a number of votes equal to the total number of
such holder's shares multiplied by the number of directors to be elected. The
shareholder has the right to distribute all of his or her votes in any manner
among any number of candidates or to accumulate such shares in favor of one
candidate.
Director Removal. Bancorp's articles of incorporation provides that a
director may be removed without cause by the shareholders only if the
shareholders holding at least eighty percent (80%) of the voting power entitled
to vote generally in the election of directors vote for such removal. The
purpose of this provision is to prevent a majority shareholder from
circumventing the classified board system by removing directors and filling the
vacancies with new individuals selected by that shareholder. This provision may
have the effect of impeding efforts to gain control of the board of directors by
anyone who obtains a controlling interest in Bancorp common stock.
The Bank articles of incorporation require the affirmative vote of at
least a majority of the shares entitled to vote for the removal of any or all
directors of the Bank.
Limitations on Director Liability. Section 271B.8-330 of the Kentucky
Business Corporation Act provides that a director shall not be liable for any
action, or failure to take action, if he discharges his duties:
>> in good faith;
>> with the care of an ordinarily prudent person in a like position under
similar circumstances; and
>> in a manner the director reasonably believes to be in the best
interests of the corporation.
In discharging his duties, a director may rely on the information,
opinions, reports or statements, including financial statements, prepared or
presented by officers or employees of the corporation whom the director
reasonably believes to be reliable. The director may also rely on such
information prepared or presented by legal counsel, public accountants or other
persons as to matters that the director reasonably believes are in the person's
competence.
The articles of incorporation of the Bank and Bancorp limit the
liability of their directors to the greatest extent permitted by law and provide
that no director shall be personally liable to the respective entities or their
respective shareholders for monetary damages for a breach of his or her duties
as a director, except for liability (a) for any transaction in which the
director's personal financial interest is in conflict with the financial
interest of the entity in question or its shareholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or are known
to the director to be in violation of law,(c) for voting for or assenting to any
distributions made in violation of Section 271B.8-330 of the Kentucky Revised
Statutes or (d) for any transaction from which the director derives an improper
personal benefit.
Indemnification. Under the Kentucky Business Corporation Act, a
corporation may indemnify any director against liability if the director:
>> conducted himself or herself in good faith;
>> reasonably believed, in the case of conduct in his or her official
capacity with the corporation, that his or her conduct was in the
best interests of the corporation;
>> reasonably believed, in all other civil cases, that his or her
conduct was at least not opposed to the corporation's best interests;
and
>> in the case of any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
Unless limited by its articles of incorporation, a Kentucky corporation
must indemnify, against reasonable expenses incurred by him or her, a director
who was wholly successful, on the merits or otherwise, in defending any
proceeding to which he or she was a party because he or she is or was a director
of the corporation. Expenses incurred by a director in defending a proceeding
may be paid by the corporation in advance of the final disposition of the
proceeding if three conditions are met:
>> the director must furnish the corporation a written affirmation of
the director's good faith belief that he or she has met the standard
of conduct as set forth above;
>> the director must furnish the corporation a written undertaking by or
on behalf of a director to repay such amount if it is ultimately
determined that he or she is not entitled to be indemnified by the
corporation against such expenses; and
>> a determination must be made that the facts then known to those making
the determination would not preclude indemnification.
>> A director may apply for court-ordered indemnification under certain
circumstances. Unless a corporation's articles of incorporation provide
otherwise,
>> an officer of a corporation is entitled to mandatory
indemnification and is entitled to apply for court-ordered
indemnification to the same extent as a director;
>> the corporation may indemnify and advance expenses to an officer,
employee or agent of the corporation to the same extent as to a
director; and
>> a corporation may also indemnify and advance expenses to an officer,
employee or agent who is not a director to the extent, consistent with
public policy, that may be provided by its articles of incorporation,
bylaws, general or specific action of its board of directors or
contract.
The articles of incorporation of Bancorp and the bylaws of the Bank,
provide for the indemnification of their respective directors and officers to
the fullest extent permitted by Kentucky law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Bancorp under
the provisions described above, Bancorp has been informed that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act of 1933, as amended, and is
therefore unenforceable.
Special Meetings of Shareholders. Special meetings of Bancorp's
shareholders may be called for any purpose or purposes whatever at any time by
five (5) or more shareholders owning, in the aggregate, not less than
twenty-five percent (25%) of the shares entitled to vote at such meeting.
Special meetings of the Bank's shareholders may be called for any
purpose by a majority of the members of the Bank board of directors, the Chief
Executive Officer of Bank or by the holders of not less than twenty percent
(20%)of all outstanding shares of Bank entitled to vote at such meeting.
Actions by Shareholders Without a Meeting. The bylaws of both Bancorp
and the Bank provide that any action required or permitted to be taken by their
respective shareholders at a duly called meeting of shareholders may be effected
by the unanimous written consent of the shareholders entitled to vote on such
action.
Shareholder Nominations and Proposals. The articles of incorporation
and bylaws of both the Bank and Bancorp are silent as to whether a shareholder
may nominate members of the board of directors or submit proposals to be
presented at an annual meeting of shareholders.
Business Combinations. Holders of eighty percent (80%) or more of
Bancorp common stock must approve a merger, consolidation, a sale or lease of
10% of the assets of Bancorp or sale of Bancorp common stock if the other party
to the transaction (including affiliates of such person)is a beneficial owner of
15% or more of the outstanding shares of Bancorp common stock. An eighty percent
(80%) vote is not required for any merger or consolidation of Bancorp with or
into any corporation or entity if a majority of the outstanding shares of voting
capital stock is owned by Bancorp or if such transaction is approved by a
majority of "continuing directors"(as defined in the articles of incorporation).
The requirement of a supermajority vote of shareholders to approve
certain business transactions may discourage a change in control of Bancorp by
allowing a minority of Bancorp's shareholders to prevent a transaction favored
by the majority of the shareholders. Also, in some circumstances, the board of
directors could cause an eighty percent (80%) vote to be required to approve a
transaction and thereby enable management to retain control over the affairs of
Bancorp. The primary purpose of the supermajority vote requirement is to
encourage negotiations with Bancorp by groups or corporations interested in
acquiring control of Bancorp and to reduce the danger of a forced merger or sale
of assets.
As a Kentucky corporation, Bancorp is or could be subject to certain
restrictions on business combinations under Kentucky law, including, but not
limited to, combinations with interested shareholders.
Holders of a majority of the shares of Bank common stock must approve a
merger, consolidation, or a sale, lease or other disposition of all or
substantially all of the assets of Bank.
Limitations on Ability to Vote Stock. The articles of incorporation and
bylaws of Bancorp and the Bank contain no provisions restricting a shareholder's
ability to vote shares of his voting stock of Bancorp or the Bank.
Dissenters' Rights of Appraisal. Under the Kentucky Business
Corporation Act, a shareholder is generally entitled to dissent from a corporate
action and obtain payment of the fair value of his shares in certain events.
These events generally include: (1) mergers, share exchanges and sales of
substantially all of the corporation's assets other than in the usual and
regular course of business, if the shareholder is entitled to vote on the
transaction; (2) certain types of amendments of the corporation's articles of
incorporatiaon that materially and adversely affects a shareholder's rights; or
(3) other corporate actions taken pursuant to a shareholder vote, to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provide for dissenters' rights. The articles of incorporation and bylaws of
Bancorp and the Bank do not provide for any such additional dissenters' rights.
For information regarding Bank shareholders' right to dissent from the
transactions contemplated by the Plan of Merger, see "ANNUAL MEETING OF BANK
SHAREHOLDERS -- Dissenters' Rights" and Appendix C attached to this proxy
statement-prospectus.
Shareholders' Rights to Examine Books and Records. The Kentucky
Business Corporation Act provides that a shareholder of a Kentucky corporation
may inspect and copy books and records of the corporation during regular
business hours, if he or she gives the corporation written notice of his or her
demand at least five business days before the date of the inspection. In order
to inspect certain records, written demand must also be made in good faith and
for a proper purpose and must describe with reasonable particularity the purpose
of the request and the records the shareholder desires to inspect.
Dividends. Bancorp's ability to pay dividends on its common stock is
governed by Kentucky corporate law. Under Kentucky corporate law, dividends may
be paid so long as the corporation would be able to pay its debts as they become
due in the ordinary course of business and the corporation's total assets would
not be less than the sum of its total liabilities plus the amount that would be
needed, if the corporation were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution to shareholders whose
preferential rights are superior to those receiving the distribution.
The Bank's Board of Directors may declare dividends on shares of Bank
common stock out of funds legally available therefor. The payment of dividends
on Bank common stock is subject to certain limitations imposed by law. Under
Kentucky law, dividends by Kentucky banks may be paid only from current or
retained net profits. Before any dividend may be declared for any period, other
than with respect to preferred stock, if any, a bank must increase its capital
surplus by at least 10% of the net profits of the bank for such period until the
bank's capital surplus equals the amount of its stated capital attributable to
its common stock. Moreover, the Commissioner of the Kentucky Department of
Financial Institutions must approve the declaration of dividends if the total
dividend to be declared by a bank for any calendar year would exceed the bank's
total net profits for such year combined with its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of preferred stock, if any, or debt.
Purchase of Own Stock. Under Kentucky law, a corporation such as
Bancorp may purchase, take, receive or otherwise acquire its own shares so long
as such action will not (i) render the corporation unable to pay its debts as
they become due in the normal course of business or (ii) render the
corporation's total assets less than the sum of its total liabilities plus
amounts needed (if the corporation were to be dissolved at such time) to satisfy
the preferential rights upon dissolution of shareholders whose preferential
rights are superior to those whose shares are being purchased. However, in some
circumstances a bank holding company may not purchase or redeem its own shares
without prior notice to and approval of the Federal Reserve Board.
Under Kentucky law, a state bank such as the Bank may not make any loan
on the security of its own capital stock, or purchase its own capital stock,
except to satisfy or protect a loan previously made in good faith and in the
ordinary course of business. Any stock so purchased or acquired must, under
Kentucky law, be sold or disposed of within six months at public or private
sale.
Taxation. In certain jurisdictions it may be more advantageous to hold
shares of Bank common stock rather than Bancorp common stock, because Bank
common stock may be exempt from ad valorem taxation, may entitle the holder to
receive dividends tax-free and may qualify as a legal investment for
fiduciaries. Some or all of these advantages may not be available with respect
to Bancorp common stock.
Information Respecting Bancorp
Bancorp has been inactive since its formation and consequently no
information is available with respect to prior business operations.
Dividends. Owners of Bancorp common stock are entitled to such
dividends and other distributions as may be declared from time to time by the
Board of Directors of Bancorp out of funds legally available therefor. The board
of directors of a Kentucky corporation may declare dividends and make a
distribution unless, after giving effect to such distribution, (i) the
corporation will not be able to pay its debts as they become due in the usual
course of business or (ii) the corporation's total assets would be less than the
sum of its total liabilities plus amounts needed (if the corporation were to be
dissolved at such time) to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those whose shares are
being purchased.
Bancorp's ability to pay dividends is dependent upon payment of
dividends by the Bank to Bancorp. The declaration of dividends by the Bank must
in turn be consistent with the requirements and limitations of Kentucky law,
which requires the approval of the Kentucky Department of Financial Institutions
for payment of dividends by the Bank in excess of the total of the Bank's net
profits for the year declared combined with the retained net profits for the
preceding two years.
Inasmuch as the Bank has not declared a dividend on Bank common stock
since the commencement of its operations, no dividends on Bancorp common stock
are anticipated in the near future. It is expected that dividends on Bancorp
common stock will depend upon the Bank's income and financial condition and upon
other factors not presently determinable.
Price Ranges of Bancorp Common Stock. No shares of Bancorp common stock
have been issued to date. While Bancorp hopes that an established public trading
market will develop for Bancorp common stock, it is contemplated that, as has
been the case with respect to Bank common stock, trading in shares of Bancorp
common stock will be sporadic in the near future following the merger.
Management. The following tabulation lists the names and certain
information about Bancorp's directors and executive officers as of April 3,
2000. The chart also lists the projected beneficial ownership of Bancorp common
stock on the part of directors and executive officers upon consummation of the
merger, assuming no shareholder dissents and exercises his appraisal rights with
respect to his shares of Bank common stock. The directors and executive officers
of the Bancorp are currently executive officers and directors of the Bank. For a
table listing the ownership of Bank common stock of the individuals who serve as
executive officers and directors of Bancorp, see "Information Respecting the
Bank - Stock Ownership of Executive Officers and Directors", below. No shares of
Bancorp common stock have been (or are expected prior to the merger to be)
issued.
Business Amount and
Experience Nature of
Name, Age and Position(s) During Past Term Beneficial Percent of
Held with Bancorp(1) Five Years Began Ownership(2) Stock
Len Aldridge Vice-President, Limited 2000 45,000(3) 4.50
Age - 62 Partners of Lexington, Inc.
Director (real estate management
company)
Dennis R. Anderson Owner, Dennis Anderson Real 2000 10,000(4) 1.00
Age - 47 Estate, Inc. (real estate
Director development and investment
company)
John D. Barlow President, Barlow Homes, 2000 11,594(5) 1.16
Age - 40 Inc. (home builder)
Director
Julian E. Beard Chairman of the Board 2000 10,000(4) 1.00
Age - 62 of Directors and Founder
Chairman of the Board of of the Bank since March 1,
Directors; President 2000; President and Chief
Executive Officer of the
Bank from 1997 to March 1,
2000; Previously President,
B.S.C., Inc. (community bank
data processing and
operations management
company) from 1990
James R. Burkholder Executive Vice-President of 2000 6,000(4) .60
Age - 50 Bank since 1997; Previously
Director; Vice-President partner, First Commonwealth
Capital Management, Inc.
from 1993
Harold Glenn Campbell President and Chief 2000 52,000(6) 5.20
Age - 49 Executive Officer Farmers
Director State Bank, Booneville,
Kentucky
William A. Combs, Jr. Officer and Director, 2000 20,000 2.00
Age - 59 Ellerslie Corp. and Dana
Director Motor Company of Cincinnati
A. F. Dawahare President and Chief 2000 20,000(7) 2.00
Age - 68 Executive Officer,
Director Dawahare's, Inc. (retail
clothier)
Dr. Kenneth L. Gerson Allergist (Gerson & Greisner 2000 10,000 1.00
Age - 69 M.D.)
Director
Tommy R. Hall President and Owner, Hall's 2000 10,570 1.06
Age - 62 Enterprises, Inc.
Director
R. Greg Kessinger Executive Vice-President and 2000 10,050(8) 1.01
Age - 50 Chief Credit Officer of Bank
Director; Secretary/Treasurer since 1997; Previously
President and Chief
Executive Officer of
Whitaker Bank, N.A. from 1994
Erle L. Levy Owner, Kentucky Lighting and 2000 10,000(9) 1.00
Age - 66 Supply, Inc.
Director
David R. McCulloch Director of Sales, Schaefer 2000 10,000 1.00
Age - 35 Systems International
Director (industrial packaging
company)
Dr. Ira P. Mersack Dermatologist (Dermatology 2000 20,000(10) 2.00
Age - 59 Associates of Kentucky,
Director P.S.C.)
Fon Rogers, II Manager, Mary-Lon 2000 22,500(11) 2.25%
Age - 49 Investments, LLC, an
Director investment limited liability
company, and Rogers Run, LLC (manages
mineral holdings in Kentucky); Trustee
of four trusts containing mineral
properties in Kentucky, Virginia and
West Virginia
Robert J. Rosenstein President, Shoppers Village 2000 30,010(12) 3.00
Age - 47 Liquors, Inc. (d/b/a The
Director Liquor Barn); Commercial
real estate developer
Dr. Ronald J. Saykaly Rheumatologist (Ronald J. 2000 40,000(13) 4.00
Age - 57 Saykaly, M.D., P.S.C.)
Director
John S. Shropshire Community Trust Bancorp, 2000 0 (14) 0
Age - 51 Inc. [President, Chief
Director Executive Officer and
Director, Flemingsburg,
Kentucky affiliate
(1995-1997); Executive
Vice-President and Senior
Lending Officer, Pikeville,
Kentucky(1997-1998);
President and
Chief Executive Officer
Central Kentucky Region
(1998-2000)]
Richard S. Trontz Owner, Hopewell Farm and 2000 15,000 1.50
Age - 45 Bluegrass Bloodstock Agency
Director (bloodstock services and
equine insurance)
William T. Vennes Retired Vice-President and 2000 25,900 2.59
Age - 59 General Manager of the
Director Imaging Solutions Division,
Lexmark International, Inc.
Kathy E. Walker Owner, Elm Street Resources, 2000 10,000 1.00
Age - 41 Inc. (coal sales agency)
Director
D. Woodford Webb, Jr. Attorney (Webb, Hoskins, 2000 10,000 1.00
Age - 31 Glover & Thompson, P.S.C.)
Director
Total Shareholdings 398,624 39.86%
<FN>
1"Executive officer" means the president, secretary, treasurer, any
vice-president in charge of a principal business function and any other
person who performs similar policymaking functions for Bancorp, such as
an auditor or a cashier.
2The persons listed, unless otherwise indicated, are expected to be the
sole owners of the reported securities and accordingly will exercise
both sole voting and sole investment power over the securities.
However, as indicated in the following footnotes, this column includes,
in some instances, shares which are not expected to be held of record
by the person listed. These shares are reported because of the
definition of "beneficial ownership" for purposes of the federal
securities laws. In each such case the director or executive officer
disclaims beneficial ownership of any such shares and declares that the
filing of this statement shall not be construed as an admission that
the director or executive officer is, for the purposes of sections
13(d), 13(g) or 14(d) of the Securities Exchange Act of 1934, or for
any other purpose, the beneficial owner of such securities.
3Includes 10,000 shares expected to be held by Brookhaven Trust
Properties of which Mr. Aldridge is a co-trustee.
4Shares are expected to be held in an individual retirement account for
the benefit of the named person.
5Includes 1,094 shares expected to be held in an individual retirement
account for the benefit of Mr. Barlow.
6Shares are expected to be held by the Harold Glenn Campbell Trust.
7Shares are expected to be held by the S F Dawahare Estate Limited
Partnership.
8Includes 10,000 share expected to be held in an individual
retirement account for the benefit of Mr. Kessinger and 50
shares expected to be held by Mr. Kessinger's wife, Lana C. Kessinger.
9Shares are expected to be jointly owned with Mr. Levy's wife, Sara
Levy.
10Includes 10,000 shares expected to be held for the benefit of
Dr. Mersack by National City Bank as Custodian for Dermatology
Associates of Kentucky, P.S.C. Profit Sharing Plan.
11Includes 500 shares expected to be held by Mr. Rogers' wife,
Rosella D. Rogers, 500 shares expected to be held in an individual
retirement account for the benefit of Rosella D. Rogers, 500 shares
expected to be held by Mr.Rogers' wife as custodian for his son,
Jonathan M. Rogers and 1,000 shares expected to be held by two trusts
(500 shares in each trust) for other of Mr. Rogers' children.
12Includes 10 shares expected to be held by Mr. Rosenstein as custodian
for his son, Ross J. Rosenstein.
13Shares are expected to be jointly owned with Dr. Saykaly's wife,
Teresa G. Saykaly.
14Does not reflect options for the purchase of 20,000 shares of Bancorp
common stock which Mr.Shropshire is expected to hold.
</FN>
Standing Committees. Bancorp has no standing committees of the board of
directors. It currently anticipates appointing in the near future an executive
committee and an audit committee, which committees would perform functions for
Bancorp similar to the functions performed by such committees of the Bank board
of directors. See "Information Respecting the Bank: Committees of the Board of
Directors," below.
Meetings of the Board of Directors. The Board of Directors of Bancorp
has held two meetings apart from its organizational meeting since it was
incorporated on February 11, 2000, at which meetings this proxy
statement-prospectus, the merger and the filing of all necessary regulatory
applications in connection with the merger were adopted and approved. It is
anticipated that following the merger the Board of Directors of Bancorp will
hold regular meetings and special meetings, as deemed necessary.
Pending Legal Proceedings. There are no material pending legal
proceedings in which Bancorp is involved, including proceedings in which any
director, officer or affiliate of Bancorp, any owner of record or beneficially
of more than five percent (5%) of Bancorp common stock, or any associate of a
director, officer or five percent (5%) security holder is a party adverse to
Bancorp or has a material interest adverse to Bancorp.
Compensation. No officers or directors of Bancorp have been compensated
for their services in such capacities, and no such compensation is contemplated
by Bancorp for such services in the immediate future.
Information Respecting the Bank
Business of the Bank. The Bank, as presently constituted, was organized
in 1997. The Bank actively competes on the local and regional levels with other
commercial banks and financial institutions for all types of deposits, loans and
the financial and other services which it offers. The Bank's general market area
consists of Fayette County. The Bank is subject to competition not only from the
other commercial banks located in Fayette County, but also from commercial banks
located elsewhere and from other types of banks and savings and loan
associations located in the Bank's service area. For several years, competition
has been increasing because of the number of financial service entities that are
competing for deposits and loans and providing financial management services.
These other entities include money market funds, finance companies, investment
banking firms, insurance companies, pension funds and large retail
organizations. Many of the banks and other financial institutions with which the
Bank competes have capital and resources substantially in excess of the Bank's
capital and resources.
The Bank is one of 18 commercial banks and thrift institutions with
offices located in Fayette County, Kentucky, which is the Bank's primary market
area. As of March 31, 2000, the Bank had total assets of $___________ and total
deposits of $--------------.
The Bank engages in a wide range of commercial and personal banking
activities, including the usual acceptance of deposits for checking, savings and
time deposit accounts; extension of secured and unsecured loans to corporations,
individuals and others; issuance of letters of credit; rental of safe deposit
boxes and financial counseling for institutions and individuals. The Bank's
lending services include commercial, industrial, real estate, installment,
credit cards and participation in loans with other banks.
The Bank's main offices are located 400 East Main Street in Lexington,
Kentucky. The Bank has one branch office which is located at 2100 Southview
Drive in Lexington, Kentucky and intends to make application with the Kentucky
Department of Financial Institution to open a second branch office at the corner
of Parliament Drive and Tates Creek Road in Lexington. The Bank's current branch
has a drive- through teller facility and ATM facilities.
Both of the Bank's current offices are leased and the land for the
branch facility for which the Bank has applied will be leased as well. The
Bank's main office lease is for a period of five years (beginning October 15,
1997), with the bank holding the option to extend said lease term for three
additional terms of three years each. During the first two years of the initial
term of this lease, the Bank is obligated to pay annual rental of $66,000, with
such annual rental increasing to $69,000 for the other three years of the
initial term. Said annual rental during the first two and the third of the lease
options will increase to $70,000 and $73,200, respectively.
The Bank's current branch office is leased for an initial term of five
years (beginning November 1, 1997), with the Bank having options to extend said
lease for three additional terms of five years each. During the initial term of
this lease, the Bank is obligated to make annual rental payments of $45,500, and
said rental obligation would increase in any lease extension period based upon
increases in the consumer price index.
The branch office for which the Bank intends to make application will
be on land leased for an initial term of four years with the Bank holding
options to extend the lease for five additional terms of five years each. Under
this lease the Bank will pay annual rent ranging from $55,000 in the first year
of the lease to $109,514.68 in the last of the lease extension periods.
The Bank anticipates a cost of at least $700,000 to construct, equip
and furnish the new facility on the site for the branch respecting which the
Bank intends to make application.
As of April 3, 2000, the Bank had 22 full-time employees. Management
considers employee relations to be good. None of the Bank's employees are
covered by a collective bargaining agreement.
Dividends. Holders of Bank common stock are entitled to such dividends
as may be declared from time to time by the Board of Directors out of funds
legally available therefor. The Bank has paid no dividends since it commenced
business and no such dividends are anticipated in the immediate future.
Federal and state statutes and regulations restrict the payment of
dividends by state-chartered banks. Under Kentucky law, dividends by Kentucky
banks may be paid only from current or retained net profits. Before any dividend
may be declared for any period, other than with respect to preferred stock, if
any, a bank must increase its capital surplus by at least 10% of the net profits
of the bank for such period until the bank's capital surplus equals the amount
of its stated capital attributable to its common stock. Moreover, the
Commissioner of the Kentucky Department of Financial Institutions must approve
the declaration of dividends if the total dividend to be declared by a bank for
any calendar year would exceed the bank's total net profits for such year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus or a fund for the retirement of preferred stock,
if any, or debt. See "SUPERVISION AND REGULATION - The Bank: Dividend
Restrictions".
Price Ranges of Bank Common Stock. The common shares of the Bank are
not traded on any listed stock exchange. The shares are traded in the
over-the-counter market under the symbol "FSLX", on an order-match basis,
whereby buyers and sellers of the stock execute transactions on a no spread
basis. No bid or asked prices are quoted. Trading volume in Bank common stock is
considered light and the stock is thinly traded. The following represents the
reported prices for which shares of Bank common stock have been exchanged since
the Bank's formation on a per share basis, as well as the total trading volume
in Bank common stock:
Price Per Share
No. of Shares
Traded During Period
High Low
1997 4th Quarter 20 20 400
1998 1st Quarter 23 20 5,500
2nd Quarter 25 20 3,800
3rd Quarter 26 23 3/4 3,800
4th Quarter 27 25 2,300
1999 1st Quarter 26 25 9,200
2nd Quarter 26 1/2 24 34,200
3rd Quarter 26 3/4 25 1/2 39,900
4th Quarter 26 21 2,100
2000 1st Quarter
These price quotations are derived from data furnished to the Bank by the
NASD OTC Bulletin Board and, accordingly, the Bank cannot guarantee the accuracy
or reliability of such price quotations. Some trades may occur which are not
reported to the NASD OTC Bulletin Board. Since there is no established public
trading market for Bank common stock, there can be no assurance that the price
information set forth above is representative of prices which could be obtained
from sales of Bank common stock in established open market transactions.
Principal Holders of Voting Securities. As of April 3, 2000, there were
approximately 383 holders of Bank common stock (including both beneficial
holders and record holders). The following tabulation sets forth the name and
address of each person known to management who owns beneficially (as determined
in accordance with the rules and regulations of the Securities and Exchange
Commission) more than five percent (5%) of the outstanding shares of Bank common
stock, as of April 3, 2000:
Amount and Nature of
Name and Address Beneficial Ownership Percent of Class
Donald K. Poole 51,950 10.39%
1999 Richmond Road
Lexington, Kentucky 40507
Harold Glenn Campbell Trust 26,000 5.20%
Route 3, Box 67
Booneville, Kentucky 41314
Management. The following table lists the persons currently serving as
directors of the Bank in addition to the persons nominated for election at the
annual meeting (see "ELECTION OF DIRECTORS"):
Year First Business Experience
Nominee Elected Positions with During the Past
and Age Director the Bank Five Years
Serving Two-Year Terms Ending in 2001
James R. Burkholder 1997 Director; Executive Executive Vice-President of
(50) Vice-President the Bank since 1997;
Previously partner, First
Commonwealth Capital
Management, Inc. from 1993
Harold Glenn Campbell 1997 Director President and Chief Executive
(49) Officer, Farmers State Bank,
Booneville, Kentucky
William A. Combs, Jr. 1997 Director Officer and Director,
(59) Ellerslie Corp. and Dana
Motor Company of Cincinnati
Dr. Kenneth L. Gerson 1997 Director Allergist (Gerson & Greisner
(69) M.D.)
Tommy R. Hall 1997 Director President and Owner, Hall's
(62) Enterprises, Inc.
Richard S. Trontz 1997 Director Owner, Hopewell Farm and
(45) Bluegrass Bloodstock Agency
(bloodstock services and
equine insurance)
William T. Vennes 1997 Director Retired Vice-President and
(59) General Manager of the
Imaging Solutions Division,
Lexmark International, Inc.
Serving Three-Year Terms Ending in 2002
Julian E. Beard 1997 Chairman of the Board of Chairman of the Board of
(62) Directors and Founder Directors and Founder of the
Bank since March 1, 2000;
President and Chief Executive
Officer of the Bank from 1997
to March 1, 2000; Previously
President, B.S.C., Inc.
(community bank data
processing and operations
management company) from 1990
Len Aldridge 1997 Director Vice-President, Limited
(62) Partners of Lexington, Inc.
(real estate management
company)
A. F. Dawahare 1997 Director President and Chief Executive
(68) Officer, Dawahare's, Inc.
(retail clothier)
Fon Rogers, II 1997 Director Manager, Mary-Lon
(49) investment liability limited
company, and Roger Run, LLC
(manages mineral holdings
in Kentucky); Trustee of
four trusts containing
mineral properties in
Kentucky, Virginia and
West Virginia
Robert J. Rosenstein 1997 Director President, Shoppers Village
(47) Liquors, Inc. (d/b/a The
Liquor Barn); Commercial real
estate developer
Dr. Ronald J. Saykaly 1997 Director Rheumatologist (Ronald J.
(57) Saykaly, M.D., P.S.C.)
Kathy E. Walker 1997 Director Owner, Elm Street Resources,
(41) Inc. (coal sales agency)
In addition to the persons listed in the table above, Michael Lischin,
Don K. Poole, Irving Rosenstein, Warren W. Rosenthal and Dr. Sibu P. Saha serve
as advisory directors of the Bank.
Committees of the Board of Directors. There are six standing committees
of the Board of Directors of the Bank: the Asset/Liability Management Committee,
the Director Loan Policy Committee, the Investment Committee, the Audit
Committee, the Community Reinvestment Act Committee and the Executive Committee.
The Asset/Liability Management Committee consists of directors Beard,
Burkholder, Kessinger, Saykaly and Shropshire. In addition, Bank Vice-Presidents
Greg Doyle and Ben New serve on this committee. The Asset/Liability Management
Committee establishes and monitors adherence to the Bank's asset/liability
policies and monitors the Bank's interest rate sensitivity and liquidity.
The Director Loan Policy Committee consists of directors Beard,
Burkholder, Kessinger, Barlow, Hall, Levy, Rosenstein, Shropshire, Trontz,
Vennes and Webb. The Director Loan Policy Committee establishes the Bank's
lending policies, monitors adherence to the Bank's lending policies and
regulatory lending requirements, reviews and participates in the loan approval
process respecting loans in excess of $750,000 and monitors the quality of the
Bank's loan portfolio, including a review of the Bank's allowance for loan and
lease losses.
The Investment Committee consists of directors Beard, Burkholder,
Aldridge, Combs, Dawahare, Levy, Rogers, Saykaly and Shropshire. The Investment
Committee establishes the Bank's investment policies, monitors adherence to the
Bank's investment policies and regulatory investment requirements and reviews
the Bank's investment portfolio.
The Audit Committee consists of directors Anderson, Dawahare, Gerson
and McCulloch. The Audit Committee nominates an independent accounting firm to
conduct an annual audit of the Bank, reviews the Bank's audited financial
statements and monitors and supervises the Bank's internal audit control. The
Audit Committee reports the result of the annual audit in writing to the Board,
such report stating whether the Bank is in a sound condition and whether
adequate internal controls and procedures are being maintained.
The Community Reinvestment Act Committee consists of directors Beard,
Burkholder, Kessinger, McCulloch, Saykaly, Shropshire, Walker and Webb. In
addition, Bank Vice-President Ben New serves as secretary to this committee. The
Community Reinvestment Act Committee monitors the Bank's adherence to the
Community Reinvestment Act of 1978.
The Executive Committee consists of directors Beard, Burkholder,
Kessinger, Aldridge, Campbell, Combs, Rogers, Rosenstein, Shropshire and Vennes.
The Executive Committee previews all matters that are brought to the Bank's
Board of Directors and has the power to direct the business of the Bank except
for such actions as are required by law to be effected by the entire Board of
Directors.
Board and Board Committee Meetings. In 1999, there were 13 meetings
held by the Board of Directors. With respect to Board of Directors committees,
such committees held the following number of meetings in 1999: Asset Liability
Management Committee, 5 meetings; Director Loan Policy Committee, 21 meetings;
Investment Committee, 6 meetings; Audit Committee, 3 meetings; Community
Reinvestment Act Committee, 4 meetings; and Executive Committee, 13 meetings.
Stock Ownership of Executive Officers and Directors. The table below
gives information as to the shares of Bank common stock beneficially owned as of
April 3, 2000 by each Bank director and executive officer, and by all such
persons as a group. Unless otherwise indicated, beneficial ownership includes
both sole voting power and sole investment power.
Amount and Nature of Eligible
Beneficial Ownership of Shares
Bank Common Stock as of Percent of Subject to
Name of Beneficial Owner April 3, 2000 Class* Warrants**
Julian E. Beard 5,000(1) 1.00 1,340
James R. Burkholder 3,000(1) .60 0
R. Greg Kessinger 5,025(2) 1.01 0
Len Aldridge 22,500(3) 4.50 0
Dennis R. Anderson 5,000(1) 1.00 1,340
John D. Barlow 5,797(4) 1.16 1,340
Harold Glenn Campbell 26,000(5) 5.20 0
William A. Combs, Jr. 10,000 2.00 1,340
A. F. Dawahare 10,000(6) 2.00 2,948
Dr. Kenneth L. Gerson 5,000 1.00 1,340
Tommy R. Hall 5,285 1.06 1,340
Erle L. Levy 5,000(7) 1.00 1,340
David R. McCulloch 5,000 1.00 1,340
Dr. Ira P. Mersack 10,000(8) 2.00 2,747
Fon Rogers, II 11,250(9) 2.25 2,948
Robert J. Rosenstein 15,005(10) 3.00 4,422
Dr. Ronald J. Saykaly 20,000(11) 4.00 0
John S. Shropshire 0(12) 0 0
Richard S. Trontz 7,500 1.50 2,211
William T. Vennes 12,950 2.59 1,340
Kathy E. Walker 5,000 1.00 0
D. Woodford Webb, Jr. 5,000 1.00 1,340
TOTAL: 199,312 39.86 28,676
<FN>
*Exclusive of shares of Bank common stock that may be purchased
pursuant to warrants. **Represents rights to purchase the number of
shares of Bank common stock indicated at a price of $20.00 per share
(or, following the merger, Bancorp shares equal to double the amount of
shares of Bank indicated at a price of $10.00 each) at any time during
the sixth full calendar year of Bank operations. These warrants were
issued to the individuals reflected in 1997 by virtue of such persons'
actions as initial investors of the Bank.
1Shares are held in an individual retirement account for the benefit of
the named person.
2Includes 5,000 shares held in an individual retirement account for
the benefit of Mr. Kessinger and 25 shares held by Mr.Kessinger's
wife, Lana C. Kessinger.
3Includes 5,000 shares held by Brookhaven Trust Properties of which
Mr. Aldridge is a co-trustee.
4Includes 547 shares held in an individual retirement account for the
benefit of Mr. Barlow.
5Shares are held by the Harold Glenn Campbell Trust.
6Shares are held by the S F Dawahare Estate Limited Partnership.
7Shares are jointly owned with Mr. Levy's wife, Sara Levy.
8Includes 5,000 shares held for the benefit of Dr. Mersack by National
City Bank as Custodian for Dermatology Associates of Kentucky, P.S.C.
Profit Sharing Plan.
9Includes 250 shares held by Mr. Rogers' wife, Rosella D. Rogers, 250
shares held in an individual retirement account for the benefit of
Rosella D. Rogers, 250 shares held by Mr.Rogers' wife as custodian for
his son, Jonathan M. Rogers and 500 shares held by two trusts (250
shares in each trust)for other of Mr. Rogers' children.
10Includes 5 shares held by Mr. Rosenstein as custodian for his son,
Ross J. Rosenstein.
11Shares are jointly owned with Dr. Saykaly's wife, Teresa G. Saykaly.
12Does not reflect 10,000 shares of Bank common stock respecting
which the Bank has agreed to extend options to Mr.Shropshire.
</FN>
Compensation of Executive Officers and Directors. The following table
sets forth information with respect to the Bank's three (3) executive officers
(apart from John S. Shropshire whose employment with the Bank began March 1,
2000 and whose compensation is described at "THE MERGER - Interests of Certain
Persons in the Merger: Shropshire Agreement") for the three (3) fiscal years
ended December 31, 1999:
Annual Compensation
Long-Term
Compensation
Awards
Name and Fiscal Restricted Stock All Other
Principal Position Year Salary Bonus Awards Compensation(1)
Julian E. Beard 1999 100,000 --- --- 4,285.68
Chairman of the Board of 1998 100,000 --- --- 4,285.68
Directors and Founder 1997 75,000
(President and CEO until
March 1, 2000)
James R. Burkholder 1999 85,000 1,000 --- 3,187.68
Executive Vice-President 1998 85,000 --- --- 3,187.68
1997 63,750
R. Greg Kessinger 1999 80,000 1,000 --- 2,400.00
Executive Vice-President 1998 80,000 --- --- 2,400.00
and Chief Credit Officer 1997 46,666
<FN>
(1) Represents the amounts contributed by the Bank to the named participants'
accounts in the Bank 401(k) Profit Sharing Plan.
</FN>
Directors of the Bank currently receive no fees for their services in
such capacity.
Transactions with Management. The Bank has had and expects in the
future to have banking transactions in the ordinary course of business with
directors and executive officers of the Bank and their associates. All loans to
such persons or their associates have been on the same terms, including interest
rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others, and have not involved more than normal risk
of collectibility or other unfavorable features.
Management's Discussion and Analysis of Financial Condition and Results
of Operations. The following discussion and analysis is presented to illustrate
and describe an overview of the business, and the results of operations and
financial condition of the Bank. It identifies trends and significant changes
that occurred during the reported periods and should be reviewed in conjunction
with the Bank's audited financial statements included in Appendix B to this
proxy statement-prospectus.
Overview of Operations
The mission of the Bank is to firmly establish itself in Lexington,
Kentucky as a community owned and operated full-service bank providing
traditional products and services typically offered by commercial banks. The
Lexington banking market is highly competitive with 18 commercial banks and
thrift institutions currently serving the market. Management believes that the
Bank's ability to compete is enhanced by its posture as a locally managed bank
with a base of local shareholders and board of directors. Most of the banks in
Lexington are part of larger bank holding companies headquartered outside of the
Lexington/Fayette County market and Kentucky. Promoting local management and
ownership has proven effective for the Bank in attracting customers, fostering
loyalty to the Bank and establishing and maintaining strong asset quality.
Management has and intends to continue emphasizing the Bank's Lexington roots,
and the Bank's philosophy of giving its customers prompt and responsive personal
service.
Following completion of a $10,000,000 initial capital offering,
($9,802,884 net of commissions on the sale of stock), the Bank commenced
operations as a newly chartered commercial bank on November 17, 1997 at 400 East
Main Street, Lexington, Kentucky. At December 31, 1997, approximately six weeks
after opening, the Bank had total assets of $13,736,200 and had incurred a net
loss from operations of $253,880 which includes $133,185 of pre-opening expenses
reimbursed to the organizers upon commencement.
Results of Operations
The operating results for the Bank substantially depend on net interest
income, which is the difference between interest income on interest-earning
assets, primarily loans and investment securities, and interest expense on
interest-bearing liabilities, primarily deposits. The Bank's net income or loss
is also affected by the amount of the provision for loan loss and other income
and operating expenses.
Net Interest Income. Net interest income is determined by an
institution's interest rate spread (i.e. the difference between the yields
earned on its interest-earning assets and the rates paid on its interest-bearing
liabilities) and the amount of interest-earning assets financed by noninterest-
bearing liabilities or stockholders' equity. Net interest income is primarily
affected by volume and rate of average interest-earning assets and
interest-bearing liabilities. The following table sets forth, for the periods
ending December 31, 1999 and 1998, information regarding the total dollar amount
of interest income from interest-earning assets and the resultant average yields
earned; the total dollar amount of interest expense on interest-bearing
liabilities and the resultant average rate; net interest income; interest rate
spread; and net yield on interest-earning assets (also referred to herein as net
interest margin):
AVERAGE BALANCE SHEETS AND RATES
Year ended December 31, 1999 Year ended December 31, 1998
Average Average Average Average
ASSETS Balance (1) Interest Rate Balance (1) Interest Rate
Interest -Earning Assets
Securities $ 3,868,770 $205,410 5.31% $ 1,519,609 $ 83,806 5.51%
Unrealized gain on
available for sale
securities ( 55,387) ________ 372 ________
Total investment securities 3,813,383 205,410 5.39 1,519,981 83,806 5.51
Loans (2)
Commercial 20,526,232 1,733,964 8.45 5,369,402 470,410 8.76
Real estate commercial 23,920,929 2,035,777 8.51 5,539,470 514,596 9.29
Real estate residential 5,743,709 469,694 8.18 2,254,788 182,304 8.09
Consumer 5,942,717 494,397 8.32 1,765,298 149,462 8.47
Total 56,133,587 4,733,832 8.43 14,928,958 1,316,772 8.82
Federal funds sold 9,040,428 447,535 4.95 13,307,149 717,107 5.39
Total interest-earning assets $68,987,398 $5,386,777 7.81% $29,756,088 $2,117,685 7.12%
Allowance for loan losses ( 579,376) ( 103,865)
Non-interest earning assets
Furniture, fixtures,
equipment and leasehold
improvements 804,998 733,628
Cash and due from banks 1,789,128 717,789
Interest receivable and other
assets 479,612 296,160
Total Assets $71,481,760 $31,399,800
LIABILITIES AND STOCKHOLDERS' EQUITY
Year ended December 31, 1999 Year ended December 31, 1998
Interest-bearing liabilities
Deposits
Interest-bearing
demand deposits $15,159,860 $ 660,759 4.36% $7,603,916 $ 350,626 4.61%
Savings deposits 3,475,784 135,820 3.91 1,333,291 49,093 3.68
Time deposits 40,219,978 2,198,432 5.47 11,976,853 693,483 5.79
Total interest-bearing deposits 58,855,622 2,995,011 5.09% 20,914,060 1,093,202 5.23
Federal funds purchased and
securities sold under
agreement to repurchase 309,106 15,170 4.91 - - -
Total interest-bearing
liabilities $59,164,728 $3,010,181 5.09% $20,914,060 $1,093,202 5.23%
Noninterest-bearing
liabilities
Noninterest-bearing demand
deposits 3,836,962 1,420,442
Interest payable and other
liabilities 351,132 142,570
Stockholders' equity 8,128,938 8,922,728
Total Liabilities and
Stockholders' Equity $71,481,760 $31,399,800
Interest margin recap
Net interest income and
interest rate spread $2,376,596 2.72% $1,024,483 1.89%
Net interest income margin
on interest-earning assets 3.45% 3.44%
(1) Average balances are computed using daily balances.
(2) Non-accrual loans (if any) are included in average loan balances and loan
fees received are included in interest income. oan fees were $246,341 for
1999 and $101,390 for 1998.
It is not uncommon for newly organized banks, like the Bank, to incur
net losses during the first two to three years of operation. During 1998, the
Bank's first full year of operation, the Bank incurred a net loss of
$(1,260,582). Of this amount, $328,948 was provided to the Bank's allowance for
loan loss reserve account, and $152,782 was a non-recurring charge for a change
in accounting principle related to organizational costs. For the period ending
December 31, 1999, the Bank's second full year of operation, the Bank achieved
net income of $21,846.
The Bank's total interest income increased from $2,117,685 in 1998 to
$5,386,777 in 1999. The increase in interest income during 1999 was primarily a
result of the increase in outstanding loans. The Bank's total interest expense
increased from $1,093,202 in 1998 to $3,010,181 in 1999. The increase in
interest expense was due to an increase in interest-bearing liabilities.
Comparing the same periods, the Bank's spread increased from 1.89% to 2.72%
while the Bank's margin increased slightly from 3.44% to 3.45%. The increase in
spread is the result of both the growth in loans which earn at higher rates than
other interest-earning assets and an overall decrease in the average rate paid
on interest-bearing deposits. The margin remained relatively constant primarily
due to the growth in loans being funded by time deposits which carry higher
average rates than other interest-bearing liabilities. While both the spread and
margin increased, they remain lower than other financial institutions of similar
size because of management's aggressive pricing strategies which are needed to
grow the Bank to a size necessary to achieve profitability. The Bank's spread
and margin are also negatively impacted by the slower growth in inexpensive
funding sources such as noninterest-bearing deposits and stockholders' equity,
which is common for newly formed Banks. Management expects to continue its
aggressive growth policies for the foreseable future.
The following table depicts the dollar effect of volume and rate
changes from December 31, 1998 to December 31, 1999. Changes not specifically
attributable to volume or rate were allocated proportionately between rate and
volume using absolute values of each for a basis for the allocation:
VOLUME/RATE ANALYSIS
Change from December 31, 1998 to
December 31, 1999 Due to
Volume Rate Total
Interest income
Securities $ 123,579 $ (1,975) $ 121,604
Loans 3,477,347 (60,287) 3,417,060
Federal funds sold (215,006) (54,566) (269,572)
Total interest income 3,385,920 (116,828) 3,269,092
Interest expense
Interest-bearing demand deposits 330,331 (20,198) 310,133
Savings deposits 83,543 3,184 86,727
Time deposits 1,545,898 (40,949) 1,504,949
Federal funds purchased and securities
sold under agreement to repurchase 15,170 - 15,170
Total interest expense 1,974,942 (57,963) 1,916,979
Net interest income $ 1,410,978 $ (58,865) $ 1,352,113
Other profitability ratios often used to evaluate a bank's earnings
performance are Return on Average Assets (ROAA) and Return on Average Equity
(ROAE). ROAA and ROAE in 1998 were (4.01%) and (14.13%) respectively, as
compared to 1999 ROAA and ROAE of .03% and .27%, respectively. Management does
not believe, however, that these performance ratios are particularly meaningful
during a bank's first two years of operation due to the substantial amount of
up-front costs necessary for a commercial bank to grow assets, deposits and the
resultant net interest spread to levels sufficient to generate net earnings.
Also, in January of 1998, two months after opening, the Bank opened its second
Lexington office location at 2100 Southview Drive. Most new banks, familiar to
management, have not incurred the extra costs associated with opening a second
office so soon after commencing operations. The Bank's growth generated through
this second office, however, exceeded management's expectations, generating
total deposits of $17,920,277 and $44,030,485 at December 31, 1998 and 1999,
respectively. This represents deposit growth at the second office during 1999 of
145%. Additionally, this office generated total loans through December 31, 1998
of $4,750,651. At December 31, 1999, total loans at the second office increased
92.6% over 1998 to $9,150,553.
The Bank's average total assets during 1998 as shown in the table above
were $31,399,800. At December 31, 1998, total assets were $47,134,586. Total
average assets during 1999 grew to $71,481,760, while total assets at December
31, 1999 were $94,514,548. Average loans increased 276% from $14,928,958 in 1998
to $56,133,587 in 1999. Total loans outstanding increased from $34,402,412 at
December 31, 1998 to $78,196,747 at December 31, 1999. Total average deposits
increased from $22,334,502 in 1998 to $62,692,584 in 1999. Total deposits at
December 31, 1999 were $83,411,724, up from $38,612,839 at December 31,1998, an
increase of 116% over December 31, 1998. The Bank's equity to total asset ratio
at December 31, 1998 and 1999 was 17.6% and 8.7%, respectively. This decrease in
the equity to asset ratio (which ratio was still within bank regulatory capital
guidelines)is a result of the substantial growth in assets during 1999.
In addition to total loans outstanding, the Bank had unfunded loan
commitments outstanding to borrowers as of December 31, 1999 of $17,269,426,
including unfunded home equity lines of credit, which, if drawn upon, would
reduce the Bank's liquidity. To meet short term funding requirements, the Bank
borrowed federal funds from a correspondent bank once for a three day period
during 1999. The Bank may need to draw upon existing borrowing arrangements in
the future to fund loan growth and maintain an adequate level of liquidity if it
does not continue to attract deposit volume within its market sufficient to meet
future loan demand. This could result in an increase to the Bank in its cost of
interest-bearing liabilities that could have the effect of decreasing net
interest income and net interest margin. In addition, should the Bank's core
deposit growth not continue to meet loan demand, resorting to other alternative
funding sources could limit the growth in assets and earnings of the Bank since
these alternative funding sources are limited. See "Financial Condition:
Deposits and Other Borrowings", below.
Subject to approval from the Bank's regulators, the Bank is planning to
open its third office in Lexington, Kentucky during the second half of 2000. The
initial start-up costs associated with opening a new office are anticipated to
be funded out of cash flow from the Bank's earnings, and, if needed, the Bank's
capital, should the Bank not generate earnings sufficient to cover the start-up
costs associated with this project. The immediate impact of establishing a new
branch office will result in an increase in noninterest-earning assets, and
could initially result in a decrease in net interest income. The Bank's net
capital position and book value per share could also be negatively impacted if
the Bank's earnings are not sufficient to cover the start-up costs associated
with building and staffing the new office. The Bank believes, however, that the
potential longer term benefits, including the prospects for new loan and deposit
growth associated with opening this third location, outweigh these potential
shorter term negative impacts.
Non-interest Income and Expense. Non-interest income of the Bank is
comprised primarily of service charges on deposit accounts. Total service
charges increased from $36,109 in 1998 to $102,354 in 1999. Service charges
increased during the reported periods primarily as a result of the increase in
the number of deposit accounts. Management anticipates service charge income
will continue to increase as the Bank continues to grow its deposit portfolio.
The largest components of end of period non-interest expense are salaries
and benefits that increased by $37,380, or 3.5%, from 1998 to 1999. From 1998 to
period end 1999, all other non-interest expense increased from $784,602 to
$909,467, exclusive of the cumulative effect of a change in accounting principle
discussed below. Two of the more commonly used ratios to analyze a bank's
non-interest expense performance are (i) assets per employee, and (ii)
efficiency ratio. The assets per employee ratio is computed by dividing total
end of period assets by the number of full-time equivalent employees at the end
of the period. The efficiency ratio expresses non-interest expenses as a
percentage of net interest income plus other fee income. At December 31, 1999,
the Bank's assets per employee ratio was $4.3 million versus $2.1 million at
December 31, 1998. For both periods, the Bank had 22 full-time equivalent
employees. The Bank's efficiency ratio improved from 173% for the 1998 period to
80% at period end 1999 as a result of the growth in earning assets during the
reported periods.
Through December 31, 1999, the Bank had not recorded any income tax
expense. This is a result of net operating losses that for tax purposes have
accumulated since the time the Bank commenced operations. As of December 31,
1999, the Bank had a net operating loss for tax purposes of $885,007, which can
be carried forward as a deferred tax asset, subject to some limitations, to
offset future taxable income. (See Note 8 to the Bank's financial statements at
Appendix B). Due to the uncertainty concerning the Bank's near-term ability to
utilize this asset, a valuation allowance in the same amount has been
established. The valuation allowance will be reduced as the net operating loss
carry forward is utilized, and will be reversed entirely at such time that the
Bank's historical and projected earnings become sufficient to support a
conclusion that the Bank will be able to fully realize this asset.
The Bank adopted Statement of Position 98-5 in 1998 that resulted in a
change in accounting principle which increased the Bank's 1998 net loss by
$152,782. (See Note 13 of the Bank's financial statements at Appendix B).
Financial Condition
Investment Securities. Through the 1998 and 1999 reporting periods, the
Bank's investment portfolio was primarily comprised of U.S. Government agency
securities. Management's intent is to maximize the yield on securities, while
maintaining management's primary emphasis of utilizing the securities portfolio
as a secondary source of liquidity. The Bank's investment policy allows it to
invest in other liquid securities, including but not limited to tax-exempt
municipal securities, Federal Deposit Insurance Corporation insured certificates
of deposit and investment grade corporate bonds. The weighted average maturity
of the Bank's investment portfolio was 2.7 years at December 31, 1999.
The following table reflects the amortized costs, fair value and
weighted average yield of the Bank's investment securities portfolio for the
periods ending December 31, 1999 and 1998:
INVESTMENT PORTFOLIO
As of December 31, 1999 As of December 31, 1998
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
Investment securities
available for sale
U.S. Treasury and
U.S. Government Agencies
Within one year $1,500,906 $1,496,950 5.01% $2,497,774 $2,497,515 4.88%
Over one year through five years 2,251,084 2,185,587 5.34 2,005,444 1,999,650 5.31
Total 3,751,990 3,682,537 5.21 4,503,218 4,497,165 4.57
Mortgage-backed securities:
Over five years through ten years 655,329 629,036 6.17 498,392 496,920 6.00
Equity securities 20,000 20,000 20,000 20,000
Total available for sale
investment securities $4,427,319 $4,331,573 5.33% $5,021,610 $5,014,085 5.14%
The recent increase in interest rates resulted in a $95,746 unrealized loss
in the fair value of the Bank's bond portfolio as of December 31, 1999.
Management believes the unrealized loss is a result of changes in interest rates
since these securities were purchased and is accordingly due to market risk
rather than credit risk. If interest rates continue to increase as they have
since mid-1999, the fair value of the Bank's existing investment portfolio would
continue to decrease, resulting in an increase in the portfolio's unrealized
loss. Through the reporting periods, all of the securities comprising the Bank's
investment portfolio are classified as "available for sale", which requires
these securities to be carried at fair value. Unrealized gains and losses are
included as a separate component of equity. Gains or losses on securities are
realized in the income statement only when securities are sold or called, or
when the unrealized loss is other than temporary. Investment transactions
resulting in an actual loss of principal to the Bank could occur if the Bank's
liquidity needs dictate the sale, at a loss, of one or more of the securities,
or if other alternatives for funding new loans are either unavailable, or more
costly, to the Bank.
Loans. Net loans increased $43,310,156, or 127%, from December 31, 1998
to December 31, 1999. The majority of this increase was in commercial loans and
commercial real estate loans. The Bank has a significant amount of its loans to
commercial and commercial real estate borrowers. At December 31, 1999,
approximately 80% of the Bank's loan portfolio was in loans to commercial
businesses and commercial real estate borrowers. The growth of commercial loans
and commercial real estate loans is a result of increased marketing and
competitive pricing in the Bank's primary market. Management expects to continue
attracting new commercial and commercial real estate borrowers, but future loan
growth in these areas of the Bank's portfolio will likely not be at a pace
consistent with 1999 increases. The Bank's loan portfolio is primarily to
customers within the Fayette County area.
Substantially all of the Bank's loans at December 31, 1999 mature
or reprice within five years or less. The Bank holds residential (1 - 4 family)
real estate loans in its own portfolio, the majority of which amortize up to
thirty years, but that mature or reprice in five years or less. At December 31,
1998 and 1999, residential loans in the Bank's portfolio were $3,830,621 and
$7,449,166, respectively. In order to accommodate customers that prefer longer
term fixed rate mortgage loans, the Bank has established a relationship with a
local mortgage company which underwrites and sells these long term fixed rate
loans into the secondary market. Income received by the Bank from this
relationship is included as other income.
Management seeks to maintain a high quality of assets through
conservative underwriting and sound lending practices. The Bank's commercial
real estate portfolio is comprised primarily of loans to owner-occupied
commercial businesses. The Bank has experienced no delinquency or default in its
commercial and commercial real estate portfolio since opening in 1997. In
addition, the Bank has had no real estate owned by means of foreclosure during
the same period.
While there is no assurance that the Bank will not suffer losses on its
commercial loans or its commercial real estate loans, management believes that
it has reduced the risks associated therewith because, among other things,
primarily all such loans relate to owner-occupied projects where the borrower
has demonstrated to the Bank's management that its business will generate
sufficient cash flow to repay the loan. The Bank primarily enters into
agreements with individuals who are familiar to Bank personnel, are residents of
the Bank's primary market area and are believed by management to be
creditworthy.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending. To the extent risks are
identified, additional precautions are taken in order to reduce the Bank's risk
of loss. Commercial loans entail certain additional risks because repayment of
such loans is usually dependent upon the successful operation of the commercial
enterprise, which in turn is subject to adverse conditions in the economy.
Commercial loans are generally riskier than residential real estate loans
because they are typically underwritten on the basis of the ability to repay
from the cash flow of a business rather than on the ability of the borrower or
any guarantor to repay. Further, the collateral underlying commercial loans may
be subject to greater fluctuations in market value over time than residential
real estate, and may fluctuate in value based on the success of the business.
The board of directors and senior management of the Bank have placed
emphasis on loan review and underwriting procedures. Management has established
an independent risk rating and review process with the objective of quickly
identifying, evaluating and initiating necessary corrective action for
commercial and commercial real estate loans. The goal of the risk rating process
is to develop a "watch list" of substandard and non-performing loans as early as
possible. These components of risk management are integral elements of the
Bank's loan program which have contributed to the loan portfolio performance to
date. Nonetheless, management maintains a cautious outlook in attempting to
anticipate the potential effects of uncertain economic conditions (both locally
and nationally).
The following tables reflect outstanding balances by loan type for the
years ended 1999 and 1998 as well as the maturity distribution of the Bank's
loans for the year ended 1999:
LOANS
December 31, 1999 December 31, 1998
Commercial $26,596,357 $12,469,646
Real Estate - Commercial 35,855,281 14,123,827
Real Estate - Residential 7,449,166 3,830,621
Consumer 8,295,943 3,978,318
Total $78,196,747 $34,402,412
SELECTED LOAN DISTRIBUTION
As of December 31, 1999
Over One
Total One Year or Through Five Over Five Years
Less Years
Fixed rate maturities $47,475,690 $7,107,579 $38,643,942 $1,724,169
Variable rate repricing frequency 30,721,057 26,182,553 4,538,504
Total $78,196,747 $33,290,132 $43,182,446 $1,724,169
Allowance for Loan Losses and Asset Quality. The allowance for loan losses
is regularly evaluated by management and reported quarterly to the Bank's board
of directors. Management and the board of directors maintain the allowance for
loan losses at a level believed to be sufficient to absorb losses in the
portfolio. Periodic revisions to the allowance are made as necessary. Factors
considered in establishing an appropriate allowance include: an assessment of
the financial condition of the Bank's borrowers; a determination of the value
and adequacy of underlying collateral; the condition of the local economy and
the condition of the specific industries of the Bank's borrowers; a
comprehensive analysis of the levels and trends of loan categories; results of
regulatory examinations; a review of delinquent and classified loans; and
because of limited historical data of the portfolio, peer information, in part,
is also being considered. This analysis of the allowance is prepared to
determine a specific allocation for loans which represent significant loss
exposure and an allocation based on historical loan loss experience and the
other factors mentioned. Management believes the allowance for loan losses at
December 31, 1999 was adequate. Although management believes it uses the best
information available to make allowance provisions, future adjustments which
could be material may be necessary if the assumptions used to determine the
allowance differ from future loan portfolio performance.
The table below illustrates how the Bank allocated its allowance for
loan losses account to the types of loans in the Bank's portfolio:
MANAGEMENT'S ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 1999 December 31, 1998
Allocated % of Loans Allocated % of Loans
Allowance to Total Loans Allowance to Total Loans
Commercial $348,221 34.0% $142,371 36.2%
Real Estate - Commercial 269,996 45.9 110,389 41.1
Real Estate - Residential 70,494 9.5 25,471 11.1
Consumer 130,340 10.6 56,641 11.6
Total $819,051 100.0% $ 334,872 100.0%
The recorded values of loans actually removed from the balance sheet
are referred to as charge-offs and, after netting out recoveries on previously
charged-off assets, are referred to as net loan charge-offs. The Bank's policy
is to charge off a loan, when, in management's opinion, the loan is deemed
uncollectible, although concerted efforts are made to maximize recovery.
The following table sets forth the Bank's loan charge-offs and
recoveries for the years ended December 31, 1999 and 1998:
SUMMARY OF LOAN LOSS EXPERIENCE
For the Years Ended
December 31, 1999 December 31, 1998
Balance at beginning of period $334,872 $15,154
Charge-offs
Commercial ------ ------
Real Estate ------ ------
Installment (Consumer) (3,172) (9,230)
Total $(3,172) (9,230)
Recoveries
Commercial ------ ------
Real Estate ------ ------
Installment (Consumer) 606 ------
Total 606 ------
Net charge-offs $ (2,566) $ (9,230)
Provision for loan losses $486,745 $328,948
Balance at end of period $819,051 $334,872
Loans at end of period $78,196,747 $34,402,412
Average loans $56,133,587 $14,928,958
Ratios:
Allowance for loan losses to
total loans 1.05% 0.97%
Net loan charge-offs to average
loans for the period 0.00% .06%
The table above illustrates how the Bank's provision for loan losses
significantly increased during the two reported periods. During 1999, management
recorded a provision to attain an allowance for loan losses to total loans of
approximately 1.1%, less loans with no risk of loss such as loans fully secured
by certificates of deposit, and loans adequately secured by cash or their
equivalent. This increased provision from 1998 to 1999 primarily resulted from
an increase in the volume of Bank loans, particularly commercial and commercial
real estate loans.
The level of non-performing loans is an important element in assessing
asset quality and the relevant risk in the Bank's credit portfolio.
Non-performing loans include non-accrual loans and loans delinquent 90 days or
more. Loans are classified as non-accrual when management believes that
collection of interest is doubtful, but for which principal is considered
collectable. A loan is defined as impaired when full payment under the loan
terms is not expected. Impairment is evaluated on an aggregate basis for
smaller-balance loans of similar nature such as residential mortgage and
consumer loans, and on an individual basis for larger balance commercial loans.
The Bank's policy is to charge off all or a portion of an impaired loan upon a
determination that it is probable the full amount will not be collected. As the
table below illustrates, the Bank has experienced a relatively small number (and
dollar amount) of charge-offs during its first two years of operation.
Management expects charge-offs to increase in future periods as the loan
portfolio matures, and as loans to consumers and small businesses increase. In
addition, adverse changes in the economy could negatively affect the Bank's
commercial and commercial real estate loans.
The table below sets forth the Bank's non-performing assets for the years
ended December 31, 1999 and 1998:
NON-PERFORMING ASSETS
December 31, 1999 December 31, 1998
Loans on non-accrual status ------ $6,000
Loans past due 90 days or more ------ ------
Total non-performing loans ------ $6,000
Other real estate owned ------ ------
Total non-performing assets ------ $6,000
Percentage of non-performing loans
to total loans ------ .02%
Percentage of non-performing
assets to total loans ------ .02%
Deposits and Other Borrowings. The deposit base provides the major
funding source for earning assets. The following table shows that the deposit
growth experienced by the Bank has been consistent across all categories of
deposits. The Bank operates in a highly competitive market for deposits. As is
often the case with newly chartered banks, in order to attract depositors, the
Bank sometimes pays above market rates on a portion of transaction deposit
accounts, savings deposits and time deposits.
The table below illistrated the Bank's deposits by major category for the
years ended December 31, 1999 and 1998:
DEPOSITS
December 31, 1999 December 31, 1998
Interest-bearing demand deposits $17,488,073 $12,192,116
Savings deposits 6,598,059 3,717,565
Time deposits 39,771,362 14,709,863
Time deposits $100,000 and over 14,397,425 5,247,380
Total interest-bearing deposits 78,254,919 35,866,924
Total noninterest-bearing deposits 5,156,805 2,745,915
Total $83,411,724 $38,612,839
=========== ===========
The following table shows the amount and maturity schedule of the
Bank's $100,000 and over time deposits at December 31, 1999:
MATURITIES OF TIME DEPOSITS $100,000 AND OVER
December 31, 1999
0-3 months $5,454,541
3-6 months 4,357,758
6-12 months 1,709,207
12 months and over 2,875,920
Total $14,397,426
===========
Liquidity. Liquidity management is the process by which the
Bank ensures that adequate liquid funds are available to meet
financial commitments on a timely basis. These commitments include
withdrawals by depositors, funding credit obligations to borrowers,
servicing long-term obligations, paying operating expenses, funding
capital expenditures, and maintaining reserve requirements.
Liquidity is monitored closely by the Asset/Liability Management
Committee of the Bank's board of directors, which monitors interest
rates and liquidity risk while implementing appropriate funding and
balance sheet strategies.
The Bank has established a limited number of alternative or
secondary sources to provide additional liquidity and funding
sources when needed to support lending activity. These alternative
funding sources currently include unsecured federal funds lines of
credit from two correspondent banks aggregating approximately
$5,000,000; secured repurchase agreement line of credit from a
correspondent bank based upon the market value of pledged
securities; and a secured line of credit in the amount of
approximately $1,000,000 from the Federal Reserve Bank of Cleveland.
Additionally, the Bank became a member of the Federal Home Loan Bank
of Cincinnati ("FHLB") in 1999. Although the Bank has not, as yet,
borrowed from the FHLB, the Bank has the ability to borrow
approximately $5,000,000 based on the level of residential loans in
the Bank's portfolio as of December 31, 1999 which serve as
collateral for this type of borrowing. The only borrowings on the
Bank's balance sheet at December 31, 1999 were in the form of
customer repurchase agreements totaling $2,381,968. There were no
repurchase agreements or other borrowings at December 31, 1998.
These repurchase agreements provide the Bank customers cash
management services. The need for future borrowing arrangements
above current levels will be evaluated by management, with
consideration given to the growth prospects of the Bank's loan
portfolio, liquidity needs, cost of deposits, market conditions and
other factors. Management believes that the Bank has adequate
sources of funds to meet existing commitments to both borrowers and
to depositors.
Asset/Liability Management and Market Risk. Asset/liability
management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards and achieve
acceptable net interest income. Management considers interest rate
risk to be the Bank's most significant market risk. Interest rate
risk is the exposure to adverse changes in the net interest income
as a result of market fluctuations in interest rates. The Bank's
interest rate sensitivity position is influenced by the distribution
of interest-earning assets and interest-bearing liabilities among
the maturity categories. Changes in interest rates can affect the
rate at which pre-payments occur. Should interest rates rise, the
rate of pre-payments, particularly on fixed rate loans, may slow,
whereas a falling rate environment could have the opposite effect.
Management regularly monitors interest rate risk in relation to
prospective market and business conditions. The Bank's board of directors sets
policy guidelines establishing maximum limits on the Bank's interest rate risk
exposure. The Asset/Liability Management Committee of the Bank's board of
directors monitors and manages interest rate risk to maintain an acceptable
level of change to net interest income resulting from market interest rate
changes. Management monitors and adjusts exposure to interest rate fluctuations
as influenced by the Bank's loan and deposit portfolios.
On a quarterly basis, the Bank uses an earnings simulation model to
analyze net interest income sensitivity and the resulting net interest margin.
Net interest margin ("NIM") expresses net interest income as a percentage of
average earning assets. The Bank's model projects the effect of instantaneous
movements in interest rates (rate shock) to the extent of a 400 basis point
movement in either direction. Rate shock is a method for stress testing the net
interest spread and NIM over the next four quarters using certain growth
assumptions under several rate change levels. These levels span four 100 basis
point increments in either direction from the current interest rates. Potential
changes in market interest rates and their subsequent effect on interest income
are then evaluated. Management uses these financial models to measure and
interpret the degree of interest rate risk and liquidity associated with
hypothetical balance sheet positions and interest rate environments. The results
of these analyses are reported to the Bank's board of directors quarterly.
The interest rate sensitivity table below illustrates the effect as of
December 31, 1999 on the Bank's projected net interest income using a 100 and
200 basis point change in interest rates. In order to simulate activity,
maturing balances are replaced with new balances at the new rate level and
repricing balances are adjusted to the new rate shock level. The interest is
recalculated for each level along with the new average yield. NIM is then
calculated and a margin risk profile is developed. Assumptions based on the
historical behavior of the Bank's deposit rates and balances in relation to
changes in interest rates are also incorporated into the model.
The table below illustrates the Bank's interest rate sensitivity at the
period ending December 31, 1999. Presentation of the Bank's 1998 interest rate
sensitivity has been omitted because management does not consider it to be
meaningful to this presentation:
INTEREST RATE SENSITIVITY
Decrease in Rates Increase in Rates
200 100 BASE 200 100
Basis Points Basis Points Basis Points Basis Points
Projected interest
income
Loans $5,922,000 $6,331,000 $6,694,000 $7,025,000 $7,349,000
Investments 222,000 233,000 244,000 255,000 266,000
Short-term investments 336,000 412,000 488,000 563,000 639,000
Total interest income 6,480,000 6,976,000 7,426,000 7,843,000 8,254,000
Projected interest
expense
Deposits 3,224,000 3,653,000 4,081,000 4,510,000 4,939,000
Other borrowings 78,000 97,000 118,000 137,000 157,000
Total interest expense 3,302,000 3,750,000 4,199,000 4,647,000 5,096,000
Net interest income $3,178,000 $3,226,000 $3,227,000 $3,196,000 $3,158,000
Change from base $(49,000) $(1,000) $(31,000) $(69,000)
% Change from base (1.52%) (0.03%) (0.96%) (2.14%)
The Bank's sensitivity to interest rate changes at December 31, 1999 is
nearly equal in a positive or negative rate environment. Given a sudden
sustained 100 or 200 basis point increase in rates, the impact would decrease
net interest income of $31,000 (.96%) or $69,000 (2.14%). Given a sudden
sustained 100 or 200 basis point increase in rates, the impact would decrease
net interest income of $1,000 (.03%) or $49,000 (1.52%). Net interest income
will decrease marginally in either a rising or declining rate scenario because
the Bank's assets are more sensitive than liabilities in a declining rate
environment while liabilities are more sensitive than assets in a rising rate
environment. Most institutions do not predict the same effect on income when
comparing rising and falling rate scenarios. The degree of change is relatively
minor in comparison to other financial institutions and results primarily
because the assets and liabilities are reasonably matched and fairly short term.
. These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in market interest rates on net interest income. Actual results
will differ from the model's simulated results due to timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and
the application of various management strategies.
Capital. Bank regulatory authorities have established five levels of
capital adequacy based on corresponding capital ratios. The highest of these is
well capitalized which requires a Tier I risk-based capital ratio (Tier I
capital to risk-weighted assets) of at least 6.0%, a total risk-based capital
ratio (total capital to risk-weighted assets) of at least 10.0% and a Tier I
leverage ratio (Tier I capital to average assets) of at least 5.0%. In
connection with the initial approval of its charter, the Bank was required to
maintain a Tier I leverage ratio of at least 8.0% during the first three years
of operation. As of December 31, 1999, the Bank's Tier I risk-based capital
ratio was 10.47%, its total risk-based capital ratio was 11.50%, and its Tier I
leverage capital ratio was 9.39%. As of December 31, 1999, the Bank met the
"well capitalized" requirements for all three ratios.
The Bank Board of Directors recommends a vote "FOR" the ratification of
the Plan of Merger and the merger.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. The following is a brief summary of statutes and rules
and regulations that will affect Bancorp and the Bank. This summary is qualified
in its entirety by reference to the particular statutes and regulatory
provisions referred to below and is not intended to be an exhaustive description
of the statutes or regulations that are (or will be) applicable to the business
of Bancorp or the Bank. Supervision, regulation and examination of Bancorp and
the Bank by the regulatory agencies are intended primarily for the protection of
depositors rather than our shareholders.
Bancorp
General. Bancorp's activities are (or will be) subject to the
supervision of Kentucky and federal law. With respect to Kentucky law, Kentucky
Revised Statutes Section 287.900 provides that any individual (which is defined
to mean a natural person, partnership, association, business trust, voting trust
or similar organization, but not a corporation) or bank holding company having
its principal place of business in Kentucky may acquire control of one or more
banks or bank holding companies wherever located within the Commonwealth of
Kentucky, subject to two general restrictions (which restrictions would be
eliminated or altered if pending legislation in the Kentucky General Assembly
becomes law): (1) neither an individual, which on the effective date of the
legislation controlled a bank or bank holding company, nor a bank holding
company can acquire control of any bank located in Kentucky, if the bank was
chartered after July 13, 1984 but has been in existence for fewer than five
years on the date of its acquisition (except for one bank holding company
formations); and (2) no individual or bank holding company may acquire control
of any bank or bank holding company if, upon the acquisition, the individual or
bank holding company would control banks located in Kentucky holding more than
fifteen percent (15%) of the total deposits of all federally-insured depository
institutions in Kentucky.
In addition to Kentucky Revised Statutes Section 287.900, Kentucky
Revised Statutes Section 287.905 also contains provisions requiring any bank
holding company to seek and obtain the approval of the Commissioner of the
Kentucky Department of Financial Institutions before acquiring control of any
bank chartered in Kentucky or any bank holding company controlling a bank which
is chartered in the Commonwealth of Kentucky. Control is defined the same as in
the Bank Holding Company Act of 1956, as amended, which generally means the
power to vote 25% or more of any class of voting securities, the power to elect
a majority of the board of directors or the power to directly or indirectly
exercise a controlling influence over the management or policies of a bank or
bank holding company.
The Commissioner of the Kentucky Department of Financial Institutions
must approve an application by a bank holding company to acquire a bank or bank
holding company unless he finds:
>> the terms of the acquisition are not in accordance with the laws of
Kentucky;
>> the financial condition or the competence, experience and integrity
of the acquiring company or its principals are such as will jeopardize
the financial stability of the acquired entity;
>> the public convenience and advantage will not be served by the
acquisition; or
>> a federal regulatory authority whose approval is required has
disapproved the transaction because it would result in a monopoly or
substantially lesser competition.
Bank holding companies are required to obtain the prior approval of the
Federal Reserve Board before they may:
>> acquire direct or indirect ownership or control of more than 5% of the
voting shares of any bank;
>> acquire all or substantially all of the assets of any bank; or
>> merge or consolidate with any other bank holding company.
The Federal Reserve Board generally may not approve any transaction
that would result in a monopoly or that would further a combination or
conspiracy to monopolize banking in the United States. Nor can the Federal
Reserve Board approve a transaction that could substantially lessen competition
in any section of the country, that would tend to create a monopoly in any
section of the country, or that would be in restraint of trade. But the Federal
Reserve Board may approve any such transaction if it determines that the public
interest in meeting the convenience and needs of the community served clearly
outweighs the anticompetitive effects of the proposed transaction. The Federal
Reserve Board is also required to consider the financial and managerial
resources and future prospects of the bank holding companies and banks
concerned, as well as the convenience and needs of the community to be served.
Consideration of financial resources generally focuses on capital adequacy,
which is discussed below. Consideration of convenience and needs include the
parities' performance under the Community Reinvestment Act of 1977.
Restrictions on Activities. In addition to the effect of Kentucky law,
Bancorp is also restricted in our activities by federal law. Under the Bank
Holding Company Act, a bank holding company is, with limited exceptions,
prohibited from acquiring direct or indirect ownership or control of any voting
shares of any company which is not a bank, or engaging in any activity other
than managing and controlling banks.
Among the activities which are permissible for bank holding companies
are:
>> acquiring and holding shares of any company engaged solely in the
business of the holding and operating of properties used wholly or
substantially by a subsidiary bank, conducting a safe deposit business
or furnishing services to or performing services for a subsidiary bank;
>> acquiring and holding up to five percent (5%) of the outstanding voting
shares of any company;
>> acquiring and holding up to five percent (5%)of the outstanding voting
shares of an investment company that is solely engaged in investing in
securities and that does not own or control more than five percent (5%)
of the outstanding shares of any class of voting securities of any
company; and
>> acquiring and holding shares of any company, the activities of which the
Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
In determining whether a particular activity is permissible, the
Federal Reserve Board must consider whether the performance of such an activity
reasonably can be expected to produce benefits to the public that outweigh
possible adverse effects. Possible benefits that the Federal Reserve Board
considers include greater convenience, increased competition, or gains in
efficiency. Possible adverse effects include undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. Among the activities which the Federal Reserve Board has determined
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto and which may be engaged in by a bank holding company or
a subsidiary thereof in accordance with the rules and regulations of the Federal
Reserve Board are:
>> making, acquiring and servicing loans and other extensions of credit;
>> operating an industrial bank, Morris Plan bank or industrial loan
company;
>> performing functions or activities that may be performed by a trust
company;
>> acting as an investment or financial advisor;
>> leasing personal or real property if the lease is to serve as the
functional equivalent of an extension of credit to the
lessee and meets other criteria;
>> making investments in corporations or projects designed primarily to
promote community welfare;
>> providing data processing and data transmission services if the data
to be processed or furnished are financial, banking or economic in
nature;
>> acting as a principal, agent or broker for insurance that is directly
related to an extension of credit by the holding company or a bank
subsidiary of the holding company, or engaging in any insurance agency
activity in a place where the holding company (or a subsidiary) has a
lending office and that has a population not exceeding 5,000;
>> owning, controlling or operating a savings association;
>> providing courier services for financial instruments exchanged among
banks and financial institutions;
>> providing management consulting advice to banks and other depository
institutions not affiliated with the holding company;
>> issuing and selling money orders and similar consumer-type payment
instruments having a face value of not more than $1,000;
>> performing appraisals of real estate and personal property;
>> acting as intermediary for the financing of commercial or industrial
income-producing real estate;
>> providing securities brokerage services, if the services are restricted
to buying and selling securities solely as agent for the account of
customers and do not include securities underwriting or dealing or
investment advice or research services;
>> underwriting and dealing in government obligations and money market
instruments;
>> providing general information and statistical forecasting with
respect to foreign exchange markets and transnational services with
respect thereto;
>> acting as futures commissions merchant for nonaffiliated persons;
>> providing investment advice on financial futures and options on
futures;
>> providing consumer financial counseling;
>> providing tax planning and preparation services;
>> providing check guaranty services;
>> operating a collection agency; and
>> operating a credit bureau.
The Federal Reserve Board has determined that the following nonbanking
activities (among others) are not so closely related to banking or managing or
controlling banks as to be a proper incident thereto:
>> insurance premium funding or the combined sale of mutual funds and
insurance;
>> underwriting life insurance, except in low-population areas, that is
not sold in connection with a credit transaction by a bank holding
company system;
>> real estate brokerage;
>> land development;
>> real estate syndication;
>> management consulting;
>> property management; and
>> operation of a travel agency.
The Gramm-Leach-Bailey Act of 1999 (the "Gramm Act") has expanded the
permissible activities of a bank holding company. The Gramm Act allows
qualifying bank holding companies to elect to be treated as "financial holding
companies." A bank holding company qualifies to be a financial holding company
if its depository institution subsidiaries are well-managed, well capitalized
and received at least a "satisfactory" Community Reinvestment Act rating as of
the most recent examination. A financial holding company may engage in
activities and acquire companies engaged in activities that are "financial" in
nature or "incidental" or "complementary" to such financial activities
including:
>> acting as a principal, agent or broker in selling various forms of
insurance,
>> providing financial investment and economic advisory services,
including advising investment companies,
>> underwriting, dealing or making a market in securities, without any
revenue limitation,
>> investing in shares or other ownership interests in any entity in
course of a bond fide underwriting, merchant banking or investment
banking business, provided that such investments are not made by a
depository institution or its subsidiary, and
>> investing, through an insurance subsidiary in the ordinary course of
its business in accordance with relevant state law, in any entity, but
subject to conditions analogous to those for merchant banking
investments.
The Federal Reserve Board and the Treasury Department have the
authority to expand the list of permissible activities for a financial holding
company. Any bank holding company which cannot or chooses not to become a
financial holding company will remain subject to the previous rules of the Bank
Holding Company Act.
Bank holding companies are not limited under section 4(c)(8) of the
Bank Holding Company Act to activities previously approved by the Federal
Reserve Board. If a bank holding company is of the opinion that other activities
in the circumstances surrounding a particular case are closely related to
banking or managing or controlling banks, the holding company may apply for
Federal Reserve Board approval to engage in the activity or acquire an interest
in a company that is engaged in the activity.
There are no territorial limitations on permissible non-banking
activities of bank holding companies. Despite prior approval, the Federal
Reserve Board has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company may result from such activity.
Bancorp may seek to engage, or to acquire an interest in a company that
engages, in nonbanking activities so closely related to banking or managing or
controlling banks as to be a proper incident thereto. No negotiations for the
acquisition of any entities other than the Bank have been carried on by us, nor
are any such negotiations specifically contemplated, nor are any plans currently
under consideration under which Bancorp would engage in any nonbanking
activities. There can be no assurance that any such entity will be acquired by
us or that we will engage in any nonbanking activities in the future.
Capital Adequacy. Bancorp and the Bank will be required to comply with
the capital adequacy standards established by the Federal Reserve Board and the
Federal Deposit Insurance Corporation, respectively. There are two basic
measures for capital adequacy for bank holding companies and the depository
institutions that they own: a risk-based measure and a leverage measure. All
applicable capital standards must be satisfied for a bank holding company to be
considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among
depository institutions and bank holding companies, to account for
off-balance-sheet exposure, and to minimize disincentives for holding liquid
assets. Assets and off-balance-sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The minimum guideline for the ratio ("Total Capital Ratio") of total
capital ("Total Capital") to risk-weighted assets (including some off-balance
sheet items, such as standby letters of credit) is 8.0%. At least half of Total
Capital must be composed of common equity, undivided profits, minority interests
in the equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and other permissible intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less
goodwill and permissible other intangible assets, of 3.0% for bank holding
companies that meet specified criteria, including having the highest regulatory
rating. All other bank holding companies generally are required to maintain a
Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200 basis
points. The guidelines also provide that bank holding companies that experience
internal growth to make acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. The Federal Reserve Board will consider a
"tangible Tier 1 Capital Leverage Ratio" (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
The federal bank regulators continue to indicate their desire to raise
the capital requirements that apply to banks beyond their current levels. The
Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office
of the Comptroller of the Currency have proposed an amendment to the risk-based
capital standards that would calculate the change in a bank's net economic value
attributable to increases and decreases in market interest rates and would
require banks with excessive interest rate risk exposure to hold additional
amounts of capital against such exposures.
Reporting Obligations. A bank holding company is required to file with
the Federal Reserve Board annual reports and other information regarding its
business operations and the business operations of its subsidiaries. It is also
subject to examination by the Federal Reserve Board and is required to obtain
Federal Reserve Board approval prior to acquiring, directly or indirectly,
ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control, directly or indirectly, more than five
percent of the voting stock of such bank unless it already owns a majority of
the shares of voting stock of such bank.
Support of Subsidiary Institutions. Under Federal Reserve Board policy
Bancorp will be expected to act as a source of financial strength for, and to
commit resources to support, the Bank. This support may be required at times
when, absent such Federal Reserve Board policy, Bancorp may not be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its banking subsidiaries are subordinate in right of payment to deposits and to
other indebtedness of such banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
Under the Federal Deposit Insurance Act, a depository institution
insured by the Federal Deposit Insurance Corporation can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the Federal Deposit
Insurance Corporation after August 9, 1989, in connection with (i) the default
of a commonly controlled Federal Deposit Insurance Corporation-insured
depository institution or (ii) any assistance provided by the Federal Deposit
Insurance Corporation to any commonly controlled Federal Deposit Insurance
Corporation-insured depository institution "in danger of default." "Default" is
defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The Federal Deposit Insurance Corporation's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company, but is subordinate to claims of depositors, secured creditors,
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institution. The Bank is subject to these
cross-guarantee provisions. As a result, any loss suffered by the Federal
Deposit Insurance Corporation in respect of the Bank would likely result in
assertion of the cross-guarantee provisions, the assessment of such estimated
losses against the depository institution's banking or thrift affiliates, and a
potential loss of Bancorp's respective investment in any other subsidiary
depository institution.
The Bank
General. As a bank organized under Kentucky law, the Bank is subject to
the regulation and supervision of the Kentucky Department of Financial
Institutions. As an insured bank under the Federal Deposit Insurance Act, the
Bank is also subject to regulation and examination by the Federal Deposit
Insurance Corporation. Although the Bank is not a member of the Federal Reserve
System, it is nevertheless be subject to provisions of the Federal Reserve Act
and regulations promulgated thereunder.
The Federal Deposit Insurance Corporation and the Kentucky Department
of Financial Institutions regularly examine the operations of the Bank. State
banks also are subject to regulation requiring the maintenance of prescribed
minimum capital levels, and the Bank is required to file annual reports and such
additional information as the Kentucky Department of Financial Institutions and
Federal Deposit Insurance Corporation regulations require. The Bank is also
subject to restrictions on loan limits, interest rates, "insider" loans to
officers, directors and principal shareholders, restrictions on tie-in
arrangements and transactions with affiliates, as well as many other matters.
Strict compliance at all times with state and federal banking laws is required.
Supervision, regulation, and examination of the Bank by bank regulatory agencies
is intended for the protection of the Bank's depositors, not the Bank's
shareholders. Federal and state regulators have authority to impose sanctions on
the Bank and its directors and officers if the Bank engages in unsafe or unsound
practices, or otherwise fails to comply with regulatory standards.
The following summaries of statutes, regulations and policies affecting
banks do not purport to be complete, and the statutes and regulations described
should be referred to by all prospective investors.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 has introduced a process that will enable nationwide
interstate banking through bank subsidiaries and interstate banking mergers.
Effective September 29, 1995, the Riegle-Neal Act allowed adequately capitalized
and well-managed bank holding companies to acquire control of a bank in any
state subject to concentration limits. The Riegle-Neal Act also generally
provides that, after June 1, 1997, national and state-chartered banks may branch
interstate through acquisitions of banks in other states. By adopting
legislation prior to that date, a state has the ability either to "opt in" and
accelerate the date after which interstate branching is permissible, or "opt
out" and prohibit interstate branching altogether.
Kentucky has enacted "opt-in" legislation that permits banks from other
states to establish branches in Kentucky by acquisition of a Kentucky bank after
June 1, 1997. Restrictions currently imposed upon Kentucky banks will continue
to apply under the legislation, including prohibiting bank holding companies
from chartering a new bank in Kentucky or acquiring a bank in Kentucky which has
been in existence for less than five years, generally prohibiting a bank from
establishing a branch office in Kentucky outside its home county except by
merging with a bank that has operated an office in the target county for at
least five years, and prohibiting acquisitions which have the result of
concentrating control of more than fifteen percent (15%) of the federally
insured deposits in Kentucky.
It is expected that the Riegle-Neal Act will increase competition in
the banking industry as it will allow out of state banks to branch into Kentucky
through acquisitions of banks in Kentucky.
State Regulation. Kentucky law places numerous restrictions and
requirements on the banking operations of state-chartered banks. State-chartered
banks must report to the Kentucky Department of Financial Institutions
periodically upon request, and at least annually, regarding the financial
condition and operations of the bank.
Kentucky Revised Statutes Section 287.100(2) limits a bank's investment
in real estate and provides that a bank may only hold title to real estate
necessary or appropriate for the transaction of legitimate business and the cost
of such real estate, including furniture and fixtures, generally may not exceed
forty percent (40%) of the total paid-in capital, unimpaired surplus and
undivided profits of the bank without approval of the Kentucky Department of
Financial Institutions. A state-chartered bank may invest in real estate other
than that related to its legitimate business within its generally accepted
banking market provided such investment does not exceed ten percent (10%) of the
bank's actual paid-in capital and surplus at the time the investment is made.
Exceptions to the foregoing rules apply in the case of real estate conveyed to a
bank in satisfaction of a debt previously contracted.
With respect to expansion, the Bank may currently establish branches
only within the geographical limits of Fayette County, Kentucky, and at
locations which are subject to approval by the Kentucky Department of Financial
Institutions. However, recent legislation will, effective July, 2000, permit the
Bank to establish a branch office anywhere in Kentucky. The Bank is also subject
to the banking and usury laws of Kentucky restricting the amount of interest it
may charge in making loans or other extensions of credit.
Though pending legislation before the Kentucky General Assembly would
remove such restriction, Kentucky law also currently imposes a time restriction
on the acquisition of recently chartered banks in Kentucky. Except for mergers
or consolidations of banks whose principal place of business is in the same
county, Kentucky Revised Statutes Section 287.900 provides that a bank or bank
holding company may not be acquired unless it has been in existence for at least
five years at the time of the acquisition.
Dividend Restrictions. Federal and state statutes and regulations
restrict the payment of dividends by state-chartered banks. Under Kentucky law,
dividends by Kentucky banks may be paid only from current or retained net
profits. Before any dividend may be declared for any period (other than with
respect to preferred stock, if any), a bank must increase its capital surplus by
at least ten percent (10%) of the net profits of the bank for such period until
the bank's capital surplus equals the amount of its stated capital attributable
to its common stock. Moreover, the Commissioner of the Kentucky Department of
Financial Institutions must approve the declaration of dividends if the total
dividend to be declared by a bank for any calendar year would exceed the bank's
total net profits for such year combined with its retained net profits for the
preceding two years, less any required transfers to surplus or a fund for the
retirement of preferred stock, if any, or debt.
The Kentucky Business Corporation Act provides additional restrictions
on distributions by a Kentucky corporation, including Bancorp and the Bank.
The Federal Deposit Insurance Corporation may also restrict the Bank's
payment of dividends. If the Federal Deposit Insurance Corporation determines
that a depository institution under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice, the Federal Deposit Insurance
Corporation may require, after notice and hearing, that the institution cease
and desist from such practice. Depending on the financial condition of the
depository institution, an unsafe or unsound practice could include the payment
of dividends. Moreover, regulations of the Federal Deposit Insurance Corporation
requiring the Bank to maintain certain capital levels will also affect the
Bank's ability to pay dividends. See "THE MERGER - Information Respecting the
Bank: Dividends" on page 44.
Prompt Corrective Action for Capital Deficiencies. The Bank is subject
to risk-based and leverage capital requirements similar to those imposed upon
Bancorp as described above under "Capital Adequacy." The failure of the Bank to
meet its capital guidelines would subject it to a variety of enforcement
remedies and other restrictions on its business. The Federal Deposit Insurance
Corporation Improvement Act of 1991 establishes a system of prompt corrective
action to resolve the problems of undercapitalized institutions. Under this
system, which became effective in December 1992, the federal banking regulators
are required to establish five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized). With respect to institutions in the three undercapitalized
categories, the regulators must take prescribed supervisory actions and are
authorized to take other discretionary actions. Generally, subject to a narrow
exception, the Improvement Act requires the banking regulator to appoint a
receiver or conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital
level for each category.
An institution is deemed to be well capitalized if it
>> has a Total Capital Ratio of 10% or greater;
>> has a Tier 1 Capital Ratio of 6.0% or greater;
>> has a Leverage Ratio of 5.0% or greater; and
>> is not subject to any written agreement, order, capital directive, or
prompt corrective action directive issued by its federal banking
agency.
An institution is considered to be adequately capitalized if it has
>> a Total Capital Ratio of 8.0% or greater;
>> a Tier 1 Capital Ratio of 4.0% or greater; and
>> a Leverage Ratio of 4.0% or greater.
An institution is considered to be undercapitalized if it has
>> a Total Capital Ratio of less than 8.0%;
>> a Tier 1 Capital Ratio of less than 4.0%; or
>> a Leverage Ratio of less than 4.0%.
An institution is considered to be significantly undercapitalized if it
has
>> a Total Capital Ratio of less than 6.0%;
>> a Tier 1 Capital Ratio of less than 3.0%; or
>> a Leverage Ratio of less than 3.0%.
An institution that has a tangible equity capital to assets ratio equal
to or less than 2.0% is deemed to be critically undercapitalized. For purposes
of the regulation, the term "tangible equity" includes core capital elements
counted as Tier 1 Capital for purposes of the risk-based capital standards, plus
the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with exceptions. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under the Improvement Act, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
limitations. The obligations of a controlling bank holding company under the
Improvement Act to fund a capital restoration plan is limited to the lesser of
5.0% of an undercapitalized subsidiary's assets or the amount required to meet
regulatory capital requirements. An undercapitalized institution is also
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the Federal Deposit Insurance Corporation. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described below if it determines "that those actions are
necessary to carry out the purpose" of the Improvement Act.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the appropriate
federal banking agency must require the institution to take one or more of the
following actions:
>> sell enough shares, including voting shares, to become adequately
capitalized;
>> merge with, or be sold to, another institution or holding company,
but only if grounds exist for appointing a conservator or
receiver;
>> restrict transactions with banking affiliates as if the "sister
bank" exception to the requirements of Section 23A of the Federal
Reserve Act did not exist;
>> otherwise restrict transactions with bank or non-bank affiliates;
>> restrict interest rates that the institution pays on deposits to
"prevailing rates" in the institution's "region";
>> restrict asset growth or reduce total assets;
>> alter, reduce, or terminate activities;
>> hold a new election of directors;
>> dismiss any director or senior executive officer who held office for
more than 180 days immediately before the institution became
undercapitalized, provided that in requiring dismissal of a director or
senior officer, the agency must comply with prescribed procedural
requirements, including the opportunity for an appeal in which the
director or officer will have the burden of proving his or her value to
the institution;
>> employ "qualified" senior executive officers;
>> cease accepting deposits from correspondent depository institutions;
>> divest nondepository affiliates which pose a danger to the institution;
or
>> be divested by a parent holding company.
In addition, without the prior approval of the appropriate federal
banking agency, a significantly undercapitalized institution may not pay any
bonus to any senior executive officer or increase the rate of compensation for
such an officer.
Deposit Insurance. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation up to the statutory limit of $100,000 per
depositor through the Bank Insurance Fund. Under current law, the insurance
assessment paid by Bank Insurance Fund-insured institutions is set by the
Federal Deposit Insurance Corporation and is designed to achieve a target
reserve ratio of 1.25 percent of estimated insured deposits, or such higher
ratio as the Federal Deposit Insurance Corporation may determine in accordance
with law. The Federal Deposit Insurance Corporation is also authorized to impose
one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the Federal Deposit Insurance Corporation from
the Treasury Department. Bank Insurance Fund annual assessment rates currently
range from 0 to 27 basis points. The actual assessment rate paid by individual
institutions is determined by the risk category rating of the institution as
determined by the Federal Deposit Insurance Corporation.
On September 30, 1996, Congress enacted the Deposit Insurance Funds Act
of 1996. The Funds Act authorized the Financing Corporation to levy assessments
on Bank Insurance Fund-assessable deposits and stipulates that the rate must
equal one-fifth of the Financing Corporation assessment rate that is applied to
deposits assessable by the Savings Association Insurance Fund. Based on June 30,
1996, deposit date, Financing Corporation assessments imposed on Bank Insurance
Fund-insured deposits in annual amounts are presently estimated at 1.26 basis
points.
Effects of Governmental Policies and Economic Conditions. The Bank's
earnings are affected by the difference between the interest earned by the Bank
on its loans and investments and the interest paid by the Bank on its deposits
or other borrowings. The yields on its assets and the rates paid on its
liabilities are sensitive to changes in prevailing market rates of interest.
Thus, the earnings and growth of the Bank are influenced by general economic
conditions, fiscal policies of the Federal government, and the policies of
regulatory agencies, particularly the Federal Reserve Board, which establishes
national monetary policy, all of which are beyond the Bank's control. The nature
and impact of any future changes in fiscal or monetary policies cannot be
predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks and other
financial institutions. For example, the Depository Institutions Deregulation
and Monetary Control Act of 1980 provided for the phasing out of restrictions on
deposit interest rate ceilings, the authorization of new accounts and related
services, and the expansion of the lending authority of savings and loan
associations. The Depository Institutions Deregulation Act, has altered the
competitive relationship that previously existed among financial institutions,
and has resulted in a substantial reduction in the historical distinction
between the services offered by banks, savings and loan associations and other
financial institutions.
Monetary Policy. Commercial banks, including the Bank, are affected by
the credit policy of various regulatory authorities, including the Federal
Reserve Board. An important function of the Federal Reserve Board is to regulate
the national supply of bank credit. Among the instruments of monetary policy
used by the Federal Reserve Board to implement these objectives are open market
operations in U.S. government securities, changes in reserve requirements on
bank deposits, changes in the discount rate on bank borrowings and limitations
on interest rates that banks may pay on time and savings deposits. The Federal
Reserve Board uses these means in varying combinations to influence overall
growth of bank loans, investments and deposits, and also to affect interest
rates charged on loans, received on investments or paid for deposits.
The monetary and fiscal policies of regulatory authorities, including
the Federal Reserve Board, also affect the banking industry. Through changes in
the reserve requirements against bank deposits, open market operations in U.S.
government securities and changes in the discount rate on bank borrowings, the
Federal Reserve Board influences the cost and availability of funds obtained for
lending and investing. No prediction can be made with respect to possible future
changes in interest rates, deposit levels or loan demand or with respect to the
impact of such changes on the business and earnings of the Bank.
ANNUAL MEETING AGENDA ITEM NUMBER 3
APPROVAL OF THE STOCK AWARD PLAN
The Bank board of directors proposes that the shareholders approve the
Stock Award Plan, a copy of which is attached to this proxy statement-prospectus
as Appendix D. Shareholders are encouraged to review the Stock Award Plan
carefully. Any description in this proxy statement-prospectus of the Stock Award
Plan is qualified in its entirety by a reference to Appendix D.
On March 21, 2000, the Bank board of directors adopted the Stock Award
Plan, subject to approval by the shareholders at the annual meeting. The Stock
Award Plan is being submitted to shareholders in an effort, among other things,
to meet the requirements for incentive stock options under the Internal Revenue
Code. If shareholder approval of the Stock Award Plan is not obtained, no
options or other equity participation will be issued under the Stock Award Plan.
If the Stock Award Plan is approved at the annual meeting and the
merger is consummated, the Bank's rights and obligations under the Stock Award
Plan will be assumed by Bancorp. Accordingly, following the merger,references in
the following discussion to "Bank" will generally be applicable to Bancorp, and
references to Bank common stock will generally be applicable to Bancorp common
stock.
Purpose
The purpose of the Stock Award Plan is to provide the Bank with greater
flexibility in the composition of incentive awards and to secure for the Bank
and its stockholders the continued services of employees, directors and advisory
directors important to the success and growth of the business of the Bank and
its subsidiaries. The Bank believes that awards under the Stock Award Plan may
serve to broaden the equity participation of such employees, directors and
advisory directors further link the long-term interests of management and
shareholders. The Bank will consider awards pursuant to the Stock Award Plan in
light of its overall compensation philosophy and competitive conditions in the
marketplace.
The Bank board of directors adopted the Stock Award Plan in the belief
that the flexibility to selectively use options and other stock awards as part
of an overall compensation package may enhance the Bank's ability to attract and
retain important individuals in an intensely competitive business environment. A
number of the Bank's competitors utilize equity awards as a significant
component of their incentive compensation programs. The use of equity-based
compensation as a larger percentage of total compensation should more closely
align incentives with the long-term goals of the Bank's shareholders, in a
tax-efficient manner.
Description of the Stock Award Plan
The Stock Award Plan is set forth as Appendix D to this proxy
statement-prospectus and the summary of the material terms of the Stock Award
Plan contained herein is qualified in its entirety by a reference to Appendix D.
All references to the "Plan" in the remaining text of this subsection shall mean
the Stock Award Plan.
The determination of employee recipients of options and awards, their
terms and conditions within the restrictions of the Plan and the number of
shares covered by each option or award will be determined and administered by
the Bank board of directors or a committee appointed by the board of directors
from among its members (collectively, the "Board").
Employees, directors and advisory directors of the Bank are eligible to
participate in the Plan based upon its terms and conditions. Awards may be
granted by the Board and may include: (i) options to purchase shares of Bank
common stock in the form of incentive stock options, as defined in Section 422
of the Internal Revenue Code ("ISOs"), or non-qualified stock option; ("NQSOs");
(ii) stock appreciation rights granted alone or in tandem with such options
("SARs"); (iii) restricted stock awards; and (iv) stock units representing the
right to receive shares of Bank common stock at the end of a specified deferral
period. ISOs and SARs may be granted only to salaried employees of the Bank or
any subsidiary or parent corporation thereof now existing or hereafter formed or
acquired. NQSOs may be granted to such salaried employees as well as to
directors or advisory directors. At the time of the original grant of options,
the Board may also authorize the grant of reload options, which shall be
non-qualified stock options for such number of shares of Bank common stock as
were used by the participant to pay the purchase price upon the exercise of
previously granted options, but are still subject to the other terms set forth
in the Plan. For each calendar year, during any part of which the Plan is in
effect, no participant may be granted awards relating in the aggregate to more
than 10,000 shares of Bank common stock,as adjusted to reflect certain changes
to the outstanding Bank common stock pursuant to the Plan. Awards of options and
SARs are not transferable except by will or the laws of descent and
distribution. However, non-qualified stock options may be transferred, for no
consideration, to certain family members of the plan participant or to trusts
for such family members. Restricted stock awards and deferred stock units remain
subject to the restrictions established by the Board for the restriction or
deferral period and may not be sold, transferred, pledged or otherwise
encumbered during such period. Shares of such restricted stock and deferred
stock units will be forfeited and will revert to the Bank upon the recipient's
termination of employment during the restriction or deferral period, except to
the extent that the Board finds that such forfeiture is not in the best
interests of the Bank.
The option price per share of options granted under the Plan shall be
determined by the Board. However, the per share option price of any ISO shall
not be less than 100% of the fair market value (as hereinafter defined) of a
share of Bank common stock at the time the ISO is granted, and the per share
option price of any NQSO shall not be less than 50% of the fair market value of
a share of Bank common stock at the time the NQSO is granted. The "fair market
value" of the Bank common stock on any date means (i) if the Bank common stock
is listed on a national securities exchange or quotation system, the closing
sales price on such exchange or quotation system on such date or, in the absence
of reported sales on such date, the closing sales price on the immediately
preceding date on which sales were reported, (ii) if the Bank common stock is
not listed on a national securities exchange or quotation system, the mean
between the bid and offered prices as quoted by the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") for such date or
(iii) if the Bank common stock is neither listed on a national securities
exchange or quotation system nor quoted by NASDAQ, the fair value as determined
by such other method as the Committee determines in good faith to be reasonable.
At the close of trading on April 3, 2000, the closing sales price of Bank common
stock as reported by the NASD OTC Bulletin Board was $________ per share. Each
option shall be exercisable at such times, or upon the occurrence of such
events, and in such amount, as may be determined by the Board and stated in the
option award agreement. The term of each ISO may not exceed ten years from the
date of grant. Payment of the option price upon exercise of an option may be
made (i) by check payable to the Bank, (ii) with the consent of the Board by
delivery of Bank common stock already owned by the optionee for at least six
months (which may include shares received as the result of a prior exercise of
an option) having a fair market value (determined as of the date such option is
exercised) equal to all or part of the aggregate purchase price, (iii) with the
consent of the Board, and at the election of the participant, by withholding
from those shares that would otherwise be obtained upon exercise of the option a
number of shares having a fair market value equal to the option exercise price,
(iv) in accordance with a cashless exercise program as specified in the Plan or
(v) by a combination of the foregoing alternatives or by any other means that
the Board deems appropriate. No optionee shall have any rights to dividends or
other rights of a shareholder with respect to his or her shares subject to the
option until the optionee has given written notice of exercise and paid in full
for such shares.
The Board may, in its sole discretion, with respect to each option
granted under the Plan, grant tandem SARs, that is, the right to relinquish such
option in whole or in part and to receive a cash payment equal to the excess of
the fair market value of the stock covered by the relinquished option (or part
thereof) over the applicable option price.
Awards of restricted stock under the Plan may be in addition to or in
lieu of option grants. During the restriction period (which may be a restriction
period that ends after certain period(s) of time and/or upon the attainment of
certain performance goals, as set by the Board) the recipient of restricted
stock is not permitted to sell, transfer, pledge or otherwise encumber the
shares, and upon the recipient's termination of employment during the
restriction period, shares of restricted stock shall generally revert to the
Bank. If provided by the Board shares of restricted stock may become free of
restriction under certain circumstances such as death, permanent disability or
retirement of the recipient or the occurrence of a Change in Control of the Bank
(as hereinafter defined) or following any other termination of employment where
the Board determines that forfeiture is not in the best interests of the Bank.
Deferred stock units represent the right to receive shares of Bank
common stock after the deferral period and subject to such other terms and
conditions as set by the Board. During the deferral period, dividends on the
specified number of shares of Bank common stock covered by the deferred stock
units may be paid in cash, or deferred and/or the value thereof automatically
reinvested in additional deferred stock units as the Board may determine or
permit the participant to elect.
In the event of a Change in Control of the Bank, the Board may, to
assure fair and equitable treatment of the participants in the Plan (i)
accelerate the exercisability of any outstanding options, or the expiration of
restriction periods of restricted stock or deferred stock units awarded pursuant
to the Plan; (ii) offer to purchase any outstanding option, shares of restricted
stock or deferred stock units made pursuant to the Plan from the holder for its
equivalent cash value; and (iii) make adjustments or modifications to
outstanding options, restricted stock or deferred stock units as the Board deems
appropriate to maintain and protect the rights and interests of participants in
the Plan following such Change in Control. In no event, however, may any option
be exercised prior to the expiration of six months from the date of grant
(unless otherwise provided in the option agreement pursuant to which such option
was granted) or after ten years from the date of grant. "Change in Control"
means: (a) a majority of the Bank board of directors ceases to consist of
continuing directors (as hereinafter defined), (b) any person becomes the
beneficial owner of 25% or more of the outstanding voting power of the Bank
unless such acquisition is approved by a majority of the continuing directors,
(c) the stockholders of the Bank approve an agreement to merge or consolidate
into any other entity, unless such merger or consolidation is approved by a
majority of the continuing directors or (d) the stockholders of the Bank approve
an agreement to dispose of all or substantially all of the assets of the Bank
unless such disposition is approved by a majority of the continuing directors.
"Continuing directors" means those members of the board of directors on the
effective date of the Plan or who are elected to the board of directors after
such date upon the recommendation or with the approval of a majority of the
continuing directors at the time of such recommendation or approval.
An aggregate of 50,000 shares of Bank common stock (subject to adjustment
as described below and provided in the Plan including an adjustment of 100,000
shares of Bancorp common stock under the merger) will be subject to the Plan. No
more than 10,000 of such shares may be awarded as restricted stock awards. Share
subject to options which terminate or expire unexercised, or shares of
restricted stock which are forfeited, will become available for future option
grants or restricted stock awards.
The Bank's board of directors may terminate, modify or amend the Plan,
but no amendment may be made which would, without the approval of the
shareholders (i) change the class of employees eligible to receive an award of
restricted stock or options payable in Bank common stock, (ii) increase the
total number of shares reserved for issuance under the Plan or (iii) materially
increase the benefits accruing to participants under the Plan, within the
meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934. The
Committee may amend the terms of any award of restricted stock or option already
granted, provided that any such retroactive amendment is consistent with the
provisions of the Plan and does not disqualify an ISO under the provisions of
Section 422 of the Internal Revenue Code.
In the event of certain changes to the outstanding Bank common stock such
as merger, consolidation, stock splits, stock dividends, reclassifications or
recapitalization, the board of directors (or the board of directors of any
entity assuming the obligation of the Plan pursuant to any such merger or
reorganization) shall appropriately adjust the character and numberof shares
available under the Plan and shall appropriately adjust the character, number
and price of shares subject to outstanding options to reflect such changes.
The Plan became effective on the date of its adoption by the Board of
Directors, subject to approval by the shareholders at the annual meeting. The
Plan will terminate upon the earlier of (i) the adoption of a resolution of the
Bank's Board of Directors to terminate the Plan, (ii) the date all shares of
Bank common stock subject to the Plan are purchased according to the Plan or
(iii) ten years from the effective date of the Plan.
The size of future grants of stock options and stock appreciation rights
and awards of restricted stock or deferred stock units to directors, and
advisory directors and employees eligible to participate in the Plan is not
determinable as of the date of this proxy statement-prospectus because of the
discretionary nature of such grants and awards. There has been no determination
to grant any options or other incentive awards under the Plan apart from awards
expected to be made to John S. Shropshire. See "THE MERGER - Interests of
Certain Persons in the Merger: Shropshire Agreement".
Certain Federal Income Tax Consequences
The following discussion is based on the Internal Revenue Code and
applicable regulations thereunder in effect on the date hereof. Any subsequent
changes in the Internal Revenue Code or such regulations may affect the accuracy
of this discussion. In addition, this discussion does not constitute any state,
local or foreign tax consequences or any circumstances that are unique to a
particular Plan participant that may affect the accuracy or applicability of
this discussion.
Incentive Stock Options
(a) Neither the grant nor the exercise of an ISO will be
treated as the receipt of taxable income by the employee or a deductible item by
the Bank. The amount by which the fair market value of the shares issued upon
exercise exceeds the option strike price will constitute an item of adjustment
that must be taken into account in determining the employee's alternative
minimum tax.
(b) If the employee holds shares acquired by him or her upon
the exercise of an ISO until the later of two years from the date of grant of
the option and one year from such exercise and has been an employee of the Bank
at all times from the date of grant of the ISO to the day three months before
such exercise, then any gain realized by the employee on a later sale or
exchange of such shares will be a capital gain and any loss sustained will be a
capital loss. The Bank will not be entitled to a tax deduction with respect to
any such sale or exchange of ISO shares.
(c) If the employee disposes of any shares acquired upon the
exercise of an ISO during the two-year period from the date of grant of the
option or the one-year period beginning on the date after such exercise (i.e., a
"disqualifying disposition"), the employee will generally be obligated to report
as ordinary income for the year in which the disposition occurred the amount by
which the fair market value of such shares on the date of exercise of the option
(or, as noted in clause (d) below, in the case of certain sales or exchanges of
such shares for less than such fair market value, the amount realized upon such
sale or exchange) exceeds the option strike price, and the Bank will be entitled
to an income tax deduction equal to the amount of such ordinary income reported
by the employee on his or her federal income tax return.
(d) If an ISO holder who has acquired stock upon the exercise
of an ISO makes a disqualifying disposition of any such stock, and the
disposition is a sale or exchange with respect to which a loss (if sustained)
would be recognized by the ISO holder, then the amount includable in the ISO
holder's gross income, and the amount deductible by the Bank will not exceed the
excess (if any) of the amount realized on the sale or exchange over the tax
basis of the stock.
Non-Qualified Stock Options. In the case of an NQSO, the grant of the
option will not generally result in taxable income to the option holder or an
income tax deduction to the Bank. The NQSO holder generally recognizes ordinary
income at the time the NQSO is exercised in the amount by which the fair market
value of the shares acquired exceeds the option strike price. The Bank will
generally be entitled to a corresponding ordinary income tax deduction, at that
time, equal to the amount of such ordinary income.
Stock Appreciation Rights. The granting of SARs does not produce
taxable income to participating employees or an income tax deduction for the
Bank. The exercise of a SAR for cash is immediately taxable as ordinary income
to the grantee and deductible by the Bank.
Restricted Stock. An employee generally will not recognize any taxable
income upon the award of any restricted stock which is not vested. Dividends
paid with respect to restricted stock prior to the vesting of such stock will be
taxable as compensation income to the employee. Generally, an employee will
recognize ordinary income upon the vesting of restricted stock in an amount
equal to the fair market value of the shares of Bank common stock on the date
they became vested. However, pursuant to Section 83(b) of the Internal Revenue
Code, an employee may elect to recognize compensation income upon the award of
restricted stock based on the fair market value of the shares of Bank common
stock subject to such award on the award date. If an employee makes such an
election, dividends paid with respect to such restricted stock will not be
treated as compensation, but rather as dividend income, and the employee will
not recognize additional income when the restricted shares vest.
The Bank will be entitled to an income tax deduction equal to an amount
of ordinary income included by the employee on his or her federal income tax
return for the year when the restricted stock vests (or year in which an
applicable Internal Revenue Code Section 83(b) election is made). The Bank will
also be entitled to a compensation deduction for the dividends that are paid on
restricted stock that has not yet vested (as described in the immediately
preceding paragraph) when such dividends are reported by the employee on his or
her federal income tax return.
The Board of Directors recommends a vote "FOR" approval of the Stock
Award Plan.
ANNUAL MEETING AGENDA ITEM NUMBER 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT
PUBLIC ACCOUNTANTS
The Bank board of directors, upon the recommendation of its Audit
Committee composed of non-management directors, has appointed Crowe, Chizek and
Company LLP as independent accountants of the Bank with respect to its
operations for the year 2000, subject to ratification by the holders of Bank
common stock. In taking this action, the members of the Bank board of directors
and the Audit Committee considered carefully Crowe, Chizek and Company LLP's
performance for the Bank in that capacity since its original retention in 1997,
its independence with respect to the services to be performed and its general
reputation for adherence to professional auditing standards. Representatives of
the firm will be present at the annual meeting to make a statement if they
desire to do so and to answer appropriate questions that may be asked by
shareholders.
There will be presented at the annual meeting a proposal for the
ratification of this appointment, which the board of directors believes is
advisable and in the best interests of the stockholders. If the appointment of
Crowe, Chizek and Company LLP is not ratified, the matter of the appointment of
independent public accountants will be considered by the Board of Directors.
The Board of Directors recommends a vote "FOR" the proposal to ratify
the appointment of Crowe, Chizek and Company LLP as the Bank's accountants for
2000.
OTHER MATTERS
As of the date of this proxy statement-prospectus, the Bank's board of
directors knows of no matters that will be presented for consideration at the
annual meeting other than as described in this proxy statement-prospectus.
However, if any other matters properly come before the annual meeting or any
adjournment or postponement of the annual meeting and are voted upon, the
enclosed proxy will be deemed to confer discretionary authority to the
individuals named as proxies to vote the shares represented by such proxy as to
any such matters.
EXPERTS
The financial statements of the Bank as of December 31, 1999 and 1998, for the
years then ended, and for the period from November 17, 1997 (date of
commencement) through December 31, 1997, included in this proxy
statement-prospectus, have been audited by Crowe, Chizek and Company LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such reports given upon authority of such firm
as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Bancorp common stock offered under this
proxy statement-prospectus and certain tax matters regarding the merger are
being passed upon by Stoll, Keenon & Park, LLP, Lexington, Kentucky.
WHERE YOU CAN FIND MORE INFORMATION
Bancorp filed a registration statement with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the shares
of Bancorp common stock offered to Bank shareholders. The registration statement
contains additional information about Bancorp and Bancorp common stock. The
Securities and Exchange Commission allows Bancorp to omit certain information
included in the registration statement from this proxy statement-prospectus. The
registration statement may be inspected and copied at the Public Reference
Section at the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains
an Internet site that contains reports, proxy and information statements, and
other information about issuers that file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov. In
addition, you can read and copy this information at the regional offices of the
Securities and Exchange Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661.
APPENDIX A
WHEREAS:
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(a) First Security Bank of Lexington, Inc. (the "Bank") is a
corporation duly organized and existing under the laws of'Kentucky , which is
duly authorized to conduct the business of banking. Bank has authorized
capital stock consisting solely of 1,000,000 shares of no par value common
voting stock (hereinafter called the "Bank Stock"), 500,000 shares of which
are issued and outstanding;
(b) New First Security Bank of Lexington, Inc. (the "New Bank") is a
corporation duly organized and existing under the laws of Kentucky having
authorized capital stock consisting solely of 2,500 shares of no par value
common voting stock (hereinafter called the "New Bank Stock"). At the Effective
Time (as hereinafter defined), all 2,500 shares of New Bank Stock will be
issued, outstanding and owned by Parent; and
(c) First Security Bancorp, Inc. ("Parent") is a corporation duly
organized and existing under the laws of Kentucky, having authorized capital
stock consisting solely of 5,000,000 shares of no par value common stock
("Parent Stock").
NOW, THEREFORE, be it resolved:
(1) Merger. At the Effective Time (as defined in paragraph 12 hereof),
New Bank shall be merged with and into Bank (the "Merger"), which shall survive
the Merger and be the surviving corporation, and which shall at times
hereinafter be called the "Surviving Corporation". The Merger shall be effected
pursuant to the provisions of and have the effect provided for by Chapter 271B
of the Kentucky Revised Statutes.
(2) Articles of Incorporation of Surviving Corporation. At and
subsequent to the Effective Time, the Articles of Incorporation of Bank
shall continue to be the Articles of Incorporation of the Surviving Corporation.
(3) Facilities of Surviving Corporation. The established offices
and facilities of Bank immediately prior to the Merger shall continue to be the
established offices and facilities of the Surviving Corporation.
(4) Effect of Merger. At the Effective Time the corporate existence of
Bank and New Bank shall be merged into and continued in the Surviving
Corporation, with the effect as provided in Section 271B.11-060 of the Kentucky
Revised Statutes. The Surviving Corporation shall have all of the rights,
privileges, immunities and powers, and be subject to all the liabilities,
obligations and duties of each of Bank and New Bank (apart from that certain
Stock Award Plan dated and adopted by the board of directors of the Bank on
March 21, 2000 [the "Stock Plan"]) and shall without the necessity of any
conveyance, assignment, or transfer become the owner of all the assets of every
kind and character formerly belonging to each of Bank and New Bank.
(5) Liabilities. At and after the Effective Time the Surviving
Corporation shall be liable for all liabilities of Bank and New Bank, and all
debts, liabilities, obligations and contracts of Bank and New Bank,
respectively, matured or unmatured, whether accrued, absolute, contingent, or
otherwise, whether or not reflected or reserved against on balance sheets, books
of account, or records of Bank or New Bank, as the case may be, shall be those
of the Surviving Corporation (apart from the Stock Plan) and shall not be
released or impaired by the Merger, and all rights of creditors and other
obligees and all liens on property of Bank and New Bank shall be preserved
unimpaired subsequent to the Merger.
(6) Conversion of Shares. At the Effective Time:
(a) Each share of Bank Stock which is issued and outstanding
immediately prior to the Effective Time shall, ipso facto at the Effective Time
without any action on the part of the holder thereof, become and be converted
into two shares of Parent Stock and outstanding certificates (hereinafter called
the "Old Certificates") representing shares of Bank Stock which are held by Bank
shareholders immediately prior to the Effective Time shall thereafter represent
shares of Parent Stock;
(b) The 2,500 shares of New Bank Stock issued and outstanding
and held by Parent immediately prior to the Effective Time shall ipso facto at
the Effective Time without any action on the part of the holder thereof become
and be converted into 750,000 shares of Bank Stock which shall be issued to
Parent; and
(c) Each holder of shares of Bank Stock who timely and
properly dissents from the Merger in the manner set out in Chapter 271B of the
Kentucky Revised Statutes shall have the rights provided dissenting shareholders
under Subtitle 13 of Chapter 271B of the Kentucky Revised Statutes.
(7) Conversion of Stock Warrants and Options; Assumption of Bank
Rights and Duties Under Stock Plan.
(a) At the Effective Time, each warrant and option to purchase
or other right with respect to shares of Bank Stock pursuant to stock warrants
("Bank Warrants") and stock options ("Bank Options") granted by Bank under stock
warrant and stock option agreements ("Bank Warrant and Option Agreements"),
which are outstanding at the Effective Time, whether or not exercisable, shall
be converted into and become warrants and options with respect to Parent Stock,
and Parent shall assume each Bank Warrant and Bank Option, in accordance with
the terms of the applicable Bank Warrant and Option Agreements or other
agreement by which it is evidenced, and shall assume all rights and obligations
of the Bank under the Stock Plan, except that from and after the Effective Time
(i) Parent's Board of Directors shall be substituted for Bank's Board of
Directors or other administrator responsible for administering such Bank Warrant
and Option Agreements or the Stock Plan, (ii) each Bank Warrant and Bank Option
assumed by Parent may be exercised solely for shares of Parent Stock, (iii) the
number of shares of Parent Stock subject to such Bank Warrants and Bank Options
shall be equal to the number of shares of Bank Stock subject to such Bank
Warrant or Bank Option immediately prior to the Effective Time multiplied by
two, and (iv) the per share exercise price under each such Bank Warrant or Bank
Option shall be adjusted by dividing the per share exercise price by two.
Notwithstanding clauses (iii) and (iv) of the first sentence of this Section 7,
each Bank Option that is an "incentive stock option" shall be adjusted as
required by Section 424 of the Internal Revenue Code, so as not to constitute a
modification, extension or renewal of the option, within the meaning of Section
424(h) of the Internal Revenue Code. Parent and Bank agree to take all necessary
steps to effectuate the foregoing provisions of this Section 7.
(b) As soon as practicable after the Effective Time, Parent
shall deliver to the holders of the Bank Warrants and Bank Options an
appropriate notice setting forth such participant's rights pursuant thereto and
the grants under such Bank Warrant and Option Agreements shall continue in
effect on the same terms and conditions (subject to the adjustments required by
Section 7(a) hereof). Parent shall comply with the terms of each Bank Option
Agreement to ensure, subject to the provisions of such Bank Option Agreement,
that Bank Options that qualified as incentive stock options prior to the
Effective Time continue to qualify as incentive stock options after the
Effective Time.
(c) All contractual restrictions or limitations on transfer
with respect to Bank Stock awarded under the Bank Warrant and Option Agreements
or any other plan, program, or contract of Bank (including, without limitation,
the Stock Plan), to the extent that such restrictions or limitations shall not
have already lapsed (whether as a result of the Merger or otherwise), and except
as otherwise expressly provided in such plan, program, or contract, shall remain
in full force and effect with respect to shares of Parent Stock into which such
restricted stock is converted pursuant to Section 6(a) hereof.
(8) Surrender of Stock Certificates. Except for persons exercising
their rights as dissenting shareholders pursuant to Section 6(c) hereof, each
holder of shares of Bank Stock which shall have been so converted into shares of
Parent Stock, upon surrender of such Old Certificates in proper form for
cancellation, shall be entitled to receive as evidence of the shares of capital
stock so converted, share certificates (hereinafter called "New Certificates")
bearing the name of Parent as issuer, for the number of shares of Parent Stock
represented by such Old Certificates when surrendered. Until so surrendered,
each Old Certificate shall be deemed, for all corporate purposes, to evidence
the ownership of the number of shares of Parent Stock which the holder thereof
would be entitled to receive upon its surrender. Until such outstanding
certificates formerly representing shares of Bank Stock are surrendered, no
dividend payable to holders of record of shares of Parent Stock for any period
as of any date subsequent to the Effective Time shall be paid to the holder of
such outstanding certificates in respect thereof. After the Effective Time there
shall be no further registry of transfers on the records of Bank of shares of
Bank Stock. Upon surrender of certificates of shares of Bank Stock for exchange
for shares of Parent Stock, there shall be paid to the record holder of the
certificates of Parent Stock issued in exchange therefor (i) the amount of
dividends theretofore paid with respect to such shares of Parent Stock as of any
date subsequent to the Effective Time which have not yet been paid to a public
official pursuant to abandoned property laws and (ii) at the appropriate payment
date the amount of dividends with a record date after the Effective Time, but
prior to surrender and a payment date subsequent to surrender. No interest shall
be payable with respect to such dividends upon surrender of outstanding
certificates.
(9) Ratification. This Plan of Merger shall be submitted to the
shareholders of Bank and of New Bank for adoption, approval and ratification at
meetings to be called and held in accordance with applicable provisions of law
and the Articles of Incorporation and Bylaws of Bank and of New Bank. Bank and
New Bank shall proceed expeditiously and cooperate fully in the procurement of
any other consents and approvals and in the taking of any other action, and the
satisfaction of all other requirements prescribed by law or otherwise, necessary
for consummation of the Merger on the terms provided by this Plan of Merger.
(10) Conditions. Consummation of the Merger is conditioned upon:
(a) Adoption, approval and ratification of this Plan of Merger
by the holders of the capital stock of Bank and by the holders of the capital
stock of New Bank in the manner as required by laws;
(b) (i) Procurement of all regulatory and other consents and
approvals without the imposition by any regulator of any condition that in the
reasonable judgment of Parent's board of directors, would so materially
adversely affect the financial or economic benefits of the Merger that, had such
condition or requirement been known, Parent would not have entered into this
Plan of Merger, (ii) completion of all filings, registrations and
certifications, and (iii) satisfaction of all other requirements prescribed by
law, which are necessary for consummation of the Merger;
(c) the receipt by Parent and the Bank of a written
opinion of Stoll, Keenon & Park, LLP as to the tax-free nature of the merger;
(d) the declaration by the Securities and Exchange Commission
that the registration statement registering the shares of Parent common stock to
be issued to Bank shareholders in the merger has become effective under the
Securities Act of 1933, as amended;
(e) the performance of all agreements and the compliance
with all covenants of the Bank and Parent as set forth in this Plan of Merger;
(f) the receipt of all other consents that may be required to
complete the Merger or to prevent any default under any contract or permit which
would be reasonably likely to have, individually or in the aggregate, a material
adverse effect on the Bank or Parent; and
(g) the absence of any law or order or any action taken by any
court, governmental, or regulatory authority of competent jurisdiction
prohibiting or restricting the merger or making it illegal.
(11) Officers and Directors. The Board of Directors of the Surviving
Corporation shall consist of all persons who are directors of Bank immediately
before the Merger becoming effective and the officers of the Surviving
Corporation shall consist of all the persons who were the officers of Bank
immediately before the Merger becoming effective.
(12) Effective Time. Subject to the terms and upon the satisfaction of
all requirements of law and the conditions specified in this plan, the Effective
Time of the Merger shall occur on the date and at the time specified in the
Articles of Merger filed with the Secretary of State of the Commonwealth of
Kentucky as provided for in Section 271B.11-050 of the Kentucky Revised
Statutes.
Unless Parent and the Bank agree otherwise, they will use reasonable
efforts to cause the Merger to become effective on the date designated by Parent
that is within 15 days after the last to occur of:
(a) the effective date of the last consent of any regulatory
authority having authority over and approving or exempting the Merger (taking
into account any required waiting period);
(b) the date on which the Bank's shareholders approve
this Plan of Merger; and
(c) the date on which all other conditions precedent, other
than those conditions which relate to those actions to be taken at closing, to
each party's obligations under this Plan of Merger have been satisfied or
waived.
(13) Termination. At any time before the Effective Time of the Merger,
the board of directors of either Parent or Bank may agree to terminate this Plan
of Merger in the following circumstances:
(a) if a material breach by the other party of any covenant or
agreement contained in this Plan of Merger cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of such
breach (provided that the terminating party is not then in breach of any
representation and warranty contained in this Plan of Merger under the
applicable standards set forth in this Plan of Merger or in material breach of
any covenant or other agreement contained in this Plan of Merger);
(b) if any consent of any regulatory authority required to
complete the Merger or other transactions contemplated by this Plan of Merger
has been denied by final nonappealable action, or if any action taken by such
authority is not appealed within the time limit for appeal;
(c) if the shareholders of the Bank fail to approve
this Plan of Merger and the Merger at a shareholders' meeting held for
consideration of this Plan of Merger and the Merger; or
(d) if the Merger is not consummated by December 31, 2000,
provided that the failure to consummate is not caused by any willful breach of
this Plan of Merger by the party electing to terminate.
FIRST SECURITY BANK OF LEXINGTON
Lexington, Kentucky
FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
CONTENTS
REPORT OF INDEPENDENT AUDITORS.............................................. 1
FINANCIAL STATEMENTS
Balance Sheets........................................................... 2
Statements of Income..................................................... 3
Statements of Changes in Shareholders Equity............................. 4
Statements of Cash Flows................................................. 5
Notes to Financial Statements............................................ 6
FIRST SECURITY BANK OF LEXINGTON
FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
First Security Bank of Lexington
Lexington, Kentucky
We have audited the accompanying balance sheets of First Security Bank of
Lexington as of December 31, 1999 and 1998 and the related statements of income,
changes in shareholders' equity, and cash flows for the years then ended and for
the period from November 17, 1997 (date of commencement) through December 31,
1997. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Security Bank of
Lexington as of December 31, 1999 and 1998 and the results of its operations and
its cash flows for the years then ended and for the period from November 17,
1997 (date of commencement) through December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 13, First Security Bank of Lexington changed its method of
accounting for certain start-up costs.
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 27, 2000
FIRST SECURITY BANK OF LEXINGTON
BALANCE SHEETS
December 31
1999 1998
ASSETS
Cash and due from banks $ 2,218,985 $ 1,174,652
Federal funds sold 9,053,000 5,742,000
Total cash and cash equivalents 11,271,985 6,916,652
Securities available for sale 4,331,573 5,014,085
Loans 78,196,747 34,402,412
Less allowance for loan losses (819,051) (334,872)
Net loans 77,377,696 34,067,540
FHLB stock 116,800 -
Leasehold improvements and equipment, net 757,795 830,214
Accrued interest receivable 527,957 225,162
Other assets 130,742 80,933
$ 94,514,548 $ 47,134,586
LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities
Deposits
Noninterest bearing $ 5,156,805 $ 2,745,915
Time deposits, $100,000 and over 14,397,425 5,247,380
Other interest bearing 63,857,494 30,619,544
Total deposits 83,411,724 38,612,839
Repurchase agreements 2,381,968 -
Accrued interest payable 387,600 158,472
Other liabilities 118,734 82,378
Total liabilities 86,300,026 38,853,689
Shareholders equity
Common stock, no par value: 1,000,000 shares authorized;
500,000 shares issued and outstanding 4,901,442 4,901,442
Paid-in capital 4,901,442 4,901,442
Accumulated deficit (1,492,616) (1,514,462)
Accumulated other comprehensive income (loss) (95,746) (7,525)
Total shareholders equity 8,214,522 8,280,897
See accompanying notes. $ 94,514,548 $ 47,134,586
STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998 and Period from
November 17, 1997 (Date of Commencement)
Through December 31, 1997
1999 1998 1997
Interest income
Loans, including fees $ 4,733,832 $ 1,316,772 $ 3,789
Securities - taxable 201,648 83,806 548
Federal funds sold 447,535 717,107 87,785
Other 3,762 - -
5,386,777 2,117,685 92,122
Interest expense
Deposits 2,995,011 1,093,202 11,604
Repurchase agreements 15,170 - -
3,010,181 1,093,202 11,604
Net interest income 2,376,596 1,024,483 80,518
Provision for loan losses 486,745 328,948 15,154
Net interest income after provision for loan losses 1,889,851 695,535 65,364
Noninterest income
Service charges and fees on deposits 102,354 36,109 642
Other 36,802 5,472 3,908
139,156 41,581 4,550
Noninterest expense
Salaries and employee benefits 1,097,694 1,060,314 118,380
Occupancy 211,383 184,638 16,184
Equipment 106,124 100,782 1,047
Advertising 67,979 98,491 965
Professional fees 71,944 71,329 -
Bank franchise tax 62,298 73,242 6,523
Pre-opening expenses - - 133,185
Other 389,739 256,120 47,510
2,007,161 1,844,916 323,794
Income (loss) before cumulative effect
of a change in accounting principle 21,846 (1,107,800) (253,880)
Cumulative effect of a change in accounting
principle - (152,782) -
Net income (loss) $ 21,846 $ (1,260,582) $ (253,880)
Weighted average shares common stock outstanding:
Basic 500,000 500,000 500,000
Diluted 509,740 500,000 500,000
Earnings per share:
Basic $ .04 $ (2.52) $ (.51)
Diluted .04 (2.52) (.51)
See Accompanying notes.
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY Years Ended
December 31, 1999 and 1998
and Period from November 17, 1997 (Date of Commencement)
Through December 31, 1997
Accumulated
Other Total
Common Paid-In Accumulated Comprehensive Shareholders
Stock Capital Deficit Income (Loss) Equity
Beginning balance $ - $ - $ - $ - $ -
Issuance of 500,000 shares of
common stock 5,000,000 5,000,000 - - 10,000,000
Commission on stock sale (98,558) (98,558) - - (197,116)
Comprehensive income:
Net loss - - (253,880) - (253,880)
Change in unrealized gain
(loss) on securities available
for sale - - - - -
Total comprehensive income
(loss) (253,880)
Balance, December 31, 1997 4,901,442 4,901,442 (253,880) - 9,549,004
Comprehensive income:
Net loss - - (1,260,582) - (1,260,582)
Change in unrealized gain
(loss) on securities available
for sale - - - (7,525) (7,525)
Total comprehensive income
(loss) (1,268,107)
Balance, December 31, 1998 4,901,442 4,901,442 (1,514,462) (7,525) 8,280,897
Comprehensive income:
Net income - - 21,846 - 21,846
Change in unrealized gain
(loss) on securities available
for sale - - - (88,221) (88,221)
Total comprehensive income
(loss) (66,375)
Balance, December 31, 1999 $ 4,901,442 $ 4,901,442 $ (1,492,616) $ (95,746) $8,214,522
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998 and Period from
November 17, 1997 (Date of Commencement)
Through December 31, 1997
1999 1998 1997
Cash flows from operating activities
Net income (loss) $ 21,846 $ (1,260,582) $ (253,880)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation 115,598 95,990 8,962
Change in accounting principle - 152,782 -
Amortization and accretion on available
for sale securities, net 2,708 1,827 (274)
Provision for loan losses 486,745 328,948 15,154
Federal Home Loan Bank stock dividends (3,500) - -
Change in assets and liabilities:
Accrued interest receivable (302,795) (221,099) (4,063)
Other assets (49,809) (33,907) (199,304)
Accrued interest payable 229,128 150,087 8,385
Other liabilities 36,356 62,884 19,040
Net cash from operating activities 536,277 (723,070) (405,980)
Cash flows from investing activities
Net change in loans (43,796,901) (32,896,198) (1,515,444)
Activity in available for sale securities:
Prepayments 93,009 7,854 -
Maturities 2,500,000 1,750,000 -
Calls - 1,500,000 -
Purchases (2,001,426) (6,535,129) (1,745,888)
Leasehold improvements and net purchases
of equipment (43,179) (460,653) (474,563)
Purchase of Federal Home Loan Bank stock (113,300) - -
Net cash from investing activities (43,361,797) (36,634,126) (3,735,895)
Cash flows from financing activities
Net change in deposits 44,798,885 34,453,522 4,159,317
Proceeds from issuance of common stock - - 10,000,000
Stock offering expenses - - (197,116)
Net change in repurchase agreements 2,381,968 - -
Net cash from financing activities 47,180,853 34,453,522 13,962,201
Net change in cash and cash equivalents 4,355,333 (2,903,674) 9,820,326
Cash and cash equivalents at beginning of period 6,916,652 9,820,326 -
Cash and cash equivalents at end of period $ 11,271,985 $ 6,916,652 $ 9,820,326
Supplemental cash flow information:
Interest paid $ 2,781,053 $ 943,115 $ 3,219
FIRST SECURITY BANK OF LEXINGTON
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1999 and 1998 and Period from
November 17, 1997 (Date of Commencement)
Through December 31, 1997
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Security Bank of Lexington (the
"Bank") conform to generally accepted accounting principles and to predominant
practices within the banking industry. The significant policies are described
below.
Nature of Operations: The Bank is a Kentucky corporation incorporated to operate
as a commercial bank under a state bank charter. The Bank was capitalized with
$9,802,884 which is net of the commission of $197,116 on the sale of stock and
represented 100% of the initial capital stock. The Bank's 1997 income statement
includes pre-opening expenses of $133,185 that were reimbursed to organizers
when banking operations were commenced on November 17, 1997. The Bank generates
commercial, mortgage, and installment loans, and receives deposits from
customers located primarily in the Fayette County, Kentucky area. The majority
of the Bank's income is derived from lending activities. The majority of the
Bank's loans are secured by specific items of collateral including business
assets, real estate, and consumer assets, although borrower cash flow may also
be a primary source of repayment. All of the Bank's operations are considered by
management to be aggregated into one reportable operating segment.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. Estimates that are more susceptible
to change in the near term include the allowance for loan losses and fair values
of securities.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due
from banks and federal funds sold. Net cash flows are reported for customer loan
and deposit transactions.
Securities: Securities are classified as available for sale. Available for sale
securities are those which might be sold before maturity, and are reported at
fair value, with unrealized gains or losses reported in other comprehensive
income. Gains and losses on sales are determined based on the amortized cost of
the specific security sold. Other securities such as Federal Home Loan Bank
stock are carried at cost. Interest income includes amortization of premiums and
accretion of discounts.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans are reported at the principal balance outstanding, net of deferred
loan fees and costs. Interest income on real estate, commercial, and consumer
loans is accrued over the term of the loans based on the principal outstanding.
Interest income is not reported when full loan repayment is in doubt. Payments
on such loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loss experience, general economic conditions, information about
specific borrower situations, and other factors. While management may
periodically allocate portions of the allowance for specific problem loan
situations, the whole allowance is available for any loan losses that occur.
Loans are considered impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage and consumer loans, and on an individual
loan basis for other loans. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at the
fair value of the collateral if the loan is collateral dependent. A portion of
the allowance for loan losses is allocated to impaired loans. Loans are
evaluated for impairment when payments are delayed or expected to be delayed or
when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Leasehold Improvements and Equipment: Leasehold improvements and equipment are
reported net of accumulated depreciation. Depreciation expense is computed using
principally straight line method over the shorter of the asset's useful life or
lease term. Maintenance and repairs are expensed and major improvements are
capitalized. These assets are reviewed for impairment when events indicate the
carrying amount may not be recoverable.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under warrants.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Lease Commitments: Expense is recognized as payments are made on operating
leases. Leasing arrangements are for five years and contain renewal options.
Dividend Restriction: The Bank is subject to banking regulations which require
the maintenance of certain capital levels and which may limit the amount of
dividends which may be paid. For details concerning regulatory capital
requirements, see Note 11 and 12.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Benefit Plans: Profit sharing and 401(k) plan expense is the amount contributed
as determined by a formula.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material impact on the financial statements.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect, but the effect will depend on derivative holdings when
this standard applies.
Reclassifications: Certain items in the prior period financial statements
were reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
Year-end securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
1999
U. S. Treasury securities $ 250,055 $ - $ (1,930) $ 248,125
U. S. Government agency securities 3,501,935 - (67,523) 3,434,412
Mortgage-backed 655,329 - (26,293) 629,036
Total debt securities 4,407,319 - (95,746) 4,311,573
Equity securities 20,000 - - 20,000
Total $ 4,427,319 $ - $ (95,746) $ 4,331,573
1998
U. S. Treasury securities $ 998,798 $ 16 $ (99) $ 998,715
U. S. Government agency securities 3,504,420 200 (6,170) 3,498,450
Mortgage-backed 498,392 - (1,472) 496,920
Total debt securities 5,001,610 216 (7,741) 4,994,085
Equity securities 20,000 - - 20,000
Total $ 5,021,610 $ 216 $ (7,741) $ 5,014,085
Contractual maturities of debt securities at year-end 1999 were as follows.
Securities not due at a single maturity date, mortgage-backed and equity
securities, are shown separately.
Amortized Fair
Cost Value
Due in one year or less $ 1,500,906 $ 1,496,950
Due from one to five years 2,251,084 2,185,587
Mortgage-backed 655,329 629,036
Equity securities 20,000 20,000
Total $ 4,427,319 $ 4,331,573
Securities pledged at year-end 1999 and 1998 had a carrying amount of $3,564,497
and $0, and were pledged to secure customer repurchase agreements. There were no
securities sales during 1999, 1998, or 1997.
NOTE 3 - LOANS
Loans at year-end were as follows:
1999 1998
Commercial $ 26,596,357 $ 12,469,646
Mortgage loans on real estate:
Commercial 35,855,281 14,123,827
Residential 7,449,166 3,830,621
Consumer 8,295,943 3,978,318
$ 78,196,747 $ 34,402,412
Changes in the allowance for loan losses were as follows:
1999 1998 1997
Beginning balance $ 334,872 $ 15,154 $ -
Loans charged off (3,172) (9,230) -
Recoveries 606 - -
Provision for loan losses 486,745 328,948 15,154
Ending balance $ 819,051 $ 334,872 $ 15,154
With the exception of $6,000 in non-accrual loans at December 31, 1998, the Bank
did not have any impaired or non-performing loans during any of the periods
presented.
Loans to executive officers, directors, and their affiliates in 1999 were as
follows:
Beginning balance $ 1,715,157
New loans 3,484,977
Repayments (565,003)
Ending balance $ 4,635,131
NOTE 4 - LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Year-end leasehold improvements and equipment were as follows:
1999 1998
Leasehold improvements $ 513,461 $ 491,427
Furniture and equipment 464,108 442,964
Total cost 977,569 934,391
Accumulated depreciation (219,774) (104,177)
Leasehold improvements and equipment, net $ 757,795 $ 830,214
The Bank is currently leasing its main banking facility under a non-cancelable
five year operating lease which includes three three-year renewal options. The
Bank is also leasing a facility for their branch operation which opened in 1998.
This lease is a non-cancelable five year operating lease which includes three
five-year renewal options. The Bank also leases certain equipment under
non-cancelable operating leases with various terms and expiration dates. Rental
expense for the years ended December 31, 1999, 1998, and 1997 was $119,247 and
$112,071, and $5,612.
Future operating lease commitments:
2000 $ 121,648
2001 117,645
2002 86,592
2003 717
2004 717
Total $ 327,319
NOTE 5 - DEPOSITS
The scheduled maturities of time deposits were as follows:
2000 $ 38,370,538
2001 12,160,634
2002 1,018,397
2003 1,231,033
2004 and thereafter 1,388,185
Total $ 54,168,787
Related party deposits totaled $4,043,849 and $2,694,632 at December 31, 1999
and 1998.
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
ninety days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows:
---------December 31---------
1999 1998
Average balance during the year $ 309,106 $ -
Average interest rate during the year 4.91% -
Maximum month-end balance during the year $ 2,381,968 $ -
NOTE 7 - STOCK WARRANTS
The Bank has issued stock warrants to each initial investor in the Bank who
subscribed to $100,000 or more of the Bank's common stock prior to July 4, 1997,
the value of which is included in common stock and paid-in capital. The warrants
entitle the holder to purchase additional shares of the Bank's common stock at
the offering price of $20 per share at any time during 2003. If all the warrants
are fully exercised, the Bank will issue a total of 44,220 shares of common
stock, and the Bank's capital will be increased by $884,400. The amount of
dilution to the book value, earnings per share, and market value of the common
stock that will occur upon exercise of the warrants will depend on a variety of
factors, including the number of warrants exercised, the amount of the Bank's
capital at the time the warrants are exercised, the number of shares of common
stock then outstanding, net earnings of the Bank (if any), and the then market
value of the Bank's common stock. The warrants have no voting rights and may be
transferred without the underlying shares of common stock, but are not
transferable until the exercise period commences. The warrants will expire if
not exercised by December 31, 2003.
NOTE 8 - INCOME TAXES
The components of the provision (benefit) for income taxes consists of:
1999 1998 1997
Current $ - $ - $ -
Deferred (7,968) 427,995 86,319
Change in valuation allowance 7,968 (427,995) (86,319)
$ - $ - $ -
NOTE 8 - INCOME TAXES (Continued)
The Bank's deferred tax assets and liabilities at December 31, 1999 and 1998 are
shown below. A valuation allowance has been established due to uncertainty over
the utilization of the deferred tax assets.
1999 1998
Deferred tax assets
Net operating loss carryforward $ 300,902 $ 403,677
Allowance for loan losses 228,640 63,147
Organizational costs 73,975 99,475
Other 3,544 1,177
Total assets 607,061 567,476
Deferred tax liabilities
Depreciation (49,693) (31,310)
Cash to accrual (49,311) (21,330)
Other (1,189) -
Total liabilities (100,193) (52,640)
506,868 514,836
Valuation allowance (506,868) (514,836)
Net deferred tax asset $ - $ -
The Bank has a tax net operating loss of $885,007 which can be carried forward
to offset future taxable income through the year 2019.
An analysis of the differences between the statutory U. S. federal income tax
rate and the effective tax rate is as follows: 1999 1998 1997
1999 1998 1997
U. S. federal income tax rate $ 7,428 34.0% $ (428,598) 34.0% $ (86,319) 34.0%
Changes from the statutory rate
Change in valuation allowance (7,968) (36.5) 427,995 (34.0) 86,319 (34.0)
Other 540 2.5 603 - - -
$ - - % $ - - % $ - - %
NOTE 9 EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
1999 1998 1997
Basic
Net income $ 21,846 $ (1,260,582) $ (353,880)
Weighted average common shares 500,000 500,000 500,000
Basic earnings per common share $ .04 (2.52) $ (.51)
Diluted
Net income $ 21,846 $ (1,260,582) $ (353,880)
Weighted average common shares
outstanding for basic earnings per
common share 500,000 500,000 500,000
Add: Dilutive effects of assumed
exercises of stock warrants 9,740
Average shares and dilutive potential
common shares 509,740 500,000 500,000
Diluted earnings per common share $ .04 (2.52) $ (.51)
Stock warrants for 44,220 shares of common stock were not considered exercised
for 1998 and 1997 diluted earnings per share because they were anti-dilutive.
NOTE 10' COMMITMENTS AND OFF-BALANCE-SHEET RISK
Some financial instruments are used in the normal course of business to meet the
financing needs of customers and to reduce exposure to interest rate changes.
These financial instruments include commitments to extend credit, and standby
letters of credit. These involve, to varying degrees, credit and interest-rate
risk in excess of the amount reported in the financial statements. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount for commitments to extend credit, standby letters of credit,
and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. Collateral or
other security is normally not required to support financial instruments with
credit risk.
NOTE 10 COMMITMENTS AND OFF-BALANCE-SHEET RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the total commitments do not necessarily represent
future cash requirements. Standby letters of credit and financial guarantees
written are conditional commitments to guarantee a customer's performance to a
third party. The contractual amount of financial instruments with
off-balance-sheet risk at year end was as follows:
1999 1998
Fixed Variable Fixed Variable
Commitments to make loans $ 1,221,912 $ 10,088,110 $ - $ 9,659,946
Unused lines of credit - 5,959,404 - 3,853,051
Letters of credit 690,000 - 25,000 -
Commitments to make loans are at market rates and generally made for periods of
60 days or less. The fixed rate loan commitments have interest rates ranging
from 7.67% to 8.95% and maturities up to seven years.
NOTE 11 LIMITATION ON BANK DIVIDENDS
Banking regulations limit the amount of dividends that may be paid without prior
approval. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, as defined,
combined with the retained net profits of the preceding two years. Also, no
dividends can be paid that would equal or exceed the retained earnings then on
hand. As of December 31, 1999, no retained earnings are available for dividends.
NOTE 12 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action.
NOTE 12 - REGULATORY MATTERS (Continued)
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, under capitalized, significantly
undercapitalized, and critically under capitalized, although these terms are not
used to represent overall financial condition. The Bank was categorized as well
capitalized at year-end 1999 and 1998 as noted in the table below:
Minimum Amounts
to be Well
Minimum Required Capitalized
for Capital Under Prompt
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(in thousands)
1999
Total Capital to Risk Weighted Assets $ 9,129 11.5% $ 6,348 8% $ 7,935 10%
Tier 1 Capital to Risk Weighted Assets 8,310 10.5 3,174 4 4,761 6
Tier 1 Capital to Average Assets 8,310 9.4 3,541 4 4,426 5
1998
Total Capital to Risk Weighted Assets $ 8,623 23.3% $ 2,954 8% $ 3,692 10%
Tier 1 Capital to Risk Weighted Assets 8,288 22.4 1,477 4 2,215 6
Tier 1 Capital to Average Assets 8,288 19.4 1,256 4 1,570 5
In addition to the above capital requirements, in connection with the initial
approval of its charter, the Bank is required to maintain Tier I capital to
total assets of at least 8% during its first three years of operation. At
December 31, 1999, the Bank's Tier I capital to total assets was 8.8%.
NOTE 13 CHANGE IN ACCOUNTING PRINCIPLE
Statement of Position 98-5 was passed in 1998 and is effective for financial
statements beginning after December 15, 1998. This pronouncement states that
certain start-up costs that could previously be capitalized must be expensed as
incurred, instead of being capitalized. Start-up costs are defined to include
organization costs, which the Bank had capitalized. The pronouncement also
states that all start-up costs previously capitalized must be expensed on
January 1, 1999. However, early adoption of this pronouncement was permitted in
1998. The Bank's management elected to early adopt the provisions of the
pronouncement and expensed all previously capitalized organizational costs in
1998. The amount of those costs was $152,782.
NOTE 14 BENEFIT PLAN
A 401(k) benefit plan was established in 1998 which allows employee
contributions up to 15% of their compensation. The Bank matches 50% of the first
7.5% of the compensation contributed. Expense for 1999, 1998, and 1997 was
$27,226, $24,444, and $0.
NOTE 15 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
1999 1998 1997
Unrealized holding gains and losses on
available-for-sale securities $ (88,221) $ (7,525) $ -
Less reclassification adjustments for gains
and losses later recognized as income - - -
Net unrealized gains and losses (88,221) (7,525) -
Tax effect - - -
Other comprehensive income (loss) $ (88,221) $ (7,525) $ -
APPENDIX C
SUBTITLE 13. DISSENTERS RIGHTS
SUBTITLE 13. DISSENTERS RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010. Definitions for subtitle
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a
dissenter, except that in the case of a merger where the issuing corporation is
not the surviving corporation, then after consummation of the merger,
"corporation" shall mean the surviving corporation.
(2) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under KRS 271B.13-020 and who exercises that right when
and in the manner required by KRS 271B.13-200 to 271B.13-280.
(3) "Fair Value," with respect to a dissenter's shares, means
the value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be
inequitable. In any transaction subject to the requirements of KRS 271B.12-210
or exempted by KRS 271B.12-220(2), "fair value" shall be at least an amount
required to be paid under KRS 271B.12-220(2) in order to be exempt from the
requirements of KRS 271B.12-210.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares
are registered in the records of a corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder: means the person who is a
beneficial owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the
beneficial shareholder.
271B.13-020. Right to dissent. (1) A shareholder shall be
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation
is a party:
1. If shareholder approval is required for the merger by KRS
271B.11-030 or the articles of incorporation and the shareholder is entitled to
vote on the merger; or
2. If the corporation is a subsidiary that is merged with its
parent under KRS 271B.11-040;
(b) Consummation of a plan of share exchange to which
the corporation is a party as the corporation whose shares will be acquired, if
the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in the usual
and regular course of business, if the shareholder is entitled to vote on the
sale or exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one (1) year after the date of sale;
(d) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a dissenters shares
because it:
1. Alters or abolishes a preferential right of the shares to a
distribution or in dissolution;
2. Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the redemption
or repurchase, of the shares;
. 3. Excludes or limits the right of the shares to vote on any
matter other than a limitation by dilution through issuance of shares or
other securities with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired for
cash under KRS 271B.6-040;
(e) Any transaction subject to the requirements of KRS
271B.12-210 or exempted by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote
to the extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are entitled
to dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for
his shares under this chapter shall not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
271B.13-030. Dissent by nominees and beneficial owners.(1)
record shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he shall dissent with respect to all shares
beneficially owned by any one (1) person and notify the corporation in writing
of the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection shall be
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters'
rights as to shares held on his behalf only if:
(a) He submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200. Notice of dissenters' rights. (1) If proposed
corporate action creating dissenters' rights under KRS 271B.13-020 is submitted
to a vote at a shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters' rights under this
subtitle and the corporation shall undertake to provide a copy of this subtitle
to any shareholder entitled to vote at the shareholders' meeting upon request of
that shareholder.
(2) If corporate action creating dissenters' rights under KRS
271B.13-020 is taken without a vote of shareholders, the corporation shall
notify in writing all shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in KRS
271B.13-220.
271B.13-210. Notice of intent to demand payment. (1) If
proposed corporate action creating dissenters' rights under KRS 271B.13-020 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights:
(a) Shall deliver to the corporation before the vote is
taken written notice of his intent to demand payment for his shares if the
proposed action is effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of
subsection (1) of this section shall not be entitled to payment for his shares
under this chapter.
271B.13-220. Dissenters notice. (1) If proposed corporate
action creating dissenters' rights under KRS 271B.13-020 is authorized at a
shareholders' meeting, the corporation shall deliver a written dissenters'
notice to all shareholders who satisfied the requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten
(10) days after the date the proposed corporate action was authorized by the
shareholders, or, if no shareholder authorization was obtained, by the board of
directors, and shall:
(a) State where the payment demand must be sent and where
and when certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the payment demand is
received;
(c) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before that date;
(d) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty (30), nor more than
sixty (60) days after the date the notice provided in subsection (1) of this
section is delivered; and
(e) Be accompanied by a copy of this subtitle.
271B.13-230. Duty to demand payment. (1) A shareholder who is
sent a dissenters' notice described in KRS 271B.13-220 shall demand payment,
certify whether he acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to subsection (2)
(c) of KRS 271B.13-220, and deposit his certificates in accordance with the
terms of the notice.
(2) The shareholder who demands payment and deposits his share
certificates under subsection (1) of this section shall retain all other rights
of a shareholder until these rights are canceled or modified by the taking of
the proposed corporate action.
(3) A shareholder who does not demand payment or deposit his
share certificates where required, each by the date set in the dissenters'
notice, shall not be entitled to payment for his shares under this subtitle.
271B.13-240. Share restrictions. (1) The corporation may
restrict the transfer of uncertificated shares from the date the demand for
their payment is received until the proposed corporate action is taken or the
restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' right are asserted as to
uncertificated shares shall retain all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
271B.13-250. Payment. (1) Except as provided in
KFLS 271B.13-270, as soon as the proposed corporate action is taken, or upon
receipt of a payment demand, the corporation shall pay each dissenter who
complied with KRS 271B.13-230 the amount the corporation estimates to be the
fair value of his shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal
year ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
and
(d) A statement of the dissenter's right to demand
payment under KRS 271B.13-280.
271B.13-260. Failure to take action. (1) If the corporation
does not take the proposed action within sixty (60) days after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares.
(2) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed action, it shall send
a new dissenters' notice under KRS 27113.13-220 and repeat the payment demand
procedure.
271B.13-270. After-acquired shares. (1) A corporation may
elect to withhold payment required by KRS 271B.13-250 from a dissenter unless he
was the beneficial owner of the shares before the date set forth in the
dissenters' notice as the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment
under subsection (1) of this section, after taking the proposed corporate
action, it shall estimate the fair value of the shares, plus accrued interest,
and shall pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer a
statement of its estimate of the fair value of the shares, an explanation of how
the interest was calculated, and a statement of the dissenter's right to demand
payment under KRS 271B.13-280.
271B.13-280. Procedure if shareholder dissatisfied with
payment or offer. (1) A dissenter may notify the corporation in writing of his
own estimate of the fair value of his shares and amount of interest due, and
demand payment of his estimate (less any payment under KRS 271B.13-250), or
reject the corporation's offer under KRS 271B.13-270 and demand payment of the
fair value of his shares and interest due, if:
(a) The dissenter believes that the amount paid under KRS
271B.13-250 or offered under KRS 271B.13-270 is less than the fair value of his
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under KRS
271B.13-250 within sixty (60) days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty (60) days after the
date set for demanding payment.
(2) A dissenter waives his right to demand payment under this
section unless he shall notify the corporation of his demand in writing under
subsection (1) of this section within thirty (30) days after the corporation
made or offered payment for his shares.
JUDICIAL APPRAISAL OF SHARES
271B.13-300 Court action. (1) If a demand for payment under
KRS 271B.13-280 remains unsettled, the corporation shall commence a proceeding
within sixty (60) days after receiving the payment demand and petition the court
to determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty (60) day period,
it shall pay each dissenter whose demand remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the
circuit court of the county where a corporation's principal office (or, if none
in this state, its registered office) is located. If the corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(3) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties shall be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is
commenced under subsection (2) of this section shall be plenary and exclusive.
The court may appoint one (1) or more persons as appraisers to receive evidence
and recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters shall be entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding shall
be entitled to judgment:
(a) For the amount, if any, by which the court finds the
fair value of his shares, plus interest, exceeds the amount paid by the
corporation; or
(b) For the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to withhold payment
under KRS 271B.13-270.
271B.13-310. Court costs and counsel fees. (1) The court in an
appraisal proceeding commenced under KRS 271B.13-300 shall determine all costs
of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel
and experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all
dissenters, if the court finds the corporation did not substantially comply
with the requirements of KRS 271B.13-200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be paid out
of the amounts awarded the dissenters who were benefitted.
APPENDIX D
FIRST SECURITY BANK OF LEXINGTON, INC.
FIRST SECURITY BANK OF LEXINGTON, INC..
STOCK AWARD PLAN
1. Purpose. The purpose of the First Security Bank of Lexington, Inc.
Stock Award Plan (the "Plan") is to secure for First Security Bank of Lexington,
Inc. and its successors and assigns (the "Bank") and its stockholders the
benefits of the additional incentive, inherent in the ownership of the Bank's
common stock, no par value per share (the "Common Stock"), by selected employees
and directors of the Bank and its subsidiaries who are important to the success
and growth of the business of the Bank and its subsidiaries and to help the Bank
and its subsidiaries secure and retain the services of such persons.
Compensation awarded under the Plan is intended to qualify for tax deductibility
pursuant to the requirements of Section 162(m) of the Internal Revenue Code of
1986, as amended from time to time or any successor statute or statutes (the
"Code"), to the extent deemed appropriate by the Committee (as defined in
Paragraph 2. 1 hereof).
Pursuant to the Plan, such employees and directors will be offered the
opportunity to acquire Common Stock through the grant of options, stock
appreciation rights in tandem with such options and awards of restricted stock.
Any options, rights or awards granted hereunder are a matter of separate
inducement and are not in lieu of any salary or other compensation for the
services of any director or employee. Options granted under the Plan will be
either "incentive stock options," intended to qualify as such under the
provisions of Section 422 of the Code, or "nonqualified" stock options. " For
purposes of the Plan, the terms "parent" and "subsidiary" shall mean "parent
corporation" and "subsidiary corporation," respectively, as such terms are
defined in Sections 424(e) and (f) of the Code.
2. Committee.
2.1 Administration. The Plan shall be administered by the Board of
Directors of the Bank or by a committee appointed by the Board of Directors from
among its members (the "Committee"). Any such committee shall be comprised,
unless otherwise determined by the Board of Directors, solely of not less than
two members who shall be (i) "Non-Employee Directors" within the meaning of Rule
16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (ii) "outside directors" within
the meaning of Treasury Regulations Section 1.162-27(e)(3) under Section 162(m)
of the Code. Any vacancy on the Committee, whether due to action of the Board of
Directors or due to any other cause, may be filled, and shall be filled if
required to maintain a Committee of at least two disinterested persons, by
resolution adopted by the Board of Directors. For purposes of the Plan, a person
shall be deemed to be a "disinterested person" if, at the time of reference,
such person is not, and has not been at any time during the preceding one-year
period, eligible to participate in the Plan or any other plan of the Bank or any
of its affiliates entitling participants therein to acquire stock, stock options
or stock appreciation rights of the Bank or any of its affiliates.
Notwithstanding any of the foregoing, the Board of Directors may designate one
or more persons, who at the time of such designation are not disinterested
persons, to serve on the Committee effective upon the date such person or
persons qualify as disinterested persons.
2.2 Procedures. The Committee shall adopt such rules and regulations as
it shall deem appropriate concerning the administration of the Plan. A majority
of the whole Committee shall constitute a quorum, and the acts of a majority of
the members of the Committee present at a meeting at which a quorum is present,
or acts approved in writing by all of the members of the Committee, shall be the
acts of the Committee.
2.3 Interpretation. The Committee shall have full power and authority
to interpret the provisions of the Plan and any agreement evidencing options or
restricted stock awards granted under the Plan, and to determine any and all
questions arising under the Plan, and its decisions shall be final and binding
on all participants in the Plan.
2.4 Liability. No member of the Committee and no employee of the Bank
shall be liable for any act or failure to act hereunder, except in circumstances
involving his or her bad faith, gross negligence or willful misconduct, or for
any act or failure to act hereunder by any other member or employee or by any
agent to whom duties in connection with the administration of this Plan have
been delegated. The Bank shall indemnify members of the Committee and any agent
of the Committee who is an employee of the Bank, a subsidiary or an affiliate
against any and all liabilities or expenses to which they may be subjected by
reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such person's bad faith, gross
negligence or willful misconduct.
The Committee may delegate to one or more of its members, or to one or more
agents, such administrative duties as it may deem advisable, and the Committee,
or any person to whom it has delegated duties as aforesaid, may employ one or
more persons to render advice with respect to any responsibility the Committee
or such person may have under the Plan. The Committee may employ such legal or
other counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation received
from any such counsel, consultant or agent. Expenses incurred by the Committee
in the engagement of such counsel, consultant or agent shall be paid by the
Bank, or the subsidiary or affiliate whose employees have benefitted from the
Plan, as determined by the Committee.
3. Shares Subject to Grants.
3.1 Number of Shares. Subject to the provisions of Paragraph 19 hereof
(relating to adjustments upon changes in capitalization), the number of shares
of Common Stock subject at any one time to options or awards of restricted stock
or deferred stock units granted under the Plan, plus the number of shares of
Common Stock theretofore issued or delivered pursuant to the exercise of options
granted, and awards of restricted stock and deferred stock units made, under the
Plan, shall not exceed 50,000 shares; provided, that no more than one-third of
such shares may be awarded as restricted stock awards. If and to the extent that
options granted under the Plan terminate, expire or are canceled without having
been exercised, or restricted stock or deferred stock units are forfeited, new
options, restricted stock or deferred stock units may be granted under the Plan
with respect to the shares of Common Stock covered by such terminated, expired
or canceled options or forfeited shares of restricted stock or deferred stock
units; provided, that the granting and terms of such new options, restricted
stock awards and deferred stock units shall in all respects comply with the
provisions of the Plan.
3.2 Character of Shares. Shares of Common Stock delivered under the
Plan may be authorized and unissued Common Stock, issued Common Stock held in
the Bank's treasury, or both.
3.3 Reservation of Shares. There shall be reserved at all times for
sale or award under the Plan a number of shares of Common Stock (authorized and
unissued Common Stock, issued Common Stock held in the Bank's treasury, or both)
equal to the maximum number of shares set forth in Paragraph 3. 1 hereof.
4. Eligibility. Options and awards of restricted stock may be granted
under the Plan to any employee or director of the Bank or any of its
subsidiaries, or to any prospective employee or director of the Bank or any of
its subsidiaries, conditioned upon, and effective not earlier than, such
person's becoming an employee or director. Notwithstanding the foregoing:
(a) Only non-qualified stock options may be granted to non-
employee directors of the Bank;
(b) No incentive stock options may be granted under the Plan to any
person who owns, directly or indirectly (within the meaning of Sections
422(b)(6) and 424(d) of the Code), at the time the incentive stock option is
granted, stock possessing more than 10% of the total combined voting power of
all classes of stock of the employee's employer corporation or of its parent, if
any, or any of its subsidiaries, unless the option price is at least 110% of the
fair market value of the shares subject to the option, determined on the date of
the grant, and the option by its terms is not exercisable after the expiration
of five years from the date such option is granted.
(c) In each calendar year during any part of which the Plan is in
effect, no Participant (as defined below) may be granted options relating in the
aggregate to more than 10,000 shares of Common Stock, subject to adjustment as
provided in Paragraph 19 hereof.
An individual receiving any option, restricted stock award or deferred
stock units under the Plan is hereinafter referred to as a "Participant." Any
reference herein to the employment of a Participant by the Bank shall include
(i) his or her employment by the Bank or any of its subsidiaries, and (ii) with
respect to a Participant who was not an employee of the Bank or any of its
subsidiaries at the time of grant of his or her option or award, his or her
period of service in the capacity for which the option or award was granted. For
all purposes of this Plan, is granted, in the case of the grant of an option to
a key employee, shall be deemed to be the effective date of such grant. The time
at which an option or award is granted, in the case of the grant of an option to
a key employee, shall be deemed to be the effective date of such grant.
The Plan does not create a right in any person to participate in the Plan,
nor does it create a right in any person to have any options or rights granted
to him or her.
5. Grant of Options. The Committee shall determine, within the limitations of
the Plan, the persons to whom options are to be granted, the number of shares
that may be purchased under each option, the option price, and shall designate
options at the time of grant as either "incentive stock options" or
"nonqualified stock options"; provided, that the aggregate fair market value
(determined as of the time the option is granted) of the Common Stock with
respect to which incentive stock options become exercisable for the first time
by any Participant (as defined in Paragraph 4 hereof) in any calendar year
(under all stock option plans of the employee's employer corporation and its
parent, if any, and its subsidiaries) shall not exceed $100,000 (the provisions
of Section 422(d) of the Code are intended to govern). In determining the
persons to whom options shall be granted and the number of shares to be covered
by each option, the Committee shall take into consideration the person's present
and potential contribution to the success of the Bank and its subsidiaries and
such other factors as the Committee may deem proper and relevant. Each option
granted under the Plan shall be evidenced by a written agreement between the
Bank and the Participant containing such terms and conditions and in such form,
not inconsistent with the provisions of the Plan or, with respect to incentive
stock options, Section 422 of the Code, as the Committee shall provide.
6. Option Price. Subject to Paragraph 19 hereof, the option price of each share
of Common Stock purchasable under any incentive stock option granted under the
Plan shall be not less than the fair market value of such share of Common Stock
at the time the option is granted, and the option price of each share of Common
Stock purchasable under any non-qualified stock option granted under the Plan
shall not be less than 50% of the fair market value of such share of Common
Stock at the time the option is granted. The option price of an option issued in
a transaction described in Section 424(a) of the Code shall be an amount which
conforms to the requirements of that Section and the regulations thereunder.
For purposes of this Plan, the "fair market value" of the Common Stock on
any date means (i) if the Common Stock is listed on a national securities
exchange or quotation system, the closing sales price on such exchange or
quotation system on such date or, in the absence of reported sales on such date,
the closing sales price on the immediately preceding date on which sales were
reported, (ii) if the Common Stock is not listed on a national securities
exchange or quotation system, the mean between the bid and offered prices as
quoted by the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ") for such date or (iii) if the Common Stock is
neither listed on a national securities exchange or quotation system nor quoted
by NASDAQ, the fair value as determined by such other method as the Committee
determines in good faith to be reasonable.
7. Stock Appreciation Rights. In the discretion of the Committee, a stock
appreciation right may be granted (a) alone, (b) simultaneously with the grant
of an option (either incentive or non-qualified) and in conjunction therewith or
in the alternative thereto or (c) subsequent to the grant of a non-qualified
option and in conjunction therewith or in the alternative thereto.
The exercise price of a right granted alone shall be determined by the
Committee but shall not be less than one hundred percent (100%) of the fair
market value of one share on the date of grant of such right. A right granted
simultaneously with or subsequent to the grant of an option and in conjunction
therewith or in the alternative thereto shall have the same exercise prices as
the related option, shall be transferable only upon the same terms and
conditions as the related option, and shall be exercisable only to the same
extent as the related option; provided, however, that a right, by its terms,
shall be exercisable only when the fair market value of the shares subject to
the right and related option exceeds the exercise price thereof.
Upon exercise of a right granted simultaneously with or subsequent to an
option and in the alternative thereto, the number of shares for which the
related option shall be exercisable shall be reduced by the number of shares for
which the right shall have been exercised. The number of shares for which a
right shall be exercisable shall be reduced upon any exercise of a related
option by the number of shares for which such option shall have been exercised.
Any right shall be exercisable upon such addition terms and conditions as
may from time to time be prescribed by the Committee.
A right shall entitle the holder upon exercise thereof to receive from the
Bank, upon a written request filed with the Secretary of the Bank at its
principal offices, a number of shares (with or without restrictions as to
substantial risk of forfeiture and transferability, as determined by the
Committee in its sole discretion), an amount of cash, or any combination of
shares and cash, as specified in the request (but subject to the approval of the
Committee, in its sole discretion, at any time up to and including the time of
payment, as to the making of any cash payment), having an aggregate fair market
value equal to the product of (a) the excess of the fair market value, on the
day of such request, of one share over the exercise price per share specified in
such right or its related option, multiplied by (b) the number of shares for
which such right shall be exercised; provided, however, that a right, by its
terms, shall be exercisable only when the fair market value of the shares
subject to the right and related option exceeds the exercise price thereof.
Upon exercise of a right granted simultaneously with or subsequent to an
option and in the alternative thereto, the number of shares for which the
related option shall be exercisable shall be reduced by the number of shares for
which the right shall have been exercised. The number of shares for which a
right shall be exercisable shall be reduced upon any exercise of a related
option by the number of shares for which such option shall have been exercised.
Any right shall be exercisable upon such addition terms and conditions as
may from time to time be prescribed by the Committee.
A right shall entitle the holder upon exercise thereof to receive from the
Bank, upon a written request filed with the Secretary of the Bank at its
principal offices, a number of shares (with or without restrictions as to
substantial risk of forfeiture and transferability, as determined by the
Committee in its sole discretion), an amount of cash, or any combination of
shares and cash, as specified in the request (but subject to the approval of the
Committee, in its sole discretion, at any time up to and including the time of
payment, as to the making of any cash payment), having an aggregate fair market
value equal to the product of (a) the excess of the fair market value, on the
day of such request, of one share over the exercise price per share specified in
such right or its related option, multiplied by (b) the number of shares for
which such right shall be exercised; provided, however, that the Committee, in
its discretion, may impose a maximum limitation on the amount of cash, the fair
market value of shares, or a combination thereof, which may be received by a
holder upon exercise of a right.
Any election by a holder of a right to receive cash in full or partial
settlement of such right, and any exercise of such right for cash, may be made
only by a request filed with the Corporate Secretary of the Bank during the
period beginning on the third business day following the date of the release for
publication by the Bank of quarterly or annual summary statements of earnings
and ending on the twelfth business day following such date. Within thirty (30)
days after the receipt by the Bank of a request to receive cash in full or
partial settlement of a right or to exercise such right for cash, the Bank
shall, in its sole discretion, either consent to or disapprove, in whole or in
part, such request.
If the Committee disapproves in whole or in part any election by a holder
to receive cash in full or partial settlement of a right or to exercise such
right for cash, such disapproval shall not affect such holder's right to
exercise such right at a later date, to the extent that such right shall be
otherwise exercisable, or to elect the form of payment at a later date, provided
that an election to receive cash upon such later exercise shall be subject to
the approval of the Committee. Additionally, such disapproval shall not affect
such holder's right to exercise any related option or options granted to such
holder under the Plan.
A holder of a right shall not be entitled to request or receive cash in
full or partial payment of such right during the first six (6) months of its
term; provided, however, that such prohibition shall not apply if the holder of
such right is not subject to the reporting requirements of Section 16(a) of the
Exchange Act.
For all purposes of this Paragraph 7, the fair market value of shares shall
be determined in accordance with the principles set forth in Paragraph 6 hereof.
8. Exercisability and Duration of Options.
8.1 Determination of Committee; Acceleration. Each option granted under
the Plan shall be exercisable at such time or times, or upon the occurrence of
such event or events, and in such amounts, as the Committee shall specify in the
agreement evidencing the option. Subsequent to the grant of an option which is
not immediately exercisable in full, the Committee, at any time before complete
termination of such option, may accelerate the time or times at which such
option may be exercised in whole or in part.
8.2 Automatic Termination. The unexercised portion of any option
granted under the Plan shall automatically and without notice terminate and
become null and void at the time of the earliest to occur of the following:
(a) The expiration of ten years from the date on which
such option was granted;
(b) The expiration of three months from the date of
termination of the Participant's employment by the Bank or service as a
director with the Bank unless a longer period is provided by the Committee
(other than a termination described in subparagraph (c) or (d) below);
provided, that if the Participant shall die during such three-month period,
the time of termination of the unexercised portion of any such option shall
be determined under the provisions of subparagraph (c) below;
(c) The expiration of six months following the issuance of
letters testamentary or letters of administration to the executor or
administrator of a deceased Participant, if the Participant's death occurs
either during his employment by the Bank or during the three-month period
following the date of termination of such employment (other than a
termination described in subparagraph (d) below), but in no event later
than one year after the Participant's death;
(d) The termination of the Participant's employment by the
Bank if such termination constitutes or is attributable to a breach by the
Participant of an employment or consulting agreement with the Bank or any
of its subsidiaries, or if the Participant is discharged or his or her
services are terminated for cause or if the Participants voluntarily
terminates his or her employment; or
(e) The expiration of such period of time or the occurrence of
such event as the Committee in its discretion may provide upon the granting
thereof.
The Committee or the Board of Directors shall have the right to
determine what constitutes cause for discharge or termination of services,
whether the Participant has been discharged or his or her services
terminated for cause and the date of such discharge or termination of
services, and such determination of the Committee or the Board of Directors
shall be final and conclusive.
9. Exercise of Options. Options granted under the Plan shall be exercised by
the Participant (or by his or her executors or administrators, as provided
in Paragraph 10 hereof) as to all or part of the shares covered thereby, by
the giving of written notice of exercise to the Bank, specifying the number
of shares to be purchased accompanied by payment of the full purchase price
for the shares being purchased. Payment of such purchase price shall be
made (a) by check payable to the Bank, (b) with the consent of the
Committee, by delivery of shares of Common Stock already owned by the
Participant for at least six months (which may include shares received as
the result of a prior exercise of an option) having a fair market value
(determined as of the date such option is exercised) equal to all or part
of the aggregate purchase price, (c) with the consent of the Committee and
at the election of the Participant, by withholding from those shares that
would otherwise be obtained upon exercise of the option a number of shares
having a fair market value equal to the option exercise price, (d) in
accordance with a "cashless exercise" program established by the Committee
in its sole discretion under which if so instructed by the Participant,
shares may be issued directly to the Participant's broker or dealer upon
receipt of the purchase price in cash from the broker or dealer or (e) by
any combination of (a), (b), (c) or (d) above or (f) by other means that
the Committee deems appropriate. Such notice of exercise, accompanied by
such payment, shall be delivered to the Bank at its principal business
office or such other office as the Committee may from time to time direct,
and shall be in such form, containing such further provisions consistent
with the provisions of the Plan, as the Committee may from time to time
prescribe. The date of exercise shall be the date of the Bank's receipt of
such notice. The Bank shall effect the transfer of the shares so purchased
to the Participant (or such other person exercising the option pursuant to
Paragraph 10 hereof) as soon as practicable. No Participant or other person
exercising an option shall have any of the rights of a stockholder of the
Bank with respect to shares subject to an option granted under the Plan
until due exercise and full payment has been made as provided above. No
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment. In
no event may any option granted hereunder be exercised for a fraction of a
share.
10. Non-Transferability of Options and Stock Appreciation Rights. Except as
provided herein, no option granted under the Plan or any right evidenced
thereby shall be transferable by the Participant other than by will or by
the laws of descent and distribution, and an option may be exercised,
during the lifetime of a Participant, only by such Participant.
Notwithstanding the preceding sentence: (a) in the event of a Participant's
death during his or her employment by the Bank or his or her service as a
director of the Bank, its parent, if any, or any of its subsidiaries, or
during the three-month period following the date of termination of such
employment, his or her options shall thereafter be exercisable, during the
period specified in Paragraph 8.2(c) hereof, by his or her executors or
administrators; and (b) the Participant, with the approval of the
Committee, may transfer his or her options (other than incentive stock
options) for no consideration to or for the benefit of the Participant's
spouse, parents, children (including stepchildren or adoptive children),
grandchildren, or siblings, or to a trust for the benefit of any of such
persons.
11. Restricted Stock. Participants may be granted awards of restricted
stock under the Plan, subject to the applicable provisions of the Plan,
including the following terms and conditions, and to such other terms and
conditions not inconsistent therewith, as the Committee shall determine:
(a) Awards of restricted stock may be in addition to or
in lieu of option grants.
(b) During a period set by, and/or until the attainment of
particular performance goals based upon criteria established by the
Committee at the time of each award of restricted stock (the "restriction
period"), the Participant shall not be permitted to sell, transfer, pledge
or otherwise encumber the shares of restricted stock; except that such
shares may be used, if the Committee permits, to pay the option price of
any option granted under the Plan; provided, that an equal number of shares
delivered to the Participant upon exercise of the option shall carry the
same restrictions as the shares of restricted stock so used.
(c) If so provided by the Committee, the applicable
restriction period shall expire, and shares of restricted stock shall
become free of all restrictions if (i) the Participant dies, (ii) the
Participant's employment terminates by reason of permanent disability, as
determined by the Committee, (iii) the recipient retires, or (iv) a "Change
in Control" of the Bank occurs (as defined in Paragraph 16 hereof). The
Committee may require medical evidence of permanent disability, including
medical examinations by physicians selected by it. If the Committee
determines that any such recipient is not permanently disabled, the
restricted stock held by such recipient shall be forfeited and revert to
the Bank.
(d) Unless and to the extent otherwise provided in accordance
with Paragraph 11(c) hereof, shares of restricted stock shall be forfeited
and revert to the Bank upon the Participant's termination of employment
during the restriction period, except to the extent the Committee, in its
sole discretion, finds that such forfeiture is not in the best interests of
the Bank and, therefore, waives all or part of the application of this
provision to the restricted stock held by such Participant.
(e) Stock certificates for restricted stock shall be
registered in the name of the Participant but shall be appropriately
legended and returned to the Bank by the Participant, together with a stock
power, endorsed in blank by the Participant. The Participant shall be
entitled to vote shares of restricted stock and shall be entitled to all
dividends paid thereon, except that dividends paid in Common Stock or other
property shall be subject to the same restrictions as apply to the
restricted stock with respect to which they are paid.
(f) Restricted stock shall become free of the foregoing
restrictions upon expiration of the applicable restriction period and the
Bank shall then deliver certificates evidencing such Common Stock to the
recipient.
12. Deferred Stock Units. Participants may be granted units representing the
right to receive shares of Common Stock at the end of a specified deferral
period ("deferred stock units"), subject to applicable provisions of the
Plan, including the following terms and conditions, and to such other terms
and conditions not inconsistent therewith, as the Committee shall
determine:
(a) Deferred stock units shall be exercisable for shares of Common
Stock after the period and upon the terms set by the Committee. If so provided
by the Committee, the applicable deferral period shall expire when (i) the
Participant dies, (ii) the Participant's employment terminates by reason of
permanent disability, as determined by the Committee, (iii) the recipient
retires, or (iv) a "Change in Control" of the Bank occurs (as defined in
Paragraph 16 hereof). The Committee may require medical evidence of permanent
disability, including medical examinations by physicians selected by it. If the
Committee determines that any such recipient is not permanently disabled, the
deferred stock units held by such recipient shall be forfeited and revert to the
Bank.
(b) Unless and to the extent otherwise provided in accordance with
Paragraph 12(a), deferred stock units shall be forfeited and revert to the Bank
upon the Participant's termination of employment during the deferral period,
except to the extent the Committee, in its sole discretion, finds that such
forfeiture is not in the best interest of the Bank and, therefore, waives all or
part of the application of this provision to the deferred stock units held by
such Participant.
(c) Unless otherwise determined by the Committee at the date of grant,
dividends on the specified number of shares of Common Stock covered by the
deferred stock units will be paid at the dividend payment date in cash, or the
payment of such dividends shall be deferred and/or the amount or value thereof
automatically reinvested in additional deferred stock units, as the Committee
shall determine or permit the Participant to elect. Unless otherwise determined
by the Committee, shares of Common Stock distributed in connection with a stock
split or stock dividend, and other property distributed as a dividend, shall be
subject to restrictions, risk of forfeiture, and/or deferral to the same extent
as the deferred stock units with respect to which such Common Stock or other
property has been distributed.
13. Reload Options. At the time an option (the "original option") is
granted, the Committee may also authorize the grant of a "reload option," which
shall be subject to the following terms:
(a) The number of shares of Common Stock subject to the reload option
shall be the number of shares, if any, used by the Participant to pay the
purchase price upon exercise of the original option, plus the number of shares,
if any, delivered by the Participant to satisfy the tax withholding requirement
relating to such exercise.
(b) The reload option shall be a nonqualified stock option.
(c) The grant of the reload option shall be effective upon the date of
exercise of the original option, and the term of the reload option shall be the
period, if any, remaining from that date to the date upon which the original
option would have expired.
(d) The grant of the reload option shall not be effective if, on the
date of exercise of the original option, the Participant is not employed by the
Bank.
(e) Except as specified in (a) through (d) above, the terms of the
reload option shall be as prescribed in the preceding Paragraphs of this Plan
14. Withholding Tax.
(a) Whenever under the Plan shares of stock are to be delivered upon
exercise of a nonqualified stock option or deferred stock unit, the Bank shall
be entitled to require as a condition of delivery that the Participant remit or,
in appropriate cases, agree to remit when due an amount sufficient to satisfy
all federal, state and local withholding tax requirements relating thereto. At
the option of the Bank, such amount may be remitted by check payable to the
Bank, in shares of Common Stock (which may include shares received as the result
of a prior exercise of an option or deferred stock unit), by the Bank's
withholding of shares of Common Stock issuable upon the exercise of any option
or stock appreciation right or pursuant to any award of restricted stock or
deferred stock unit pursuant to the Plan, or any combination thereof. Whenever
an amount shall become payable to a Participant in connection with the exercise
of a stock appreciation right, the Bank shall be entitled to withhold therefrom
an amount sufficient to satisfy all federal, state and local withholding tax
requirements relating to such amount.
(b) Recipients of restricted stock, pursuant to Paragraph 11 hereof,
shall be required to remit to the Bank an amount sufficient to satisfy all
applicable tax withholding requirements upon expiration of restriction periods
or upon such earlier date(s) as may be elected pursuant to Section 83 of the
Code, unless other arrangements satisfactory to the Bank have been made for the
withholding of applicable taxes. At the option of the Bank, the amount-referred
to in the preceding sentence may be remitted by check payable to the Bank, in
shares of Common Stock (which may include shares of Common Stock received as the
result of a prior exercise of an option), by the Bank's withholding of shares of
Common Stock issuable upon the exercise of any option or stock appreciation
right or pursuant to any award of restricted stock or deferred stock unit
pursuant to the Plan, or any combination thereof.
15. Restrictions on Delivery and Sale of Shares. Each option and restricted
stock award and deferred stock unit granted under the Plan is subject to the
condition that if at any time the Committee, in its discretion, shall determine
that the listing, registration or qualification of the shares covered by such
option or award upon any securities exchange or under any state or federal law
is necessary or desirable as a condition of or in connection with the granting
of such option or award or the purchase or delivery of shares thereunder, the
delivery of any or all shares pursuant to exercise of the option or upon
expiration of the restriction or deferral period may be withheld unless and
until such listing, registration or qualification shall have been effected. The
Committee may require, as a condition of exercise of any option, or grant of a
restricted stock award or deferred stock unit that the Participant represent, in
writing, that the shares received are being acquired for investment and not with
a view to distribution and agree that the shares will not be disposed of except
pursuant to an effective registration statement, unless the Bank shall have
received an opinion of counsel satisfactory to the Bank that such disposition is
exempt from such requirement under the Securities Act of 1933. The Committee may
require that the sale or other disposition of any shares acquired upon exercise
of an option hereunder or upon expiration of a restriction or deferral period
shall be subject to a right of first refusal in favor of the Bank, which right
shall permit the Bank to repurchase such shares from the Participant or his or
her representative prior to their sale or other disposition at their then
current fair market value in accordance with such terms and conditions as shall
be specified in the agreement evidencing the grant of the option, restricted
stock award or deferred stock unit. The Bank may endorse on certificates
representing shares issued upon the exercise of an option or expiration of a
restriction or deferral period, such legends referring to the foregoing
representations or restrictions or any other applicable restrictions on resale
as the Bank, in its discretion, shall deem appropriate.
16. Change in Control.
(a) In the event of a Change in Control of the Bank, as defined below,
the Committee may, in its sole discretion, provide that any of the following
applicable actions be taken as a result, or in anticipation, of any such event
to assure fair and equitable treatment of Participants:
(i) accelerate the Exercisability of any outstanding options,
or the expiration of restriction periods of restricted stock or the expiration
of deferral periods of deferred stock units awarded pursuant to this Plan;
(ii) offer to purchase any outstanding options or shares of
restricted stock or deferred stock units made pursuant to this Plan from the
holder for its equivalent cash value, as determined by the Committee, as of the
date of the Change in Control; or
(iii) make adjustments or modifications to outstanding
options, restricted stock or deferred stock units as the Committee deems
appropriate to maintain and protect the rights and interests of the Participants
following such Change in Control.
Any such action approved by the Committee shall
(b) In no event, however, may (i) any option be exercised prior to the
expiration of six (6) months from the date of grant (unless otherwise provided
in the agreement evidencing the option), or (ii) any option be exercised after
ten (10) years from the date it was granted.
(c) To the extent not otherwise defined in this Plan, the following
terms used in this Paragraph 16 shall have the following meanings:
"Affiliate" means any other corporation or other entity which
controls, is controlled, directly or indirectly, by, or under common control
with, the Bank and which the Committee designates as an "Affiliate" for purposes
of the Plan.
"Associate" of a Person means (a) any corporation or
organization of which such Person is an officer or partner or is, directly or
indirectly, the Beneficial Owner of 10% or more of any class of equity
securities, (b) any trust or other estate in which such Person has a substantial
beneficial interest or as to which such Person serves as trustee or in a similar
fiduciary capacity and (c) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or who is a
director or officer, of such Person or any of its parents or subsidiaries.
"Beneficial Owner" has the meaning ascribed thereto in Rule
13d-3 under the Exchange Act, except that, in any case, a Person shall be deemed
the Beneficial Owner of any securities owned, directly or indirectly by the
Affiliates and Associates of such Person.
"Change in Control" means (a) a majority of the Board of
Directors ceases to consist of Continuing Directors; (b) any Person becomes the
Beneficial Owner of 25% or more of the outstanding voting power of the Bank
unless such acquisition is approved by a majority of the Continuing Directors;
(c) the stockholders of the Bank approve an agreement to merge or consolidate
into any other entity, unless such merger or consolidation is approved by a
majority of the Continuing Directors; or (d) the stockholders of the Bank
approve an agreement to dispose of all or substantially all of the assets of the
Bank, unless such disposition is approved by a majority of the Continuing
Directors.
"Continuing Director" means any member of the Board of
Directors who is a member on the effective date of the Plan as set forth in
Paragraph 21 hereof or who is elected to the Board of Directors after such date
upon the recommendation or with the approval of a majority of the Continuing
Directors at the time of such recommendation or approval.
"Person" means an individual, a corporation, a partnership, an
association, a joint stock Bank, a trust, any unincorporated organization or a
government or a political subdivision thereof or any other entities.
17. Right to Terminate Employment. Nothing in the Plan or in any option granted
under the Plan shall confer upon any Participant the right to continue as an
employee of the Bank or affect the right of the Bank or any of its subsidiaries
to terminate the Participant's employment at any time, subject, however, to the
provisions of any agreement of employment between the Participant and the Bank,
its parent, if any, or any of its subsidiaries.
18. Transfer or Leave of Absence. For purposes of this Plan, neither (i) a
transfer of an employee from the Bank to a subsidiary or other affiliate of the
Bank, or vice versa, or from one subsidiary or affiliate of the Bank to another,
nor (ii) a duly authorized leave of absence, shall be deemed a termination of
employment.
19. Adjustment Provisions; Effect of Certain Transactions. If there shall be
any change in the Common Stock of the Bank, through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, reverse stock
split, split up, spinoff, combination of shares, exchange of shares, dividend in
kind or other like change in capital structure or distribution to shareholders
of the Bank (other than normal cash dividends), in order to prevent dilution or
enlargement of participants' rights under the Plan, the Committee (or the
counterpart committee of any entity assuming the obligations of the Plan) shall
adjust, in an equitable manner, the number and kind of shares that may be issued
under the Plan, the number and kind of shares subject to outstanding options and
rights, the consideration to be received upon exercise of options or in respect
of rights, the exercise price applicable to outstanding options and rights,
and/or the fair market value of the shares and other value determinations
applicable to outstanding options and rights. Appropriate adjustments may also
be made by the Committee (or the counterpart committee of any entity assuming
the obligations of the Plan) in the terms of any options and rights under the
Plan to reflect such changes or distributions and to modify any other terms of
outstanding options and rights on an equitable basis. In addition, the Committee
(or the counterpart committee of any entity assuming the obligations of the
Plan) is authorized to make adjustments to the terms and conditions of, and the
criteria included in, options and rights in recognition of unusual or
nonrecurring events affecting the Bank or the financial statements of the Bank,
or in response to changes in applicable laws, regulations, or accounting
principles.
20. Expiration and Termination of the Plan.
20.1 General. Options and awards of restricted stock and deferred stock
units may be granted under the Plan at any time and from time to time on or
prior to the tenth anniversary of the effective date of the Plan as set forth in
Paragraph 21 hereof (the "Expiration Date"), on which date the Plan will expire
except as to options then outstanding and stock subject to restriction or
deferral periods under the Plan. Such outstanding options shall remain in effect
until they have been exercised, terminated or have expired; such restricted
stock shall remain subject to restriction until expiration of the restriction
period in accordance with Paragraph 11 hereof and such deferred stock units
shall remain subject to deferral until expiration of the deferral period in
accordance with Paragraph 12. The Plan may be terminated, modified or amended by
the Board of Directors at any time on or prior to the Expiration Date, except
with respect to any options then outstanding under the Plan; provided, however,
that the approval of the Bank's stockholders will be required for any amendment
which (i) changes the class of employees eligible for grants, as specified in
Paragraph 4, (ii) increases the maximum number of shares subject to grants, as
specified in Paragraph 3 hereof (unless made pursuant to the provisions of
Paragraph 19 hereof) or (iii) materially increases the benefits accruing to
participants under the Plan, within the meaning of Rule 16b-3 promulgated under
the Exchange Act.
20.2 Modifications. No modification, extension, renewal or other change
in any option or award of restricted stock or deferred stock unit granted under
the Plan shall be made after grant, unless the same is consistent with the
provisions of the Plan and does not disqualify an incentive stock option under
the provisions of Section 422 of the Code.
21. Effective Date of Plan. The Plan shall become effective on March 21,
2000, the date of its adoption by the Board of Directors, subject, however, to
the approval of the Plan by the Bank's stockholders within 12 months of such
adoption.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification of corporate directors and officers is governed by Sections
271B.8-500 through 271B.8-580 of the Kentucky Revised Statutes (the "Act").
Under the Act, a person may be indemnified by a corporation against judgments,
fines, amounts paid in settlement and reasonable expenses (included attorneys'
fees) actually and necessarily incurred by him in connection with any threatened
or pending suit or proceeding or any appeal thereof (other than an action by or
in the right of the corporation), whether civil or criminal, by reason of the
fact that he is or was a director or officer of the corporation or is or was
serving at the request of the corporation as a director or officer, employee or
agent of another corporation of any type or kind, domestic or foreign, if such
director or officer acted in good faith for a purpose which he reasonably
believed to be in the best interest of the corporation and, in criminal actions
or proceedings only, in addition, had no reasonable cause to believe that his
conduct was unlawful. A Kentucky corporation may indemnify a director or officer
thereof in a suit by or in the right of the corporation against amounts paid in
settlement and reasonable expenses, including attorneys' fees, actually and
necessarily incurred as a result of such suit if such director or officer acted
in good faith for a purpose which he reasonably believed to be in the best
interests of the corporation.
Article VIII entitled INDEMNIFICATION, of the registrant's Bylaws
provides as follows:
ARTICLE VIII
Indemnification
8.1 Definitions. As used in this Article VIII:
-----------
(a) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative or investigative, and whether formal or informal;
(b) "Party" includes a person who was, is or is threatened
to be made a named defendant or respondent in a Proceeding;
(c) "Expenses" include attorneys' fees;
(d) "Officer" means any person serving as Chairman of the
Board of Directors, President, Vice-President, Treasurer,
Secretary or any other officer of the Corporation; and
(e) "Director" means an individual who is or was a director of
the Corporation or an individual who, while a director of the
Corporation, is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee or agent of
another foreign or domestic corporation, partnership, limited
liability company, registered limited liability partnership,
joint venture, association, trust, employee benefit plan or
other entity. A Director shall be considered serving an employee
benefit plan at the request of the Corporation if his duties to
the Corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or
beneficiaries of the plan. "Director" includes, unless the
context requires otherwise, the estate or personal
representative of a director.
8.2 Indemnification by Corporation.
(a) The Corporation shall indemnify any Officer or Director who
is made a Party to any Proceeding by reason of the fact that
such person is or was an Officer or Director if:
(1) Such Officer or Director conducted himself in
good faith; and
(2) Such Officer or Director reasonably believed:
(i) In the case of conduct in his official
capacity with the Corporation, that his
conduct was in the best interests of the
Corporation; and
(ii) In all other cases, that his conduct
was at least not opposed to the best interests
of the Corporation; and
(3) In the case of any criminal Proceeding, he
had no reasonable cause to believe his conduct was unlawful.
(b) A Director's conduct with respect to an employee benefit
plan for a purpose he reasonably believes to be in the
interest of the participants in and beneficiaries of the plan
shall be conduct that satisfies the requirement of Section 8.2
(a)(2)(ii) of these Bylaws.
(c) Indemnification shall be made against judgments,
penalties, fines, settlements and reasonable Expenses,
including legal Expenses, actually incurred by such Officer or
Director in connection with the Proceeding, except (1) if the
Proceeding was by or in the right of the Corporation,
indemnification shall be made only against such reasonable
Expenses and shall not be made in respect of any Proceeding in
which the Officer or Director shall have been adjudged to be
liable to the Corporation, and (2) if the Proceeding charged
improper personal benefit to the Officer or Director and the
Officer or Director was adjudged liable on the basis that
improper personal benefit was improperly received by him,
indemnification shall not be made. The termination of any
Proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not, by
itself, be determinative that the Officer or Director did not
meet the requisite standard of conduct set forth in this
Section 8.2.
(d) (1) Reasonable Expenses incurred by an
Officer or Director as a Party to a Proceeding with respect to
which indemnity is to be provided under this Section 8.2 shall
be paid or reimbursed by the Corporation in advance of the
final disposition of such Proceeding provided:
(i) The Corporation
receives (I) a written affirmation by the Officer or
Director of his good faith belief that he has met the
requisite standard of conduct set forth in this Section 8.2,
and (II) the Corporation receives a written undertaking by or
on behalf of the Officer or Director to repay such amount if
it shall ultimately be determined that he has not met such
standard of conduct; and
(ii) The Corporation's
Board of Directors (or other appropriate decision maker
for the Corporation)determines that the facts then known to
the Board of Directors (or decision maker) would not preclude
indemnification under Kentucky law.
(2) The undertaking required
herein shall be an unlimited general obligation of the
Officer or Director but shall not require any security and
shall be accepted without reference to the financial ability
of the Officer or Director to make repayment.
(3) Determinations and
authorizations of payments under this Section 8.2(d) shall be
made in the manner specified in Section 8.2(e) of these
Bylaws.
(e) (1) The Corporation shall not indemnify
an Officer or Director under this Section 8.2 unless
authorized in the specific case after a determination has been
made that indemnification of the Officer or Director is
permissible in the circumstances because he has met the
standard of conduct set forth in this Section 8.2.
(2) Such determination shall be
made:
(i) By the Corporation's
Board of Directors by majority vote of a quorum consisting of
directors not at the time Parties to the Proceeding;
(ii) If a quorum cannot be
obtained under Section 8.2(e)(2)(i) of these Bylaws, by
majority vote of a committee duly designated by the
Corporation's Board of Directors (in which designation
directors who are Parties may participate), consisting solely
of two (2) or more directors not at the time Parties to the
Proceeding; or
(iii) By special legal
counsel:
(I) Selected by
the Corporation's Board of Directors or its committee in the
manner prescribed in Sections 8.2(e)(2)(i) and (ii) of these
Bylaws; or
(II) If a quorum
of the Board of Directors cannot be obtained under Section
8.2(e)(2)(i) of these Bylaws and a committee cannot be
designated under Section 8.2(e)(2)(ii) of these Bylaws,
selected by a majority vote of the full Board of Directors
(in which selection directors who are Parties may participate)
; or
(iv) By the shareholders,
provided that shares owned by or voted under the control of
Directors who are at the time Parties to the Proceeding shall
not be voted on the determination.
(3) Authorization of
indemnification and evaluation as to reasonableness of
Expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the
determination is made by special legal counsel, authorization
of indemnification and evaluation as to reasonableness of
Expenses shall be made by those entitled under Section 8.2(e)
(2)(iii) of these Bylaws to select counsel.
Board Further Indemnification. Notwithstanding any
limitation imposed by Section 8.2 of these Bylaws or elsewhere
and in addition to the indemnification set forth in Section
8.2 of these Bylaws, the Corporation, to the full extent
permitted by law, may agree by contract or otherwise to
indemnify any Officer or Director and hold him harmless
against any judgments, penalties, fines, settlements and
reasonable Expenses actually incurred or reasonably
anticipated in connection with any Proceeding in which any
Officer or Director is a Party, provided the Officer or
Director was made a Party to such Proceeding by reason of the
fact that he is or was an Officer or Director of the
Corporation or by reason of any inaction, nondisclosure,
action or statement made, taken or omitted by or on behalf of
the Officer or Director with respect to the Corporation or by
or on behalf of the Officer or Director in his capacity as an
Officer or Director.
8.4 Insurance. The Corporation may, in the discretion
of the Board of Directors, purchase and maintain or cause to
be purchased and maintained insurance on behalf of all
Officers and Directors against any liability asserted against
them or incurred by them in their capacity or arising out of
their status as an Officer or Director, to the extent such
insurance is reasonably available. Such insurance shall
provide such coverage for the Officers and Directors as the
Board of Directors may deem appropriate.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herein:
Exhibit No. Description
2 Plan of Merger by and between First Security Bank of
Lexington, Inc., New First Security Bank of Lexington,
Inc. and First Security Bancorp, Inc. (included as
Appendix A to the within proxy statement-prospectus)
3.1 Articles of Incorporation of First Security Bancorp, Inc.
3.2 Article of Amendment to Articles of Incorporation of
First Security Bancorp, Inc.
3.3 Bylaws of First Security Bancorp, Inc.
4.1 Articles of Incorporation of First Security Bancorp,
Inc. (included in Exhibit 3.1)
4.2 Articles of Amendment to Articles on Incorporation of
First Security Bancorp, Inc. (included in Exhibit 3.2)
5 Opinion of Stoll, Keenon & Park, LLP as to the
validity of the shares of First Security Bancorp, Inc.
Common Stock being registered
8 Opinion of Stoll, Keenon & Park, LLP re tax matters
10.1 Employment Agreement between First Security Bank of
Lexington, Inc. and John S. Shropshire
10.2 Contract for Electronic Data Processing Services
between BSC,Inc.and First Security Bank of Lexington, Inc.
10.3 Outsource Contract between BSC, Inc. and First Security
Bank of Lexington, Inc.
10.4 Business/Manager(R)License Agreement between Private
Business, Inc. and First Security Bank of Lexington, Inc.
10.5 Agreement for Administration of Credit Card Program
between Crittson Financial LLC and First Security
Bank of Lexington, Inc.
10.6 Lease 400 East Main Street between Isaac and Teresa C.
Lawrence and First Security Bank of Lexington, Inc.
10.7 Lease between THOMCO, Inc. and First Security Bank of
Lexington, Inc.
10.8 Ground Lease between Cherrywood Development, LLC and
First Security Bank of Lexington, Inc.
10.9 First Security Bank of Lexington, Inc. Stock Award
Plan (included as Appendix D to the within proxy
statement-prospectus)
11 Statement re Computation of Per Share Earnings
(included in Note 9 to the First Security Bank of
Lexington, Inc. Financial Statements included as Appendix
B to the within proxy statement-prospectus)
21 Subsidiaries of First Security Bancorp, Inc.
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Stoll, Keenon & Park, LLP (included in
Exhibit 5)
24 Power of attorney from officers and directors of First
Security Bancorp, Inc. (contained on the signature
page at page II-8 hereof)
27.1 Financial Data Schedule for the year ended December 31,
1999
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus
which is a part of this registration statement, by
any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus
will contain the information called for by the
applicable registration form with respect to
reofferings by persons who may be deemed
underwriters, in addition to the information called
for by the other items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3)
of the Act and is used in connection with an offering
of securities subject to Rule 415, will be filed as a
part of an amendment to the registration statement
and will not be used until such amendment is
effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Lexington, Commonwealth
of Kentucky, on March 21, 2000.
FIRST SECURITY BANCORP, INC.
By:/s/Julian E.Beard
Julian E. Beard
President
We, the undersigned directors and officers of First Security Bancorp,
Inc. do hereby constitute and appoint Julian E. Beard and James R. Burkholder,
and each of them, our true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for us and in our name, place and
stead, in any and all capacities, to sign any and all amendments to this
registration statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, and we do hereby ratify and confirm all that said attorneys-in-fact
and agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/Julian E. Beard President; Chairman of the Board of 3-15-00
Julian E. Beard Directors (Principal Executive
Officer)
/s/James R. Burkholder Vice-President; Director (Principal 3-15-00
James R. Burkholder Financial and Accounting Officer)
/s/R. Greg Kessinger Secretary/Treasurer; Director 3-15-00
R. Greg Kessinger
/s/Len Aldridge Director
Len Aldridge
/s/Dennis Anderson Director 3-21-00
Dennis Anderson
/s/John D. Barlow Director 3-21-00
John D. Barlow
/s/Harold Glenn Campbell
Harold Glenn Campbell Director 3-20-00
/s/ William A. Combs, Jr.
William A. Combs, Jr. Director 3-14-00
/s/ A. F. Dawahare
A. F. Dawahare Director 3-14-00
/s/Dr. Kenneth L. Gerson
Dr. Kenneth L. Gerson Director
/s/Tommy R. Hall
Tommy R. Hall Director 3-21-00
/s/ Erle L. Levy
Erle L. Levy Director 3-14-00
/s/David R. McCulloch
David R. McCulloch Director 3-16-00
/s/ Dr. Ira P. Mersack
Dr. Ira P. Mersack Director 3-21-00
/s/ Fon Rogers, II
Fon Rogers, II Director 3-14-00
/s/Robert J. Rosenstein
Robert J. Rosenstein Director
/s/Dr. Ronald J. Saykaly
Dr. Ronald J. Saykaly Director 3-14-00
/s/John S. Shropshire
John S. Shropshire Director 3-14-00
/s/Richard S. Trontz
Richard S. Trontz Director 3-21-00
/s/William T. Vennes
William T. Vennes Director 3-20-00
/s/Kathy E. Walker
Kathy E. Walker Director 3-21-00
/s/D. Woodford Webb, Jr.
D. Woodford Webb, Jr. Director 3-14-00