1
REGISTRATION NO. 333-61227
FILED PURSUANT TO RULE 424(b)(3)
August 24, 1998
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting and
Prospectus/Proxy Statement for the Special Meeting of Shareholders of Peoples
Bank ("Peoples") to be held on September 24, 1998 at 7:00 pm, local time, at the
main office of Peoples, 601 Highway 46, South, Dickson, Tennessee 37056 (the
"Special Meeting").
At the Special Meeting you will be asked to consider and vote on a
proposed merger of First American Interim Bank ("Interim Bank"), a Tennessee
state-chartered bank and wholly-owned subsidiary of First American Corporation
("First American"), a Tennessee corporation, with and into Peoples, a Tennessee
banking corporation. By virtue of that proposed merger, each share of Peoples
common stock, par value $2.00 per share ("Peoples Common Stock"), outstanding
immediately prior to the time that the proposed merger of Interim Bank and
Peoples is completed, except as provided in the Agreement and Plan of Merger,
dated as of April 21, 1998, by and between Peoples and First American (the
"Agreement"), will be exchanged for 3.70 shares of common stock of First
American, par value $2.50 per share ("First American Common Stock") (the
proposed merger and share exchange, collectively, are the "Merger"). First
American is headquartered in Nashville, Tennessee. As of June 30, 1998, First
American had banking operations in Tennessee, Mississippi, Louisiana, Arkansas,
Virginia and Kentucky, and had consolidated assets of about $19.1 billion,
deposits of about $13.6 billion and shareholders' equity of about $1.6 billion.
First American Common Stock is listed and traded on the New York Stock
Exchange under the symbol "FAM." The closing price of First American Common
Stock in composite trading on August 19, 1998 was $42.19 per share, as reported
in The Wall Street Journal. Peoples Common Stock is neither listed nor publicly
traded.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER
AND RECOMMENDS A VOTE "FOR" THE MERGER. The proposed Merger has been approved by
the Peoples Board of Directors (the "Peoples Board") as being in the best
interest of Peoples and its shareholders. The Peoples Board reached this
decision after careful consideration of a number of factors. The enclosed
Prospectus/Proxy Statement contains more detailed information concerning the
Peoples Board's decision and the Merger. We urge you to consider it carefully.
The affirmative vote of the holders of a majority of Peoples Common
Stock entitled to vote thereon (and with no more than 5% of such holders
dissenting pursuant to applicable Tennessee law) is required to approve the
Agreement. IT IS VERY IMPORTANT THAT YOUR SHARES ARE VOTED AT THE SPECIAL
MEETING, REGARDLESS OF WHETHER YOU ATTEND IN PERSON. A FAILURE TO VOTE, EITHER
BY NOT RETURNING THE ENCLOSED PROXY OR BY CHECKING THE "ABSTAIN" BOX THEREON,
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE AGREEMENT. PLEASE
COMPLETE THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID,
RETURN ENVELOPE. Peoples and First American intend to consummate the Merger by
October 1, 1998.
IF YOU VOTE TO APPROVE THE AGREEMENT, WE ASK THAT YOU SEND THE
CERTIFICATE OR CERTIFICATES REPRESENTING YOUR SHARE(S) OF PEOPLES COMMON STOCK
TO THOMAS HAYES AT PEOPLES. Your certificates will be held by Peoples pending
the completion of the Merger. Certificates representing the shares of First
American Common Stock you are entitled to receive as a result of the Merger will
be sent to you as soon as practicable following completion of the Merger. If the
Merger is not completed for any reason, Peoples will return your Peoples
certificates to you. If you do not send in your Peoples certificates and the
Merger is completed, you will be provided information after the Merger
describing the procedure to be followed to exchange your Peoples certificates
for First American certificates. You will not receive any certificates for First
American Common Stock until you have surrendered your Peoples certificates.
IF YOU WISH TO EXERCISE DISSENTERS' RIGHTS WITH RESPECT TO THE MERGER (SEE
"ADDITIONAL INFORMATION -- DISSENTERS' APPRAISAL RIGHTS"), YOU SHOULD NOT
SEND YOUR PEOPLES CERTIFICATES TO PEOPLES AT THIS TIME.
2
In order to make sure that your vote is represented, indicate your vote
on the enclosed proxy form, date and sign it, and return it in the enclosed
envelope. If you attend the meeting in person, you may revoke your proxy at the
Special Meeting and vote in person.
Sincerely,
Thomas Hayes
President and Chief Executive Officer
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS OR OTHER GOVERNMENTAL AGENCY HAVE APPROVED THE FIRST AMERICAN COMMON
STOCK TO BE ISSUED UNDER THIS PROSPECTUS/PROXY STATEMENT OR DETERMINED IF THIS
PROSPECTUS/PROXY STATEMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Prospectus/Proxy Statement dated August 24,
1998 and first mailed to shareholders on August 25, 1998.
2
3
PEOPLES BANK
601 HIGHWAY 46, SOUTH
DICKSON, TN 37056
(615) 446-9091
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
To be held on September 24, 1998
TO THE SHAREHOLDERS OF
PEOPLES BANK:
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of
Peoples Bank ("Peoples") will be held at the main office of Peoples, 601 Highway
46, South, Dickson, Tennessee 37056, on September 24, 1998 at 7:00 pm, local
time, (the "Special Meeting") for the purpose of considering and voting upon the
following matters:
1. Approval and adoption of the Agreement and Plan of Merger (the
"Agreement"), dated as of April 21, 1998, by and between Peoples, a
Tennessee banking corporation, and First American Corporation ("First
American"), a Tennessee corporation, a copy of which is included as
Appendix A to the accompanying Prospectus/Proxy Statement and
incorporated by reference herein, and the related Merger Agreement
attached as Annex 1 thereto, between Peoples and First American Interim
Bank ("Interim Bank"), a wholly owned Tennessee state-chartered bank
subsidiary of First American. Interim Bank will be merged with and into
Peoples, and each outstanding share of common stock of Peoples
("Peoples Common Stock"), par value $2.00 per share, will be exchanged
for 3.70 shares of common stock of First American, par value $2.50 per
share, plus an associated right to purchase shares of First American's
Series A Junior Preferred Stock, and cash in lieu of any fractional
share determined in accordance with the terms of the Agreement (the
merger and share exchange, collectively, are the "Merger").
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof.
Only holders of record of Peoples Common Stock at the close of business
on August 15, 1998, are entitled to notice of and to vote at the Special Meeting
or any adjournments or postponements of the Special Meeting.
All shareholders are cordially invited to attend the Special Meeting.
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE AND
PROMPTLY MAIL YOUR PROXY IN THE RETURN ENVELOPE ENCLOSED. This will not prevent
you from voting in person, but will help to secure a quorum and avoid added
solicitation costs. Your proxy may be revoked at any time before it is voted.
Please review the Prospectus/Proxy Statement accompanying this notice for more
complete information regarding the Merger and the Special Meeting.
Under Section 45-2-1309 of the Tennessee Banking Act (the "TBA"),
holders of Peoples Common Stock who comply with Chapter 23 of the Tennessee
Business Corporation Act (the "TBCA") will have the right to dissent from the
Merger and to obtain payment of the fair value of their shares. A copy of
Chapter 23 of the TBCA is attached as Appendix C to the accompanying
Prospectus/Proxy Statement. Please see the section entitled "ADDITIONAL
INFORMATION--Dissenters' Appraisal Rights" in the attached Prospectus/Proxy
Statement for a discussion of the procedures to be followed in asserting these
dissenters' rights.
BY ORDER OF THE BOARD OF DIRECTORS
Thomas Hayes
President and Chief Executive Officer
August 24, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU PLAN
TO ATTEND THE SPECIAL MEETING.
THE BOARD OF DIRECTORS OF PEOPLES UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
FOR APPROVAL OF THE AGREEMENT.
4
QUESTIONS AND ANSWERS
ABOUT THE FIRST AMERICAN/PEOPLES TRANSACTION
Q: WHY IS PEOPLES CHOOSING TO COMBINE WITH FIRST AMERICAN?
A: We believe that combining with First American will enhance
opportunities for profitable growth, thus providing you with
substantial benefits. We also believe that by combining with the fourth
largest financial services institution, measured by total assets, in
the mid-south region of the United States, we will better serve our
customers' increasingly diversified financial services needs and desire
for banking convenience and flexibility. Furthermore, the resources and
capital First American offers will provide an enhanced ability to
compete in the changing and competitive financial services industry.
Moreover, with First American, we believe that we can still provide a
local, familiar and trustworthy face to our customers because of First
American's history of outstanding service in Middle Tennessee and
because of the proximity of its corporate headquarters to Peoples.
Q: AS A PEOPLES SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: You will have the right to receive 3.70 shares of First American Common
Stock in exchange for each share of Peoples Common Stock you own.
However, First American won't issue any fractional shares. Instead, you
will receive an amount of cash for any fraction of a share based on the
market value of First American Common Stock over a period close to the
date the Merger is completed.
Example: If you own one share of Peoples Common Stock, upon completion
of the Merger you'll have the right to receive three shares of First
American Common Stock and a check for the market value of 0.7 of a
share of First American Common Stock.
Q: WHAT HAPPENS AS THE MARKET PRICE OF FIRST AMERICAN COMMON STOCK
FLUCTUATES?
A: The exchange ratio is fixed at 3.70. Since the market value of First
American Common Stock will fluctuate before and after the closing of
the Merger, the value of the stock Peoples shareholders will receive in
the Merger will fluctuate as well and could decrease.
Q: WHAT HAPPENS TO MY DIVIDENDS IN THE FUTURE?
A: After the Merger, First American expects to pay $.25 per share, the
amount First American has recently paid as a regular quarterly cash
dividend to its shareholders. While the board of directors of First
American ("First American Board") currently expects to pay those
dividends, it can't assure these payments. The First American Board
will use its discretion to decide whether and when to declare dividends
and in what amount, and it will consider all relevant factors in doing
so.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the Merger by October 1, 1998. The Merger must be
approved by the Peoples shareholders. We have already received all
required regulatory approvals, which include approval of the Federal
Reserve Board and the Commissioner of Financial Institutions of the
State of Tennessee.
Q: AS A PEOPLES SHAREHOLDER, WHAT ARE THE U.S. FEDERAL INCOME TAX
CONSEQUENCES TO ME?
A: We expect that for U.S. federal income tax purposes, your exchange of
shares of Peoples Common Stock for shares of First American Common
Stock by virtue of the Merger generally will not cause you to recognize
any gain or loss. You will, however, have to recognize gain in
connection with any cash received instead of fractional shares. This
tax treatment won't apply to you if you dissent from the Merger under
Tennessee law.
We provide a more detailed review of the U.S. federal income tax
consequences of the Merger at pages 26-27 of this document.
Q: AS A PEOPLES SHAREHOLDER, DO I HAVE TO ACCEPT FIRST AMERICAN COMMON
STOCK IN EXCHANGE FOR MY PEOPLES SHARES IF THE MERGER IS APPROVED?
A: No. If you are a Peoples shareholder and you follow the procedures
prescribed by Tennessee law, you may dissent from the Merger and have
the fair value of your stock appraised by a court and paid in cash. If
you follow those procedures, you won't receive First American Common
Stock. The fair value of your Peoples Common Stock, determined in the
manner prescribed by Tennessee law, will be paid to you in cash. That
amount could be more or less than the market value of the First
American Common Stock at the time the Merger is consummated. For a more
complete description of these dissenters' rights, see page 52 of this
document.
5
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and
mail the proxy card in the enclosed return envelope as soon as possible
so that your shares may be represented at the Special Meeting. If you
sign and send in your proxy but don't indicate how you want to vote,
your proxy will be counted as a vote in favor of the Merger. If you
don't vote on the Merger or if you abstain, the effect will be a vote
against the Merger.
Tennessee law permits you to dissent from the Merger and to have the
fair value of your stock appraised by a court and paid to you in cash.
To do this, you must follow certain procedures, including filing
certain notices with us and refraining from voting your shares in favor
of the Merger. If you execute a proxy card and desire to effect your
appraisal rights, you must mark the proxy card "Against" the proposal
relating to the Merger because if the proxy card is left blank, it will
be voted "For" the proposal relating to the Merger. If you dissent from
the Merger, your shares of Peoples Common Stock will not be exchanged
for shares of First American Common Stock in the Merger, and your only
right will be to receive the appraised value of your shares in cash. We
provide more detailed instructions about dissenting from the Merger on
page 52. If shareholders owning more than 5% of the outstanding
shares of Peoples Common Stock dissent from the Merger, First American
may elect to not proceed with the transaction.
The Special Meeting will take place on September 24, 1998. You are
invited to the Special Meeting to vote your shares in person, rather
than signing and mailing your proxy card. If you do sign your proxy
card, you can take back your proxy up to and including the date of your
shareholders' meeting and either change your vote or attend the Special
Meeting and vote in person. We provide more detailed instructions about
voting on page 16.
THE BOARD OF DIRECTORS OF PEOPLES UNANIMOUSLY RECOMMENDS VOTING IN
FAVOR OF THE PROPOSED MERGER.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Only if you provide instructions on how your broker should vote. You
should instruct your broker how to vote your shares, following the
directions your broker provides. Without instructions from you to your
broker, your shares will not be voted and this will effectively be a
vote against the Merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: Yes. If you vote in favor of the Merger, we ask that you send your
Peoples stock certificates to Peoples Bank to the attention of Mr.
Thomas Hayes at the address listed below. Peoples will hold your stock
certificates in escrow until the Merger is completed. If for any reason
the Merger is not completed, your Peoples stock certificates will be
returned to you. However, if you vote against the Merger and wish to
preserve your dissenters' rights you should continue to hold your
Peoples stock certificates.
After the Merger is completed, First American will send you written
instructions on how to exchange your Peoples Common Stock for First
American Common Stock if you do not send in your Peoples stock
certificates prior to the Special Meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the Merger, you should contact:
Peoples Bank
601 Highway 46, South
Dickson, TN 37056
Attention: Thomas Hayes
Phone Number: (615) 446-9091
6
TABLE OF CONTENTS
SUMMARY
Page
----
The Companies........................................................................................................... 1
First American Corporation..................................................................................... 1
Peoples Bank................................................................................................... 1
Peoples' Reasons for the Merger......................................................................................... 1
The Shareholders' Meetings.............................................................................................. 1
Peoples' Recommendation to Shareholders................................................................................. 1
Record Date; Voting Power............................................................................................... 1
Vote Required........................................................................................................... 1
The Merger.............................................................................................................. 1
Conditions to Completion of the Merger......................................................................... 1
Termination of the Agreement................................................................................... 2
Federal Income Tax Consequences................................................................................ 2
Accounting Treatment........................................................................................... 2
Accounting Treatment........................................................................................... 2
Opinion of Peoples' Financial Advisor.......................................................................... 2
Board of Directors and Management of First American Following the Merger....................................... 2
Interests of Other Persons in the Merger That are Different from Yours......................................... 3
Dissenters' Appraisal Rights................................................................................... 3
Regulatory Approvals........................................................................................... 3
Termination Fee................................................................................................ 3
Comparative Per Share Market Price Information................................................................. 3
Forward-Looking Statements May Prove Inaccurate................................................................ 3
Comparative Unaudited Per Share Data.................................................................................... 4
Selected Financial Data................................................................................................. 6
Selected Historical Financial Data of First American........................................................... 6
Selected Historical Financial Data of Peoples.................................................................. 7
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Pro Forma Combined Condensed Balance Sheet.............................................................................. 9
Pro Forma Combined Condensed Income Statements..........................................................................10
Notes to Unaudited Pro Forma Combined Condensed Financial Information...................................................15
THE PEOPLES SPECIAL MEETINGS
General.................................................................................................................16
Proxies.................................................................................................................16
Solicitation of Proxies.................................................................................................16
Record Date and Voting Rights...........................................................................................16
Dissenters' Rights......................................................................................................17
Recommendation of the Peoples Board.....................................................................................17
THE MERGER
Description of the Merger...............................................................................................18
Background of the Merger................................................................................................19
Reasons of Peoples for the Merger.......................................................................................19
Opinion of Peoples' Financial Advisor...................................................................................20
Acquisition Comparison Analysis.........................................................................................20
Adjusted Net Asset Value Analysis.......................................................................................21
Discounted Earnings Analysis............................................................................................21
Specific Acquisition Analysis...........................................................................................21
The Effective Time......................................................................................................22
Exchange of Certificates................................................................................................22
Conduct of Business Prior to the Merger and Other Covenants.............................................................23
Conditions to the Merger................................................................................................23
Termination of the Agreement............................................................................................25
Termination Fee.........................................................................................................25
Expenses................................................................................................................26
Certain Federal Income Tax Consequences.................................................................................26
Interests of Certain Persons in the Merger..............................................................................27
Accounting Treatment....................................................................................................28
Regulatory Matters......................................................................................................28
Restrictions on Resales by Affiliates...................................................................................28
7
Page
----
INFORMATION ABOUT OUR COMPANIES
Information About First American........................................................................................30
General........................................................................................................30
Pending Acquisitions...........................................................................................30
Information About Peoples...............................................................................................30
Management and Operations After the Merger..............................................................................31
Price Range of Common Stock and Dividends...............................................................................31
Market Prices..................................................................................................31
Dividends......................................................................................................32
Supervision and Regulation of First American and Peoples................................................................32
General........................................................................................................32
Capital and Operational Requirements...........................................................................33
Enforcement Powers of the Banking Agencies.....................................................................34
First American Capital Stock............................................................................................35
First American Common Stock....................................................................................35
First American Preferred Stock.................................................................................35
Comparative Rights of Shareholders of First American and Peoples........................................................36
Board of Directors.............................................................................................36
Business Combination Provisions................................................................................36
Shareholder Rights Plan........................................................................................37
Dissenters' Appraisal Rights...................................................................................39
Consideration of Non-Shareholder Interests by Board of Directors...............................................39
Certain Purchases of the Corporation's Securities..............................................................39
Taxation of Dividends..........................................................................................39
Indemnification................................................................................................39
Amendments to Articles of Incorporation and Bylaws.............................................................40
ADDITIONAL INFORMATION ABOUT PEOPLES
Business of Peoples.....................................................................................................41
Competition....................................................................................................42
Loans and Loan Review..........................................................................................42
Asset/Liability Management.....................................................................................42
Community Credit Services, Inc.................................................................................42
Highland Rim title Company.....................................................................................43
Management's Discussion and Analysis of Financial Condition and Results of Operations...................................42
General........................................................................................................42
Summary........................................................................................................42
Gross Interest Margin..........................................................................................42
Liquidity and Interest Rate Sensitivity Management.............................................................45
Loans and Loan Quality.........................................................................................45
Capital Resources, Capital and Dividends.......................................................................46
Results of Operations..........................................................................................47
Impact of Recently Issued Accounting Standards on the Financial
Statements when Adopted in Future Period..................................................................48
Year 2000 Compliance...........................................................................................49
Financial Ratios...............................................................................................49
Supervision and Regulation..............................................................................................49
Security Ownership of Management........................................................................................49
ADDITIONAL INFORMATION
Dissenters' Appraisal Rights............................................................................................51
Legal Opinion...........................................................................................................51
Experts.................................................................................................................51
Other Matters...........................................................................................................52
Where You Can Find More Information.....................................................................................52
Cautionary Statement Concerning Forward-Looking Information.............................................................53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF PEOPLES BANK AND SUBSIDIARIES........................................................................................F-1
APPENDICES
APPENDIX A AGREEMENT AND PLAN OF MERGER..........................................................................A-1
APPENDIX B OPINION OF PROFESSIONAL BANK SERVICES, INC............................................................B-1
APPENDIX C CHAPTER 23 OF THE TENNESSEE BUSINESS CORPORATION ACT..................................................C-1
ii
8
SUMMARY
This summary highlights selected information from this document. It
does not contain all of the information that is important to you. You should
carefully read this entire document and the documents to which we have referred
you in order to understand fully the Merger and to obtain a more complete
description of the legal terms of the Merger. See "ADDITIONAL INFORMATION--Where
You Can Find More Information" (page [53]). Each item in this summary includes a
page reference that directs you to a more complete description in this document
of the topic discussed.
THE COMPANIES (PAGE 30)
FIRST AMERICAN CORPORATION
First American Center
Nashville, Tennessee 37237-0700
(615) 748-2000
First American is incorporated in Tennessee and is a federal bank holding
company. First American provides banking and other financial services. These
banking services are provided in Tennessee, Mississippi, Louisiana, Arkansas,
Virginia and Kentucky. First American's principal assets are the stock of its
subsidiaries. As of June 30, 1998, its total assets were about $19.1 billion,
its deposits were about $13.6 billion and shareholders' equity was about $1.6
billion.
PEOPLES BANK
601 Highway 46, South
Dickson, Tennessee 37056
(615) 446-9091
Peoples is a Tennessee state-chartered bank. Peoples operates six banking
offices in Dickson and Houston Counties, Tennessee. As of June 30, 1998, our
total assets were about $136 million, our deposits were about $118 million and
shareholders' equity was about $16.8 million.
PEOPLES' REASONS FOR THE MERGER (PAGE 19)
Peoples proposes to merge with First American because we believe that by
combining with them we will be able to provide you with substantial benefits and
better serve our customers. We think that by combining with First American we
can create a company with enhanced financial performance and expanded
opportunities for profitable growth. We believe that First American's presence
throughout the Middle Tennessee region and its diversified financial services
will provide our customers with more convenient access to full-service banks and
will enhance our financial service capabilities in order to compete in the
changing and competitive financial services industry.
To review the background of, and reasons for, the Merger in greater detail,
please see pages [19 through 20.]
THE PEOPLES SPECIAL MEETING (PAGE 16)
The Peoples Special Meeting will be held at the main office of Peoples, 601
Highway 46, South, Dickson, Tennessee 37056, on September 24, 1998 at 7:00 pm.
At the Special Meeting, Peoples shareholders will be asked to approve the
Agreement.
PEOPLES' RECOMMENDATION TO SHAREHOLDERS (PAGE 20)
The Peoples Board believes that the Merger is fair to you and in your best
interests, and unanimously recommends that you vote "FOR" the proposal to
approve the Agreement.
RECORD DATE; VOTING POWER (PAGE 16)
You can vote at the Special Meeting if you owned Peoples Common Stock as of the
close of business on August 15, 1998, the record date. On that date, 250,000
shares of Peoples Common Stock were outstanding and therefore are allowed to
vote at the Special Meeting. You will be able to cast one vote for each share of
Peoples common stock you owned on August 15, 1998.
VOTE REQUIRED (PAGE 17)
In order for the Merger to be approved, Peoples shareholders holding a majority
of the outstanding shares of Peoples Common Stock on the record date must vote
in favor of the Merger.
Directors owning more than 32% of the outstanding shares of Peoples Common Stock
have agreed to vote their shares in favor of the Merger.
THE MERGER (PAGE 18)
We have attached the Agreement to this Prospectus/Proxy Statement as Appendix A.
We encourage you to read the Agreement. It is the legal document that governs
the Merger.
THE EXCHANGE RATIO (PAGE 18)
In the Merger, each outstanding share of Peoples Common Stock will be converted
into 3.70 shares of First American Common Stock.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 24)
The completion of the Merger depends on a number of conditions being met,
including the following:
1. Peoples shareholders approving the Merger, and the holders of not more than
5% of the outstanding shares of Peoples Common Stock dissenting from the
Merger;
9
2. The New York Stock Exchange (the "NYSE") having approved for listing the
shares First American will issue to Peoples shareholders by virtue of the
Merger;
3. receipt of all required regulatory approvals and the expiration of any
regulatory waiting periods;
4. the absence of any governmental order blocking completion of the Merger, or
of any proceedings by a government body trying to block it;
5. receipt of an opinion of Peoples' counsel that the U.S. federal income tax
treatment of Peoples shareholders, Peoples and First American in the Merger
will generally be as we've described it to you in this document; and
6. receipt of a letter from First American's independent public accountants
stating that the Merger will qualify for "pooling of interests" accounting
treatment.
In cases where the law permits, a party to the Agreement could elect to waive a
condition that has not been satisfied and complete the Merger although it is
entitled not to. We can't be certain whether or when any of the conditions we've
listed will be satisfied (or waived, where permissible), or that the Merger will
be completed.
TERMINATION OF THE AGREEMENT (PAGE 25)
First American and Peoples can mutually agree at any time to terminate the
Agreement without completing the Merger, even if the Peoples shareholders have
already voted to approve it. Also, First American can terminate the Agreement if
the Peoples Board withdraws, or modifies in any way adverse to First American,
its recommendation that Peoples shareholders approve the Merger.
Moreover, either First American or Peoples can terminate the Agreement in the
following circumstances:
1. after a final decision by a governmental authority to prohibit the Merger,
or after the rejection of an application for a governmental approval
required to complete the Merger;
2. if the Merger isn't completed by December 31, 1998, so long as the
terminating party did not materially breach its obligations under the
Agreement in a manner that caused the Merger not to be completed by that
date;
3. if the Peoples shareholders don't approve the Merger; or
4. if the other party violates, in a significant way, any of its
representations, warranties or obligations under the Agreement.
Generally, a party can only terminate the Agreement in one of the preceding four
situations if that party isn't in violation of the Agreement or if its
violations of the Agreement aren't the cause of the event permitting
termination.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 26)
We have structured the transaction with the intent that First American, Peoples
and Peoples' shareholders won't recognize any gain or loss for U.S. federal
income tax purposes in the Merger, except in connection with cash received
instead of fractional shares by Peoples shareholders. We have conditioned the
merger on the receipt of a legal opinion that this will be the case, but these
opinions won't bind the Internal Revenue Service, which could take a different
view.
This tax treatment may not apply to certain Peoples shareholders, including the
types of Peoples shareholders discussed on page 26 and will not apply to any
Peoples shareholder who dissents from the Merger under Tennessee law.
Determining the actual tax consequences of the Merger to you can be complicated.
They will depend on your specific situation and many VARIABLES not within our
control. You should consult your own tax advisor for a full understanding of the
Merger's tax consequences.
ACCOUNTING TREATMENT (PAGE 28)
We expect the Merger to qualify as a pooling of interests, which means that, for
accounting and financial reporting purposes, we will treat First American and
Peoples as if they had always been one company. We have conditioned the Merger
on the receipt of a letter from First American's independent public accountants
that the Merger will qualify as a pooling of interests and a letter from
Peoples' independent accountants, indicating that they have examined certain
financial information with respect to Peoples (as required by the terms of the
Agreement) and making such representations and giving such assurances as are
required by the terms of the Agreement.
OPINION OF PEOPLES' FINANCIAL ADVISOR (PAGE 20)
In deciding to approve the Merger, the Peoples Board considered the opinion of
its financial advisor, Professional Bank Services, Inc. ("PBS"), that as of the
date of the opinion the exchange ratio was fair from a financial point of view
to Peoples shareholders. We have attached this opinion, along with a letter
dated the date of this Prospectus/Proxy Statement in which PBS reaffirms its
opinion, as Appendix B to this document. You should read the opinion and the
letter carefully.
BOARD OF DIRECTORS AND MANAGEMENT OF FIRST AMERICAN FOLLOWING THE MERGER
(PAGE 31)
The Board of Directors and executive officers of First American immediately
prior to the Merger shall continue to hold such positions following the Merger.
The name of Peoples after the Merger shall continue to be Peoples unless
otherwise determined by First American. After the Merger, the Board of Directors
and officers of Peoples shall be named by First American. First American
currently anticipates that Peoples will be merged into First American National
Bank ("FANB"), a national banking association of which First American is the
sole shareholder, by the middle of 1999.
2
10
INTERESTS OF OTHER PERSONS IN THE MERGER THAT ARE DIFFERENT FROM YOURS
(PAGE 27)
Mr. Thomas Hayes, who is Peoples' President and Chief Executive Officer and a
director of Peoples, will be employed by FANB after the Merger.
Mr. Hayes will enter into an employment agreement with FANB that will become
effective upon completion of the Merger. During the term of his agreement, Mr.
Hayes will receive an annual base salary of no less than $165,000 and a bonus of
no more than $27,500 payable on or before December 31, 1998.
Please refer to pages 27 to 28 for more information concerning this
employment agreement.
Members of the Peoples Board and Peoples' officers also are entitled to
indemnification and liability insurance under the Agreement.
Please refer to page 28 for more information concerning severance and
employment arrangements for current Peoples employees after the Merger.
DISSENTERS' APPRAISAL RIGHTS (PAGE 52)
Tennessee law permits you to dissent from the Merger and to have the fair value
of your stock appraised by a court and paid to you in cash. To do this, you must
follow certain procedures, including the filing of certain notices with us and
refraining from voting your shares in favor of the Merger. If you dissent from
the Merger, your shares of Peoples Common Stock will not be exchanged for shares
of First American Common Stock in the Merger, and your only right will be to
receive the appraised value of your shares in cash. That amount could be more or
less than the market value of First American Common Stock at the time of
completion of the Merger.
REGULATORY APPROVALS (PAGE 28)
We can't complete the Merger unless we obtain the approval of the Board of
Governors of the Federal Reserve System. The U.S. Department of Justice has
input into the Federal Reserve Board's approval process. Federal law requires us
to wait for up to 30 days before completing the Merger after the Federal Reserve
Board has approved it. The Merger also requires the approval of the Federal
Deposit Insurance Corporation ("FDIC") and the Department of Financial
Institutions of the State of Tennessee (the "Department").
As of the date of this Prospectus/Proxy Statement, we have already received the
required approvals of the Federal Reserve Board, the FDIC and the Department and
all required waiting periods have expired.
TERMINATION FEE (PAGE 26)
Under certain circumstances, if First American terminates the Agreement by
reason of certain actions or omissions on the part of Peoples, or if Peoples
terminates the Agreement and has taken certain actions regarding a possible
transaction with a third party which would result in such third party acquiring
a significant portion of the assets or securities of Peoples, Peoples may be
required to pay First American liquidated damages in the amount of $2 million.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 4)
Shares of First American are quoted on the NYSE. Shares of Peoples are neither
listed nor publicly traded. On April 20, 1998, the last full trading day prior
to the public announcement of the Merger, First American stock closed at $52.38
per share. On August 19, 1998, First American stock closed at $42.19 per
share.
Based on the exchange ratio in the merger, which is 3.70, the market value of
the consideration that Peoples shareholders will receive in the Merger for each
share of Peoples Common Stock would be $193.79 based on First American's April
20, 1998 closing price and $156.10 based on First American's August 19, 1998
closing price. Of course, the market price of First American Common Stock will
fluctuate prior to and after completion of the Merger, while the exchange ratio
is fixed. You should obtain current stock price quotations for First American
Common Stock.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 55)
We have each made forward-looking statements in this document (and in documents
to which we refer you in this document) that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of First American's operations or performance
after the Merger. Also, when we use any of the words "believes," "expects,"
"anticipates" or similar expressions, we are making forward-looking statements.
Many possible events or factors could affect the future financial results and
performance of First American after the Merger and could cause those results or
performance to differ materially from those expressed in our forward-looking
statements. These possible events or factors include the following:
1. legal and regulatory risks and uncertainties;
2. economic, political and competitive forces affecting our businesses,
markets, constituencies or securities;
3. the risk that our analyses of these risks and forces could be incorrect, or
that the strategies we've developed to deal with them may not succeed.
3
11
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information about our companies' income per
share, dividends per share and book value per share, and similar information
reflecting the Merger and First American's acquisitions of The Middle Tennessee
Bank ("MTB"), Pioneer Bancshares, Inc. ("PIONEER") and CSB Financial Corp.
("CSB") (collectively, the "PROPOSED TRANSACTIONS") (which is referred to as
"pro forma" information). In presenting the comparative pro forma information
for certain time periods, we assumed the Proposed Transactions were completed at
the beginning of those periods.
In connection with the Merger, First American will exchange 3.70 shares
of First American Common Stock for each of the 250,000 outstanding shares of
Peoples Common Stock. In connection with its acquisition of MTB, First American
will exchange 7.768 shares of First American Common Stock for each of the
150,000 outstanding shares of common stock of Peoples ("MTB COMMON STOCK"). In
connection with its acquisition of CSB, First American will exchange 9.7071
shares of First American Common Stock for each of the 84,947 outstanding shares
of common stock of CSB ("CSB COMMON STOCK") and 4.4653 shares of First American
Common Stock for each of the 6,868 shares of common stock of Cheatham State
Bank not owned by CSB. In connection with its acquisition of Pioneer, First
American will exchange 1.65 shares of First American Common Stock for each of
the 3,735,848 outstanding shares of Pioneer ("PIONEER COMMON STOCK").
In presenting the comparative pro forma information, we also assumed
that we will treat the companies as if they had always been combined for
accounting and financial reporting purposes (a method which is referred to as
the "pooling of interests" method of accounting).
The information listed as "equivalent pro forma" was obtained by
multiplying the pro forma amounts by the exchange ratio of 3.70. It is intended
to reflect the fact that Peoples shareholders will be receiving more than one
share of First American Common Stock for each share of Peoples Common Stock
exchanged in the Merger.
We expect that we will incur restructuring and merger-related expenses
as a result of the Proposed Transactions. We also anticipate that the Proposed
Transactions will provide financial benefits such as reduced operating expenses
and the opportunity to earn more revenue. However, none of these anticipated
expenses or benefits has been factored into the pro forma information, except
for the pro forma combined condensed balance sheet. For that reason, the pro
forma information, while helpful in illustrating the financial attributes of the
combined company under one set of assumptions, doesn't attempt to predict or
suggest future results. Also, the information we've set forth for the six-month
period ended June 30, 1998 doesn't indicate what the results will be for the
full 1998 fiscal year.
The information in the following table is based on the historical
financial information of First American that has been presented in its prior
Securities and Exchange Commission filings, the historical financial information
of Peoples that is included at the back of this Prospectus/Proxy Statement and
the historical financial information of MTB, Pioneer and CSB. First American's
financial information has been incorporated into this Prospectus/Proxy Statement
by reference. See "ADDITIONAL INFORMATION--Where You Can Find More Information"
on page 53.
4
12
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31
SIX MONTHS ENDED -------------------------------------
JUNE 30, 1998 1997(A) 1996(A) 1995(A)
--------------- ------- ------- -------
FIRST AMERICAN COMMON STOCK
Income from continuing operations per common share
Basic:
Historical $ 0.77 $ 2.23 $ 1.96 $ 1.73
Pro Forma - Peoples 0.78 2.23 1.97 1.73
Pro Forma - Proposed Transactions (b) 0.78 2.19 1.93 1.70
Diluted:
Historical $ 0.75 $ 2.18 $ 1.93 $ 1.70
Pro Forma - Peoples 0.76 2.19 1.94 1.70
Pro Forma - Proposed Transactions (b) 0.77 2.15 1.91 1.67
Cash dividends declared per common share:
Historical(d) $ 0.34 $ 0.73 $ 0.61 $ 0.51
Pro Forma - Peoples 0.33 0.73 0.61 0.51
Pro Forma - Proposed Transactions (b) 0.33 0.71 0.60 0.50
Book value per common share as of end of period:
Historical $ 14.59 $ 14.56
Pro Forma - Peoples 14.61 14.58
Pro Forma - Proposed Transactions (b) 14.84 14.77
AT OR FOR THE AT OR FOR THE YEARS ENDED DECEMBER 31
SIX MONTHS ENDED -------------------------------------
JUNE 30, 1998 1997 1996 1995
--------------- ------- ------- -------
PEOPLES COMMON STOCK
Income from continuing operations per common share
Basic:
Historical $ 6.08 $ 9.51 $ 8.49 $ 6.53
Equivalent Pro Forma - Peoples (c) 2.89 8.25 7.29 6.40
Equivalent Pro Forma - Proposed Transactions (b) 2.89 8.10 7.14 6.29
Diluted:
Historical $ 6.08 $ 9.51 $ 8.49 $ 6.53
Equivalent Pro Forma - Peoples (c) 2.81 8.09 7.17 6.29
Equivalent Pro Forma - Proposed Transactions (b) 2.85 7.96 7.07 6.18
Cash dividends declared per common share:
Historical $ -- $ 1.75 $ 1.60 $ 1.50
Equivalent Pro Forma - Peoples (c) 1.22 2.70 2.26 1.89
Equivalent Pro Forma - Proposed Transactions (b) 1.22 2.63 2.22 1.85
Book value per common share as of end of period:
Historical $ 67.23 $ 61.89
Equivalent Pro Forma - Peoples (c) 54.06 53.95
Equivalent Pro Forma - Proposed Transactions (b) 54.91 54.65
(a) Historical data has been restated to reflect the acquisition of Deposit
Guaranty Corp. effective May 1, 1998 accounted for using the "pooling of
interests" method of accounting.
(b) First American will account for the Proposed Transactions using the
"pooling of interests" method of accounting.
(c) Peoples equivalent pro forma amounts are computed by multiplying the First
American pro forma combined amounts by the exchange ratio of 3.70.
(d) First American historical dividends are computed by combining
dividends paid by First American and Deposit Guaranty Corp. divided by the
combined weighted average shares outstanding for the period
5
13
SELECTED FINANCIAL DATA
The following tables show summarized unaudited historical financial
data for First American and Peoples. The information we've set forth for the
six-month period ended June 30, 1998 doesn't indicate what the results will be
for the full 1998 fiscal year.
The information in the following tables is based on the historical financial
information of First American that has been presented in its prior filings with
the Securities and Exchange Commission and the historical financial information
of Peoples that is attached at the back of this Prospectus/Proxy Statement. All
of the summary financial information provided in the following tables should be
read in connection with this historical financial information. See "ADDITIONAL
INFORMATION--Where You Can Find More Information" on page 53. First American's
audited historical financial statements were audited by KPMG Peat Marwick LLP,
independent certified public accountants, and Peoples' audited historical
financial statements were audited by Kraft Bros., Esstman, Patton & Harrell,
PLLC, Peoples' independent certified public accountants. The financial
information as of or for the interim periods ended June 30, 1998 and June 30,
1997 has not been audited and in the respective opinions of management reflects
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data.
SELECTED HISTORICAL FINANCIAL DATA OF FIRST AMERICAN
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30 AS OF AND FOR THE YEAR ENDED DECEMBER 31
------------------------ ----------------------------------------------------------------
1998 1997 (A) 1997 (A) 1996 (A) 1995 (A) 1994 (A) 1993 (A)
----------- ----------- ----------- ----------- ----------- ----------- -----------
CONDENSED INCOME DATA (THOUSANDS):
Net interest income $ 342,487 $ 325,282 $ 662,123 $ 593,261 $ 539,053 $ 477,623 $ 458,383
Provision for loan losses 11,000 3,750 12,500 5,340 2,243 (14,669) (57,405)
Non-interest income 228,211 188,506 395,761 303,749 203,005 181,224 166,617
Non-interest expense 427,186 330,323 669,731 571,663 463,900 419,317 419,794
Income tax expense 51,408 65,802 137,901 114,825 100,215 89,867 88,650
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative effect
of changes in accounting
principles, net of tax 81,104 113,913 237,752 205,182 175,700 164,332 173,961
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative effect of changes in
accounting principles, net
of tax -- -- -- -- -- -- (84)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 81,104 $ 113,913 $ 237,752 $ 205,182 $ 175,700 $ 164,332 $ 173,877
=========== =========== =========== =========== =========== =========== ===========
END OF PERIOD BALANCE SHEET ITEMS
(THOUSANDS):
Assets $19,059,601 $17,088,911 $17,834,436 $16,806,010 $15,727,890 $13,416,988 $12,612,944
Loans net of unearned discount
and net deferred loan fees 11,099,030 11,318,111 11,641,732 10,632,665 9,999,637 8,027,142 7,085,384
Deposits 13,641,535 14,104,456 13,405,457 12,848,368 12,180,187 10,354,439 10,082,265
Long-term debt 600,125 417,053 596,218 430,562 421,791 271,473 77,053
Shareholders' equity 1,557,043 1,473,771 1,543,977 1,449,973 1,334,585 1,111,222 1,019,450
PER SHARE DATA:
Income per share:
Basic $ 0.77 $ 1.06 $ 2.23 $ 1.96 $ 1.73 $ 1.67 $ 1.77
Diluted 0.75 1.04 2.18 1.93 1.70 1.64 1.75
Cash dividends declared(6) 0.45 0.36 0.76 0.61 0.53 0.44 0.53
Book value, end of period 14.59 13.84 14.56 13.79 12.78 11.27 10.49
SHARES OUTSTANDING (THOUSANDS):
Basic - Average 105,275 107,330 106,745 104,533 101,593 98,683 98,011
Diluted - Average 107,645 109,642 108,950 106,092 103,300 100,180 99,349
End of period 106,732 106,435 106,032 105,109 104,428 98,583 97,172
(a) Data has been restated to reflect the acquisition of Deposit Guaranty
effective May 1, 1998 accounted for using the "pooling of interests" method
of accounting.
(b) Cash dividends declared represents the dividends declared by First
American without any effect given to the acquisition of Deposit Guaranty
Corp.
6
14
SELECTED HISTORICAL FINANCIAL DATA OF PEOPLES
AS OF OR FOR THE
SIX MONTHS ENDED
JUNE 30 AS OF AND FOR THE YEAR ENDED DECEMBER 31
1998 1997 1997 1996 1995 1994 1993
CONDENSED INCOME DATA (THOUSANDS):
Net interest income $ 2,972 $ 3,065 $ 6,323 $ 5,497 $ 4,509 $ 4,180 $ 3,923
Provision for loan losses -- 76 284 269 25 21 (62)
Non-interest income 1,329 797 1,748 1,483 1,086 1,103 1,164
Non-interest expense 2,143 2,068 4,458 3,784 3,236 2,850 2,724
Income tax expense 637 484 952 805 701 596 574
------------------------------------------------------------------
Income before cumulative effect of changes in
accounting principles, net of tax 1,521 1,234 2,377 2,122 1,633 1,816 1,851
Cumulative effect of changes in accounting principles,
net of tax -- -- -- -- -- -- --
------------------------------------------------------------------
Net income $ 1,521 $ 1,234 $ 2,377 $ 2,122 $ 1,633 $ 1,816 $ 1,851
==================================================================
END OF PERIOD BALANCE SHEET ITEMS (THOUSANDS):
Assets $135,667 $129,650 $133,282 $117,701 $104,842 $91,637 $86,228
Loans, net of unearned discount and net deferred
loan fees 75,228 74,760 78,317 67,500 59,230 49,175 43,118
Deposits 118,019 113,189 115,614 103,430 88,231 78,954 77,070
Long-term debt -- -- -- -- -- -- --
Stockholder's equity 16,807 14,824 15,473 13,583 11,707 9,748 8,781
PER SHARE DATA:
Income per share:
Basic $ 6.08 $ 4.94 $ 9.51 $ 8.49 $ 6.53 $ 7.27 $ 7.40
Diluted 6.08 4.94 9.51 8.49 6.53 7.27 7.40
Cash dividends declared -- -- 1.75 1.60 1.50 1.40 1.32
Book value, end of period 67.23 59.30 61.89 54.33 46.83 38.99 35.12
SHARES OUTSTANDING (THOUSANDS):
Basic 250 250 250 250 250 250 250
Diluted 250 250 250 250 250 250 250
End of period 250 250 250 250 250 250 250
7
15
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as
of June 30, 1998, combines the historical consolidated balance sheet of First
American, the historical consolidated balance sheet of Peoples, the historical
consolidated balance sheet of MTB, the historical consolidated balance sheet of
Pioneer and the historical consolidated balance sheet of CSB as if the Proposed
Transactions had been effective on June 30, 1998, after giving effect to certain
adjustments described in the attached Notes to Unaudited Pro Forma Combined
Condensed Financial Information.
The following Unaudited Pro Forma Combined Condensed Income Statements
for the six months ended June 30, 1998 and 1997, and the years ended December
31, 1997, 1996 and 1995, present the combined results of operations of First
American, Peoples, MTB, Pioneer and CSB as if the Proposed Transactions had been
effective at the beginning of each period presented therein, after giving effect
to certain adjustments described in the attached Notes to Unaudited Pro Forma
Combined Condensed Financial Information.
The unaudited pro forma combined condensed financial information and
accompanying notes reflect the application of the "pooling of interests" method
of accounting for the Proposed Transactions. Under this method of accounting,
the recorded assets, liabilities, shareholders' equity, income and expenses of
First American, Peoples, MTB, Pioneer and CSB are combined and reflected at
their historical amounts.
While no assurance can be given, it is expected that the combined
company will achieve significant merger benefits in the form of operating cost
savings and revenue enhancements. The pro forma earnings, which do not reflect
any direct costs, potential savings, or revenue enhancements expected to result
from the consolidation of First American, Peoples, MTB, Pioneer and CSB are not
indicative of the results of future operations. No assurances can be given with
respect to the ultimate level of expense savings or revenue enhancements.
The pro forma condensed financial information does not include the
effects prior to the date of acquisition of Hartsville Bancshares, Inc. which
was completed on January 1, 1997, the acquisition of Jefferson Guaranty Bancorp
which was completed on January 3, 1997, the acquisition of First Capital Bancorp
which was completed on March 31, 1997, the acquisition of NBC Financial
Corporation which was completed on June 30, 1997, the acquisition of CitiSave
Financial Corporation which was completed on July 31, 1997, and the acquisition
of Victory Bancshares, Inc. which was completed on March 23, 1998. These
acquisitions are not significant to the historical financial position or results
of operations of First American, either individually or in the aggregate.
8
16
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(UNAUDITED)
The following unaudited pro forma combined condensed balance sheet
combines the consolidated historical balance sheets of First American, Peoples,
MTB, Pioneer and CSB assuming the companies had been combined as of June 30,
1998 on a "pooling of interests" accounting basis.
At June 30, 1998
-----------------------------------------------------------------
First Pro Forma
(In thousands) American Peoples Adjustments Total MTB
------------ -------- ----------- ------------ --------
Assets
Cash and due from other banks $ 1,004,527 $ 5,210 $ -- $ 1,009,737 $ 9,630
Time deposits with other banks 4,910 -- -- 4,910 1,179
Securities:
Held to maturity 985,792 -- -- 985,792 --
Available for sale 4,906,133 46,832 -- 4,952,965 101,224
------------ -------- ------- ------------ --------
Total securities 5,891,925 46,832 -- 5,938,757 101,224
------------ -------- ------- ------------ --------
Federal funds sold and securities
purchased under agreements to resell 104,250 2,400 -- 106,650 10,500
Trading account securities 109,577 -- -- 109,577 --
Total loans 11,111,109 75,259 -- 11,186,368 96,868
Unearned discount and net deferred
loan fees 12,079 31 -- 12,110 93
------------ -------- ------- ------------ --------
Loans, net of unearned discount
and net deferred loan fees 11,099,030 75,228 -- 11,174,258 96,775
Allowance for loan losses 180,138 968 -- 181,106 1,335
------------ -------- ------- ------------ --------
Total net loans 10,918,892 74,260 -- 10,993,152 95,440
Premises and equipment, net 340,994 4,147 -- 345,141 4,603
Other assets 684,526 2,818 492 (3) 687,836 2,751
------------ -------- ------- ------------ --------
Total assets $ 19,059,601 $135,667 $ 492 $ 19,195,760 $225,327
============ ======== ======= ============ ========
Liabilities
Deposits $ 13,641,535 $118,019 $ -- $ 13,759,554 $189,523
Short-term borrowings 2,786,341 -- -- 2,786,341 --
Long-term debt 600,125 -- -- 600,125 3,188
Other liabilities 474,557 841 1,453 (3) 476,851 2,064
------------ -------- ------- ------------ --------
Total liabilities 17,502,558 118,860 1,453 17,622,871 194,775
------------ -------- ------- ------------ --------
Shareholder's equity
Common stock 266,829 500 1,813 (2) 269,142 1,500
Additional paid in capital 142,586 500 (1,813)(2) 141,273 1,500
Retained earnings 1,171,319 15,689 (961)(3) 1,186,047 26,800
Other (33,543) -- -- (33,543) --
------------ -------- ------- ------------ --------
Realized shareholders' equity 1,547,191 16,689 (961) 1,562,919 29,800
Net unrealized gains on securities
available for sale, net of tax 9,852 118 -- 9,970 752
------------ -------- ------- ------------ --------
Total shareholders' equity 1,557,043 16,807 (961) 1,572,889 30,552
------------ -------- ------- ------------ --------
Total liabilities and
shareholders' equity $ 19,059,601 $135,667 $ 492 $ 19,195,760 $225,327
============ ======== ======= ============ ========
At June 30, 1998
------------------------------------------------------
Pro Forma
(Dollars in thousands) Pioneer CSB(6) Adjustments Combined
----------- -------- ----------- ------------
Assets
Cash and due from other banks $ 59,835 $ 4,501 $ -- $ 1,083,703
Time deposits with other banks 250 -- -- 6,339
Securities: -- -- -- --
Held to maturity 30,912 3,597 -- 1,020,301
Available for sale 176,117 48,807 -- 5,279,113
----------- -------- -------- ------------
Total securities 207,029 52,404 -- 6,299,414
----------- -------- -------- ------------
Federal funds sold and securities
purchased under agreements to resell 175 -- -- 117,325
Trading account securities -- -- -- 109,577
Total loans 700,343 82,431 -- 12,068,010
Unearned discount and net deferred 1,908 79 -- 14,190
loan fees
----------- -------- -------- ------------
Loans, net of unearned discount
and net deferred loan fees 700,435 82,352 -- 12,053,820
Allowance for loan losses 8,141 1,060 -- 192,642
----------- -------- -------- ------------
Total net loans 691,294 81,292 -- 11,861,178
Premises and equipment, net 23,125 3,280 (1,294)(3) 374,855
Other assets 22,843 3,384 4,619 (3) 721,433
----------- -------- -------- ------------
Total assets $ 1,004,551 $144,861 $ 3,325 $ 20,573,824
=========== ======== ======== ============
Liabilities
Deposits $ 804,213 $131,679 $ -- $ 14,884,969
Short-term borrowings 68,592 -- -- 2,854,933
Long-term debt 20,000 630 -- 623,943
Other liabilities 8,622 1,559 16,101 (3) 505,197
----------- -------- -------- ------------
Total liabilities 901,427 133,868 16,101 18,869,042
----------- -------- -------- ------------
Shareholder's equity
Common stock 38 85 18,668 (2) 289,433
Additional paid in capital 65,190 1,639 (18,668)(2) 190,934
Retained earnings 38,124 8,912 (12,776)(3) 1,247,107
Other (1,164) -- -- (34,707)
----------- -------- -------- ------------
Realized shareholders' equity 102,188 10,636 (12,776) 1,692,767
Net unrealized gains on securities
available for sale, net of tax 936 357 -- 12,015
----------- -------- -------- ------------
Total shareholders' equity 103,124 10,993 (12,776) 1,704,782
----------- -------- -------- ------------
Total liabilities and
shareholders' equity $ 1,004,551 $144,861 $ 3,325 $ 20,573,824
=========== ======== ======== ============
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
9
17
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(UNAUDITED)
The following unaudited pro forma combined condensed income statements
present the combined income statements of First American, Peoples, MTB, Pioneer
and CSB assuming the companies had been combined as of the beginning of the
period presented on a "pooling of interests" accounting basis.
For the Six Months Ended June 30, 1998
--------------------------------------------------------------------------------------------
First Pro Forma Pro Forma
American Peoples Adjustments Total MTB Pioneer CSB(6) Adjustments Combined
-------- ------- ----------- -------- ------- ------- ------- ----------- --------
(in thousands except per share amounts)
Interest income
Interest and fees on loans $479,844 $4,010 $ -- $483,854 $4,601 $30,556 $ 4,149 $ -- $523,160
Interest and dividends on
securities 151,601 1,333 -- 152,934 3,534 5,872 1,570 -- 163,910
Other interest income 5,029 74 -- 5,103 286 586 70 -- 6,045
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total interest income 636,474 5,417 -- 641,891 8,421 37,014 5,789 -- 693,115
-------- ------ ------- -------- ------ ------- ------- -------- --------
Interest expense
Interest on deposits 222,923 2,443 -- 225,366 3,604 14,298 2,701 -- 245,969
Interest on short-term
borrowings 52,534 2 -- 52,536 -- 2,307 2 -- 54,845
Interest on long-term debt 18,530 -- -- 18,530 82 -- 17 -- 18,629
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total interest expense 293,987 2,445 -- 296,432 3,686 16,605 2,720 -- 319,443
Net interest income 342,487 2,972 -- 345,459 4,735 20,409 3,069 -- 373,672
Provision for loan losses 11,000 -- -- 11,000 145 2,275 162 -- 13,582
-------- ------ ------- -------- ------ ------- ------- -------- --------
Net interest income after
provision for loan losses 331,487 2,972 -- 334,459 4,590 18,134 2,907 -- 360,090
-------- ------ ------- -------- ------ ------- ------- -------- --------
Noninterest income 225,068 1,160 -- 226,228 635 5,621 799 -- 233,283
Net realized gain on sales
of securities 3,143 169 -- 3,312 5 8 7 -- 3,332
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total noninterest income 228,211 1,329 -- 229,540 640 5,629 806 -- 236,615
Noninterest expense 427,186 2,143 -- 429,329 3,630 16,393 2,375 -- 451,727
-------- ------ ------- -------- ------ ------- ------- -------- --------
Income from continuing
operations before income tax
expense 132,512 2,158 -- 134,670 1,600 7,370 1,338 -- 144,978
Income tax expense 51,408 637 -- 52,045 544 2,440 439 -- 55,468
-------- ------ ------- -------- ------ ------- ------- -------- --------
Net income $ 81,104 $1,521 $ -- $ 82,625 $1,056 $ 4,930 $ 899 $ -- $ 89,510
======== ====== ======= ======== ====== ======= ======= ======== ========
Net income per common share:
Basic $ 0.77 $ 6.08 $ -- $ 0.78 $ 7.04 $ 1.31 $ 10.59 $ -- $ 0.78
Diluted 0.75 6.08 -- 0.76 7.04 1.31 10.41 -- 0.77
Weighted-average common
shares outstanding:
Basic - Average 105,275 250 675 106,200 150 3,734 85 4,212 114,381
Diluted - Average 107,645 250 675 108,570 150 3,732 86 4,212 116,750
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
10
18
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(UNAUDITED)
For the Six Months Ended June 30, 1997
---------------------------------------------------------------------------------------------
First Pro Forma Pro Forma
American(5) Peoples Adjustments Total MTB Pioneer CSB(6) Adjustments Combined
----------- ------- ----------- -------- ------- ------- ------- ----------- ---------
(in thousands except per share amounts)
Interest income
Interest and fees on loans $460,485 $3,932 $ -- $464,417 $3,951 $24,325 $ 3,554 $ -- $496,247
Interest and dividends on
securities 136,565 1,293 -- 137,858 3,892 7,179 1,462 -- 150,391
Other interest income 5,453 43 -- 5,496 95 349 34 -- 5,974
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total interest income 602,503 5,268 -- 607,771 7,938 31,853 5,050 -- 652,612
-------- ------ ------- -------- ------ ------- ------- -------- --------
Interest expense
Interest on deposits 223,604 2,200 -- 225,804 3,495 12,781 2,318 -- 244,398
Interest on short-term 40,563 3 -- 40,566 -- 1,365 10 -- 41,941
borrowings
Interest on long-term debt 13,054 -- -- 13,054 75 341 7 -- 13,477
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total interest expense 277,221 2,203 -- 279,424 3,570 14,487 2,335 -- 299,816
Net interest income 325,282 3,065 -- 328,347 4,368 17,366 2,715 -- 352,796
Provision for loan losses 3,750 76 -- 3,826 163 1,621 86 -- 5,696
-------- ------ ------- -------- ------ ------- ------- -------- --------
Net interest income after
provision for loan losses 321,532 2,989 -- 324,521 4,205 15,745 2,629 -- 347,100
-------- ------ ------- -------- ------ ------- ------- -------- --------
Noninterest income 187,114 777 -- 187,891 496 4,229 846 -- 193,462
Net realized gain on sales
of securities 1,392 20 -- 1,412 26 62 11 -- 1,511
-------- ------ ------- -------- ------ ------- ------- -------- --------
Total noninterest income 188,506 797 -- 189,303 522 4,291 857 -- 194,973
Noninterest expense 330,323 2,068 -- 332,391 3,149 13,638 2,231 -- 351,409
-------- ------ ------- -------- ------ ------- ------- -------- --------
Income from continuing
operations before income tax
expense 179,715 1,718 -- 181,433 1,578 6,398 1,255 -- 190,664
Income tax expense 65,802 484 -- 66,286 610 1,690 410 -- 68,996
-------- ------ ------- -------- ------ ------- ------- -------- --------
Net income $113,913 $1,234 $ -- $115,147 $ 968 $ 4,708 $ 845 $ -- $121,668
======== ====== ======= ======== ====== ======= ======= ======== ========
Net income per common share:
Basic $ 1.06 $ 4.94 $ -- $ 1.06 $ 6.46 $ 1.25 $ 9.95 $ -- $ 1.04
Diluted 1.04 4.94 -- 1.04 6.46 1.25 9.89 -- 1.02
Weighted-average common
shares outstanding
Basic - Average 107,330 250 675 108,255 150 3,737 85 -- 116,444
Diluted - Average 109,642 250 675 110,567 150 3,737 85 -- 118,756
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
11
19
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(UNAUDITED)
For the Year Ended December 31, 1997
----------------------------------------------------------------------------------------
First Pro Forma Pro Forma
American(5) Peoples Adjustments Total MTB Pioneer CSB(6) Adjustments Combined
----------- ------- ----------- -------- ------- ------- ------- ----------- --------
(in thousands except per share amounts)
Interest income
Interest and fees on loans $ 949,676 $ 8,194 $ -- $957,870 $8,467 $53,107 $ 7,465 $ -- $1,026,909
Interest and dividends on
securities 271,441 2,763 -- 274,204 7,539 13,348 3,047 -- 298,138
Other interest income 11,014 -- -- 11,014 226 781 60 -- 12,081
--------- ------- ------- -------- ------ ------- ------- -------- ---------
Total interest income 1,232,131 10,957 -- 1,243,088 16,232 67,236 10,572 -- 1,337,128
--------- ------- ------- -------- ------ ------- ------- -------- ---------
Interest expense
Interest on deposits 451,980 4,634 -- 456,614 7,087 26,378 4,915 -- 494,994
Interest on short-term
borrowings 90,067 -- -- 90,067 -- -- 22 -- 90,089
Interest on long-term debt 27,961 -- -- 27,961 148 3,821 20 -- 31,950
-------- ------- ------- -------- ------ ------- ------- -------- ---------
Total interest expense 570,008 4,634 -- 574,642 7,235 30,199 4,957 -- 617,033
Net interest income 662,123 6,323 -- 668,446 8,997 37,037 5,615 -- 720,095
Provision for loan losses 12,500 284 -- 12,784 537 3,609 232 -- 17,162
-------- ------ ------- -------- ------ ------- ------- -------- ---------
Net interest income after
provision for loan losses 649,623 6,039 -- 655,662 8,460 33,428 5,383 -- 702,933
-------- ------ ------- -------- ------ ------- ------- -------- ---------
Noninterest income 391,527 1,696 -- 393,223 1,077 9,578 1,305 -- 405,183
Net realized gain on sales
of securities 4,234 52 -- 4,286 -- 294 192 -- 4,772
-------- ------ ------- -------- ------ ------- ------- -------- ---------
Total noninterest income 395,761 1,748 -- 397,509 1,077 9,872 1,497 -- 409,955
Noninterest expense 669,731 4,458 -- 674,189 6,481 29,373 4,418 -- 714,461
-------- ------ ------- -------- ------ ------- ------- -------- ---------
Income from continuing
operations before income tax
expense 375,653 3,329 -- 378,982 3,056 13,927 2,462 -- 398,427
Income tax expense 137,901 952 -- 138,853 998 4,165 822 -- 144,838
-------- ------ ------- -------- ------ ------- ------- -------- ---------
Net income $237,752 $2,377 $ -- $240,129 $2,058 $ 9,762 $ 1,640 $ -- $ 253,589
======== ====== ======= ======== ====== ======= ======= ======== =========
Net income per common share:
Basic $ 2.23 $ 9.51 $ -- $ 2.23 $13.72 $ 2.60 $ 19.31 $ -- $ 2.19
Diluted 2.18 9.51 -- 2.19 13.72 2.60 19.12 -- 2.15
Weighted-average common
shares outstanding:
Basic - Average 106,745 250 675 107,670 150 3,760 85 4,229 115,894
Diluted - Average 108,950 250 675 109,875 150 3,762 85 4,229 118,101
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
12
20
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(UNAUDITED)
For the Year Ended Ended December 31, 1996
------------------------------------------------------------------------------------------------
First Pro Forma Pro Forma
American(5) Peoples Adjustments Total MTB Pioneer CSB(6) Adjustments Combined
---------- ------- ----------- -------- -------- ------- ------ ---------- ----------
(in thousands except per share amounts)
Interest income
Interest and fees on loans $ 867,897 $7,032 $ -- $ 874,929 $ 7,445 $41,069 $6,487 $ -- $ 929,930
Interest and dividends on
securities 243,853 2,402 -- 246,255 8,064 15,409 2,684 -- 272,412
Other interest income 21,550 -- -- 21,550 321 486 74 -- 22,431
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Total interest income 1,133,300 9,434 -- 1,142,734 15,830 56,964 9,245 -- 1,224,773
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Interest expense
Interest on deposits 434,116 3,937 -- 438,053 7,249 23,670 4,084 -- 473,056
Interest on short-term
borrowing 76,839 -- -- 76,839 -- 2,585 21 -- 79,445
Interest on long-term debt 29,084 -- -- 29,084 158 -- 27 -- 29,269
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Total interest expense 540,039 3,937 -- 543,976 7,407 26,255 4,132 -- 581,770
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Net interest income 593,261 5,497 -- 598,758 8,423 30,709 5,113 -- 643,003
Provision for loan losses 5,340 269 -- 5,609 323 1,097 222 -- 7,251
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Net interest income after
provision for loan losses 587,921 5,228 -- 593,149 8,100 29,612 4,891 -- 635,752
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Noninterest income 301,164 1,427 -- 302,591 1,044 7,881 1,227 -- 312,743
Net realized gain (loss)
on sales of securities 2,585 56 -- 2,641 -- 297 (100) -- 2,838
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Total noninterest income 303,749 1,483 -- 305,232 1,044 8,178 1,127 -- 315,581
Noninterest expense 571,663 3,784 -- 575,447 5,906 25,739 3,897 -- 610,989
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Income from continuing operations
before income tax expense 320,007 2,927 -- 322,934 3,238 12,051 2,121 -- 340,344
Income tax expense 114,825 805 -- 115,630 1,160 3,054 670 -- 120,514
---------- ------ ------ ---------- -------- ------- ------ -------- ----------
Net income $ 205,182 $2,122 $ -- $ 207,304 $ 2,078 $ 8,997 $1,451 $ -- $ 219,830
========== ====== ====== ========== ======== ======= ====== ======== ==========
Net income per common share:
Basic $ 1.96 $ 8.49 $ -- $ 1.97 $ 13.85 $ 2.39 $17.75 $ -- $ 1.93
Diluted 1.93 8.49 -- 1.94 13.85 2.39 17.69 -- 1.91
Weighted-average common shares
outstanding:
Basic - Average 104,533 250 675 105,458 150 3,760 82 4,160 113,610
Diluted - Average 106,092 250 675 107,017 150 3,760 82 4,160 115,169
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
13
21
PRO FORMA COMBINED CONDENSED INCOME STATEMENT
(UNAUDITED)
For the Year Ended Ended December 31, 1995
------------------------------------------------------------------------------------------
Pro Forma
First Adjust- Proforma
American(5) Peoples ments Total MTB Pioneer CSB(6) Adjustments Combined
---------- ------- ------- --------- ------- ------- ------- ----------- --------
(in thousands except per share amounts)
Interest income
Interest and fees on loans $ 754,662 $5,708 $ - $ 760,370 $ 7,224 $31,572 $ 5,505 $ -- $ 804,671
Interest and dividends on
securities 250,437 2,223 - 252,660 8,091 15,941 2,498 -- 279,190
Other interest income 14,775 -- - 14,775 401 1,460 57 -- 16,693
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Total interest income 1,019,874 7,931 - 1,027,805 15,716 48,973 8,060 -- 1,100,554
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Interest expense
Interest on deposits 382,307 3,422 - 385,729 7,006 21,233 3,617 -- 417,585
Interest on short-term
borrowings 78,543 -- - 78,543 -- 1,749 15 -- 80,307
Interest on long-term debt 19,971 -- - 19,971 164 -- 64 -- 20,199
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Total interest expense 480,821 3,422 - 484,243 7,170 22,982 3,696 -- 518,091
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Net interest income 539,053 4,509 - 543,562 8,546 25,991 4,364 -- 582,463
Provision for loan losses 2,243 25 - 2,268 170 619 172 -- 3,229
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Net interest income after
provision for loan losses 536,810 4,484 - 541,294 8,376 25,372 4,192 -- 579,234
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Noninterest income 201,349 1,046 - 202,395 943 6,771 1,083 -- 211,192
Net realized gain (loss) on
sales of securities 1,656 40 - 1,696 -- 211 (229) -- 1,678
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Total noninterest income 203,005 1,086 - 204,091 943 6,982 854 -- 212,870
Noninterest expense 463,900 3,236 - 467,136 5,353 22,848 3,297 -- 498,634
Income from continuing
operations before income
tax expense 275,915 2,334 - 278,249 3,966 9,506 1,749 -- 293,470
Income tax expense 100,215 701 - 100,916 1,323 2,424 616 -- 105,279
---------- ------ ---- ---------- ------- ------- ------- ------ ----------
Net income $ 175,700 $1,633 $ - $ 177,333 $ 2,643 $ 7,082 $ 1,133 $ -- $ 188,191
========== ====== ==== ========== ======= ======= ======= ====== ==========
Net income per common share:
Basic $ 1.73 $ 6.53 $ - $ 1.73 $ 17.62 $ 1.89 $ 14.09 $ -- $ 1.70
Diluted 1.70 6.53 - 1.70 17.62 1.89 14.09 -- 1.67
Weighted-average common shares
outstanding:
Basic - Average 101,593 250 675 102,518 150 3,760 80 4,186 110,694
Diluted - Average 103,300 250 675 104,225 150 3,760 80 4,186 112,401
See accompanying Notes to Unaudited Pro Forma
Combined Condensed Financial Statements.
14
22
NOTES TO UNAUDITED COMBINED CONDENSED PRO FORMA FINANCIAL INFORMATION
(1) The unaudited pro forma information presented herein is not necessarily
indicative of the results of operations or the combined financial position
that would have resulted had the acquisitions been consummated at the
beginning of the applicable periods presented, nor is it necessarily
indicative of the results of operations in future periods or the future
financial position of the combined entities. See "ADDITIONAL INFORMATION
-- Cautionary Statement Concerning Forward-Looking Information."
(2) Each of the Proposed Transactions will be accounted for on a pooling of
interests accounting basis, and accordingly the related pro forma
adjustments herein reflect, where applicable, an exchange ratio of 3.70
shares of First American Common Stock for each of the 250,000 shares of
Peoples Common Stock which were outstanding at June 30, 1998, an exchange
ratio of 7.768 shares of First American Common Stock for each of the
150,000 shares of MTB Common Stock which were outstanding at June 30,
1998, an exchange ratio of 1.65 shares of First American Common Stock for
each of the 3,735,848 shares of Pioneer Common Stock which were
outstanding at June 30, 1998 and an exchange ratio of 9.7071 shares of
First American Common Stock for each of the 84,946 shares of CSB Common
Stock which were outstanding at June 30, 1998.
As a result, information was adjusted for the Proposed Transactions by the
(i) addition of 9,109,000 shares of First American Common Stock amounting
to $22,800,000; (ii) elimination of 250,000 shares of Peoples Common
Stock, 150,000 shares of MTB Common Stock, 3,735,848 shares of Pioneer
Common Stock, and 84,946 shares of CSB Common Stock; and (iii) recording
the difference of $20,481,000 as a decrease to additional paid-in capital.
In addition, 30,668 shares of First American Common Stock will be
exchanged for 6,868 shares of common stock of Cheatham State Bank that
are not owned by CSB.
As of June 30, 1998, First American, Pioneer and CSB had 24,400,824,
200,000 and 7,684 shares of common stock reserved for issuance, primarily
for stock option plans, respectively, which are not included in the
unaudited pro forma financial information presented herein. MTB and
Peoples have no shares of common stock reserved for issuance.
(3) In connection with the Proposed Transactions, the companies expect to
incur certain restructuring and merger-related costs, including investment
banking, legal, accounting, and other related transaction costs and fees.
Additionally, the companies expect to incur other restructuring and
merger-related costs associated with the integration of the separate
companies and institution of efficiencies anticipated as a result of the
Proposed Transactions. Based on information currently available, the total
amount of restructuring and merger-related charges to be recognized in
connection with the Proposed Transactions is estimated to be approximately
$13.7 million, after tax. The following is a breakdown of estimated
restructuring and merger-related costs by entity:
PEOPLES MTB PIONEER CSB TOTAL
------- ------ ------- ------ -------
Severance $ 227 $ 295 $ 2,675 $ 800 $ 3,997
Systems conversion 227 1,854 2,640 357 5,078
Investment banker and legal expenses -- -- 4,850 -- 4,850
Other 999 795 2,393 736 4,923
------ ------ ------- ------ -------
Estimated restructuring and merger-related costs 1,453 2,944 12,558 1,893 18,848
Income tax effect 492 989 2,988 642 5,111
------ ------ ------- ------ -------
Total $ 961 $1,955 $ 9,570 $1,251 $13,737
====== ====== ======= ====== =======
- -----------
(4) Certain insignificant reclassifications have been included herein to
conform statement presentations. Transactions conducted in the ordinary
course of business between First American, MTB, Peoples, Pioneer and CSB
are immaterial, and accordingly, have not been eliminated.
(5) On May 1, 1998, Deposit Guaranty Corp. was merged with and into
First American. The transaction was accounted for using the
pooling-of-interest method. Historical results of First American have been
restated to reflect the impact of the transaction.
(6) For CSB, amounts include the minority interest.
15
23
THE PEOPLES SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is first being mailed to the holders
(the "PEOPLES SHAREHOLDERS") of shares of common stock, par value $2.00,
("PEOPLES COMMON Stock"), of Peoples Bank ("PEOPLES") on or about August 25,
1998, and is accompanied by the Notice of Special Meeting and a form of proxy
that is solicited by the Board of Directors of Peoples (the "PEOPLES BOARD") for
use at the special meeting of Peoples Shareholders to be held on September 24,
1998, at 7:00 p.m., local time, in the main office of Peoples, 601 Highway 46,
South, Dickson, Tennessee 37056, and at any adjournments or postponements
thereof (the "SPECIAL MEETING"). At the Special Meeting, Peoples Shareholders
will consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of April 21, 1998, by and between First American
Corporation ("FIRST AMERICAN") and Peoples (the "AGREEMENT") and the
transactions contemplated thereby, including the Merger Agreement attached as
Annex 1 thereto, providing for the proposed merger of First American Interim
Bank with and into Peoples and the related share exchange (together, the
"MERGER"). The Peoples Shareholders may also be asked to vote upon a proposal to
adjourn or postpone the Special Meeting, which adjournment or postponement could
be used for the purpose, among others, of allowing additional time for the
soliciting of additional votes to approve the Agreement.
PROXIES
A Peoples Shareholder may use the accompanying proxy if such Peoples
Shareholder is unable to attend the Special Meeting in person or wishes to have
his or her shares voted by proxy even if such shareholder does attend the
meeting. A shareholder may revoke any proxy given pursuant to this solicitation
by delivering to Peoples, prior to the taking of the vote at the Special
Meeting, a written notice revoking the proxy or a duly executed proxy relating
to the same shares bearing a later date or by attending the meeting and electing
to vote in person; however, attendance at the Special Meeting will not in and of
itself constitute a revocation of a proxy. All written notices of revocation and
other communications with respect to the revocation of Peoples proxies should be
addressed to Peoples Bank, P.O. Box 734, Dickson, Tennessee 37056, Attn: Thomas
Hayes, President and CEO. For such notice of revocation or later proxy to be
valid, however, it must actually be received by Peoples prior to the vote of the
Peoples Shareholders at the Special Meeting. All shares represented by valid
proxies received pursuant to this solicitation, and not revoked before they are
exercised, will be voted in the manner specified therein. If no specification is
made, the proxies will be voted in favor of approval of the Agreement. The
Peoples Board is unaware of any other matters that may be presented for action
at the Special Meeting. If other matters do properly come before the Special
Meeting, however, it is intended that shares represented by proxies in the
accompanying form will be voted (or not voted) by the persons named in the
proxies in their discretion, provided that no proxy that is voted against
approval and adoption of the Agreement will be voted in favor of any adjournment
or postponement of the Special Meeting for the purpose of soliciting additional
proxies to approve the Agreement.
SOLICITATION OF PROXIES
The entire cost of soliciting proxies from the Peoples Shareholders
will be borne by Peoples, except that Peoples and First American will each bear
half of the expenses associated with the printing and mailing of this
Prospectus/Proxy Statement and the registration statement and all filing fees in
connection therewith. In addition to the solicitation of proxies by mail,
Peoples will request banks, brokers and other record holders to send proxies and
proxy material to the beneficial owners of the stock and secure their voting
instructions, if necessary. Peoples will reimburse such record holders for their
reasonable expenses in so doing. If necessary, Peoples may also use several of
its regular employees, who will not be specially compensated, to solicit proxies
from Peoples Shareholders, either personally or by telephone, telegram,
facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
The Peoples Board has fixed August 15, 1998 as the record date (the
"PEOPLES RECORD DATE") for the determination of the Peoples Shareholders
entitled to receive notice of and to vote at the Special Meeting. Accordingly,
only Peoples Shareholders of record at the close of business on the Peoples
Record Date will be entitled to notice of and to vote at the Special Meeting. At
the close of business on the Peoples Record Date, there were 250,000 shares of
Peoples Common Stock entitled to vote at the Special Meeting held by
approximately 117 holders of record. The presence, in person or by proxy, of
shares of Peoples Common Stock representing a majority of the votes entitled to
be cast on the Agreement and the transactions contemplated thereby on the
Peoples Record Date is necessary to constitute a quorum at the Special Meeting.
Each share of Peoples Common Stock outstanding on the Peoples Record Date
entitles its holder to one vote as to the approval of the Agreement and the
transactions contemplated thereby and any other proposal that may properly come
before the Special Meeting.
Peoples will count shares of Peoples Common Stock present in person at
the Special Meeting but not voting, and shares of Peoples Common Stock for which
it has received proxies but with respect to which holders of such shares have
abstained, as present at the Special Meeting for purposes of determining the
presence or absence of a quorum for the transaction of business. In addition,
shares represented by proxies returned by a broker holding such shares in
nominee or "street" name will be counted for purposes of determining whether a
quorum exists, even if such shares are not voted in matters where discretionary
voting by the broker is not allowed ("BROKER NON-VOTES"). Under applicable rules
of the New York Stock Exchange, Inc. (the "NYSE"), brokers who hold shares of
Peoples Common Stock in "street" name for customers who are the beneficial
owners of such shares are prohibited from
16
24
giving a proxy to vote shares held for such customers with respect to the
matters to be considered and voted upon at the Special Meeting without specific
instructions from such customers.
UNDER THE TENNESSEE BANKING ACT (THE "TBA"), APPROVAL OF THE AGREEMENT
REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF ALL VOTES ENTITLED
TO BE CAST ON THE AGREEMENT AT THE SPECIAL MEETING. BECAUSE APPROVAL OF THE
AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF
OUTSTANDING SHARES OF PEOPLES COMMON STOCK, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. ACCORDINGLY, THE PEOPLES BOARD
URGES PEOPLES SHAREHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
It is currently expected that directors owning in excess of 32% of the
Peoples Common Stock will vote the shares of Peoples Common Stock beneficially
owned by them for approval of the Agreement and the transactions contemplated
thereby. In addition, as of the Peoples Record Date, the bank and trust
subsidiaries of First American held 2,087 shares of Peoples Common Stock but did
not exercise shared or sole voting power with respect to any such shares, while
Peoples did not hold any shares of Peoples Common Stock and thus had no shared
or sole voting power.
For additional information with respect to beneficial ownership of
Peoples Common Stock by individuals and entities owning more than 5% of such
stock and more detailed information with respect to beneficial ownership of
Peoples Common Stock by directors and executive officers of Peoples, see
"ADDITIONAL INFORMATION ABOUT PEOPLES Security Ownership of Management."
DISSENTERS' RIGHTS
Under Section 45-2-1309 of the TBA, each Peoples Shareholder who
dissents from the Merger has the right to have the fair value of such Peoples
Shareholder's shares appraised and paid to such Peoples Shareholder in cash
pursuant to Chapter 23 of the Tennessee Business Corporation Act (the "TBCA").
See "ADDITIONAL INFORMATION- Dissenters' Appraisal Rights."
RECOMMENDATION OF THE PEOPLES BOARD
The Peoples Board has unanimously approved the Agreement and the
transactions contemplated thereby. The Peoples Board believes that the Merger is
fair to and in the best interests of Peoples and the Peoples Shareholders and
unanimously recommends that the Peoples Shareholders vote "FOR" approval and
adoption of the Agreement and the transactions contemplated thereby. See "THE
MERGER - Reasons of Peoples for the Merger."
17
25
THE MERGER
THE FOLLOWING SUMMARY OF CERTAIN TERMS AND PROVISIONS OF THE AGREEMENT
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT, WHICH IS
INCORPORATED HEREIN BY REFERENCE, AND, WITH THE EXCEPTION OF CERTAIN EXHIBITS
THERETO, IS ATTACHED AS APPENDIX A TO THIS PROSPECTUS/PROXY STATEMENT.
DESCRIPTION OF THE MERGER
At the effective time of the Merger (the "EFFECTIVE TIME"), First
American Interim Bank ("INTERIM BANK"), which shall be a wholly owned Tennessee
state-chartered bank subsidiary of First American to be formed by First American
prior to the Closing Date, will be merged with and into Peoples. The separate
corporate existence of Interim Bank will cease, and Peoples will be the
surviving bank (the "RESULTING BANK") and will continue to exist as a Tennessee
state-chartered bank and wholly owned subsidiary of First American. Subject to
the satisfaction or waiver of certain conditions set forth in the Agreement and
described more fully in "--Conditions to the Merger," the Merger will become
effective upon the filing of a merger agreement by and between Peoples and
Interim Bank and copies of the resolutions of the shareholders of Peoples and
Interim Bank approving it and certified by certain officers of the banks, with
the Commissioner of Financial Institutions of the State of Tennessee (the
"COMMISSIONER") in accordance with the TBCA. The Merger will have the effects
set forth in Part 13 of the TBA, and the charter and bylaws of the Resulting
Bank at the Effective Time shall be the charter and bylaws of Peoples in effect
immediately prior to the Effective Time. At the Effective Time, the directors
and officers of Peoples shall be named by First American without any prejudice
to the rights of First American as the sole shareholder of the Resulting Bank.
At the Effective Time, automatically by virtue of the Merger and
without any action on the part of any party or Peoples Shareholder, each share
of Peoples Common Stock (excluding shares of Peoples Common Stock with respect
to which dissenters' rights have been properly demanded in accordance with
Chapter 23 of the TBCA ("DISSENTING SHARES"), or held by Peoples or any of its
subsidiaries or by First American or any of its subsidiaries, in each case,
other than Trust Account Shares (as defined below) or shares held in respect of
a debt previously contracted) issued and outstanding immediately prior to the
Effective Time will become and be converted into the right to receive 3.70 (the
"EXCHANGE RATIO") shares of First American Common Stock (which Exchange Ratio is
subject to potential adjustment as described under "--Termination of the
Agreement"), plus associated rights to purchase shares of First American's
Series A Junior Preferred Stock, and cash in lieu of any fractional share (the
"MERGER Consideration"). If, before the Effective Time, the shares of First
American Common Stock are increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization (but not a merger),
reclassification, stock dividend, stock split, reverse stock split or other
similar change, the Exchange Ratio will be adjusted accordingly.
It is expected that the market price of First American Common Stock
will fluctuate between the date of this Prospectus/Proxy Statement and the date
on which the Merger is consummated and thereafter. Because the Exchange Ratio is
fixed (subject to possible adjustment in the circumstances described under
"--Termination of the Agreement") and because the market price of First American
Common Stock is subject to fluctuation, the value of the shares of First
American Common Stock that holders of Peoples Common Stock will receive in the
Merger may increase or decrease prior to the Merger. For further information
concerning the historical market prices of First American Common Stock and
Peoples Common Stock, see "INFORMATION ABOUT OUR COMPANIES--Price Range of
Common Stock and Dividends--Market Prices." No assurance can be given concerning
the market price of First American Common Stock before or after the Effective
Time.
As of the Effective Time, by virtue of the Merger and without any
action on the part of the Peoples Shareholders, all shares of Peoples Common
Stock that are owned by Peoples or its subsidiaries or by First American or any
subsidiary of First American (other than shares in trust accounts, managed
accounts, custodial accounts and the like that are beneficially owned by third
parties (any such shares, "TRUST ACCOUNT SHARES")) shall be canceled and retired
and shall cease to exist and no stock of First American or other consideration
shall be delivered in exchange therefor. All shares of $2.50 par value common
stock of First American (the "FIRST AMERICAN COMMON STOCK") that are owned by
Peoples (other than Trust Account Shares) shall become authorized but unissued
stock of First American, and all other shares of First American Common Stock
outstanding as of the Effective Time will remain outstanding. Further,
Dissenting Shares will not be converted into the right to receive, or be
exchangeable for, the Merger Consideration; instead, the holders of Dissenting
Shares will be entitled to payment of the appraised value of the Dissenting
Shares if they deliver a written demand therefor to Peoples in accordance with
Chapter 23 of the TBCA. Notwithstanding the foregoing: (a) if any holder of
Dissenting Shares subsequently delivers a written withdrawal of such holder's
demand for appraisal thereof, or (b) if any such holder fails to establish such
holder's entitlement to dissenters' rights under Chapter 23 of the TBCA, or (c)
if no holder of Dissenting Shares has filed a petition demanding a determination
of the value of all Dissenting Shares within the time provided in Chapter 23 of
the TBCA, such holder or holders will forfeit the right to appraisal and such
shares will be deemed to have been converted into the right to receive, and to
have become exchangeable for, the Merger Consideration. See "ADDITIONAL
INFORMATION--Dissenters' Appraisal Rights."
From and after the Effective Time, each outstanding certificate
theretofore representing shares of Interim Bank common stock shall be deemed for
all purposes to evidence ownership of and to represent the number of shares of
Resulting Bank common stock into which such shares of Interim Bank common stock
shall have been converted. Promptly after the Effective Time, the
18
26
Resulting Bank shall issue to First American a stock certificate or certificates
representing such shares of Resulting Bank common stock in exchange for the
certificate or certificates which formerly represented shares of Interim Bank
common stock, which shall be canceled.
BACKGROUND OF THE MERGER
In 1993, Peoples entered into a merger agreement with First Alabama
Bancshares, Inc. ("FIRST ALABAMA") whereby the then shareholders of Peoples
would have received 1.6 shares of First Alabama common stock. That transaction
was terminated by mutual agreement, and thereafter the long-term strategic plan
of Peoples was to remain an independent, community-oriented financial
institution.
From time to time, representatives of First American have held
discussions with Thomas Hayes, President and Chief Executive Officer of Peoples,
concerning First American's interest in acquiring Peoples. In September of 1997,
Mr. Dale Polley, the President of First American contacted Mr. Hayes to discuss
the possibility of First American's acquisition of Peoples at a price of
approximately $32 million in First American Common Stock. Mr. Hayes indicated
that Peoples was not interested at that time in such proposal, but that the
Peoples Board would review its strategic alternatives after the end of the
fiscal year. Messrs. Hayes and Polley had further conversations in January and
early February 1998. On March 24, 1998, First American sent a letter to the
Peoples Board proposing to exchange 3.65 shares of First American Common Stock
for each share of Peoples Common Stock. The Peoples Board considered First
American's March 24 offer and more detailed March 27 proposal (containing the
same financial terms) at special meetings of the Peoples Board held on March 24
and March 28, 1998. At the meeting on March 28, 1998, the Peoples Board invited
representatives of First American to meet with them on April 1, 1998. On April
1, 1998, the Peoples Board met with Mr. Polley and Ms. Mary Neil Price, First
American's General Counsel, and with Peoples' special counsel. After receiving a
presentation from and questioning the First American representatives, the
Peoples Board authorized the retention of Professional Bank Services, Inc.
("PBS") to provide investment banking services and analysis of First American's
proposal.
On April 3, 1998, the Peoples Board further considered the First
American proposal and received preliminary advice from PBS with respect to the
exchange ratio proposed. Following this meeting and discussions between
representatives of Peoples and PBS and representatives of First American, First
American agreed to increase the proposed exchange ratio to 3.70 shares of First
American Common Stock for each share of Peoples Common Stock. On April 7, 1997,
the Peoples Board met, considered the revised financial terms and authorized
management and counsel to proceed to negotiate the terms of a definitive
acquisition agreement. Following this meeting, representatives of First American
and Peoples each conducted due diligence investigations of the other.
On April 14, the Peoples Board met to consider the terms of the
Agreement. At this meeting, the Board received an opinion from PBS that the
terms of the Agreement were fair from a financial point of view. The Board
unanimously approved the proposed Merger and the Agreement and recommended its
submission to shareholders. In addition, directors representing in excess of 32%
of Peoples' Common Stock agreed to vote their shares in favor of the Merger. On
April 21, 1998, officers of Peoples, as authorized by the Board, executed the
definitive Agreement.
REASONS OF PEOPLES FOR THE MERGER
In reaching its unanimous conclusion that the Merger is in the best
interest of Peoples and its shareholders, the Peoples Board carefully considered
a number of factors. The following include all of the material factors
considered thereby: (i) similarities between the community banking philosophies
of First American and Peoples, as well as First American's long standing
presence and reputation in Middle Tennessee; (ii) the current operating
environment, including, but not limited to, the continued consolidation and
increasing competition in the banking and financial services industries, the
prospect for further changes in these industries and the importance of being
able to capitalize on developing opportunities in these industries; (iii) the
financial terms of the Merger, including the expectation that the Merger will
qualify as a tax-free share exchange and the expectation that the Merger will
qualify as a "pooling of interests," (iv) a comparison of the financial terms of
the Merger with comparable transactions in Tennessee and elsewhere in the
country; (v) a review by the Peoples Board with its legal and financial advisors
of the provisions of the Agreement; (vi) the financial advice rendered by PBS to
the Peoples Board and the opinion rendered by PBS that the Exchange Ratio is
fair, from a financial point of view, to the holders of Peoples Common Stock;
(vii) the absence of any apparent regulatory impediments and the corresponding
likelihood that the proposed transaction would be consummated; (viii) the stock
price performance of and dividends paid on First American Common Stock over the
past several years; (ix) the opportunity for Peoples Shareholders to obtain
shares in a publicly traded company at a substantial multiple of book value, and
the increased marketability and liquidity of First American Common Stock
compared to Peoples Common Stock; (x) information with respect to the financial
condition, results of operations, businesses and prospects of Peoples,
specifically analyzing the option of selling Peoples or continuing on a
stand-alone basis; (xi) information with respect to the financial condition,
results of operations, business and prospects of First American as presented
both by First American and by PBS, as well as the Peoples Board's own knowledge
of Peoples, First American and their respective businesses (including without
limitation certain operating synergies resulting from integration and
consolidation of certain corporate, accounting and data processing functions).
THE PEOPLES BOARD BELIEVES THE MERGER IS FAIR TO, AND IN THE BEST
INTERESTS OF, PEOPLES AND THE PEOPLES SHAREHOLDERS. THE PEOPLES BOARD
UNANIMOUSLY RECOMMENDS THAT PEOPLES
19
27
SHAREHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY.
OPINION OF PEOPLES' FINANCIAL ADVISOR
PBS was engaged by Peoples to advise its Board as to the fairness of
the Merger Consideration, from a financial perspective to be paid by First
American to Peoples Shareholders. PBS is a bank consulting firm with offices in
Louisville, Atlanta, Chicago, Nashville and Washington, D.C. As part of its
investment banking business, PBS is regularly engaged in reviewing the fairness
of financial institution acquisition transactions from a financial perspective
and in the valuation of financial institutions and other businesses and their
securities in connection with mergers, acquisitions, estate settlements, and
other transactions. Neither PBS nor any of its affiliates has a material
financial interest in Peoples or First American. PBS was selected to advise the
Peoples Board based upon its familiarity with Tennessee financial institutions
and knowledge of the banking industry as a whole.
PBS performed certain analyses described herein and discussed the range
of values for Peoples resulting from such analyses with the Peoples Board in
connection with PBS's advice as to the fairness of the consideration to be paid
by First American.
A fairness opinion of PBS was delivered to the Peoples Board at a
special meeting on April 14, 1998. A copy of the fairness opinion (the "FAIRNESS
OPINION"), which includes a summary of the assumptions made and information
analyzed in deriving the fairness opinion, together with a letter dated the date
of this Prospectus/Proxy Statement reaffirming such opinion, are attached as
Appendix B to this Prospectus/Proxy Statement and should be read in their
entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Peoples and First
American. PBS considered certain financial and stock market data of Peoples and
First American, compared that data with similar data for certain other
publicly-held bank holding companies and considered the financial terms of
certain other comparable bank transactions that had recently been effected. PBS
also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant. In connection with its review, PBS did not independently verify the
foregoing information and relied on such information as being complete and
accurate in all material respects. Financial forecasts prepared by PBS were
based on assumptions believed by PBS to be reasonable and to reflect currently
available information. PBS did not make an independent evaluation or appraisal
of the assets of Peoples or First American.
As part of preparing its Fairness Opinion, PBS performed a due
diligence review of First American on April 14, 1998. As part of the due
diligence, PBS focused on the review of various documents, including the Form
10-K for the fiscal year ended December 31, 1997 filed with the Securities and
Exchange Commission; the Proxy/Prospectus for the 1998 First American Annual
Meeting and merger with Deposit Guaranty Corp., Jackson, Mississippi; internal
analysis of the Allowance For Loan and Lease Losses; the 1997-2000 Strategic
Planning Document; the December 31, 1997 Uniform Bank Performance Report for
First American National Bank; and personal interviews with individuals in the
treasury, internal audit and loan review functions of First American.
PBS reviewed and analyzed the historical performance of Peoples as set
forth in: Peoples Annual Reports as of 1997 and 1996; December 31, 1997
Consolidated Reports of Condition and Income filed by Peoples with the Federal
Deposit Insurance Corporation ("FDIC"); December 31, 1997 Uniform Bank
Performance Report of Peoples; and the premises and other fixed assets of
Peoples. PBS reviewed and tabulated statistical data regarding the loan
portfolio, securities portfolio and other performance ratios and statistics.
Financial projections were prepared and analyzed as well as other financial
studies, analyses and investigations as deemed relevant for the purposes of the
Fairness Opinion. In review of the aforementioned information, PBS took into
account its assessment of general market and financial conditions, experience in
other transactions, and knowledge of the banking industry generally.
In connection with rendering its Fairness Opinion and preparing its
various written and oral presentations to the Board of Directors, PBS performed
a variety of financial analyses, including those summarized herein. The summary
does not purport to be a complete description of the analyses performed by PBS
in this regard. The preparation of a Fairness Opinion involves various
assumptions as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized below,
PBS believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors could create an incomplete view of the
evaluation process underlying its Fairness Opinion. In performing its analyses,
PBS made numerous assumptions with respect to industry performance, business and
economic conditions and other matters, many of which are beyond Peoples' or
First American's control. The analyses performed by PBS are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. In addition, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the process by which businesses actually may be sold.
ACQUISITION COMPARISON ANALYSIS
PBS reviewed bank acquisition transactions in Alabama, Arkansas,
Florida, Georgia, Mississippi, North Carolina, Tennessee, Virginia and West
Virginia (the "REGIONAL AREA") since 1995. There were approximately 264 bank
acquisition transactions in the Regional Area announced since 1995 for which
detailed financial information was available. The purpose of the analysis was to
obtain an evaluation range based on these Regional Area bank acquisition
transactions. Median multiples of earnings and book value
20
28
implied by the comparable transactions were utilized in obtaining a range for
the acquisition value of Peoples. In addition to reviewing recent Regional Area
bank transactions, PBS performed separate comparable analyses for acquisitions
of Regional Area banks which, like Peoples, had an equity-to-asset ratio between
10.0% and 12.0%, assets between $100.0 and $200.0 million, a return on equity
above 15%, located in Tennessee, and announced since January 1, 1997. Median
values for the 264 Regional Area acquisitions expressed as multiples of both
book value and earnings were 2.09x and 19.13x, respectively. The median
multiples of book value and earnings for acquisitions of Regional Area banks
with an equity-to-asset ratio between 10.0% and 12.0% were 2.11x and 20.00x,
respectively. For acquisitions of Regional Area banks with assets between $100.0
and $200.0 million, the median multiples of book value and earnings were 2.28x
and 20.37x, respectively. Median multiples for Regional Area banks with a return
on equity above 15% were 2.38x and 15.36x, respectively. The median multiples of
book value and earnings for acquisitions of Regional Area banks located in
Tennessee were 1.92x and 16.28x, respectively. For transactions announced since
January 1, 1997, the median multiples of book value and earnings were 2.53x and
21.28x, respectively.
In the proposed transaction, Peoples shareholders will receive 3.70
shares of First American Common Stock per share of Peoples Common Stock, subject
to adjustment as further defined in the Agreement. On April 13, 1998, the
average of the bid/ask price for First American Common Stock on the Nasdaq
National Market System ("NASDAQ") was $50.59 per share. Using this average price
of $50.59 per share of First American Common Stock, the proposed consideration
to be received represents an aggregate value of $46,795,750 or $187.18 per share
of Peoples' Common Stock. This represents a multiple of Peoples' December 31,
1997 adjusted book value and multiple of 1997 adjusted earnings of 3.02x and
20.33x, respectively.
ADJUSTED NET ASSET VALUE ANALYSIS
PBS reviewed Peoples' balance sheet data to determine the amount of
material adjustments required to the stockholder's equity of Peoples based on
differences between the market value of Peoples' assets and their value
reflected on Peoples' financial statements. PBS determined that one adjustment
was warranted. PBS reflected a value of the non-interest bearing demand deposits
of $5,531,000. The adjusted net asset value was determined to be $84.02 per
share of Peoples Common Stock.
DISCOUNTED EARNINGS ANALYSIS
A dividend discount analysis was performed by PBS pursuant to which a
range of stand-alone values of Peoples was determined by adding the present
value of estimated future dividend streams that Peoples could generate over a
five-year period beginning in 1998 and ending in 2002, and the present value of
the "terminal value" of Peoples' earnings at the end of the year 2002. The
"terminal value" of Peoples' earnings at the end of the five-year period was
determined by applying a multiple of 16.28 times the projected terminal year's
net income. The 16.28x multiple represents the median price paid as a multiple
of earnings for all Tennessee bank transactions since 1995.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of common stock. The value of
Peoples, determined by adding the present value of the total cash flows, was
$154.11 per share. In addition, using the five-year projection as a base, a
twenty-year projection was prepared assuming an annual growth rate of 6% and
assuming return on assets reaches 2.00% by year three and remains constant
thereafter. Dividends also were assumed to be 50% of income for years one
through five and 70% thereafter. This long-term projection resulted in a value
of $136.29 per share.
SPECIFIC ACQUISITION ANALYSIS
PBS valued Peoples based on an acquisition analysis assuming a
"break-even" earnings scenario to an acquirer which factored in price, current
interest rates and amortization of the premium paid. Based on this analysis, an
acquiring institution would pay $114.78 per share of common stock, assuming they
were willing to accept no impact to their net income in the initial year. If an
overhead reduction of 10% is assumed, an acquiring company would pay $124.92 per
share of common stock. This analysis was based on a funding cost of 7.5%
adjusted for taxes, amortization of the acquisition premium over 15 years and an
earnings level for Peoples of $2,302,000 in 1997.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Peoples Shareholders under the Agreement is fair
and equitable from a financial perspective and does not constitute a
recommendation to any of the Peoples Shareholders to vote in favor of the
Merger. No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by Peoples or any of its affiliates.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Peoples Shareholders under
the Agreement, is fair and equitable from a financial perspective to the
shareholders of Peoples.
Pursuant to the terms of its agreement with PBS, Peoples has paid or
expects to pay PBS at its customary hourly rates not to exceed $30,000, plus
reasonable travel and related expenses for all services performed in connection
with rendering the Fairness Opinion. In addition, Peoples has agreed to
indemnify PBS and their directors, officers and employees, from liability in
connection
21
29
with the transaction, and to hold PBS harmless from any losses, actions, claims,
damages, expenses or liabilities related to any acts or decisions made by PBS in
good faith and in the best interest of Peoples.
THE EFFECTIVE TIME
The Merger will become effective upon the filing of a merger agreement
by and between Peoples and Interim Bank, and copies of the resolution of the
shareholders of Peoples and Interim Bank approving it and certified by the
officers of the banks with the Commissioner or at such time thereafter as is
provided in the Agreement, but in any event, Peoples and First American intend
that the Effective Time shall be 12:01 a.m. Central Time of the first calendar
day of the month immediately following the month in which the date of the
closing of the Merger occurs (the "CLOSING DATE"). The Closing Date will occur
on the last business day of September 1998, or succeeding calendar months
thereafter, and at least two business days after the satisfaction or waiver,
subject to applicable law, of the conditions described under "-- Conditions to
the Merger."
At the Effective Time, Peoples Shareholders (other than those who
perfect dissenters' rights under the TBCA--see "ADDITIONAL INFORMATION--
Dissenters' Appraisal Rights") will cease to be, and will have no rights as,
Peoples Shareholders, other than to receive (i) any dividend or other
distribution with respect to Peoples Common Stock with a record date occurring
prior to the Effective Time and (ii) the Merger Consideration. There will be no
transfers on the stock transfer books of Peoples of shares of Peoples Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Peoples Certificates (as defined herein) are presented to
Peoples for any reason, they will be cancelled and exchanged for certificates
representing shares of First American Common Stock as provided in the Agreement.
EXCHANGE OF CERTIFICATES
As of the Effective Time, First American will deposit, or will cause to
be deposited, with its transfer agent (the "EXCHANGE AGENT"), certificates
representing the shares of First American Common Stock (collectively, "FIRST
AMERICAN CERTIFICATES") and cash to be paid in lieu of fractional shares to
which a holder of certificates formerly representing Peoples Common Stock
(collectively, "PEOPLES CERTIFICATES") would otherwise be entitled based on the
Exchange Ratio (such cash and First American Certificates, together with any
dividends or distributions with respect thereto, the "EXCHANGE FUND").
Peoples shall use its best efforts to cause each Peoples Shareholder
(who does not dissent pursuant to Chapter 23 of the TBCA), to deliver the
Peoples Certificates to Peoples, and Peoples shall keep such certificates in
escrow for the benefit of each Peoples Shareholder until the Closing Date. On
the Closing Date, Peoples shall deliver these certificates to First American.
Upon surrender of a Peoples Certificate for cancellation to the Exchange Agent
together with such documentation as the Exchange Agent may reasonably require to
effectuate the exchange, the Exchange Agent shall, at or after the Effective
Time, deliver to the holder of each such Peoples Certificate a certificate
representing that number of whole shares of First American Common Stock which
such holder has the right to receive in respect of the Peoples Certificate
surrendered pursuant to the Agreement (after taking into account all shares of
Peoples Common Stock then held by such holder), and cash for fractional shares,
if any, and the Peoples Certificate so surrendered shall thereupon be canceled.
In the event of a transfer of ownership of Peoples Common Stock which is not
registered in the transfer records of Peoples, a certificate representing the
proper number of shares of First American Common Stock may be issued to a
transferee if the certificate representing such Peoples Common Stock is
presented to the Exchange Agent, accompanied by all documents required by the
Exchange Agent, in its sole discretion, to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Upon
surrendered to the Exchange Agent in the manner contemplated by the Agreement,
each Peoples Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of First American Common Stock and cash in lieu of any
fractional shares of First American Common Stock, without interest, as
contemplated by the Agreement.
No fractional shares of First American Common Stock and no First
American Certificates or scrip therefor, or other evidence of ownership thereof,
will be issued in the Merger, nor will any dividend or distribution be payable
on or with respect thereto, nor will any such fractional share entitle the
holder thereof to vote or to any other rights of a First American Shareholder.
Instead, First American will pay to each Peoples Shareholder who would otherwise
be entitled to a fractional share of First American Common Stock (after taking
into account all Peoples Certificates delivered by such Peoples Shareholder) an
amount in cash to be paid in lieu of fractional shares (without interest)
determined by multiplying such fraction by the closing price of First American
Common Stock on the NYSE (as reported in The Wall Street Journal or, if not
reported thereby, any other authoritative source) on the trading day immediately
preceding the date on which the Effective Time occurs.
Any part of the Exchange Fund that remains unclaimed by Peoples
Shareholders for 12 months after the Effective Time will be paid to First
American, and after such time Peoples Shareholders may look only to First
American for payment of the Merger Consideration and unpaid dividends and
distributions, if any, on First American Common Stock deliverable in respect of
each share of Peoples Common Stock held by such holder, in each case, without
interest thereon. Neither First American nor Peoples or the Exchange Agent, or
any other person, will be liable to any Peoples Shareholder or First American
Shareholder for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to applicable abandoned property,
escheat or similar law.
22
30
In the event that any Peoples Certificate is lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming the same,
and if required by First American, the posting of a bond by such person in an
amount that First American may direct as indemnity against any claim that may be
made against it with respect to such Peoples Certificate, the Exchange Agent
will issue in exchange for such Peoples Certificate the shares of First American
Common Stock and cash in lieu of fractional shares deliverable in respect
thereof.
No dividends or other distributions declared or made after the
Effective Time with respect to First American Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Peoples Certificate with respect to the shares of First American Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder until the holder of such Peoples Certificate shall
surrender such Certificate in accordance with the Agreement. Subject to the
effect of applicable laws, following proper surrender of any such Peoples
Certificate, there shall be paid to the holder of the certificates representing
whole shares of First American Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of any cash payable with
respect to a fractional share of First American Common Stock to which such
holder is entitled pursuant to the Agreement and the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of First American Common Stock, and, if
necessary, (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of First American Common Stock.
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
The Agreement contains negative and affirmative covenants that are
customary in transactions of this nature. In addition, the Agreement provides
that, except as specifically contemplated or permitted thereby, Peoples shall,
and shall cause its subsidiaries to, operate its business only in the usual,
regular and ordinary course and preserve intact its business organizations and
assets and maintain it rights and franchises and each of Peoples and First
American shall, and shall cause each of its respective subsidiaries to, take no
action which would materially adversely affect the ability of any party to
perform its covenants in all material respects to consummate the Merger or
prevent or impede the transactions contemplated by the Agreement from qualifying
as a reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended ("CODE"), or the Merger qualifying as a pooling of interests; provided,
however, that the foregoing generally does not prevent First American or any of
its subsidiaries from acquiring or disposing of assets or businesses and that
Peoples shall be permitted to sell all of the assets or stock of Community
Credit Services, Inc. with the prior written consent of First American, which
consent shall not be unreasonably withheld. Further, without the prior written
consent of First American, or as otherwise provided in the Agreement, Peoples
generally may not, and may not permit its subsidiaries to, incur new debt other
than in the ordinary course of business; declare or pay dividends other than a
dividend on an equivalent basis to First American's current dividend; increase
compensation or benefits of employees, officers or directors except as
specifically permitted in the Agreement; or take certain other actions, other
than in the ordinary course of business or as described in the Agreement, that
might impact the financial condition or business of Peoples. The Agreement also
contains certain other provisions pursuant to which Peoples has agreed to take
certain actions relating to its lending, environmental and other policies with
the purpose of coordinating such policies with those of First American in
anticipation of the completion of the transactions contemplated by the
Agreement.
In the Agreement, Peoples has agreed that it will not authorize or
permit any officer, director, employee, investment banker, financial consultant,
attorney, accountant or other representative of Peoples or any subsidiary,
directly or indirectly, to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any Competing Transaction (as defined
in "--Termination of Agreement" below). Peoples will not authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Peoples or any subsidiary, directly or
indirectly, (a) to cooperate with, or furnish or cause to be furnished any
non-public information concerning its business, properties or assets to, any
person or entity in connection with any Competing Transaction; (b) to negotiate
any Competing Transaction with any person or entity; or (c) to enter into any
agreement, letter of intent or agreement in principle as to any Competing
Transaction. Peoples will promptly give written notice to First American upon
becoming aware of any Competing Transaction.
In the event this covenant relating to Competing Transactions is
breached by Peoples, or any of its directors, officers, employees or agents, and
the Agreement is terminated as a result, under certain circumstances Peoples may
be required to pay to First American liquidated damages of $2,000,000. See "--
Termination Fee."
CONDITIONS TO THE MERGER
The obligations of First American and Peoples to consummate the Merger
are subject to the satisfaction (or waiver, where legally allowed), at or prior
to the Effective Time, of a number of conditions set forth in the Agreement,
including: (i) approval and adoption of the Agreement by the affirmative vote of
the holders of not less than a majority of Peoples Common Stock entitled to vote
thereon and with no more than 5% of shares of Peoples Common Stock dissenting
pursuant to the applicable provisions of the Agreement and the TBCA; (ii)
approval for listing on the NYSE of the shares of First American Common Stock to
be issued in the Merger; (iii) the receipt of all authorizations, consents,
orders or approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental entity (all the foregoing,
"CONSENTS") which are necessary for the consummation of the Merger, other than
Consents the failure to obtain which would have no material adverse effect on
the consummation of the Merger or on First American and its subsidiaries, taken
as a whole, (all such permits, approvals, filings and consents and the lapse of
all such waiting periods being referred to as the "REQUISITE REGULATORY
APPROVALS"); (iv) the Registration Statement shall have
23
31
become effective under the Securities Act of 1933, as amended (the "SECURITIES
ACT"), and shall not be the subject of any stop order or proceedings seeking a
stop order; (v) the absence of any order, injunction or decree issued by any
court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Merger, and the absence of any
statute, rule, regulation, order, injunction or decree having been enacted,
entered, enforced or deemed applicable to the Merger that would render
consummation of the Merger illegal; and (vii) the absence of any proceeding
initiated by any governmental entity seeking an Injunction.
The obligation of First American to effect the Merger is subject to the
satisfaction of the following additional conditions unless waived in writing by
First American: (i) the representations and warranties of Peoples set forth in
the Agreement shall be true and correct in all material respects as of the date
of the Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date; (ii) as of the Closing Date and continuing until the Effective
Time, the realized shareholders' equity of Peoples, calculated on a consolidated
basis in accordance with generally accepted accounting principles ("GAAP"),
shall not be less than $16.4 million (exclusive of Merger-related costs in an
amount not to exceed $200,000 and exclusive of bonuses and payments made by
Peoples to Peoples' 401(k) Profit Sharing Plan in an aggregate amount not to
exceed $250,000); (iii) Peoples shall have performed in all material respects
all obligations required to be performed by it under the Agreement at or prior
to the Closing Date; (iv) prior to or on the Closing Date, Peoples shall have
obtained the consent or approval of each person (other than those the failure to
obtain which would not have a material adverse effect upon the consummation of
the Merger or on First American or its subsidiaries) whose consent or approval
shall be required in order to permit the succession by First American after the
Effective Time to any obligation, right or interest of Peoples under any loan or
credit agreement, note, mortgage, indenture, lease, license or other agreement
or instrument; (v) First American and Peoples shall have received the opinion of
the law firm of Bass, Berry & Sims PLC, dated as of the Closing Date, to the
effect that the Merger will have the federal income tax consequences set forth
under "--Certain Federal Income Tax Consequences"; (vi) First American also
shall have received the opinion of the law firm of Bass, Berry & Sims PLC,
counsel to Peoples, dated as of the Closing Date, in form reasonably
satisfactory to First American, which shall cover the matters set forth in the
Agreement; (vii) there shall have been no material adverse change in the
business, financial condition, prospects or results of operations or prospects
of Peoples from that reflected in the documents provided to First American
pursuant to the terms of the Agreement and neither Peoples nor any of its
subsidiaries shall have suffered any substantial loss or damage to their
respective properties, or assets whether or not insured that would materially
adversely affect or impair the ability of Peoples or its subsidiaries to conduct
their business and operations except for such changes that result from changes
contemplated by the Agreement; (viii) First American shall have received written
affiliates agreements as provided for in the Agreement; (ix) First American
shall have received a letter from Kraft Bros., Esstman, Patton & Harrell, PLLC,
dated as of the Closing Date, in form and substance satisfactory to First
American, addressing certain matters regarding the financial statements of
Peoples set forth in the Agreement; (x) First American shall have received a
certificate of the President and Chief Executive Officer of Peoples certifying
to First American immediately prior to the Effective Time (a) the number of
shares of Peoples Common Stock issued and outstanding; (b) that there were no
options for Peoples Common Stock outstanding; (c) that no other shares of
capital stock or securities convertible into or evidencing the right to purchase
or subscribe for any shares of Peoples capital stock are outstanding and that
there are no other outstanding warrants, calls, subscriptions, rights,
commitments, stock appreciation rights, phantom stock or similar rights or any
other agreements of any character obligating Peoples to issue any shares of
capital stock or securities convertible into or evidencing the right to purchase
such stock; (d) that no shares of Peoples stock are held by Peoples in treasury;
and (e) that Peoples owns, free and clear, all of the capital stock of the
subsidiaries; (xi) the Employment Agreement between First American National Bank
("FANB") and Thomas Hayes, substantially in the form attached to the Agreement,
shall have been executed and delivered by Mr. Hayes prior to the Closing Date;
(xii) First American shall have received (a) a letter from Kraft Bros., Esstman,
Patton & Harrell, PLLC, to the effect that Peoples Bank has taken no action that
would cause the transactions contemplated herein not to qualify for
"pooling-of-interests" accounting treatment and (b) the opinion of KPMG Peat
Marwick LLP to the effect that the Merger shall be accounted for as a
"pooling-of-interests"; (xiii) at Closing, Peoples shall provide to First
American a statement, dated on and as of the Closing Date, concerning the status
and costs associated with Peoples' compliance or non-compliance with its
covenants under the Agreement and as to the other items covered by the monthly
status reports as called for by the terms of the Agreement; and (xiv) at
Closing, First American shall receive a statement from the President and Chief
Executive Officer of Peoples certifying that Peoples and its subsidiaries have
complied in all material respects with the standards set forth in the FFIEC
Interagency Statement regarding Year 2000 compliance dated May 5, 1997, and as
revised on December 17, 1997, and as may have been amended thereafter.
The obligation of Peoples to effect the Merger is subject to the
satisfaction of the following additional conditions unless waived by Peoples:
(i) the representations and warranties of First American set forth in the
Agreement shall be true and correct in all material respects as of the date of
the Agreement and (except to the extent such representations speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date; (ii) First American shall have performed in all material respects all
obligations required to be performed by it under the Agreement at or prior to
the Closing Date; (iii) Peoples shall have received the opinion of Mary Neil
Price, Esq., General Counsel to First American, dated as of the Closing Date, in
form reasonably satisfactory to Peoples, which shall cover the matters set forth
in the Agreement; and (iv) there shall have been no material adverse change in
the business, financial condition, prospects or results of operations or
prospects of First American from that reflected in the SEC filings of First
American as were provided to Peoples by First American in accordance with the
terms of the Agreement and First American shall not have suffered any
substantial loss or damage to its properties, or assets whether or not insured
that would materially adversely affect or impair the ability of First American
to conduct its business and operations.
24
32
No assurance can be provided as to whether all of the conditions
precedent to the Merger will be satisfied or, where legally permitted, waived by
the party permitted to do so.
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the shareholders of Peoples: (a) by
mutual written consent of First American and Peoples; or (b) by either First
American or Peoples if (i) the Merger shall not have been consummated on or
before December 31, 1998, provided the terminating party shall not have breached
in any material respect its obligations under the Agreement in a manner that
proximately contributed to the failure to consummate the Merger by such date;
(ii) any governmental or regulatory body, the consent of which is a condition to
the obligations of First American and Peoples to consummate the transactions
contemplated by the Agreement, shall have determined not to grant its consent
and all appeals of such determination shall have been taken and have been
unsuccessful; or (iii) any court of competent jurisdiction in the United States
or any State shall have issued an order, judgment or decree (other than a
temporary restraining order) restraining, enjoining or otherwise prohibiting the
Merger and such order, judgment or decree shall have become final and
nonappealable.
The Agreement may be terminated by First American at any time prior to
the Effective Time, whether before or after approval by the shareholders of
Peoples: (i) if any event shall have occurred as a result of which any condition
of First American's obligations to effect the Merger, as set forth in the
Agreement, is no longer capable of being satisfied; (ii) if there has been a
breach by Peoples of any representation or warranty contained in the Agreement,
which would or would be reasonably likely to have a material adverse effect on
the assets, liabilities, financial condition, results of operations or prospects
of Peoples and its subsidiaries, taken as a whole, or there has been a material
breach of any of the covenants or agreements set forth in the Agreement on the
part of Peoples; (iii) if Peoples (or the Peoples Board) shall have authorized,
recommended, proposed or publicly announced its intention to enter into a
Competing Transaction (as herein defined); (iv) if the Peoples Board shall have
withdrawn or materially modified its authorization, approval or recommendation
to the stockholders of Peoples with respect to the Merger or the Agreement or
shall have failed to make the favorable recommendation required by the terms of
the Agreement; or (v) if Peoples has authorized or permitted any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Peoples or any subsidiary, directly or
indirectly, to negotiate any Competing Transaction with any person or entity.
The term "COMPETING TRANSACTION" means any of the following involving
Peoples (other than the transactions contemplated by the Agreement): (x) any
merger, consolidation, share exchange, business combination, or other similar
transaction; (y) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the capital stock or assets of Peoples in a single
transaction or series of transactions to the same person, entity or group; or
(z) any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
The Agreement may also be terminated at any time prior to the Effective
Time, whether before or after approval by the shareholders of Peoples: (i) if
any event shall have occurred as a result of which any condition of Peoples'
obligations to effect the Merger, as set forth in the Agreement, is no longer
capable of being satisfied; or (ii) if there has been a breach by First American
of any representation or warranty contained in the Agreement which would have or
would be reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or prospects
of First American and FANB, taken as a whole, or there has been a material
breach of any of the covenants or agreements set forth in the Agreement on the
part of First American.
In the event of termination of the Agreement pursuant to its terms the
Agreement will become void and have no effect, except with respect to those
provisions of the Agreement which by their terms expressly survive the
termination of the Agreement, and except with respect to the provisions of the
Agreement relating to publicity, fees and expenses and the parties' rights and
obligations upon termination and except that termination will not relieve or
release a breaching party from liability or damages for its willful breach of
the Agreement.
TERMINATION FEE
In recognition of the fact that First American has spent substantial
time and effort in examining the business, properties, affairs, financial
condition and prospects of Peoples, has incurred substantial fees and expenses
in connection with such examination, the preparation of the Agreement and the
accomplishment of the transactions contemplated thereunder, and will be unable
to evaluate and, possibly, make investments in or acquire other entities due to
the limited number of personnel available for such purpose and the constraints
of time, the Agreement provides that Peoples shall pay to First American a fee
in the amount of $2 million (the "FEE"), which amount is inclusive of the First
American expenses, not as a penalty but as full and complete liquidated damages:
(a) if First American terminates the Agreement: (i) by reason of the failure of
Peoples to meet certain conditions set forth in the Agreement due to Peoples'
knowing and intentional misrepresentation or knowing and intentional breach of
warranty or breach of any covenant or agreement, and within twelve (12) months
from the date of termination a Competing Transaction is consummated or Peoples
shall have directly or indirectly solicited bids for a Competing Transaction or
shall have entered into an agreement or an agreement in principle which if
consummated would constitute a Competing Transaction; (ii) after the Peoples
Board shall have withdrawn or materially modified its authorization, approval or
recommendation to the shareholders of Peoples with respect to the Merger or the
Agreement or shall have failed to make the favorable recommendation required by
the terms of the Agreement; or (iii) because
25
33
Peoples (or its Board of Directors) shall have authorized, recommended, proposed
or publicly announced its intention to enter into a Competing Transaction and
within twelve (12) months from the date of termination a Competing Transaction
is consummated or Peoples shall have entered into an agreement which if
consummated would constitute a Competing Transaction; or (b) if Peoples
terminates the Agreement pursuant to its termination right under the Agreement
because the Agreement did not receive the requisite vote of the Peoples
shareholders and within twelve (12) months from the date of termination a
Competing Transaction is consummated or Peoples shall have entered into an
agreement which if consummated would constitute a Competing Transaction. Any Fee
required to be paid shall be made no later than two business days after the date
due and shall be made by wire transfer of immediately available funds to an
account designated by First American. In the event that First American is
entitled to the Fee, Peoples shall also pay to First American interest at the
rate of 9% per year on any amounts that are not paid when due, plus all costs
and expenses in connection with or arising out of the enforcement of the
obligation of Peoples to pay the Fee or such interest.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses
incurred in connection with the Agreement and the transactions contemplated
thereby shall be paid by the party incurring such expense; provided that First
American and Peoples shall equally share all expenses connected with the
printing and mailing of the Registration Statement; and, provided, further, that
in the event the requisite vote of the Peoples Shareholders to approve the
Merger is not obtained, Peoples shall bear all of the expenses incurred by First
American in connection with the preparation, printing, or mailing of an offering
statement to Peoples Shareholders, the registration of First American Common
Stock through the Registration Statement or other out-of-pocket expenses
incurred by First American under the Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated U.S. federal
income tax consequences of the Merger to Peoples Shareholders who hold Peoples
Common Stock as a capital asset. The summary is based on the Code, Treasury
regulations thereunder, and administrative rulings and court decisions in effect
as of the date hereof, all of which are subject to change at any time, possibly
with retroactive effect. This summary is not a complete description of all of
the consequences of the Merger and, in particular, may not address U.S. federal
income tax considerations applicable to stockholders subject to special
treatment under U.S. federal income tax law (including, for example, non-U.S.
persons, financial institutions, dealers in securities, insurance companies,
tax-exempt entities and holders who hold Peoples Common Stock as part of a
hedge, straddle or conversion transaction). In addition, no information is
provided herein with respect to the tax consequences of the Merger under
applicable foreign, state or local laws. PEOPLES SHAREHOLDERS ARE URGED TO
CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER TO
THEM, INCLUDING THE EFFECTS OF U.S. FEDERAL, STATE AND LOCAL, FOREIGN, AND OTHER
TAX LAWS.
In connection with the filing of the Registration Statement, First
American has received an opinion of Bass, Berry & Sims PLC as of August 10,
1998, addressing the U.S. federal income tax consequences of the Merger
described below. Such opinion has been rendered on the basis of facts,
representations and assumptions set forth or referred to in such opinion which
are consistent with the expected state of facts existing at the Effective Time.
In rendering this opinion, Bass, Berry & Sims PLC has required and relied upon
representations and covenants, including those contained in certificates of
officers of First American and Peoples.
First American's obligation to effect the Merger is conditioned upon
its receipt of an opinion of the law firm of Bass, Berry & Sims PLC, counsel to
Peoples, dated as of the Closing Date, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a)(1)(B) of the Code, and that First American and Peoples will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code. In addition, Peoples shall have received an opinion from Bass, Berry &
Sims PLC, to the foregoing effect and to the effect that (i) the Peoples
Shareholders will not recognize any gain or loss to the extent that such
shareholders exchange shares of Peoples Common Stock solely for shares of First
American Common Stock in the Merger; (ii) the basis of the First American Common
Stock received by a Peoples Shareholder who exchanges Peoples Common Stock
solely for First American Common Stock will be the same as the basis of the
Peoples Common Stock surrendered therefor (subject to any adjustments required
as a result of the receipt of cash in lieu of fractional shares); (iii) the
holding period of the First American Common Stock received by a Peoples
Shareholder receiving First American Common Stock will include the period during
which the Peoples Common Stock surrendered in exchange therefor was held
(provided that the Peoples Common Stock was held as a capital asset at the
Effective Time); and (iv) cash received by a Peoples Shareholder in lieu of a
fractional First American Common Stock share will be treated as having been
received as a distribution in full payment in exchange for such fractional share
interest.
None of the tax opinions to be delivered to the parties in connection
with the Merger as described herein are binding on the Internal Revenue Service
(the "IRS") or the courts, and the parties do not intend to request a ruling
from the IRS with respect to the Merger. Accordingly, there can be no assurance
that the IRS will not challenge the conclusions reflected in such opinions or
that a court will not sustain such challenge.
Based upon the current ruling position of the IRS, cash received by a
Peoples Shareholder in lieu of a fractional share interest in First American
Common Stock will be treated as having been received in redemption of such
fractional share interest, and a Peoples
26
34
Shareholder should generally recognize capital gain or loss for federal income
tax purposes measured by the difference between the amount of cash received and
the portion of the tax basis of the share of Peoples Common Stock allocable to
such fractional share interest. Such gain or loss should be a long-term capital
gain or loss if the holding period for such share of Peoples Common Stock is
greater than one year at the Effective Time. The holding period of a share of
First American Common Stock received in the Merger (including a fractional share
interest deemed received and redeemed as described above) will include the
holder's holding period in the Peoples Common Stock surrendered in exchange
therefor.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Peoples' management and the Peoples Board may be
deemed to have certain interests in the Merger that are in addition to their
interests as Peoples Shareholders generally. The Peoples Board was aware of
these interests and considered them, among other matters, in approving the
Agreement and the transactions contemplated thereby.
Employment Agreement. Pursuant to the terms of the Agreement, First
American's obligation to effect the Merger is subject to the execution and
delivery, prior to the Closing Date, by Thomas Hayes of an employment agreement
(the "EMPLOYMENT AGREEMENT") between Mr. Hayes and FANB. As of the date of the
Agreement, Mr. Hayes was the President and Chief Executive Officer and a
director of Peoples. Pursuant to the Employment Agreement, Mr. Hayes will be
employed by FANB. The term of the Employment Agreement commences on the Closing
Date and continues until December 31, 2000, unless renewed by mutual agreement
of the parties thereto prior to that date (or any subsequent date on which Mr.
Hayes ceases to be employed by FANB and/or its subsidiaries, affiliates,
successors or assigns) ("TERMINATION DATE") for an additional one year period;
provided that (i) Mr. Hayes' term of employment pursuant to the Employment
Agreement (the "EMPLOYMENT PERIOD") shall terminate prior to such date upon Mr.
Hayes' resignation, death or permanent disability or incapacity and (ii) the
Employment Period may be terminated by FANB at any time prior to such date for
cause (as defined in the Employment Agreement) or without cause.
Mr. Hayes' base salary will be $165,000 per year or such higher rate as
may be determined from time to time in accordance with the policies and
procedures of FANB ("BASE SALARY") during the Employment Period. Mr. Hayes shall
also receive a bonus, payable on or before December 31, 1998, in an amount not
to exceed $27,500 for services rendered to FANB in 1998, and shall not be
entitled to participate in any First American annual incentive plan in 1998;
such bonus shall be accrued by Peoples prior to the date of the Employment
Agreement. On or after January 1, 1999, and until the Termination Date, Mr.
Hayes shall also be entitled to participate in any First American annual
incentive plan for similarly situated employees during the term of the
Employment Agreement.
If the Employment Period is terminated by FANB without cause prior to
the Termination Date, Mr. Hayes shall be entitled to receive one-half of his
Base Salary, as in effect immediately prior to the Termination Date, through,
and in consideration for, the Noncompete Period (as defined in the Employment
Agreement), so long as Mr. Hayes has not materially breached the provisions of
the Employment Agreement. Such Base Salary payments shall be payable in regular
installments in accordance with FANB's general payroll practices. If the
Employment Period is terminated as a result of Mr. Hayes' death or permanent
disability or incapacity, Mr. Hayes or his estate shall be entitled to receive
his Base Salary, as in effect immediately prior to the Termination Date through
the Termination Date. All of Mr. Hayes' rights to benefits and bonuses under the
Employment Agreement (if any) accruing after the Termination Date shall cease
upon such termination.
The Employment Agreement also provides that Mr. Hayes is entitled to
participate in all of FANB's benefit programs for which similarly situated
employees of FANB and its subsidiaries are generally eligible. The Employment
Agreement, once effective, supersedes any other employment agreement between Mr.
Hayes and Peoples.
Severance Arrangements. First American will use its reasonable efforts
to provide employment opportunities in other First American locations in Middle
Tennessee to qualified employees of Peoples whose services in current Peoples
positions after the Effective Time are no longer necessary, and from and after
the Effective Time, all employees of Peoples who are terminated after the Merger
will be eligible for severance benefits under First American's severance policy.
Indemnification; Insurance. The Agreement provides that, from and after
the Effective Time, First American shall indemnify, defend and hold harmless
each person who is now, or has been at any time prior to the date of the
Agreement or who becomes prior to the Effective Time, an officer, director or
employee of Peoples or any of its subsidiaries (the "INDEMNIFIED PARTIES")
against all losses, claims, damages, costs, expenses (including attorneys'
fees), liabilities or judgments, or amounts that are paid in settlement with the
approval of First American (which approval shall not be unreasonably withheld),
of or in connection with any claim, action, suit, proceeding or investigation in
which an Indemnified Party is, or is threatened to be made a party or witness,
based in whole or in part on or arising in whole or in part out of the fact that
such person is or was a director, officer or employee of Peoples or any
subsidiary of Peoples, whether pertaining to any matter existing or occurring at
or prior to the Effective Time and whether asserted or claimed prior to, or at
or after, the Effective Time, in each case to the full extent Peoples would have
been permitted under Tennessee or federal law in effect as of the date of the
Agreement or as amended applicable to a time prior to the Effective Time, and
its charter and by-laws or the charter and by-laws of the Peoples subsidiary, as
applicable, to indemnify such person. Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Party (whether arising before or after the Effective
Time), (i) any counsel retained by the Indemnified Parties for any period after
the Effective Time
27
35
shall be reasonably satisfactory to First American; (ii) after the Effective
Time, First American shall pay all reasonable fees and expenses of such counsel
and such other fees and expenses as are reasonable for the Indemnified Parties
promptly as statements therefor are received; and (iii) after the Effective
Time, First American will use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that First American shall not be liable for
any settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under these provisions of the Agreement, upon learning of
any such claim, action, suit, proceeding or investigation, shall notify First
American (but the failure so to notify First American shall not relieve it from
any liability which it may have under these provisions of the Agreement except
to the extent such failure materially prejudices First American). The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
First American has also agreed, from and after the Effective Time and
for a period of three years thereafter, to use its best efforts to maintain in
effect directors' and officers' liability insurance coverage which is at least
as advantageous as to coverage and amounts as maintained by Peoples immediately
prior to the Effective Time with respect to claims arising from facts or events
which occurred before the Effective Time; provided, however, that First American
shall not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 1.5 times premiums paid as of the date hereof by
Peoples for such insurance. Notwithstanding anything to the contrary contained
in the Agreement, First American's agreement set forth above shall be limited to
cover claims only to the extent that those claims are not covered under Peoples'
directors' and officers' insurance policies (or any substitute policies
permitted by the terms of the Agreement). These provisions of the Agreement
relating to indemnification are intended to be for the benefit of, and shall be
enforceable by, each Indemnified Party, and each Indemnified Party's heirs and
representatives.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a "pooling of
interests" under GAAP, and the receipt of a letter from First American's
independent accountants to the effect that the Merger will qualify for such
accounting treatment is a condition to First American's obligation to consummate
the Merger.
REGULATORY MATTERS
The acquisition of Peoples by First American in the share exchange is
subject to prior approval by the Federal Reserve Board under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). The merger of Peoples and Interim
Bank is subject to the prior approval of the FDIC under the Bank Merger Act. The
Merger requires a notice filing with the Tennessee Department of Financial
Institutions (the "DEPARTMENT") in connection with First American's acquisition
of Peoples and Interim Bank. In addition, the establishment of Interim Bank
requires the prior approval of the Department. On June 5, 1998, the Federal
Reserve Board approved the acquisition of Peoples. On July 24, 1998, the FDIC
approved the merger of Peoples and Interim Bank. On July 15, 1998 and July 13,
1998, respectively, the Department approved the Merger and the establishment of
Interim Bank. As of the date of this Prospectus/Proxy Statement, all required
waiting periods in connection with any of the foregoing approvals have expired.
First American and Peoples are not aware of any governmental approvals
or actions that may be required for consummation of the Merger other than as
described above. Should any other approval or action be required, First American
and Peoples currently contemplate that such approval of action would be sought.
See "--The Effective Time," "--Conditions to the Merger" and
"--Termination of the Agreement."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of First American Common Stock issuable to Peoples
Shareholders upon consummation of the Merger have been registered under the
Securities Act. Such securities may be traded freely without restriction by
those shareholders who are not deemed to be "affiliates" of First American or
Peoples, as that term is defined in the rules promulgated under the Securities
Act.
Shares of First American Common Stock received and beneficially owned
by those Peoples Shareholders who are deemed to be affiliates of Peoples at the
time of the Special Meeting may be resold without registration under the
Securities Act only as permitted by Rule 145 under the Securities Act or as
otherwise permitted thereunder. Commission guidelines regarding qualifying for
the "pooling of interests" method of accounting also limit sales of shares of
the acquiring and acquired company by affiliates of either company in a business
combination. Commission guidelines also 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.
Peoples has agreed in the Agreement to use its reasonable best efforts
to cause each person who is an affiliate (for purposes of Rule 145 under the
Securities Act and for purposes of qualifying the Merger for "pooling of
interests" accounting treatment) of
28
36
Peoples to deliver to First American a written agreement, intended to ensure
compliance with the Securities Act and to preserve the ability of the Merger to
be accounted for as a "pooling-of-interests."
29
37
INFORMATION ABOUT OUR COMPANIES
INFORMATION ABOUT FIRST AMERICAN
GENERAL
First American was incorporated in Tennessee in 1968 and is registered
as a bank holding company under the BHCA. First American owns all of the capital
stock of FANB, a national banking association headquartered in Nashville,
Tennessee ("FANB"); Deposit Guaranty National Bank, a national banking
association headquartered in Jackson, Mississippi ("DGNB"); First American
Federal Savings Bank, a federal savings bank headquartered in Roanoke, Virginia;
and First American Enterprises, Inc., a Tennessee corporation headquartered in
Nashville, Tennessee. First American anticipates that DGNB will be merged into
FANB effective September 1, 1998. First American's subsidiary banks engage in
lending in the following areas: commercial, consumer (amortizing mortgages and
other consumer loans) and real estate (construction, commercial mortgages and
other real estate loans).
FANB owns 98.75% of the issued and outstanding capital stock of IFC
Holdings, Inc. (formerly INVEST Financial Corporation), a Delaware corporation
headquartered in Tampa, Florida, which is engaged in the distribution of
securities, other investment products, and insurance, and 49% of the capital
stock of The SSI Group, Inc., a Florida corporation headquartered in Mobile,
Alabama, which is engaged in health care claims processing.
First American coordinates the financial resources of the consolidated
enterprise and maintains systems of financial, operational and administrative
controls that allow coordination of selected policies and activities. First
American derives its income from interest, dividends and management fees
received from its subsidiaries.
As of June 30, 1998, First American had total assets of approximately
$19.1 billion, total deposits of approximately $13.6 billion and shareholders'
equity of approximately $1.6 billion. The mailing address of the principal
executive offices of First American is First American Center, Nashville,
Tennessee 37237-0700, and the telephone number is (615) 748-2000.
PENDING ACQUISITIONS
In addition to the Merger, First American has pending three other
proposed acquisitions of financial institutions to be accounted for as
pooling-of-interests.
First American has entered into a Bank Merger Agreement dated May 26,
1998 to acquire The Middle Tennessee Bank, Columbia, Tennessee ("MTB"). As of
June 30, 1998, MTB operated seven branches in Maury County, Tennessee, and had
approximately $225 million in assets, $190 million in deposit liabilities and
$30 million in stockholders' equity. This transaction is expected to be
consummated by the beginning of the fourth quarter of 1998.
First American has entered into an Agreement and Plan of Merger dated
May 28, 1998 to acquire Pioneer Bancshares, Inc ("PIONEER"). As of June 30,
1998, Pioneer operated through its depository institution subsidiaries 34
branches in the Chattanooga, Tennessee metropolitan area and Northern Georgia,
and had approximately $1.0 billion in consolidated assets, $804 million in
consolidated deposit liabilities and $103 million in stockholders' equity. This
transaction is expected to be consummated during the fourth quarter of 1998.
First American has entered into an Agreement and Plan of Merger dated
June 9, 1998 to acquire CSB Financial Corp. ("CSB"). As of June 30, 1998, CSB
operated four branches in Cheatham County, Tennessee, and had approximately $144
million in assets, $132 million in deposit liabilities and $11 million in
stockholders' equity. This transaction is expected to be consummated by the
beginning of the fourth quarter of 1998.
INFORMATION ABOUT PEOPLES
Peoples was organized and began business in Vanleer, Dickson County,
Tennessee on November 26, 1906. In 1985, it changed its principal banking office
to Dickson, Tennessee. Peoples has one active wholly owned subsidiary, the
Highland Rim Title Company ("HRTC"), which was organized and began business in
October, 1996 to assist the bank with real estate closings. Community Credit
Services, Inc. ("CCS"), a wholly owned subsidiary of Peoples which was organized
and began business in April, 1996 to offer credit to "B" and "C" credit
customers in Dickson, sold substantially all of its assets on May 1, 1998.
Peoples is a state chartered, non-member, FDIC insured commercial bank,
offering a wide range of commercial banking services, including checking,
savings, money market deposit accounts, certificates of deposits, and loans for
consumer, commercial, agricultural and real estate purposes. Peoples considers
its primary market for its products and services to be individuals,
professionals and small to medium sized businesses located in Dickson and
Houston Counties in Tennessee. Peoples' main office is in Dickson, Tennessee.
Peoples has five other full service banking locations, one other in Dickson,
Tennessee and one each in Charlotte, Burns, and Vanleer, Tennessee, all of which
are located in Dickson County as well as one location in Erin, Houston County,
Tennessee. Besides the Vanleer office, each full service facility is equipped
with an automated teller machine ("ATM") for 24-hour
30
38
banking. Peoples also has three other free standing ATMs, one each in Dickson
and White Bluff in Dickson County and one in Tennessee Ridge, Houston County.
As of June 30, 1998, Peoples had total assets of approximately $136
million, total deposits of approximately $118 million and shareholders' equity
of approximately $16.8 million. Other than its investment in HRTC, Peoples has
no other significant investments. The mailing address of the principal executive
offices of Peoples is 601 Highway 46, South, Dickson, Tennessee 37056, and the
telephone number is (615) 446-9091. See "ADDITIONAL INFORMATION ABOUT PEOPLES."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Following the consummation of the Merger, the current directors and
executive officers of First American will continue to be the directors and
executive officers of First American.
First American currently expects that, immediately following the
consummation of the Merger, Peoples will be held as a separate state-chartered
bank subsidiary and that the existing branches of Peoples will continue to use
the Peoples name in the markets in which they currently operate. First American
currently anticipates that Peoples will be merged with and into FANB by the
middle of 1999.
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
MARKET PRICES
First American Common Stock is listed on the NYSE under the symbol
"FAM." Prior to July 1, 1998, First American Stock was authorized for quotation
on Nasdaq under the trading symbol "FATN." As of August 19, 1998, First American
Common Stock was held of record by approximately 15,378 persons. The following
table sets forth the high and low closing sale prices of the First American
Common Stock as reported by the NYSE or Nasdaq.
FIRST AMERICAN CLOSING SALES PRICES
-----------------------------------
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1996:
First Quarter $24.25 $21.19
Second Quarter 22.81 21.06
Third Quarter 24.13 20.38
Fourth Quarter 29.38 23.88
YEAR ENDED DECEMBER 31, 1997:
First Quarter 34.63 28.00
Second Quarter 40.00 29.63
Third Quarter 50.13 38.00
Fourth Quarter 55.38 43.75
YEAR ENDED DECEMBER 31, 1998:
First Quarter 49.00 44.00
Second Quarter 54.31 43.44
Third Quarter (through August 19, 1998) 50.75 41.06
Peoples Common Stock is not listed, traded or quoted on any securities
exchange or any quotation system, and no dealer, to Peoples' knowledge, makes a
market in Peoples Common Stock. Rather, buyers and sellers of Peoples Common
Stock are matched by Peoples, as an accommodation. According to Peoples' stock
transfer books, there were in 1996 approximately 13 transactions involving an
aggregate of 8,920 shares transferred; in 1997 one transaction occurred
involving 1,580 shares; and thus far in 1998, there has been one transaction
involving 100 shares. As Peoples is not an actual party to these transactions,
it has no record of or knowledge of the sales price per share of such
transactions.
31
39
DIVIDENDS
The following table sets forth dividends declared per share of First
American Common Stock and Peoples Common Stock, respectively, for the periods
indicated. The ability of either First American or Peoples to pay dividends to
its respective shareholders is subject to certain restrictions. See
"--Supervision and Regulation of First American and Peoples."
FIRST
AMERICAN PEOPLES
DIVIDENDS(a) DIVIDENDS
------------ ---------
YEAR ENDED DECEMBER 31, 1996:
First Quarter $.140 $ --
Second Quarter .155 --
Third Quarter .155 --
Fourth Quarter .155 1.60
YEAR ENDED DECEMBER 31, 1997:
First Quarter .155 --
Second Quarter .200 --
Third Quarter .200 --
Fourth Quarter .200 1.75
YEAR ENDED DECEMBER 31, 1998:
First Quarter .200 --
Second Quarter .250 --
Third Quarter (through August 19, 1998) .250(b) --(c)
(a) Cash dividends declared represents the dividends declared by
First American without any effect given to the acquisition of
Deposit Guaranty Corp.
(b) First American will pay this dividend on August 31, 1998 to
holders of First American Common Stock on August 14, 1998.
(c) The Merger Agreement permits Peoples to pay a dividend of
$2.18 per share prior to September 30, 1998. Peoples
anticipates it will declare and pay such dividend in September
prior to closing.
SUPERVISION AND REGULATION OF FIRST AMERICAN AND PEOPLES
GENERAL
As a registered bank holding company, First American is subject to the
supervision of, and to regular inspection by, the Federal Reserve Board. Peoples
is a Tennessee state chartered bank subject to regulation, supervision and
examination by the Commissioner of Financial Institutions of the State of
Tennessee (the "COMMISSIONER"). The bank subsidiaries of First American are
organized as national banking associations, which are subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
(the "OCC"). First American owns a federal savings bank subject to supervision,
regulation and examination by the Office of Thrift Supervision (the "OTS"). The
deposits of each of the banking subsidiaries of First American and of Peoples
are insured, up to applicable limits, by the FDIC, which maintains back-up
enforcement authority over each institution. In addition to banking laws,
regulations and regulatory agencies, First American and Peoples and their
subsidiaries and affiliates are subject to various other laws and regulations
and supervision and examination by other regulatory agencies, all of which,
directly or indirectly, affect the operations and management of First American
and Peoples and their ability to make distributions. The following discussion
summarizes certain aspects of those laws and regulations that affect First
American and Peoples. To the extent statutory or regulatory provisions or
proposals are described, the description is qualified in its entirety by
reference to the particular statutory or regulatory provision or proposal.
Supervision and regulation of bank holding companies and their subsidiaries are
intended primarily for the protection of depositors, the deposit insurance funds
of the FDIC and the banking system as a whole, not for the protection of bank
holding company shareholders or creditors. Further information on the
supervision and regulation of First American and its subsidiaries may be found
in First American's Annual Report on Form 10-K for the year ended December 31,
1997, as amended. See "ADDITIONAL INFORMATION--Where You Can Find More
Information." For additional information on the regulation and supervision of
Peoples, see "ADDITIONAL INFORMATION ABOUT PEOPLES -- Supervision and
Regulation."
The activities of First American and those of companies which First
American controls or in which it holds more than 5% of the voting stock are
limited to banking, managing or controlling banks, furnishing services to or
performing services for their subsidiaries or any other activity which the
Federal Reserve Board determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries can
reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh possible
adverse effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. Generally, bank
holding companies, such as First American, are required to obtain prior approval
of the Federal Reserve Board to
32
40
engage in any new activity or to acquire more than 5% of any class of voting
stock of any company. The activities of Peoples generally are limited to the
business of banking as defined by Tennessee banking laws and applicable federal
laws and regulations.
Bank holding companies like First American are also required to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
any class of voting stock of any bank that is not already majority-owned by the
bank holding company. Under the Tennessee Bank Structure Act, no bank holding
company, whether incorporated in Tennessee or elsewhere, may acquire any bank in
Tennessee that has been in operation for less than five years, or organize a new
bank in Tennessee, except in the case of certain interim bank mergers and
acquisitions of banks in financial difficulty. Under Tennessee law pertaining to
bank mergers, banks in separate counties in Tennessee that have been in
operation for at least five years may merge. Banks with principal offices in the
same county may merge without regard to the five-year aging requirement. Under
these provisions, First American could in the future acquire banks in Tennessee
that have been in operation for five years, but may not form or acquire a new
bank in any Tennessee county other than Davidson County, in which the main
office of FANB is located. Peoples has been in existence more than five years.
Pursuant to the Riegle-Neal Banking and Branching Efficiency Act of
1994 (the "INTERSTATE BANKING AND BRANCHING ACT") bank holding companies
generally can acquire banks in states other than their home states without
regard to the permissibility of such acquisitions under state law. The
Interstate Banking and Branching Act also authorizes banks with different home
states to merge across state lines, unless the home state of a participating
institution has passed legislation prior to June 1, 1997 explicitly prohibiting
interstate branching within that state. No states in which First American's
banking subsidiaries are located passed such legislation.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such proposals or bills being enacted and the impact they might have on First
American, Peoples and their subsidiaries cannot be determined at this time.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve Board, the OCC, the OTS and the FDIC have issued
substantially similar risk-based and leverage capital guidelines applicable to
United States bank holding companies and federally insured depository
institutions. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels,
whether because of its financial condition or actual or anticipated growth. The
Federal Reserve Board risk-based guidelines applicable to bank holding companies
define a two-tier capital framework. Tier 1 capital generally consists of common
and qualifying preferred shareholders' equity, less goodwill, certain
intangibles and other adjustments. Tier 2 capital consists of subordinated and
other qualifying debt, and the allowance for credit losses up to 1.25% of
risk-weighted assets. The sum of Tier 1 and Tier 2 capital less investments in
unconsolidated subsidiaries represents qualifying total capital, at least 50% of
which must consist of Tier 1 capital. Risk-based capital ratios are calculated
by dividing Tier 1 and total capital by risk-weighted assets. For purposes of
calculating risk-weighted assets, assets and off-balance sheet exposures are
assigned to one of four categories of risk weights, based primarily on relative
credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. First American's Tier 1 and total
risk-based capital ratios under these guidelines at June 30, 1998 were 9.52%
and 11.49% respectively, and Peoples' were 20.7% and 21.9% respectively.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3%, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points above 3%. First American's leverage ratio at June 30, 1998 was 7.49%.
First American Federal Savings Bank is subject to similar capital requirements
adopted by the OTS. Under the OTS capital guidelines, a savings association is
required to maintain tangible capital of at least 1.5% of tangible assets, core
(leverage) capital of at least 3% of the association's adjusted total assets and
risk-based capital of at least 8% of risk-weighted assets.
The other U.S. federal banking agencies have established risk-based and
leverage capital guidelines for federally-insured banks and thrifts that are
substantially similar to the Federal Reserve Board's capital guidelines for bank
holding companies. At June 30, 1998, Peoples and each of the depository
institution subsidiaries of First American was in compliance with these
applicable federal capital adequacy guidelines.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective U.S. federal regulatory agencies
to implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan in order for
the capitalization plan to be accepted by the appropriate bank regulator. The
liability of the parent holding company under any such guarantee is limited to
the lesser of 5% of the bank's assets at the time it became "undercapitalized"
or the amount needed to comply with the plan. Furthermore, in the event of the
bankruptcy of the parent holding company, such guarantee would take priority
over the parent's general unsecured creditors. In addition, FDICIA requires the
various regulatory agencies to prescribe certain non-capital standards for
safety and soundness related generally to operations and
33
41
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized, including, in the most severe cases, placing an institution
into conservatorship or receivership. Under the regulations, a "well
capitalized" institution must have a Tier 1 capital ratio of at least 6%, a
total capital ratio of at least 10% and a leverage ratio of a least 5% and not
be subject to a capital directive order. An "adequately capitalized" institution
must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at
least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these
guidelines, Peoples and each of the banking subsidiaries of First American was
considered well capitalized as of June 30, 1998.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. That
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies have adopted final regulations requiring
regulators to consider interest rate risk (when the interest rate sensitivity of
an institution's assets does not match the sensitivity of its liabilities or its
off-balance sheet position) in the determination of a bank's capital adequacy.
Distributions. First American derives funds for cash distributions to
its shareholders from a variety of sources, including cash and temporary
investments. The primary source of such funds, however, is dividends received
from its banking subsidiaries. Under applicable law, the national banking
subsidiaries of First American may not pay a dividend, without the prior
approval of the OCC, if the total of all dividends declared in any calendar year
exceeds the total of its net profits of the preceding two calendar years, less
any required transfers to surplus or to a fund for the retirement of any
preferred stock. In addition, federal savings associations must provide the OTS
with at least 30 days' notice prior to declaring a dividend and are subject to
other OTS regulations governing capital distributions. As a Tennessee-chartered
bank, Peoples may pay dividends not more than once each calendar quarter from
undivided profits. Each of First American's banking subsidiaries and Peoples is
prohibited from paying a dividend if thereafter such entity would fail to
maintain capital within regulatory minimums. The appropriate U.S. federal
regulatory authority is authorized to determine under certain circumstances
relating to the financial condition of the bank or bank holding company that the
payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof.
Federal Reserve Board policy provides that, as a matter of prudent
banking, a bank holding company generally should not maintain a rate of cash
dividends unless its net income available to common shareholders has been
sufficient to fully fund the dividends, and the prospective rate of earnings
retention appears to be consistent with the holding company's capital needs,
asset quality and overall financial condition.
In addition to the foregoing, the ability of Peoples, First American,
and First American's banking subsidiaries to pay dividends may be affected by
the various minimum capital requirements and the capital and non-capital
standards established under FDICIA, as described above. The right of First
American, Peoples, their respective shareholders and their respective creditors
to participate in any distribution of the assets or earnings of their respective
subsidiaries is further subject to the prior claims of creditors of the
respective subsidiaries.
"Source of Strength" Policy; Cross-Guarantee Liability. According to
Federal Reserve Board policy, bank holding companies are expected to act as a
source of financial strength to each subsidiary bank and to commit resources to
support each such subsidiary. This support may be required at times when a bank
holding company may not be able to provide such support. Under the
cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of
a loss suffered or anticipated by the FDIC--either as a result of default of a
banking or thrift subsidiary of a bank holding company such as First American or
related to FDIC assistance provided to a subsidiary in danger of default--the
other banking subsidiaries of such bank holding company may be assessed for the
FDIC's loss, subject to certain exceptions.
ENFORCEMENT POWERS OF THE BANKING AGENCIES
The U.S. federal and state banking agencies have broad enforcement
powers over bank holding companies and their subsidiaries, as well as over banks
that are not part of a holding company structure and the subsidiaries of such
banks, including, in the case of the federal agencies, the power to terminate
deposit insurance, impose substantial fines and other civil penalties and, in
the most severe cases, to appoint a conservator or receiver for a depository
institution. Failure to maintain adequate capital or to comply with applicable
laws, regulations and supervisory agreements could subject First American,
Peoples or their subsidiaries to these enforcement provisions.
34
42
FIRST AMERICAN CAPITAL STOCK
FIRST AMERICAN COMMON STOCK
General. First American is authorized to issue 200,000,000 shares of
First American Common Stock, of which 106,865,039 shares were outstanding as of
August 14, 1998. First American Common Stock is listed on the NYSE under the
symbol "FAM." As of August 14, 1998, 20,026,615 shares of First American Common
Stock were reserved for issuance under various employee benefit plans of First
American or otherwise, pursuant to the First American Dividend Reinvestment and
Stock Purchase Plan and pursuant to that certain agreement (the "CHARTER FEDERAL
AGREEMENT") by and between First American and Charter Federal Savings Bank in
connection with certain litigation with the U.S. Government with respect to the
treatment of supervisory goodwill. After taking into account the shares reserved
as described above and the number of shares expected to be issued in the Merger
and the other Proposed Transactions, the number of authorized shares of First
American Common Stock available for other corporate purposes as of August 14,
1998 was approximately 63,608,346.
Voting and Other Rights. The holders of First American Common Stock are
entitled to one vote per share, and, in general, assuming the presence of a
quorum, a majority of votes cast with respect to a matter is sufficient to
authorize action upon routine matters. Directors are elected by a plurality of
the votes cast, and each First American Shareholder entitled to vote in such
election is entitled to vote each share of stock for as many persons as there
are directors to be elected. In elections for directors, such shareholders do
not have the right to cumulate their votes (unless action is taken to provide
otherwise by charter amendment, which action management does not currently
intend to propose). In general, (i) amendments to the First American Charter
must be approved by each voting group entitled to vote separately thereon by a
majority of the votes entitled to be cast by that voting group, if the amendment
would create dissenters' appraisal rights as to that group, and otherwise by a
majority of the votes cast thereon; (ii) a merger or share exchange required to
be approved by the First American Shareholders must be approved by each voting
group entitled to vote separately thereon by a majority of the votes entitled to
be cast by that voting group; and (iii) the dissolution of First American, or
the sale of all or substantially all of the property of First American other
than in the usual and regular course of business, must be approved by a majority
of all votes entitled to be cast thereon.
In the event of liquidation, holders of First American Common Stock
would be entitled to receive pro rata any assets legally available for
distribution to First American Shareholders with respect to shares held by them,
subject to any prior rights of any First American preferred stock (as described
below) then outstanding.
First American Common Stock does not have any preemptive rights,
redemption privileges, sinking fund privileges or conversion rights. All the
outstanding shares of First American Common Stock are, and upon issuance the
shares of First American Common Stock to be issued to Peoples Shareholders will
be, validly issued, fully paid and nonassessable.
First Chicago Trust Company of New York acts as transfer agent and
registrar for First American Common Stock.
Distributions. The holders of First American Common Stock are entitled
to receive such dividends or distributions as the First American Board may
declare out of funds legally available for such payments. The payment of
distributions by First American is subject to the restrictions of Tennessee law
applicable to the declaration of distributions by a business corporation. A
corporation generally may not authorize and make distributions if, after giving
effect thereto, it would be unable to meet its debts as they become due in the
usual course of business or if the corporation's total assets would be less than
the sum of its total liabilities plus the amount that would be needed, if it
were to be dissolved at the time of distribution, to satisfy claims upon
dissolution of shareholders who have preferential rights superior to the rights
of the holders of its common stock. In addition, the payment of distributions to
shareholders is subject to any prior rights of outstanding preferred stock.
Share dividends, if any are declared, may be paid from authorized but unissued
shares.
The ability of First American to pay distributions is affected by the
ability of its banking subsidiaries to pay dividends. The ability of such
banking subsidiaries, as well as of First American, to pay dividends in the
future currently is, and could be further, influenced by bank regulatory
requirements and capital guidelines. See "INFORMATION ABOUT OUR
COMPANIES--Supervision and Regulation of First American and Peoples."
FIRST AMERICAN PREFERRED STOCK
First American has authorized 2,500,000 shares of preferred stock,
without par value, and may issue such preferred stock in one or more series,
each with such preferences, limitations, designations, conversion rights, voting
rights (not to exceed one vote per share), distribution rights, voluntary and
involuntary liquidation rights and other rights as it may determine. First
American has designated 300,000 shares of First American $2.375 Cumulative
Preferred Stock and 1,250,000 shares of First American Series A Junior Preferred
Stock. As of the date of this Prospectus/Proxy Statement, no shares of either
such series of First American preferred stock were outstanding.
35
43
COMPARATIVE RIGHTS OF SHAREHOLDERS OF FIRST AMERICAN AND PEOPLES
First American is a Tennessee corporation subject to the provisions of
the TBCA, the Tennessee Business Combination Act and the Tennessee Greenmail Act
(the "TGA"). Peoples is a Tennessee banking corporation subject to the
provisions of the TBA and the provisions of the TBCA to the extent provided in
the TBA.
BOARD OF DIRECTORS
Size. The First American Charter and the First American By-Laws provide
that the size of the First American Board shall consist of not fewer than nine
nor more than 27 directors, the exact number to be determined from time to time
by the First American Board pursuant to a resolution adopted by a majority of
the First American Board. The Peoples By-Laws provide that the size of the
Peoples Board shall consist of not fewer than five nor more than 25 directors,
the exact number to be determined from time to time by the Peoples Board.
Cumulative Voting. The TBCA provides that shareholders do not have the
right to cumulate their votes unless the corporation's charter provides
otherwise. Pursuant to the First American By-Laws, First American Shareholders
may not cumulate their votes in the election of directors. Pursuant to the
Peoples Charter, Peoples Shareholders may not cumulate their votes in the
election of directors.
Qualification of Directors. The First American By-laws provide that no
person may be elected or re-elected a director after reaching the age of 70
unless the First American Board deems that election or re-election (which may be
for a single additional term only) is in the best interests of First American or
unless the person owns greater than 1% of the issued and outstanding shares of
First American. The Peoples By-Laws provide certain geographic limitations on
who shall be qualified to be a voting director, and provide that upon obtaining
the age of 70, directors shall automatically become non-voting directors
emeritus at the next annual meeting.
Vacancies. The Peoples Charter does not contain any provision regarding
directors' vacancies. Thus, as provided under the TBCA, vacancies on
the Peoples Board may be filled by vote of the shareholders or the Board.
The First American Charter and the First American By-Laws provide that
any vacancy on the First American Board is to be filled only by a majority vote
of directors then in office, such appointee to serve for the unexpired term of
his or her predecessor or, if there is no predecessor, until the next annual
meeting of shareholders.
Removal. The First American Charter and the First American By-Laws
provide for removal of directors only for cause, only at a meeting called for
that purpose and only upon a vote for removal of at least 75% of the votes
entitled to be cast by all holders of voting stock voting together as a single
class at a meeting called for such purpose. The Peoples By-Laws follows the TBCA
allowing removal of directors by the shareholders with or without cause.
Nomination of Directors. Pursuant to the First American By-Laws,
nominations of directors by First American Shareholders must be made in writing
and given to the Secretary of First American generally not later than (i) 90
days in advance of the date on which the last annual meeting of First American
Shareholders was held if the election is to be held at the current year's annual
meeting or (ii) the close of business on the 15th day following the day on which
notice is first given to First American Shareholders of a special meeting held
to elect such directors. Neither the Peoples Charter nor the Peoples By-Laws has
any special provision for the nomination of directors.
BUSINESS COMBINATION PROVISIONS
The Tennessee Business Combination Act provides that a party
beneficially owning 10% or more of the voting power of any class or series of
then outstanding shares entitled to vote generally in the election of directors
of a corporation (an "INTERESTED SHAREHOLDER") cannot engage in a business
combination with the corporation for a period of five years following such
Interested Shareholder's share acquisition date, and may only engage in such
business combination after the five year period if the transaction either (i) is
approved by at least two-thirds of the voting stock of the corporation not
beneficially owned by such Interested Shareholder at a meeting called for such
purpose no earlier than five years after such Interested Shareholder's share
acquisition date or (ii) satisfies certain fairness criteria specified in the
TBCA. The Tennessee Business Combination Act exempts transactions with
Interested Shareholders if the transaction is approved by the corporation's
board of directors prior to the time when the person became an Interested
Shareholder. The Tennessee Business Combination Act also exempts transactions
with Interested Shareholders if the corporation enacts a charter amendment or
bylaw by a majority vote of shareholders who have held shares for more than one
year prior to the vote removing the corporation from the coverage of the Act, in
which case the business combination can take effect two years after such vote.
First American has adopted a charter or by-law amendment removing First American
from the coverage of the Tennessee Business Combination Act. Peoples is not
subject to the Tennessee Business Combination Statute.
The First American Charter and the First American By-Laws contain
substantially similar provisions, except that the First American Charter and the
First American By-Laws require the affirmative vote of at least 75% of the votes
entitled to be cast by all holders of capital stock entitled to vote in the
election of directors (including the Interested Shareholder) and a majority of
the votes
36
44
entitled to be cast by all holders of capital stock entitled to vote in the
election of directors, other than the shares beneficially owned by the
Interested Shareholder. The Peoples Charter and the Peoples By-Laws do not
address business combinations.
SHAREHOLDER RIGHTS PLAN
First American has in place the Rights Agreement dated as of December
14, 1988, between First American and First American Trust Company, N.A. (the
"FIRST AMERICAN RIGHTS AGREEMENT"), under which holders of First American Common
Stock have been and are issued certain rights (the "FIRST AMERICAN RIGHTS"), the
effect of which may be to discourage certain coercive or abusive takeover
tactics. Pursuant to the First American Rights Agreement, the First American
Board authorized and declared a distribution of one First American Right for
each outstanding share of First American Common Stock to First American
Shareholders of record at the close of business on December 27, 1988 (the
"RIGHTS RECORD DATE") and for each share of First American Common Stock issued
by First American after the Rights Record Date but prior to the Distribution
Date (as defined and described below). Accordingly, a First American Right will
attach to each share of First American Common Stock issued in the Merger. Each
First American Right entitles the registered holder, subject to the terms of the
First American Rights Agreement, to purchase from First American one
one-hundredth of a share (a "UNIT") of Series A Junior Preferred Stock of First
American (the "PREFERRED STOCK"), at a purchase price of $80.00 per Unit,
subject to adjustment. The First American Rights attach to all certificates
representing shares of outstanding First American Common Stock, and no separate
First American Rights certificates have been issued. The First American Rights
will separate from the First American Common Stock, and the distribution date
for the First American Rights (the "DISTRIBUTION DATE") will occur, upon the
earlier of: (i) 10 days following public announcement (the date of the
announcement being the "STOCK ACQUISITION DATE") that a person or group of
affiliated or associated persons (other than First American, any subsidiary of
First American or any employee benefit plan of First American or such
subsidiary) has acquired, obtained the right to acquire, or otherwise obtained
the beneficial ownership of 20% or more of the then outstanding shares of the
First American Common Stock, or (ii) 10 days following the commencement of a
tender or exchange offer that would result in a person or group beneficially
owning 20% or more of the then outstanding shares of the First American Common
Stock. As soon as practicable after the Distribution Date, First American Rights
certificates would be mailed to holders of record of the First American Common
Stock as of the close of business on the Distribution Date and, thereafter, the
separate First American Rights certificates alone would represent the First
American Rights.
Until a First American Right is exercised, the holder thereof has no
rights as a shareholder of First American, including the right to vote or to
receive dividends. Once the First American Right is exercised, however, each
Unit of Preferred Stock will have one vote, voting together as a single class
with the First American Common Stock.
The First American Rights Agreement also provides First American
Shareholders certain rights in the following situations. In the event that (i) a
person becomes the beneficial owner of 20% or more of the then outstanding
shares of First American Common Stock or (ii) during the pendency of any tender
or exchange offer for First American Common Stock or prior to the expiration of
20 business days (or such later date as a majority of the independent directors
may determine) after the date such tender or exchange offer is terminated or
expires, a person becomes the beneficial owner of 10% or more of the then
outstanding shares of First American Common Stock (unless the 10% beneficial
ownership results from certain limited circumstances specified in the First
American Rights Agreement), then, in each case, each holder of a First American
Right will thereafter have the right to receive, upon exercise, First American
Common Stock having a value equal to two times the exercise price of the First
American Right.
In addition, in the event that, at any time following the Stock
Acquisition Date, (i) First American is acquired in a merger or other business
combination transaction (with certain limited exceptions specified in the First
American Rights Agreement) and First American is not the surviving corporation;
(ii) any person effects a share exchange or merger of First American and all or
part of the First American Common Stock is converted or exchanged for
securities, cash or property of any other person; or (iii) 50% or more of First
American's assets or earning power is sold or transferred, each holder of a
First American Right (except First American Rights which previously have been
voided pursuant to the "Beneficial Ownership" provision of the First American
Rights Agreement) shall thereafter have the right to receive, upon exercise,
common stock of the acquiring person having a value equal to two times the
exercise price of the First American Right.
The First American Rights are not exercisable until the Distribution
Date and will expire at the close of business on December 27, 1998 (the "FINAL
EXPIRATION DATE") unless earlier redeemed by First American. They may be
redeemed by First American at its option, by action of a majority of the First
American independent directors, at any time prior to the earlier of (i) the
close of business on the Final Expiration Date or (ii) the close of business on
the tenth day following the Stock Acquisition Date. The Rights may only be
redeemed in whole, not in part, at a price of $.01 per First American Right (the
"REDEMPTION PRICE"), payable, at the election of such majority of independent
directors, in cash or shares of First American Common Stock.
On July 16, 1998, the First American Board of Directors authorized a
new Rights Agreement to provide for new First American Rights (the "NEW FIRST
AMERICAN RIGHTS") pursuant to a new First American Rights Agreement (the "NEW
FIRST AMERICAN RIGHTS AGREEMENT") between First American and First Chicago Trust
Company, as Rights Agent. Under the New First American Rights Agreement, one
right ("NEW RIGHT") will be distributed for each share of First American Common
Stock outstanding to First American stockholders of record on the close of
business on December 28, 1998. One New Right will also be distributed for each
share of First American Common Stock issued after December 28, 1998 until the
distribution date for the New First American Rights ("NEW RIGHTS AGREEMENT
DISTRIBUTION DATE"). The New Rights Agreement Distribution Date will occur
37
45
upon the earliest of (i) 10 business days following a public announcement that a
person or group of affiliated or associated persons (an "ACQUIRING PERSON") has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of First American Common Stock (the "STOCK ACQUISITION
DATE"), (ii) 10 business days following the commencement of a tender offer or
exchange offer that would if consummated result in a person or group
beneficially owning 20% or more of such outstanding shares of First American
Common Stock, subject to certain limitations (or, if later, the date of receipt
of any required regulatory approvals or approvals of the stockholders of such
person or group for such tender or exchange offer), or (iii) 10 business days
after the Board of Directors of First American shall declare any Person to be an
"ADVERSE PERSON," upon a determination that such person, alone or together with
its affiliates and associates, has or will become the beneficial owner of 10% or
more of the outstanding shares of Common Stock (provided that any such
determination shall not be effective until such Person has become the beneficial
owner of 10% or more of the outstanding shares of First American Common Stock),
including consultation with such persons as such directors shall deem
appropriate, that (a) such beneficial ownership by such person is intended to
cause, is reasonably likely to cause or would cause First American to change its
strategic direction under circumstances where the Board of Directors believes
that such change is not in the best interest of First American and its
stockholders, employees, customers, suppliers or other constituencies of First
American and its subsidiaries, or (b) such beneficial ownership by such person
is intended to cause, is reasonably likely to cause or will cause pressure on
First American to take action or enter into a transaction or series of
transactions including by causing a transaction with such person or other
person, intended to provide such person with short-term financial gain under
circumstances where the Board of Directors determines that the best long-term
interests of First American and its stockholders would not be served by taking
such action or entering into such transactions or series of transactions at that
time or (c) such beneficial ownership is causing or is reasonably likely to
cause a material adverse impact (including, but not limited to, impairment of
relationships with customers or impairment of First American's ability to
maintain its competitive position) on the business or prospects of First
American or (d) such beneficial ownership otherwise is determined to be not in
the best interests of First American and its stockholders, employees, customers,
suppliers, or other constituencies of the Company or its subsidiaries.
Until the New First American Rights Agreement Distribution Date, (i)
the New Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after December 28, 1998 will contain a notation
incorporating the New First American Rights Agreement by reference and (iii) the
surrender for transfer of any certificates for Common Stock outstanding will
also constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.
The New Rights are not exercisable until the New First American Rights
Agreement Distribution Date and will expire at the close of business on December
31, 2008, subject to extension by the Board of Directors, or unless earlier
redeemed by First American as described below.
As soon as practicable after the New First American Rights Agreement
Distribution Date, Rights Certificates will be mailed to holders of record of
the Common Stock as of the close of business on the New First American Rights
Agreement Distribution Date and, thereafter, the separate Rights Certificates
alone will represent the New Rights. Except for certain issuances in connection
with outstanding options and convertible securities and as otherwise determined
by the Board of Directors, only shares of Common Stock issued prior to the New
First American Rights Agreement Distribution Date will be issued with New
Rights.
In the event that the Board of Directors determines that a person is an
Adverse Person or, at any time following the New First American Rights Agreement
Distribution Date, a person becomes the beneficial owner of 20% or more of the
then-outstanding shares of Common Stock, each holder of a Right will thereafter
have the right to receive at the time specified in the New First American Rights
Agreement, (x) upon exercise and payment of the exercise price, Common Stock
(or, in certain circumstances, cash, property or other securities of First
American) having a value equal to two times the exercise price of the New Right
or (y) at the discretion of the Board of Directors, upon exercise and without
payment of the exercise price, First American Common Stock (or, in certain
circumstances, cash, property or other securities of First American) having a
value equal to the difference between the exercise price of the New Right and
the value of the consideration which would be payable under clause (x).
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in this paragraph, all New Rights that are, or (under certain
circumstances specified in the New First American Rights Agreement) were,
beneficially owned by any Acquiring Person or Adverse Person will be null and
void. However, Rights are not exercisable following the occurrence of either of
the events set forth above until such time as the New Rights are no longer
redeemable by First American as set forth below.
In the event that, at any time following the Stock Acquisition Date,
(i) First American is acquired in a merger, statutory share exchange or other
business combination transaction in which First American is not the surviving
corporation, or (ii) 50% or more of First American's assets or earning power is
sold or transferred, each holder of a New Right (except New Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the New Right.
In general, First American may redeem the New Rights in whole, but not
in part, at a price of $0.01 per New Right, at any time until 10 business days
following the Stock Acquisition Date. Moreover, redemption would not be
permitted after 10 business days following the effective date of any declaration
by the Board of Directors that any person is an Adverse Person. After the
redemption period has expired, the First American's right of redemption may be
reinstated if an Acquiring Person or Adverse Person reduces his beneficial
ownership to less than 10% of the outstanding shares of First American Common
Stock in a transaction or series of transactions not involving First American
and there are no other Acquiring Persons or Adverse Persons. Immediately upon
the
38
46
action of the Board of Directors ordering redemption of the New Rights, the
New Rights will terminate and the only right of the holders of New Rights will
be to receive the $0.01 redemption price.
DISSENTERS' APPRAISAL RIGHTS
Under the TBA and TBCA, Peoples Shareholders have dissenters' rights as
described in "ADDITIONAL INFORMATION -- Dissenters' Appraisal Rights" and
Appendix C to this Prospectus/Proxy Statement. Because First American is listed
on the NYSE, First American Shareholders currently do not have dissenters'
appraisal rights.
CONSIDERATION OF NON-SHAREHOLDER INTERESTS BY BOARD OF DIRECTORS
The First American Charter requires the First American Board to
consider all relevant factors when evaluating whether certain proposed business
combinations or certain dispositions of all or substantially all of First
American or of any First American subsidiary, any offer to purchase any or all
of First American's securities, any solicitation of proxies for election of
directors of First American, or any similar transaction is in the best interests
of First American and First American Shareholders, including: the consideration
being offered in the proposed transaction in relation to the then-current market
price, in relation to the then-current value of First American in a freely
negotiated transaction and in relation to the First American Board's
then-current estimate of the future value of First American as an independent
entity; the social and economic effects on the employees, customer, suppliers
and other constituents of First American and its subsidiaries and on the
communities in which First American and its subsidiaries operate or are located;
and the desirability of maintaining First American's independence from other
entities.
CERTAIN PURCHASES OF THE CORPORATION'S SECURITIES
The TGA provides that it is unlawful for any Tennessee corporation
which has a class of voting stock registered or traded on a national securities
exchange or registered with the Commission pursuant to Section 12(g) of the
Exchange Act or any subsidiary of such corporation to purchase, directly or
indirectly, any of its shares at a price above the market value of such shares
from any person who holds more than 3% of the class of the securities to be
purchased if such person has held such shares for less than two years, unless
the purchase has been approved by the affirmative vote of a majority of the
outstanding shares of each class of voting stock of the corporation, or,
alternatively, unless the corporation makes an offer of at least equal value per
share to all holders of such class. The TGA applies to purchases of First
American Common Stock.
TAXATION OF DIVIDENDS
Under Tennessee tax law, cash dividends paid by banks, like Peoples, to
Tennessee residents are exempt from state income tax; cash dividends paid by
non-bank business corporations, like First American, to Tennessee residents
would be subject to a state income tax currently at a rate of six (6%) percent.
INDEMNIFICATION
Peoples. Under Section 45-2-211 of the TBA, a state bank may provide
for indemnification of its officers and directors as provided in the TBCA. Under
the TBCA, subject to certain exceptions, a Tennessee corporation may indemnify
an individual made a party to a proceeding, because he or she is or was a
director, against liability incurred in the proceeding if (i) he or she
conducted himself or herself in good faith, (ii) he or she reasonably believed
(a) in the case of conduct in his or her official capacity with the corporation,
that his or her conduct was in the best interest of the corporation, and (b) in
all other cases, that his or her conduct was at least not opposed to the
corporation's best interests, and (iii) in the case of any criminal proceeding,
he or she had no reasonable cause to believe his or her conduct was unlawful
(the "STANDARD OF CONDUCT"). Moreover, unless limited by its charter, a
Tennessee corporation must indemnify a director who was wholly successful, on
the merits or otherwise, in the defense of any proceeding to which he or she was
a party because he or she is or was a director of the corporation against
reasonable expenses incurred by him or her in connection with the proceeding.
Expenses incurred by a director in defending a proceeding may be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of a written affirmation by the director of his or her good faith belief that he
or she has met the Standard of Conduct and a written undertaking by or on behalf
of a director to repay such amount if it shall ultimately be determined that he
or she is entitled to be indemnified by the corporation against such expenses
and a determination is made that the facts known to those making the
determination would preclude indemnification. Before any such indemnification is
made, it must be determined that such indemnification would not be precluded by
the TBCA.
A director of a Tennessee corporation may also apply for court-ordered
indemnification under certain circumstances. Unless a Tennessee corporation's
charter provides otherwise, (i) 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; (ii) 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 (iii) 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 charter, bylaws, general or specific action of its board of directors, or
contract.
39
47
The Peoples Charter limits director liability to the fullest extent
permitted by the TBCA and by Tennessee banking law. The Peoples Charter does not
limit Peoples' capacity to indemnify its officers and directors. The Peoples
By-Laws provide for the indemnification of its directors and officers to
the fullest extent permitted by Tennessee law.
First American. The First American Charter provides that
indemnification to the full extent permitted by law for directors, officers,
employees and agents of First American may be provided either directly or
through insurance, and that no director of First American shall be personally
liable to First American or its shareholders for monetary damages for breach of
any fiduciary duty as a director to the full extent permitted by law.
The First American By-Laws provide that First American will indemnify
any Defendant in any Proceeding (other than a Proceeding by or in the right of
First American) by reason of serving or having served as a director of First
American (or counsel to the First American Board), an advisory director, or an
officer of First American, or serving or having served at the request of the
corporation in such a capacity with another entity against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding, including any appeal, if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interest of First American, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
The First American By-Laws provide, however, that no indemnification
shall be made (i) if a judgment or other final disposition adverse to the
Defendant establishes his liability for intentional misconduct or knowing
violation of the law or for an unlawful distribution under Tennessee law, (ii)
if a judgment or other final adjudication adverse to the Defendant for breach of
the Defendant's duty of loyalty to First American is based upon such Defendant
gaining personal benefit or advantage to which he was not entitled, (iii) for
any amounts if the Defendant is adjudged liable to First American or for any
amounts paid to First American in settlement of a proceeding by or in the right
of First American, or (iv) in a proceeding by First American directly (and not
derivatively) for expenses, unless such proceeding is brought after a change in
control of First American.
The First American By-Laws provide that First American shall indemnify
a Defendant pursuant to the By-laws unless a determination is made that the
Defendant did not meet the standard of conduct therein specified. Determination
of the propriety of indemnification shall be made by the First American Board
acting by a quorum consisting of disinterested directors, by independent legal
counsel if such a quorum is not obtainable, or, even if obtainable, if the
majority of a quorum of disinterested directors so directs, or by the First
American Shareholders.
The First American By-Laws provide that, subject to certain procedural
requirements, First American shall pay expenses reasonably incurred in any
Proceeding (other than a Proceeding brought by First American directly unless
that action follows a change in control) in advance of the final disposition of
the matter if the Defendant undertakes to repay such amount in the event that
such Defendant is ultimately determined not to be entitled to indemnification,
unless a quorum of disinterested directors or independent legal counsel directed
by the First American Board (in the event that such a quorum is not obtainable)
reasonably and promptly determines in a written opinion that indemnity is not
proper under the terms of the First American By-Laws.
The First American By-Laws provide that the indemnity provision
contained therein are additional to, and not limitations on, any other rights to
which a Defendant seeking indemnification may be entitled under law, agreement,
insurance policy, or otherwise. The First American By-Laws provide that the
corporation may indemnify and advance expenses to any employee or agent of First
American who is not a director or officer (and his heirs, executors and
administrators) to the same extent as to a director or officer if the First
American Board determines that to do so is in First American's best interests.
The First American By-laws provide that First American may purchase insurance
coverage for the purpose of indemnifying the directors, officers, employees and
agents of First American and its subsidiaries regardless of whether such entity
would have had the power or the obligation to indemnify such person against such
liability under the provisions discussed above.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS
The First American Charter provides that altering, amending or
repealing the provisions of the First American Charter relating to (including
changes to provisions that would have the effect of permitting action
inconsistent with or in circumvention of such provisions relating to) the First
American Board (including, with respect to directors, the number, term length,
classification, removal and procedure for filling vacancies) and certain
business combinations with Interested Shareholders requires (i) the affirmative
vote of at least 75% of the votes entitled to be cast by all holders of voting
stock voting as a single class and (ii) a majority of the votes entitled to be
cast by all holders of voting stock, other than shares of voting stock which are
beneficially owned by an Interested Shareholder, if any.
The Peoples Charter does not contain such a provision.
40
48
ADDITIONAL INFORMATION ABOUT PEOPLES
BUSINESS OF PEOPLES
Peoples is a state chartered, non-member, FDIC insured commercial bank,
offering a wide range of commercial banking services, including checking,
savings, money market deposit accounts, certificates of deposits, and loans for
consumer, commercial, agricultural and real estate purposes. Peoples considers
its primary market for its products and services to be individuals,
professionals and small to medium sized businesses located in Dickson and
Houston Counties in Tennessee. Peoples' main office is in Dickson, Tennessee.
Peoples has five other full service banking locations, one other in Dickson,
Tennessee and one each in Charlotte, Burns, and Vanleer, Tennessee, all of which
are located in Dickson County as well as one location in Erin, Houston County,
Tennessee. Besides the Vanleer office, each full service facility is equipped
with an automated teller machine ("ATM") for 24-hour banking. Peoples also has
three other free standing ATMs, one each in Dickson and White Bluff in Dickson
County and one in Tennessee Ridge, Houston County.
COMPETITION
Peoples competes in Dickson County with approximately six commercial
banking organizations and one credit union. Two of the six commercial
banking competitors are small banking organizations. The remaining commercial
banking competitors are all owned by large regional and super-regional
multi-bank holding companies. As of June 1997 Peoples had a 24.69% market share
of deposits in these Dickson County financial institutions. Only one other
competitor, a local banking organization, had a larger market share with a
25.71% share as of June 1997. In Houston County, Peoples competes with one other
commercial banking organization owned by a super-regional multi-bank holding
company. This institution has an approximately 75% market share of deposits in
Houston County as opposed to a 25% market share of deposits by Peoples as of
June 1997.
According to the U.S. Department of Commerce, Bureau of the Census, as
of July 1995, Dickson County had a population of approximately 38,740 while
Houston County had a population of 7,579. Based on the 1990 U.S. Census, Dickson
County had a per capita money income of $11,162 and a median household income of
$24,419 while Houston County had a per capita money income of $9,060 with a
median household income of $20,112.
LOANS AND LOAN REVIEW
Peoples offers various types of secured and unsecured commercial,
consumer, agricultural and real estate loans. Loans are generally made to
customers who also have other relationships with Peoples. Most loans made by
Peoples are secured. Peoples also makes mortgage loans which are sold into the
secondary market. This service helps Peoples compete in the mortgage loan
origination business without incurring significant interest rate risk normally
associated with long maturity mortgage loans funded with traditional bank
deposits.
Peoples has established written loan guidelines for loan officers
regarding the types, maturities, security requirements, pricing, and, in the
case of real estate loans, loan to value ratios to which each loan officer is
expected to adhere. In addition, each loan officer is provided a maximum loan
limit authority. Loans for an amount in excess of an officer's authority or
those which would require an exception to Peoples' loan policy must be approved
by higher authorities in the bank including other officers and the Peoples Board
of Directors.
Loans are reviewed periodically by personnel who have no authority
other than loan review. This process is utilized by Peoples to grade the bank's
loans and determine the adequacy of Peoples loan loss reserve.
ASSET/LIABILITY MANAGEMENT
A committee comprised of senior Peoples officers is charged with
managing Peoples assets and liabilities within the umbrella of Peoples Funds and
Risk Management Policy (the "FUNDS AND RISK MANAGEMENT COMMITTEE" or "FARM
COMMITTEE"). The FARM Committee's task is to maximize and stabilize the net
interest margin, and to provide reasonable growth of assets, earnings and
return on equity capital while maintaining credit quality, reasonable interest
rate risk, adequate capital and liquidity. To meet these objectives, the FARM
Committee monitors Peoples' progress and assists in directing Peoples' overall
acquisition and allocation of funds. The FARM Committee meets quarterly to
review liquidity and funds position, and to review the general economic
condition and other factors affecting the availability and use of funds of the
bank. The FARM Committee reports quarterly to the Board of Directors explaining
variances between budget and actual results, providing the likely reasons for
such variances and reporting management's course of action in light of any
budget variances. The Asset/Liability Management policy is reviewed annually by
the Board of Directors.
COMMUNITY CREDIT SERVICES, INC.
Community Credit Services, Inc. ("CCS"), a wholly-owned subsidiary of
Peoples, operates in Dickson, Tennessee and is registered under Tennessee's
Industrial Loan and Thrift Companies Act. CCS has extended credit to consumers
considered a higher risk than Peoples has customarily accepted. CCS is subject
to the supervision of, and regular examination by, the Department. On May 1,
1998 CCS entered into a Purchase and Sale Agreement with FirstPlus Consumer
Finance of Tennessee, Inc. ("FIRSTPLUS") whereby CCS sold essentially all assets
to FirstPlus. CCS is currently in the process of being dissolved.
HIGHLAND RIM TITLE COMPANY
Highland Rim Title Company ("HRTC"), also a wholly-owned subsidiary of
Peoples, operates as a title insurance and escrow agent. HRTC has one office in
Charlotte, Dickson County, Tennessee.
41
49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The consolidated financial statements present the accounts and
operations of Peoples and its subsidiaries. Peoples operates as a commercial
bank regulated by the FDIC and the Department. Peoples provides deposit services
and grants real estate, consumer and commercial loans to customers primarily in
Dickson, Houston, and adjoining counties of Tennessee.
During 1996, Peoples chartered two new companies as wholly owned
subsidiaries: CCS and HRTC. CCS has one office located at 404 Highway 46 South,
Dickson, Tennessee, and operates under the Industrial Loan & Thrift Company Act.
CCS extends credit to consumers who are considered a higher credit risk than
Peoples customarily accepts. On May 1, 1998, all of the assets and liabilities
of CCS were sold. Peoples recognized a gain on the sale of $143,713. HRTC has
one office located at Court Square, Charlotte, Tennessee, and operates as a
title insurance and an escrow agent.
The accompanying tables plus the discussion and financial information
are presented to aid in understanding Peoples' current financial position and
results of operations. The emphasis of this discussion will be on the six months
ended June 30, 1998, and on the years ended December 31, 1997, 1996 and 1995;
however, financial information for prior years will also be presented when
appropriate. This discussion should be read in conjunction with the Financial
Statements and the Notes to Financial Statements included elsewhere in this
Prospectus/Proxy Statement.
SUMMARY
Peoples reported net income of $2.4 million for 1997 compared to $2.1
million in 1996 and $1.6 million in 1995. On a per common share basis, net
income was $9.51 for 1997 versus $8.49 for 1996 and $6.53 for 1995. The
improvement in 1997's earnings resulted from a strong gross margin reinforced by
loan demand that changed the mix of earning assets as higher yielding loans were
funded with maturing investment securities and an increase in noninterest income
sufficient to cover a smaller increase in noninterest expenses and most of the
increase in taxes. These improvements were partially offset by higher additions
to the allowance for loan losses.
Peoples reported net income of $862,468 for the quarter ended June 30,
1998 as compared to $655,503 for the quarter ended June 30, 1997. Peoples
reported net income of $1,520,835 for the six months ended June 30, 1998 as
compared to $1,234,000 for the six months ended June 30, 1997. On a per common
share basis, net income was $3.45 for the quarter ended June 30, 1998 as
compared to $2.62 for the quarter ended June 30, 1997. On a per common share
basis, net income was $6.08 for the six months ended June 30, 1998. The
improvement in net income in the quarter and six months ended June 30, 1998 as
compared to the same periods in 1997 was due to the sale of CCS and gains on
securities sales.
The return on average equity for the six-months ended June 30, 1998 was
18.8% compared to 16.4% for the same period in 1997. The return on average
equity for 1997 was 16.4% compared to 16.0% for 1996 and 15.2% for 1995. The
return on average assets for the six-months ended June 30, 1998 was 2.26%
compared to 1.92% for the same period in 1997. The return on average assets was
1.89% for 1997 versus 1.91% for 1996 and 1.66% for 1995.
GROSS INTEREST MARGIN
Peoples' gross interest margin is defined as the difference between its
revenue from earning assets, primarily interest income on outstanding loans, and
interest expense it must pay on its interest-bearing liabilities. The
maintenance of a gross interest margin at a level which, when coupled with
noninterest revenues, is sufficient to cover additions to the allowance for loan
losses, noninterest expenses and income taxes, and yield an acceptable profit is
critical for success in the banking industry. The gross interest margin is a
function of the average balances of earning assets and interest-bearing
liabilities and the yields earned and rates paid on those balances.
Management activities are planned to maintain a satisfactory spread
between the yields on earning assets and the related cost of interest-bearing
funds. The gross interest spread is determined by comparing the taxable
equivalent gross interest margin to average earning assets before deducting the
allowance for loan losses. This ratio reflects the overall profitability of
earning assets, including both those funded by interest-bearing sources and
those, which incur no interest cost (primarily noninterest-bearing demand
deposits). This ratio is most often used when analyzing a banking institution's
overall gross margin profitability compared to that of other similarly situated
financial institutions. The incremental interest spread compares the difference
between the yields on earning assets and the cost of interest-bearing funds.
This calculation and similar ratios are used to assist in pricing decisions for
interest related products.
Table 1 entitled Distribution of Assets, Liabilities, and Stockholders'
Equity, Interest Rates and Interest Differential presents for each of the last
three years by major categories of assets and liabilities, the average daily
balances, the components of the gross interest margin (on a taxable equivalent
basis), the yield or rate, and the incremental and gross interest spread.
42
50
TABLE 1 -- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY,
INTEREST RATES AND INTEREST DIFFERENTIAL
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- --------------------------- --------------------------
AVERAGE RATE/ AVERAGE RATE/ AVERAGE RATE/
BALANCE YIELD INTEREST BALANCE YIELD INTEREST BALANCE YIELD INTEREST
------- ----- -------- -------- ----- -------- ------- ------ --------
ASSETS (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Interest earning assets
Loans, net $ 71,909 11.39% $ 8,194 $ 62,511 11.25% $7,033 $53,428 10.68% $5,708
Bank time deposits - - - - - - - -
Taxable securities 30,420 6.41 1,951 23,704 6.10 1,447 21,970 6.75 1,483
Tax exempt securities 13,577 7.03 954 * 16,422 7.00 1,149 * 14,669 6.16 904 *
Federal funds sold 306 2.45 75 305 2.20 67 586 7.50 44
-------- ------- -------- ------ ------- ------
TOTAL EARNING ASSETS 116,212 9.62% $11,174 102,942 9.51% $9,696 90,653 8.98% $8,139
======= ====== ======
Noninterest earning assets
Cash and due from banks 3,920 3,314 2,772
Bank premises and equipment 4,284 3,998 3,494
Other assets 1,076 1,018 1,320
-------- -------- -------
TOTAL ASSETS $125,492 $111,272 $98,239
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Time and savings deposits:
NOW and money market accounts $ 12,665 2.38% $ 302 $ 11,009 2.56% $ 282 $ 8,830 2.74% $ 242
Savings 9,241 2.94 272 8,455 3.26 276 7,852 3.68 289
Time 48,314 5.35 2,584 42,710 5.27 2,250 42,112 4.75 2,001
Time over $100,000 23,297 6.24 1,454 21,186 5.27 1,116 15,134 5.74 868
-------- ------- -------- ------ ------- ------
TOTAL INTEREST BEARING DEPOSITS 93,517 4.93 4,612 83,360 4.71 3,924 73,928 4.60 3,400
Noninterest bearing liabilities
Federal funds purchased 700 3.29 23 356 3.65 13 628 3.50 22
Other short-term debt - - - - - -
-------- ------- -------- ------ ------- ------
TOTAL INTEREST BEARING LIABILITIES 94,217 4.92 $ 4,635 83,716 4.70 $3,937 74,556 4.59 $3,422
======= ====== ======
Noninterest bearing liabilities
Demand deposits 16,376 14,563 12,567
Other liabilities 371 348 388
-------- -------- -------
TOTAL LIABILITIES 110,964 98,627 87,511
STOCKHOLDERS' EQUITY 14,528 12,645 10,728
-------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $125,492 $111,272 $98,239
======== ======== =======
Spread between combined rates earned and
combined rates paid* 4.70% 4.81% 4.39%
Net yield on interest-earning assets* 5.63% 5.59% 5.20%
* Taxable equivalent basis
Notes:
(1) The taxable equivalent adjustment has been computed on a 34% federal
income tax rate and has given effect to the disallowance of interest
expense, for federal income tax purposes, related to certain tax-free
assets. Loans include nonaccrual loans for all years presented.
(2) The average balances of the amortized cost of available-for-sale
securities were used in the calculations in this table.
43
51
Table 2 sets forth, for the periods indicated, a summary of changes in
interest earned and interest paid separated into the amount generated by volume
changes and the amount generated by changes in the yield or rate.
TABLE 2 - VOLUME AND YIELD/RATE VARIANCES
(TAXABLE EQUIVALENT BASIS - IN THOUSANDS)
1997 COMPARED TO 1996 1996 COMPARED TO 1995
---------------------------------- ----------------------------------
RATE/ NET INCREASE RATE/ NET INCREASE
VOLUME YIELD (DECREASE) VOLUME YIELD (DECREASE)
------- ----- ------------ ------ ----- ------------
REVENUE EARNED ON
Net loans $ 1,065 $ 96 $ 1,161 $ 995 $ 330 $ 1,325
Investment securities
Taxable securities 420 84 504 110 (146) (36)
Tax-free securities (233) 38 (195) 123 122 245
Federal funds sold -- 8 8 (1) 24 23
------- ----- ------- ------- ----- -------
TOTAL INTEREST EARNING ASSETS 1,252 226 1,478 1,227 330 1,557
------- ----- ------- ------- ----- -------
INTEREST PAID ON
NOW and money market accounts 40 (20) 20 56 (16) 40
Savings deposits 26 (30) (4) 22 (35) (13)
Time deposits 297 37 334 16 233 249
Time over $100,000 121 217 338 333 (85) 248
Federal funds purchased 11 (1) 10 1 (10) (9)
------- ----- ------- ------- ----- -------
TOTAL INTEREST-BEARING FUNDS 495 203 698 428 87 515
------- ----- ------- ------- ----- -------
NET INTEREST EARNINGS $ 757 $ 23 $ 780 $ 799 $ 243 $ 1,042
======= ===== ======= ======= ===== =======
Notes:
(1) The change in interest resulting from both volume and yield/rate has
been allocated to change due to volume and change due to yield/rate in
proportion to the relationship of the absolute dollar amounts of the
change in each.
(2) The computation of the taxable equivalent adjustment has given effect
to the disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets.
Average earning assets increased 6.3% as of June 30, 1998 compared to
year-end 1997. At June 30, 1998, average net loans represented 61.2% of average
earning assets. Total average net loans increased during the six months ended
June 30, 1998 showing a 5.1% growth as compared to year end 1997. Average
investments accounted for the remaining balance of average earning assets at
June 30, 1998, increasing 8.3% from year end 1997. Average total assets
increased during the six months ended June 30, 1998, as evidenced by a 7.2%
growth compared to year end 1997.
Average earning assets increased 12.9% in 1997 compared to a 13.6%
increase in 1996 and a 15.2% increase in 1995. As a financial institution,
Peoples' primary earning asset is loans. At December 31, 1997, average net loans
represented 61.9% of average earning assets. Total average net loans increased
during the last three years showing a 15.0% growth from 1996 to 1997, a 17.0%
growth from 1995 to 1996, and a 15.8% growth from 1994 to 1995. Average
investments accounted for the remaining balance of average earning assets at
December 31, 1997, increasing 9.6% from year end 1996. Some of the proceeds from
maturities and calls of investment securities were used to fund the expanding
loan demand during the year. Average investments increased 9.1% in 1996. The
investments increased 1.7% in 1995. Average total assets increased during the
last three years as evidenced by a 12.8% growth from 1996 to 1997, a 13.3%
growth from 1995 to 1996, and a 14.4% growth from 1994 to 1995.
Peoples' average interest bearing deposits grew during the six months
ended June 30, 1998, as evidenced by a 7.6% growth rate as compared to year end
1997.
44
52
Peoples' average interest bearing deposits grew during the last three
years reflecting a 12.1% growth from 1996 to 1997, a 12.0% growth from 1995 to
1996, and a 14.8% growth from 1994 to 1995. Short and medium term rates remained
competitive compared to longer term rates during 1997 and some depositors left
money in or moved money back into interest-bearing transaction accounts, which
increased 9.7% during 1997 and 15.0% in 1996. Average interest-bearing checking
accounts decreased 2.5% in 1995 as investors took advantage of higher
certificate of deposit rates. Average savings deposits increased almost 9.3%
during 1997 and increased 7.7% during 1996. Savings deposits have been strong
historically providing a core, low cost, source of funding. Average savings
deposits declined 12.0% in 1995. Average certificates of deposit under $100,000
increased 15.8% during 1997, increased 0.8% during 1996 and increased 23.3% in
1995. Certificates of deposit over $100,000 increased 10.0% in 1997 compared to
40.0% in 1996 and 58.9% in 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
Peoples maintains a formal asset and liability management process to
control interest rate risk and assist management in maintaining reasonable
stability in the gross interest margin as a result of changes in the level of
interest rates and/or the spread relationships among interest rates. Each month,
the Asset/Liability Committee monitors the relationship of rate sensitive
earning assets to rate sensitive interest bearing liabilities (interest rate
sensitivity) which is the principal factor in determining the effect that
fluctuating interest rates will have on future net interest income. Rate
sensitive earning assets and interest bearing liabilities are those which can be
repriced to current market rates within a defined time period.
Another tool used to monitor Peoples' overall interest rate sensitivity
is a "gap" analysis which shows the difference between the earning asset and
interest-bearing liability amounts scheduled to be repriced to current market
rates in subsequent periods. Table 3, Rate Sensitivity of Earning Assets and
Interest-Bearing Liabilities, shows the Bank's rate sensitive position at
December 31, 1997, as measured by such analysis.
As a policy, budgeted financial goals are monitored on a monthly basis
by the Funds and Risk Management Committee where the actual dollar change in net
interest income given different interest rate movements is reviewed. The net
interest margin, on a tax equivalent basis, at December 31, 1997, 1996, and 1995
was 5.63%, 5.59% and 5.20% respectively.
TABLE 3 - RATE SENSITIVITY OF EARNING ASSETS AND INTEREST-BEARING LIABILITIES
3 Months 3 - 6 6 - 12 Over 1 Total
As of December 31, 1997 Or Less Months Months Year
------- -------- -------- ------- --------
Earning assets
Federal funds sold $ -- $ -- $ -- $ -- $ --
Taxable investment securities 6,369 4,052 2,700 17,429 30,550
Tax-exempt investment securities 2,729 1,736 1,158 8,929 14,552
Loans and leases, net of unearned 26,439 18,157 12,105 22,023 78,724
------- -------- -------- ------- --------
TOTAL EARNING ASSETS 35,537 23,945 15,963 48,381 123,826
Interest-bearing liabilities
NOW and money market accounts 2,500 1,570 1,570 6,896 12,536
Savings 3,342 507 507 5,330 9,686
Time 9,810 9,484 10,323 20,930 50,547
Time over $100,000 7,094 9,418 4,036 6,495 27,043
Other short-term debt 1,400 -- -- -- 1,400
------- -------- -------- ------- --------
TOTAL INTEREST BEARING LIABILITIES 24,146 20,979 16,436 39,651 $101,212
------- -------- -------- ------- ========
Interest-bearing, net -- -- -- (22,614)
Net asset/liability funding gap 11,391 (2,966) (473) 7,952
------- -------- -------- -------
Cumulative net asset/liability Funding gap $11,391 $ 14,357 $ 13,884 $ --
======= ======== ======== =======
LOANS AND LOAN QUALITY
As with most commercial banking institutions, the loan portfolio is the
largest component of earning assets and consequently provides the highest amount
of revenues. The loan portfolio also contains, as a result of credit quality,
the highest exposure to risk.
45
53
When analyzing potential loans, management assesses both interest rate
objectives and credit quality objectives in determining whether to make a given
loan and the appropriate pricing for that loan. Peoples maintains a diversified
portfolio in order to spread its risk and reduce its exposure to economic
downturns, which may occur in different segments of the economy or in particular
industries. The composition of the loan portfolio is disclosed in detail in Note
3 in the Notes to Financial Statements at page F-21.
Peoples follows written loan policies which include loan review
procedures and approvals. Depending primarily on the amount of the loan, there
are various approval levels.
Peoples has a Loan Review Department, which performs ongoing,
independent reviews of specific loans for credit quality and proper
documentation. This department is centralized and independent of the lending
function. Regular reports are made to senior management and the Peoples Board
regarding the credit quality of the loan portfolio, as well as trends. Loans
over a stated amount are assigned a risk rating by the loan officer subject to
review by Loan Review. Peoples also has a Credit Administrator who is
responsible for assisting loan officers in structuring new loans, reviewing
problem loans, monitoring their status from period to period, and assisting in
their resolution. This analysis and review also includes a formal review that is
prepared quarterly to assess the risk in the loan portfolio and to determine the
adequacy of the allowance for loan losses. This review supported management's
assertion that the allowance was adequate at December 31, 1997.
Table 4, Risk Elements in The Loan Portfolio, includes all loans
management considers to be potential problem loans, summarizes average loan
balances, and reconciles the allowance for loan losses for each year. Additions
to the allowance, which have been charged to operating expenses, are also
disclosed. Management does not believe that there is a concentration of loans to
a multiple number of borrowers engaged in similar activities.
Loans with insignificant balances at December 31, 1997 have been
identified as impaired in accordance with the provisions of SFAS 114. Please
refer to Note 1 and Note 3 in the Notes to Financial Statements at pages F-16
and F-22 for more information on Peoples' policy regarding loan impairment.
TABLE 4 -- RISK ELEMENTS IN THE LOAN PORTFOLIO
December 31,
---------------------------------------------------- --------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
(Dollars In Thousands)
Average amount of loans outstanding $71,909 $62,511 $ 53,428 $ 46,110 $ 42,184
======= ======= ======== ======== ========
Balance of allowance for possible loan losses at
beginning of year $ 943 $ 765 $ 802 $ 757 $ 758
Loans charged-off:
Loans secured by real estate 2 -- -- -- 3
Commercial and industrial loans 51 3 10 84 33
Individuals 207 132 91 30 25
------- ------- -------- -------- --------
TOTAL LOANS CHARGED OFF 260 135 101 114 61
------- ------- -------- -------- --------
Recoveries of loans previously charged off:
Loans secured by real estate -- -- -- -- --
Commercial and industrial loans 8 13 18 120 102
Individuals 81 31 21 18 20
------- ------- -------- -------- --------
TOTAL RECOVERIES 89 44 39 138 122
------- ------- -------- -------- --------
NET LOANS CHARGED-OFF (RECOVERED) 171 91 62 (24) (61)
------- ------- -------- -------- --------
Provision (reversal) charged to operating expenses 284 269 25 21 (62)
------- ------- -------- -------- --------
BALANCE OF ALLOWANCE FOR POSSIBLE LOAN LOSSES AT END
OF YEAR $ 1,056 $ 943 $ 765 $ 802 $ 757
======= ======= ======== ======== ========
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding 0.24% 0.43 0.05 (0.05) (0.14)
======= ======= ======== ======== ========
CAPITAL RESOURCES, CAPITAL AND DIVIDENDS
Historically, internal growth has financed the capital needs of
Peoples. At June 30, 1998, Peoples had a ratio of average Tier 1 capital to
average assets of 12.4%. At December 31, 1997, Peoples had a ratio of average
Tier 1 capital to average assets of 11.46%. This compares to a ratio of average
Tier 1 capital to average assets of 11.26% at December 31, 1996, and 9.50% at
December 31, 1995.
46
54
No cash dividends were declared for the six months ended June 30, 1998.
Cash dividends declared in 1997 were 9.4% more than those paid in 1996. The
dividend to net income ratio was 18% for 1997. Peoples plans to maintain or
increase the payout ratio while continuing to maintain a capital to asset ratio
reflecting financial strength and adherence to regulatory guidelines.
As of June 30, 1998, Peoples' ratio of Tier 1 capital to risk-weighted
assets and total capital to risk-weighted assets were 20.7% and 21.9%
respectively.
As of December 31, 1997, Peoples' ratios of Tier I capital to
risk-weighted assets and total capital to risk-weighted assets were 18.5% and
19.7% respectively. At December 31, 1996, the comparable ratios were 18.0% and
19.2% respectively. Please refer to Note 14 in the Notes to Financial Statements
at pages F-30 for more information on the capital strength of Peoples.
RESULTS OF OPERATIONS
Interest Income. Total interest income decreased 3.9% for quarter ended
June 30, 1998 as compared to the quarter ended June 30, 1997. Total interest
income increased 2.8% for the six months ended June 30, 1998 as compared to the
six months ended June 30, 1997. The decrease for the quarter end was due
primarily to the sale of CCS's loans on May 1 and a slow down in loan demand.
Most of the increase for the six months ended June 30, 1998 was due to interest
earned on loans.
Total interest income increased 16.2% in 1997 enhanced by loan growth
in all the market areas Peoples serves. Interest and fees earned on loans
increased 16.5% in 1997 accounting for 74.8% of gross interest income. Interest
earned on investment securities and other investments increased 15.0% in 1997
rounding out gross interest income contributing 25.2%. Total interest income
increased 19.0% in 1996 and 20.5% in 1995. Table 5, Five-Year Net Income
Summary, furnishes more detail on income and expense items.
Interest Expense. Total interest expense increased 7.6% for the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997. Total
interest expense increased 11.0% for the six months ended June 30, 1998, as
compared to June 30, 1997.
Total interest expense increased 17.7% in 1997 due mostly to the
increase in interest-bearing deposits. This increase compares favorably to a
15.0% increase in 1996, and a 42.3% increase in 1995. The cost of
interest-bearing deposits remained steady all year under monthly monitoring by
the Funds and Risk Management Committee. This contributed to the strong gross
margin achieved during 1997. The net interest margin (tax equivalent net
interest income divided by average earning assets) was 5.63% at the end of 1997
and 5.59% at the end of 1996 and 5.20% at the end of 1995.
Net interest income on a fully taxable equivalent basis is influenced
primarily by changes in: (1) the volume and mix of earning assets and sources of
funding, (2) market rates of interest, and (3) income tax rates. The impact of
some of these factors can be controlled by management policies and actions.
External factors can also have a significant impact on changes in net
interest income from one period to another. Some examples of such factors are:
(1) the strength of credit demands by customers; (2) Federal Reserve Board
monetary policy, and (3) fiscal and debt management policies of the federal
government, including changes in tax laws.
Noninterest Income and Expense. Noninterest income increased 110.0% for
the quarter ended June 30, 1998, as compared to the quarter ended June 30, 1997.
Noninterest income increased 66.8% for the six months ended June 30, 1998, as
compared to the six months ended June 30, 1997. The increases in 1998 are due to
the sale of CCS and gains on the sales of securities.
Noninterest income increased 17.9% during 1997 led by fees on deposits.
This increase is due to continued growth in deposit accounts.
Noninterest expenses, excluding the provisions for possible loan
losses, increased 3.2% for the quarter ended June 30, 1998, as compared to the
quarter ended June 30, 1997. Noninterest expense, excluding the provisions for
possible loan losses, increased 3.6% for the six months ended June 30, 1998, as
compared to the six months ended June 30, 1997.
Noninterest expenses, excluding the provision for possible loan losses,
increased 17.8% in 1997 which compares favorably with the 16.9% increase in
1996. The increase in 1995 was 13.5%. Increased productivity fostered by
technology improvements as the learning curve diminished and cost control
efforts contributed to this cost containment during periods of strong growth.
Included in this category is net occupancy expense for furniture and equipment.
Net Income. Net income was 31.6% higher for the quarter ended June 30,
1998, as compared to the quarter ended June 30, 1997. Net income was 23.2%
higher for the six months ended June 30, 1998, as compared to the six months
ended June 30, 1997. Net income was 12.0% higher in 1997 than in 1996. As
indicated earlier, the improvement in 1997's earnings resulted from a strong
gross margin reinforced by loans increasing as a percentage of earning assets,
an increase in noninterest income sufficient to cover a smaller increase in
noninterest expenses, and most of the increase in taxes. These improvements were
partially offset by higher additions to the allowance for loan losses.
47
55
TABLE 5 - FIVE YEAR NET INCOME SUMMARY
1997 1996 1995 1994 1993
----------- ---------- ---------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 8,194,390 $7,032,709 $5,707,681 $ 4,517,586 $ 4,182,090
Interest on investment securities, taxable 2,026,322 1,513,501 1,527,106 1,111,274 1,093,718
Interest on investment securities, exempt from
federal income tax 737,366 887,977 696,207 955,379 939,606
----------- ---------- ---------- ----------- -----------
TOTAL INTEREST INCOME 10,958,078 9,434,187 7,930,994 6,584,239 6,215,414
INTEREST EXPENSE
Interest on deposits 4,635,063 3,937,115 3,422,184 2,404,388 2,292,266
----------- ---------- ---------- ----------- -----------
NET INTEREST INCOME 6,323,015 5,497,072 4,508,810 4,179,851 3,923,148
PROVISION (REVERSAL) FOR POSSIBLE LOAN LOSSES 284,436 269,132 25,000 21,000 (62,000)
----------- ---------- ---------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,038,579 5,227,940 4,483,810 4,158,851 3,985,148
NONINTEREST INCOME
Service fees on deposit accounts 1,140,646 1,084,156 803,826 696,013 652,337
Other operating income 520,738 289,688 211,594 353,562 410,635
Loan sales gains 34,872 52,817 30,767 -- --
Securities gains 52,218 56,287 40,229 54,785 100,979
----------- ---------- ---------- ----------- -----------
TOTAL NONINTEREST INCOME 1,748,474 1,482,948 1,086,416 1,104,360 1,163,951
----------- ---------- ---------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,311,082 2,000,333 1,654,793 1,441,114 1,253,997
Net occupancy expense 787,318 655,983 539,961 340,541 329,440
Deposit insurance 15,541 1,500 92,206 -- --
Other operating expenses 1,344,329 1,125,967 949,059 1,068,755 1,140,866
----------- ---------- ---------- ----------- -----------
TOTAL NONINTEREST EXPENSES 4,458,270 3,783,783 3,236,019 2,850,410 2,724,303
----------- ---------- ---------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,328,783 2,927,105 2,334,207 2,412,801 2,424,796
PROVISION FOR INCOME TAXES 951,949 804,520 700,925 596,460 573,845
----------- ---------- ---------- ----------- -----------
NET INCOME $ 2,376,834 $2,122,585 $1,633,282 $ 1,816,341 $ 1,850,951
=========== ========== ========== =========== ===========
EARNINGS PER COMMON SHARE (250,000
outstanding shares) $ 9.51 $ 8.49 $ 6.53 $ 7.27 $ 7.40
=========== ========== ========== =========== ===========
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS ON THE FINANCIAL
STATEMENTS WHEN ADOPTED IN FUTURE PERIOD
The Financial Accounting Standards Board has issued two standards that
have been adopted by Peoples as follows: (1) Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share" requires a reconciliation of
the numerators and the denominators of the basic and diluted per-share
computation for income from continuing operations. The statement is effective
prospectively for earnings per share computation for both interim and annual
periods ending after December 31, 1997. Because Peoples has no potential common
stock outstanding, it is required to present only basic earnings per share and
its presentation of earnings per share did not change. (2) Statement of
Financial Accounting Standards No. 129 (SFAS 129), "Disclosure of Information
about Capital Structure" requires an entity to explain, in summary form within
its financial statements, the pertinent rights and privileges of the various
securities outstanding. Peoples only has one class of common stock outstanding
and this statement had no material effect on the financial statements.
The Financial Accounting Standards Board has issued two standards that
have not been adopted by Peoples: (1) Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income" purposes that an
entity report a measure of all change in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The statement is effective for fiscal
years beginning after December 15, 1997. Management does not believe this
statement will have any material effect on future financial statements except
for disclosures. (2) Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information"
establishes guidelines for reporting financial information about an operating
segment or component of an enterprise.
48
56
The statement is effective for fiscal years beginning after December 15, 1997.
Management does not believe this statement will have any material effect on
future financial statements except for disclosures.
YEAR 2000 COMPLIANCE
A Year 2000 Compliance Task Force (the "TASK FORCE") has been
established to evaluate the mission critical software and hardware that must be
compatible for continued satisfactory data processing; representations have been
obtained, or are in the process of being obtained, from software and hardware
vendors, confirming their Year 2000 compatibility. Under the guidance of the
Task Force and with the assistance of outside consultants, Peoples has upgraded
certain of its software and hardware to achieve Year 2000 compliance,
concentrating efforts on those systems scheduled to survive the Merger, at an
approximate cost of $60,000 since January 1, 1998. The Peoples Board has also
adopted a Year 2000 test plan for Year 2000 testing in accordance with
requirements of the Federal Financial Interagency Examination Council. The plan
designates specific critical test dates, testing methodology, and contingency
planning. The Task Force estimates the cost for testing systems that survive the
Merger will approximate $5,000. Management believes that information systems are
well on their way to being Year 2000 compliant.
FINANCIAL RATIOS
The ratio of net income to average shareholders' equity and average
total assets, and certain other ratios, are presented below:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- -------
Percentage of net income to:
Total average assets 1.89 1.91 1.66
Average shareholders' equity 16.40 16.00 15.20
Percentage of dividends declared to net income 18.40 18.80 23.00
Percentage of average shareholders' equity to total average assets 11.58 11.36 10.91
SUPERVISION AND REGULATION
Peoples is subject to extensive regulations under state and federal
statutes and regulations. The discussion in this section, which briefly
summarizes certain of such statutes, does not purport to be complete, and is
qualified in its entirety by reference to such statutes. Other state and federal
legislation and regulations directly and indirectly affecting banks and other
financial institutions may be enacted or implemented in the future; however,
such legislation and regulations and their effect on the business of Peoples
cannot be predicted.
Peoples is incorporated under the banking laws of the State of
Tennessee, and as such, is subject to the provisions of the TBA and the
supervision of and regular examination by the Department. Peoples is a member of
the FDIC and, therefore, also subject to the provisions of the FDIA and to
supervision and examination by the FDIC.
Tennessee statutes and the FDIA regulate a variety of the banking
activities of Peoples, including required reserves, investments, loans,
exchanges and consolidations, issuance of securities, payment of dividends, and
establishment of branches. Tennessee law prohibits state banks from paying
dividends other than from undivided profits, and, where the surplus account is
not at least equal to the capital account imposes certain other restrictions on
dividends. The FDIA prohibits state banks insured by the FDIC from paying
dividends if such bank is in default in the payment of any assessments due the
FDIC. Under Tennessee law, state banks are prohibited from lending to any one
person, firm or corporation amounts more than fifteen percent (15%) (or if such
loan is approved by the bank's board of directors or finance committee
twenty-five percent (25%)) of its equity capital accounts, except in the case of
certain loans secured by negotiable title documents covering readily marketable
nonperishable staples. Except for certain specified loans, Tennessee law also
requires that loans to officers, directors and employees of a state bank require
prior board of directors or finance committee approval. See generally
"INFORMATION ABOUT OUR COMPANIES - Supervision and Regulation of First American
and Peoples."
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of the Peoples Record Date, certain
information as to the Peoples Common Stock beneficially owned by (i) any Peoples
person or group of persons who is known to Peoples to be the beneficial owner of
more than 5% of the Peoples stock, and (ii) each of Peoples' directors, each of
Peoples' executive officers who are not directors and by all of Peoples'
directors and executive officers as a group.
Name Shares Beneficially Owned Percent of Class
---- ------------------------- ----------------
Directors and Executive Officers:
Thomas Hayes (1) 40,016 16.01%
Ted H. Williams (2) 2,500 1.00
J.A. Stokes (3) 28,500 11.40
Lisa A. Scott (4) 272 0.11
Melissa Street (5) 648 0.26
49
57
Jerry Smith (6) 400 0.16
Noah Daniel 950 0.38
Phil E. Hall (7) 1,999 0.80
Susan S. McMillan 7,360 2.94
Neill Milam 1,740 0.70
R.L. Smith 7,380 2.95
All directors, officers, as a group: 91,765 36.71
Other significant shareholders:
Jane B. Averitte (8) 19,560 7.82
Mary A. Speight 12,000 4.80
Jack L. or Mary S. Warwick (9) 20,540 8.22
(1) Includes 3,320 shares held in trust under Peoples 401(k)
Profit Sharing Plan, 399 shares held in an Individual
Retirement Account ("IRA") with Ameristar Investments and
Trust ("AMERISTAR") and 399 shares held by Mr. Hayes' spouse
in an IRA with Ameristar.
(2) Includes 975 shares held in trust under Peoples 401(k) Profit
Sharing Plan and 150 shares held by spouse in an IRA with
Ameristar.
(3) Includes 1,000 shares held by Mr. Stokes' spouse.
(4) Includes 90 shares held in trust under Peoples 401(k) Profit
Sharing Plan.
(5) Includes 139 shares held by spouse in an IRA with Ameristar.
(6) All shares held in an IRA registered under Cede & Company, New
York, New York.
(7) Includes 700 shares held in an IRA registered under Cede &
Company, New York, New York.
(8) Includes 80 shares held by either the estate of Mr. Billy
Averitte or his son, not held by Mrs. Averitte. Billy Averitte
is Mrs. Averitte's recently deceased spouse, and these shares
will likely remain with his son.
(9) Includes 280 shares held by Mrs. Warwick, not held by Mr.
Warwick.
50
58
ADDITIONAL INFORMATION
DISSENTERS' APPRAISAL RIGHTS
Peoples Shareholders have the right to dissent from the Merger and
obtain in cash the fair value of their shares of Peoples Common Stock.
In order to perfect dissenters' rights with respect to the Merger, a
Peoples Shareholder must (i) deliver to Peoples, before the vote is taken,
written notice of his or her intent to demand payment for his or her shares of
Peoples Common Stock if the Merger is consummated; and (ii) not vote his or her
shares of Peoples Common Stock in favor of the Agreement. Subsequent to
shareholder approval of the Agreement, First American would be required under
Tennessee law to send to each of the Peoples Shareholders who has perfected
dissenters' rights in accordance with the steps disclosed above, written notice
setting forth instructions for receipt of payment for their shares. Upon receipt
of such notice, dissenting Peoples Shareholders would become entitled to receive
payment of their shares of Peoples Common Stock when they: (i) demand payment;
(ii) certify that they have received their shares prior to the date of the first
public announcement of First American's and Peoples' intention to merge; and
(iii) deposit with First American certificates representing their shares of
Peoples Common Stock in accordance with the instructions set forth in the
notice. A copy of the Tennessee statutory law regarding dissenters' rights,
Chapter 23 of the TBCA, is attached as Appendix C to this Prospectus/Proxy
Statement.
The foregoing is only a summary of the rights of dissenting holders of
Peoples Common Stock. Any holder of Peoples Common Stock who intends to dissent
should carefully review the text of the Tennessee statutory law set forth in
Appendix C to this Prospectus/Proxy Statement and should consult with such
holder's attorney. The failure of a Peoples Shareholder to follow precisely the
procedure summarized above and set forth in Appendix C to this Prospectus/Proxy
Statement may result in loss of appraisal rights. No further notice of the
events giving rise to appraisal rights or any steps associated therewith will be
furnished to holders of Peoples Common Stock, except as indicated above or
otherwise required by law.
In general, any dissenting shareholder who perfects such holder's right
to be paid the "fair value" of such holder's Peoples Common Stock in cash will
recognize taxable gain or loss for federal income tax purposes upon receipt of
such cash.
If Peoples Shareholders owning more than 5% of the outstanding shares
of Peoples Common Stock exercise their right to dissent, First American may
elect not to proceed with the Merger.
LEGAL OPINION
The legality of the First American Common Stock to be issued in
connection with the Merger will be passed upon by Mary Neil Price, Esq., General
Counsel of First American. As of August 19, 1998, Ms. Price beneficially owned
16,646.995 shares of First American Common Stock.
EXPERTS
The consolidated financial statements of First American Corporation and
subsidiaries as of December 31, 1997 and December 31, 1996, and for each of the
years in the three-year period ended December 31, 1997, have been incorporated
by reference herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The supplemental consolidated financial statements give retroactive
effect to the merger of First American Corporation and Deposit Guaranty Corp. on
May 1, 1998 which has been accounted for as a pooling of interests. Generally
accepted accounting principles proscribe giving effect to a consummated business
transaction accounted for by the pooling of interest method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they became
the historical financial statements of First American Corporation and
subsidiaries after financial statements covering the date of consummation of the
business combination were issued.
With respect to the unaudited interim financial information for the
periods ended June 30, 1998 and 1997, and March 31, 1998 and 1997, incorporated
by reference herein, the independent certified public accountants have reported
that they applied limited procedures in accordance with professional standards
for review of such information. However, their separate reports included in
First American's quarterly reports on Form 10-Q for the quarters ended June 30,
1998 and March 31, 1998, and incorporated by reference herein, state that KPMG
Peat Marwick LLP did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on KPMG Peat
Marwick LLP's reports on such information should be restricted in light of the
limited nature of the review procedures applied. The accountants are not subject
to the liability provisions of Section 11 of the Securities Act of 1933 for
their reports on the unaudited interim financial information because those
reports are not "reports" or a "part" of the registration statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
The consolidated financial statements of Peoples and subsidiaries as of
December 31, 1997 and December 31, 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included in this
Prospectus/Proxy Statement in reliance upon the report of Kraft Bros., Esstman
Patton & Harrell, PLLC, independent certified public accountants, also included
herein, and upon the authority of said firm as experts in accounting and
auditing.
51
59
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the Peoples Board
knows of no matters that will be presented for consideration at the Special
Meeting, other than as described in this Prospectus/Proxy Statement. If any
other matters should properly come before the meeting or any adjournments or
postponements thereof and be voted upon, the enclosed proxies will be deemed to
confer discretionary authority on the individuals named as proxies therein to
vote the shares represented by such proxies as to any such matters. The persons
named as proxies intend to vote or not to vote in accordance with the
recommendation of the management of Peoples.
WHERE YOU CAN FIND MORE INFORMATION
First American has filed with the Commission a Registration Statement
under the Securities Act that registers the distribution to Peoples Shareholders
of the shares of First American Common Stock to be issued in connection with the
Merger (the "REGISTRATION STATEMENT"). The Registration Statement, including the
attached exhibits and schedules, contain additional relevant information about
First American and the First American Common Stock. The rules and regulations of
the Commission allow us to omit certain information included in the Registration
Statement from this Prospectus/Proxy Statement.
In addition, First American files reports, proxy statements and other
information with the Commission under the Exchange Act. You may read and copy
this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates.
The Commission also maintains an Internet world wide web site that
contains reports, proxy statements and other information about issuers, like
First American, who file electronically with the Commission. The address of that
site is http://www.sec.gov.
You can also inspect reports, proxy statements and other information
about First American at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
The Commission allows First American to "incorporate by reference"
information into this Prospectus/Proxy Statement. This means that First American
can disclose important information to you by referring you to another document
filed separately with the Commission. The information incorporated by reference
is considered to be a part of this Prospectus/Proxy Statement, except for any
information that is superseded by other information that is set forth directly
in this document.
This Prospectus/Proxy Statement incorporates by reference the documents
set forth below that First American has previously filed with the Commission.
They contain important information about First American and its financial
condition.
52
60
FIRST AMERICAN SEC FILINGS PERIOD
-------------------------- ------
Annual Report on Form 10-K Year ended December 31, 1997, as filed March 27, 1998
Quarterly Reports on Form 10-Q Quarters ended:
o March 31, 1998, as filed April 30, 1998
o June 30, 1998, as filed August 11, 1998
The description of the First American Common Stock
and the First American Rights contained in registration
statements filed pursuant to Section 12 of the Exchange
Act, including any amendment or reports filed for the
purpose of updating that description
Current Reports on Form 8-K Filed:
o May 11, 1998
o July 14, 1998
Annual Report on Form 11-K Year ended December 31, 1997, as filed June 30, 1998
First American incorporates by reference additional documents that it
may file with the Commission between the date of this Prospectus/Proxy Statement
and the date of the Special Meeting. These documents include periodic reports,
such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
First American has supplied all information contained or incorporated
by reference in this Prospectus/Proxy Statement relating to First American.
Peoples has supplied all information contained in this Prospectus/Proxy
Statement relating to Peoples.
You can obtain any of the documents incorporated by reference in this
document through First American, or from the Commission through the Commission's
Internet world wide web site at the address described above. Documents
incorporated by reference are available from the companies without charge,
excluding any exhibits to those documents unless the exhibit is specifically
incorporated by reference as an exhibit in this Prospectus/Proxy Statement. You
can obtain documents incorporated by reference in this Prospectus/Proxy
Statement by requesting them in writing or by telephone from First American at
the following address:
Joe Powell
Director of Investor Relations
First American Corporation
First American Center
Nashville, Tennessee 37237-0700
Telephone (615) 748-2455
If you would like to request documents from First American, please do
so by September 17, 1998 to receive them before the Special Meeting. If you
request any incorporated documents from us, we will mail them to you by first
class mail, or another equally prompt means, within one business day after we
receive your request.
You should rely only on the information contained in or incorporated by
reference in this Prospectus/Proxy Statement in considering how to vote your
shares at the Special Meeting. Neither First American nor Peoples has authorized
anyone to provide you with information that is different from the information in
this document. This Prospectus/Proxy Statement is dated August 21, 1998. You
should not assume that the information contained in this document is accurate as
of any date other than that date. Neither the mailing of this Prospectus/Proxy
Statement nor the issuance of First American Common Stock in the Merger shall
create any implication to the contrary.
If you live in a jurisdiction where it is unlawful for First American
to offer its securities to you, this Prospectus/Proxy Statement does not
constitute an offer for you to purchase or receive First American Common Stock.
THE SHARES OF FIRST AMERICAN COMMON STOCK THAT YOU WOULD RECEIVE IN
THE MERGER ARE NOT DEPOSITS OF ANY BANK AND THEY ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Prospectus/Proxy Statement and documents incorporated herein by
reference contain certain forward-looking statements about the financial
condition, results of operations and business of First American and Peoples.
The words "believes," "expects," "anticipates," "intends," "estimates," "plans"
or similar expressions, indicate we are making forward-looking statements.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. The future results and
shareholder value of First American may differ materially from those expressed
in these forward-looking statements. Many of the factors that could influence
or determine actual results are unpredictable and not within the control of
First American. In addition, First American and Peoples do not intend to, and
are not obligated to, update these forward-looking statements after we
distribute this Prospectus/Proxy Statement, even if new information, future
events or other circumstances have made them incorrect or misleading as of any
future date. For all of these statements, First American and Peoples claim the
protection of the safe harbor for forward-looking statements provided in the
Private Securities Litigation Reform Act of 1995.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) competitive pressure among financial services
providers in the mid-south region of the United States or in the financial
services industry generally increases significantly; (ii) interest rates change
in such a way as to reduce First American's margins; (iii) general economic or
monetary conditions, either nationally or regionally, are less favorable than
expected, resulting in a deterioration in credit quality or a diminished demand
for First American's services and products; (iv) changes in laws or government
rules, or the way in which courts interpret these laws or rules, adversely
affect First American's business; (v) business conditions, inflation or
securities markets undergo significant change; and (vi) disruptions occur in
the operations of First American or any of its subsidiaries or any other
governmental or private entity as a result of the "Year 2000 Problem."
53
61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PEOPLES BANK AND SUBSIDIARIES
PAGE
CONDENSED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 1998 AND 1997................................... F-2
Condensed Balance Sheets..................................................................................... F-2
Condensed Statements of Income............................................................................... F-3
Condensed Statements of Stockholders' Equity................................................................. F-4
Condensed Statements of Cash Flows........................................................................... F-5
Notes to Condensed Financial Statements...................................................................... F-7
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................................................... F-8
CONSOLIDATED FINANCIAL STATEMENTS FOR 1997 AND 1996
Consolidated Balance Sheets.................................................................................. F-9
Consolidated Statements of Income............................................................................ F-10
Consolidated Statements of Stockholders' Equity.............................................................. F-11
Consolidated Statements of Cash Flows........................................................................ F-12
Notes to Consolidated Financial Statements................................................................... F-14
F-1
62
CONDENSED BALANCE SHEETS
(Dollar Amounts in Thousands, Except Per Share Amounts)
JUNE 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,210 $ 3,971
Securities available for sale, at fair value 46,832 45,102
Federal funds
sold 2,400 --
Loans, net of unearned income and allowance for possible
loan losses 74,260 77,261
Loans held for sale 952 407
Accrued interest receivable 1,090 1,253
Bank premises and equipment, at cost less accumulated
depreciation - Notes 5 and 13
4,147 4,283
Other assets
776 1,005
-------- --------
TOTAL ASSETS $135,667 $133,282
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 16,673 $ 15,802
Interest-bearing 101,346 99,812
-------- --------
118,019 115,614
Federal funds purchased -- 1,400
Accrued interest payable 649 583
Other liabilities 192 212
-------- --------
TOTAL LIABILITIES 118,860 117,809
-------- --------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock - $2 par value, 1,000,000 shares authorized;
250,000 shares issued and outstanding 500 500
Additional paid-in capital 500 500
Retained earnings 15,689 14,168
Unrealized gain on available-for-sale securities, net of deferred income taxes 118 305
-------- --------
TOTAL STOCKHOLDERS' EQUITY 16,807 15,473
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $135,667 $133,282
======== ========
See accompanying notes.
F-2
63
CONDENSED STATEMENTS OF INCOME
(Dollar Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended June 30, Six-Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 1,854 $ 1,980 $ 3,895 $ 3,806
Exempt from federal income taxes 55 65 115 126
Interest on investment securities:
Taxable 483 476 996 889
Exempt from federal income taxes 236 220 411 447
------- ------- ------- -------
TOTAL INTEREST INCOME 2,628 2,741 5,417 5,268
INTEREST EXPENSE 1,232 1,145 2,445 2,203
------- ------- ------- -------
NET INTEREST INCOME 1,396 1,596 2,972 3,065
PROVISION FOR POSSIBLE LOAN LOSSES (24) 60 -- 76
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,420 1,536 2,972 2,989
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 305 304 590 568
Other operating income 429 84 570 209
Net gain on sale of securities 104 11 169 20
------- ------- ------- -------
TOTAL NONINTEREST INCOME 838 399 1,329 797
------- ------- ------- -------
NONINTEREST EXPENSES
Salaries and employee benefits 508 526 1,072 1,066
Net occupancy expense 192 188 409 382
Other operating expense 349 303 662 620
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 1,049 1,017 2,143 2,068
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,209 918 2,158 1,718
PROVISION FOR INCOME TAXES 346 263 637 484
------- ------- ------- -------
NET INCOME $ 863 $ 655 $ 1,521 $ 1,234
======= ======= ======= =======
BASIC EARNINGS PER SHARE (based on $ 3.45 $ 2.62 $ 6.08 $ 4.94
250,000 shares outstanding) ======= ======= ======= =======
See accompanying notes.
F-3
64
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
UNREALIZED
ADDITIONAL GAIN ON
PAID-IN RETAINED AVAILABLE-FOR-SALE
COMMON STOCK CAPITAL EARNINGS SECURITIES TOTAL
------------ ---------- --------- -------------------- --------
BALANCE AT JANUARY 1, 1997 $ 500 $ 500 $ 12,229 $ 354 $ 13,583
Net income for six-month period -- -- 1,234 -- 1,234
Change in unrealized gain on available-
for-sale securities, net of deferred
income taxes -- -- -- 7 7
------- ------- -------- ------- --------
BALANCE AT JUNE 30, 1997 $ 500 $ 500 $ 13,463 $ 361 $ 14,824
======= ======= ======== ======= ========
BALANCE AT JANUARY 1, 1998 $ 500 $ 500 $14,168 $ 305 $ 15,473
Net income for six-month period 1,521 1,521
Change in unrealized gain on available- -- -- -- (187) 187
for-sale securities, net of deferred ------- ------- ------- ------- --------
income taxes
BALANCE AT JUNE 30, 1998 $ 500 $ 500 $ 15,689 $ 118 $ 16,807
======= ======= ======== ======= ========
See accompanying notes.
F-4
65
PEOPLES BANK AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Six-Months Ended June 30,
-------------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income for the period $ 1,521 $ 1,234
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion on securities (50) (79)
Net gain on sale of loans held for sale (42) (16)
Net gain on sale of securities (168) (20)
Loss on sale of premises and equipment -- 26
Excess (net charge-off in excess of provision)
of provision for loan losses over net charge-offs (87) 18
Provision for depreciation 234 208
Deferred benefit income taxes 39 (12)
Proceeds from sale of loans held for sale 4,338 3,013
Originations of loans held for sale (4,841) (2,679)
(Increase) decrease in accrued interest receivable 163 118
Increase (decrease) in other assets (235) (97)
Increase (decrease) in other liabilities 110 72
Increase (decrease) in accrued interest payable 66 99
-------- --------
TOTAL ADJUSTMENTS (473) 651
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,048 1,885
-------- --------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (28,855) (14,023)
Proceeds from sales, maturities and calls of
available-for-sale securities 25,072 16,658
Proceeds from principal collections of
available-for-sale securities 2,378 80
Net increase (decreases) in loans 3,088 (7,260)
Purchases of premises and equipment (121) (300)
Proceeds from sale of premises and equipment 22 16
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,584 (4,829)
-------- --------
(Continued on next page)
See accompanying notes.
F-5
66
PEOPLES BANK AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands, Except Per Share Amounts)
(Unaudited)
Six-Months Ended June 30,
-------------------------
1998 1997
------- -------
FINANCING ACTIVITIES
Net increase in deposits $ 2,407 $ 9,760
Net increase (decrease) in federal funds purchased (1,400) 775
Cash dividends paid -- --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,007 10,535
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 3,639 7,591
CASH AND CASH EQUIVALENTS -
BEGINNING OF YEAR 3,971 3,869
------- -------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 5,210 $ 11,460
======= ========
See accompanying notes.
F-6
67
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed financial statements present the accounts and operations
of Peoples Bank, a Tennessee banking corporation (the "Bank"), with
branches in Dickson, Charlotte, Vanleer, Erin and Burns, Tennessee.
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the
financial condition and results of operations of the Bank for the
interim periods. The results of operations for the three-months and
six-months ended June 30, 1998, are not necessarily indicative of the
results which may be expected for the entire year.
NOTE 2 - STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows for 1998 and 1997, the
Bank has considered cash equivalents to include amounts due from banks
and federal funds sold. Total interest paid for the six months ended
June 30, 1998 and 1997, was $2,379,000 and $2,104,000, respectively.
Total income taxes paid for the six-months ended June 30, 1998 and 1997
was $526,272 and $452,629, respectively.
NOTE 3 - SUBSEQUENT EVENTS AND PENDING TRANSACTIONS
Effective April 21, 1998, the Bank's Board of Directors approved an
agreement and plan of merger pursuant to which the Bank will become a
subsidiary of First American Corporation, a registered bank holding
company with its principal office located in Nashville, Tennessee. The
agreement is subject to the approval of the Bank's shareholders and
appropriate regulatory authorities. Such approval is pending.
F-7
68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Peoples Bank and Subsidiaries
Dickson, Tennessee
We have audited the accompanying consolidated balance sheets of Peoples Bank
(the "Bank") and its wholly-owned subsidiaries, as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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 consolidated financial position of Peoples Bank and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Kraft Bros., Esstman, Patton & Harrell, PLLC
Nashville, Tennessee
January 30, 1998
F-8
69
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
Cash and due from banks $ 3,970,972 $ 3,869,193
Securities available for sale, at fair value - Note 2 45,101,522 40,625,988
Loans, net of unearned income and allowance for
possible loan losses - Notes 3 and 4 77,260,759 66,556,512
Loans held for sale 406,717 316,650
Accrued interest receivable 1,253,495 1,182,005
Bank premises and equipment, at cost less accumulated
depreciation - Notes 5 and 13 4,283,253 4,285,725
Other assets 1,005,634 865,243
------------ ------------
TOTAL ASSETS $133,282,352 $117,701,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 15,801,723 $ 16,951,523
Interest-bearing (including certificates of deposit $100,000 or
greater: 1997 - $26,098,057; 1996 - $21,365,606) 99,812,367 86,478,379
------------ ------------
115,614,090 103,429,902
Federal funds purchased - Note 6 1,400,000 --
Accrued interest payable 583,132 497,777
Other liabilities 212,565 190,605
------------ ------------
TOTAL LIABILITIES 117,809,787 104,118,284
------------ ------------
COMMITMENTS - Note 7
STOCKHOLDERS' EQUITY
Common stock - $2 par value, 1,000,000 shares authorized;
250,000 shares issued and outstanding 500,000 500,000
Additional paid-in capital 500,000 500,000
Retained earnings 14,168,016 12,228,682
Unrealized gain on available-for-sale securities, net of deferred
income taxes of: 1997 - $186,659; 1996 - $217,189 - Note 2 304,549 354,350
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,472,565 13,583,032
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,282,352 $117,701,316
============ ============
See accompanying notes to consolidated financial statements.
F-9
70
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 7,943,710 $ 6,872,963
Exempt from federal income taxes 250,680 159,746
Interest on investment securities:
Taxable 2,026,322 1,513,501
Exempt from federal income taxes 737,366 887,977
----------- -----------
TOTAL INTEREST INCOME 10,958,078 9,434,187
INTEREST EXPENSE 4,635,063 3,937,115
----------- -----------
NET INTEREST INCOME 6,323,015 5,497,072
PROVISION FOR POSSIBLE LOAN LOSSES - Note 4 284,436 269,132
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,038,579 5,227,940
----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 1,140,646 1,084,156
Other operating income 520,738 289,688
Net gain on sale of loans held for sale 34,872 52,817
Net gain on sale of securities - Note 2 52,218 56,287
----------- -----------
TOTAL NONINTEREST INCOME 1,748,474 1,482,948
----------- -----------
NONINTEREST EXPENSES
Salaries and employee benefits 2,311,082 2,000,333
Net occupancy expense 787,318 655,983
Deposit insurance premium 15,541 1,500
Other operating expense 1,344,329 1,125,967
----------- -----------
TOTAL NONINTEREST EXPENSES 4,458,270 3,783,783
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 3,328,783 2,927,105
PROVISION FOR INCOME TAXES - NOTE 9 951,949 804,520
----------- -----------
NET INCOME $ 2,376,834 $ 2,122,585
=========== ===========
BASIC EARNINGS PER SHARE (based on 250,000 shares outstanding) $ 9.51 $ 8.49
=========== ===========
See accompanying notes to consolidated financial statements.
F-10
71
PEOPLES BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
UNREALIZED
ADDITIONAL GAIN ON
PAID-IN RETAINED AVAILABLE-FOR-SALE
COMMON STOCK CAPITAL EARNINGS SECURITIES TOTAL
------------ ----------- ----------- ------------------ -----------
BALANCE AT JANUARY 1, 1996 $ 500,000 $ 500,000 $10,506,097 $ 200,416 $11,706,513
Net income for the year -- -- 2,122,585 -- 2,122,585
----------- ----------- ----------- ----------- -----------
Cash dividends, $1.60 per share -- -- (400,000) -- (400,000)
----------- ----------- ----------- ----------- -----------
Change in unrealized gain on
available-for-sale securities, net of
deferred income taxes of $94,342 -- -- -- 153,934 153,934
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 500,000 500,000 12,228,682 354,350 13,583,032
Net income for the year -- -- -- 2,376,834 2,376,834
----------- ----------- ----------- ----------- -----------
Cash dividends, $1.75 per share -- -- (437,500) -- (437,500)
Change in unrealized gain on
available-for-sale securities, net of
deferred income taxes of $30,530 -- -- -- (49,801) (49,801)
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 $ 500,000 $ 500,000 $14,168,016 $ 304,549 $15,472,565
=========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-11
72
PEOPLES BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
OPERATING ACTIVITIES
Net income for the year $ 2,376,834 $ 2,122,585
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Net accretion on securities (142,454) (232,401)
Net gain on sale of loans held for sale (34,872) (52,817)
Net gain on sale of securities (52,218) (56,287)
Loss on sale of premises and equipment 26,126 --
Excess of provision for loan losses over net charge-offs 112,694 178,023
Provision for depreciation 413,295 323,181
Deferred income taxes (33,614) (40,946)
Proceeds from sale of loans held for sale 4,590,172 5,715,940
Originations of loans held for sale (4,645,367) (5,795,773)
(Increase) decrease in accrued interest receivable (71,490) 8,890
Increase in other assets (76,247) (85,053)
Increase in other liabilities 21,960 66,006
Increase (decrease) in accrued interest payable 85,355 (82,352)
------------ ------------
TOTAL ADJUSTMENTS 193,340 (53,589)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,570,174 2,068,996
------------ ------------
INVESTING ACTIVITIES
Purchases of available-for-sale securities (39,059,032) (33,262,054)
Proceeds from sales, maturities and calls of available-for-sale securities 33,561,562 30,206,968
Proceeds from principal collections of available-for-sale securities 1,136,266 665,205
Net increase in loans (10,816,941) (8,269,419)
Purchases of premises and equipment (453,041) (897,969)
Proceeds from sale of premises and equipment 16,103 --
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (15,615,083) (11,557,269)
------------ ------------
(Continued on next page)
See accompanying notes to consolidated financial statements.
F-12
73
PEOPLES BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits $ 12,184,188 $ 15,198,875
Net increase (decrease) in federal funds purchased 1,400,000 (4,200,000)
Cash dividends paid (437,500) (400,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,146,688 10,598,875
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 101,779 1,110,602
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,869,193 2,758,591
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 3,970,972 $ 3,869,193
============ ============
See accompanying notes to consolidated financial statements.
F-13
74
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements present the accounts and
operations of Peoples Bank (the "Bank"), a Tennessee banking
corporation with branches in Dickson, Charlotte, Vanleer, Burns and
Erin, Tennessee, and its subsidiaries. The Bank operates as a
commercial bank regulated by the Federal Deposit Insurance Corporation
and the Tennessee Department of Financial Institutions. The Bank
provides deposit services and grants real estate, consumer and
commercial loans to customers primarily in Dickson, Houston, and
adjoining counties of Tennessee.
During 1996, the Bank chartered two new companies as wholly-owned
subsidiaries: Community Credit Services, Inc. (CCS) and Highland Rim
Title Company (HRTC). Community Credit Services, Inc. has one office
located at 404 Highway 46 South, Dickson, Tennessee, and operates under
the Industrial Loan & Thrift Company Act. CCS extends credit to
consumers who are considered a higher credit risk than the Bank
customarily accepts. Highland Rim Title Company has one office located
at Court Square, Charlotte, Tennessee, and operates as a title
insurance and escrow agent.
The accounting principles followed and the methods of applying those
principles conform with generally accepted accounting principles and to
general practices in the banking industry. The significant policies are
summarized as follows:
Principles of Consolidation
The accompanying consolidated financial statements present the accounts
and operations of the Bank and its wholly-owned subsidiaries, CCS and
HRTC (collectively, the "Companies"). Material intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Due From Banks
Included in cash and due from banks are legal reserve requirements
which must be maintained on an average basis in the form of cash and
balances due from the Federal Reserve Bank and other banks.
F-14
75
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents
Cash equivalents include amounts due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Securities
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are
carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior
to maturity for asset/liability management purposes, or that may be
sold in response to changes in interest rates, changes in prepayment
risk, to increase regulatory capital or other similar factors, are
classified as securities available for sale and carried at fair value
with any adjustments to fair value, net of related deferred income tax,
reported as a separate component of stockholders' equity. Declines in
the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary are included
in earnings as realized losses. Securities purchased for trading
purposes are held in the trading portfolio at market value, with market
adjustments included in noninterest income. The Bank had no securities
classified as held-to-maturity or trading securities as of December 31,
1997 and 1996.
Interest and dividends on securities, including the amortization of
premiums and the accretion of discounts, are recognized using the
interest method. Gains and losses on the sale of securities are
recorded on the trade date using the specific identification method.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amounts adjusted for any charge-offs, the
allowance for possible loan losses, and any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid balance.
Interest on commercial and real estate loans is computed on a daily
basis based on the principal amount outstanding. Interest on
installment loans is recognized under both the interest method and the
Rule of 78's method, which is not materially different from the
interest method. Interest accruals including accruals of interest on
impaired loans are discontinued when management believes, after
considering economic and business conditions and collection efforts,
that the borrower's financial condition is such that it is not
reasonable to expect such interest will be collected. Interest income
is subsequently recognized only to the extent cash payments are
received.
F-15
76
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans (Continued)
Loans are considered impaired when, based on current information, it is
probable that all amounts of principal and interest due will not be
collected according to the contractual terms of the loan agreement. The
amount of impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or
for collateral dependent loans, based on a loan's observable market
price or the fair value of the collateral.
Loan origination and commitment fees and certain loan related costs are
deferred and the net amount amortized as an adjustment to the related
loan yield over the contractual life of the loan.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Other Real Estate
Other real estate, which is included in other assets, represents real
estate acquired through foreclosure and is stated at lower of (i) fair
value minus estimated costs to sell, or (ii) cost. If, at the time of
foreclosure, the fair market value of the real estate acquired is less
than the Bank's carrying value of the related loan, a writedown is
recognized through a charge to the allowance for possible loan losses,
and the fair market value becomes the new cost basis for subsequent
accounting. If the Bank later determines that the cost of the property
cannot be recovered through sale or use, a writedown is recognized by a
charge to operations. When the property is not in a condition suitable
for sale or use at the time of foreclosure, completion and holding
costs, including such items as real estate taxes, maintenance and
insurance, are capitalized up to the property's fair value minus
estimated costs to sell. However, when the property is in a condition
for sale or use at the time of foreclosure, or the property is already
carried at its fair value minus estimated costs to sell, any subsequent
holding costs are expensed. Legal fees and any other direct costs
relating to foreclosures are charged to operations when incurred.
F-16
77
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Possible Loan Losses
The allowance for possible loan losses is established by charges to
operations and is maintained at an amount which management believes
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of loan collectibility and on prior
loan loss experience. The evaluations consider such factors as changes
in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic
conditions that may affect a borrower's ability to pay. Uncollectible
loans are charged to the allowance account in the period such
determination is made. Subsequent recoveries of loans previously
charged off are credited to the allowance account in the period
received.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the allowance for possible loan
losses as of the date of the balance sheet and the amount of loan loss
expense recognized for the period. Actual results could differ
significantly from those estimates, since the allowance for possible
loan losses is a material estimate that is particularly susceptible to
significant change in the near term. While management uses available
information to recognize losses on loans, future losses may be
accruable based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such
agencies may require the Bank to recognize additional losses based on
their judgment of information available to them at the time of their
examination.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. The provision for depreciation is computed principally on
the straight-line method over the estimated useful lives of the assets,
which range as follows: buildings - 5 to 40 years; furniture and
equipment - 3 to 10 years. Costs of major additions and improvements
are capitalized. Expenditures for maintenance and repairs are charged
to operations as incurred. Gains or losses from the disposition of
property are reflected in operations, and the asset accounts and
related allowances for depreciation are reduced.
F-17
78
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
On January 1, 1996, the Corporation adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by the Corporation be
reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable.
Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use is
based on the fair market value of the asset. The statement requires
that the majority of long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying
amount or fair value less costs to sell. The adoption of this statement
had no effect on the consolidated financial statements.
Fair Value of Financial Instruments
The Bank follows the disclosure requirements of Statement of Financial
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments." SFAS 107 requires corporations to disclose the fair value
of their financial instruments, whether or not recognized in the
balance sheet, where it is practical to estimate that value.
Income Taxes
The Companies file a consolidated federal income tax return.
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax bases of assets and
liabilities. Such differences will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Per Share Amounts
Basic earnings per share are calculated based on the weighted average
number of shares outstanding during each year, in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
Reclassification
Certain reclassifications have been made to the December 31, 1996
financial statements in order to make them comparative with the current
year's presentation.
F-18
79
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 2 - INVESTMENT SECURITIES
Following were the amortized cost, estimated fair values, and gross
unrealized gains and losses of investment securities at December 31:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
1997
AVAILABLE-FOR-SALE SECURITIES:
U.S. Agency Securities $ 15,988,305 $ 111,165 $ (17,330) $ 16,082,140
State, County, and
Municipal Securities 13,692,112 409,825 (14,682) 14,087,255
Mortgage-backed Securities 14,549,898 61,955 (59,726) 14,552,127
Other Bank Certificates of
Deposit 380,000 -- -- 380,000
------------ ------------ ------------ ------------
$ 44,610,315 $ 582,945 $ (91,738) $ 45,101,522
============ ============ ============ ============
1996
AVAILABLE-FOR-SALE SECURITIES:
U.S. Agency Securities $ 15,228,519 $ 75,163 $ (80,523) $ 15,223,159
State, County, and
Municipal Securities 16,671,919 771,149 (115,516) 17,327,552
Mortgage-backed Securities 8,153,999 30,615 (109,337) 8,075,277
------------ ------------ ------------ ------------
$ 40,054,437 $ 876,927 $ (305,376) $ 40,625,988
============ ============ ============ ============
F-19
80
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of debt securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $17,498,580 $17,564,204
Due after one year through five years 16,218,617 16,342,819
Due after five years through ten years 8,537,166 8,829,717
Due after ten years 2,355,952 2,364,782
----------- -----------
$44,610,315 $45,101,522
=========== ===========
Securities carried at $22,027,388 and $20,738,028 at December 31, 1997
and 1996, respectively, were pledged to secure deposits and for other
purposes as required or permitted by law.
The fair values are established by an independent pricing service as of
the approximate dates indicated. The differences between amortized cost
and fair value reflect current interest rates and represent the
potential gain (or loss) had the portfolio been liquidated on those
dates. Security gains (or losses) are realized only in the event of
dispositions prior to maturity.
Proceeds from the sale, maturities and calls of debt securities in 1997
were $33,561,562 ($30,206,968 in 1996). Gross gains and losses realized
on such transactions were as follows:
1997 1996
---------- ----------
Gross realized gains $ 103,659 $ 180,117
Gross realized losses (51,441) (123,830)
----------- ----------
Net gain on sale of securities $ 52,218 $ 56,287
=========== ==========
At December 31, 1997 and 1996, the Bank did not hold investment
securities of any single issuer, other than obligations of U.S.
Government agencies, whose aggregate book value exceeded ten percent of
stockholders' equity.
F-20
81
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 3 - LOANS
A summary of loans outstanding by category follows:
1997 1996
------------ ------------
Secured by 1 to 4-family residential properties $ 21,913,283 $ 19,481,000
Secured by nonfarm, nonresidential properties 21,934,000 15,221,000
Secured by other real estate 10,709,000 10,177,000
Loans to individuals for household, family and
other personal expenditures 11,835,000 11,073,000
Commercial and industrial 8,067,000 8,743,000
All other 4,856,365 3,168,704
------------ ------------
79,314,648 67,863,704
Less: unearned interest and fees (998,343) (364,340)
allowance for possible loan losses (1,055,546) (942,852)
------------ ------------
$ 77,260,759 $ 66,556,512
============ ============
A summary of loan maturities follows:
1997 1996
------------ ------------
Due in three months or less $ 26,439,000 $ 23,543,000
Due after three months through one year 30,262,000 28,685,000
Due after one year 18,929,000 14,411,000
Due after five years 3,684,648 1,224,704
------------ ------------
$ 79,314,648 $ 67,863,704
============ ============
A summary of loans by fixed rate or variable rate follows:
1997 1996
------------ ------------
Fixed rate $ 68,312,680 $ 56,545,000
Variable rate 11,001,968 11,318,704
------------ ------------
$ 79,314,648 $ 67,863,704
============ ============
F-21
82
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 3 - LOANS (CONTINUED)
Related parties (principally directors and executive officers of the
Bank, including their affiliates, families, and companies in which they
hold ten percent or more ownership) had loans with the Bank totaling
$1,805,501 and $268,262 as of December 31, 1997 and 1996, respectively.
These loan transactions were made on substantially the same terms as
those prevailing at the time for comparable loans to other persons.
They did not involve more than the normal risk of collectibility or
present other unfavorable features. No related party loans were charged
off in 1997 or 1996.
The amount of the recorded investment in impaired loans was not
significant at December 31, 1997. The Bank had one impaired loan with a
recorded investment of $191,423 at December 31, 1996. The average
recorded investment in impaired loans during 1997 and 1996 was
approximately $183,000 and $16,000, respectively. There was no specific
allowance for loan losses related to these loans as of December 31,
1997 or 1996. Interest income recognized for cash payments received on
impaired loans amounted to $21,078 and $13,957 in 1997 and 1996,
respectively.
The Bank is not committed to lend additional funds to debtors whose
loans have been modified.
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as follows:
1997 1996
----------- -----------
Balance at beginning of year $ 942,852 $ 764,829
Provision charged to operations 284,436 269,132
Loan losses:
Loans charged off (260,474) (134,690)
Recoveries on loans previously charged off 88,732 43,581
----------- -----------
Balance at end of year $ 1,055,546 $ 942,852
=========== ===========
F-22
83
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 4 - ALLOWANCE FOR POSSIBLE LOAN LOSSES (CONTINUED)
It is management's opinion that the allowance was adequate at December
31, 1997 and 1996, based on conditions reasonably known to management.
However, the allowance may be increased or decreased based on loan
growth, changes in credit quality, and changes in general economic
conditions.
For federal income tax purposes, the allowance for possible loan losses
is maintained at the maximum amount allowable by the Internal Revenue
Code.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of bank premises and equipment:
1997 1996
---------- ----------
Land and land improvements $ 675,629 $ 585,979
Premises 3,444,684 3,416,279
Furniture and equipment 2,337,201 2,069,725
---------- ----------
6,457,514 6,071,983
Less accumulated depreciation 2,174,261 1,786,258
---------- ----------
$4,283,253 $4,285,725
========== ==========
The annual provision for depreciation was $413,295 in 1997 and $323,181
in 1996.
NOTE 6 - BORROWED FUNDS
Federal funds purchased generally mature within one to four days of the
transaction date. Federal funds purchased had a rate of 5.75% at
December 31, 1997. There were no federal funds purchased as of December
31, 1996.
F-23
84
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 7 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Generally, the Bank obtains collateral or other security to support
financial instruments with credit risk.
Contract or
Notional Amount
---------------
Financial instruments whose contract amounts
represent credit risk at December 31, 1997:
Commitments to extend credit $6,879,678
Standby letters of credit 347,400
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. All letters of credit are due within one year of the
original commitment date. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan
facilities to customers.
F-24
85
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates made as of December 31, 1997 and 1996 are based on
relevant market information about the financial instruments. These
estimates do not reflect any premiums or discounts that could result
from offering for sale at one time the Bank's entire holding of a
particular financial instrument. In cases where quoted market prices
are not available, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in the estimates.
The following methods and assumptions were used by the Bank in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS -- The carrying amounts reported in the
balance sheets for cash and short-term instruments approximate those
assets' fair values.
SECURITIES AVAILABLE-FOR-SALE -- Fair values were based on quoted
market prices where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
LOANS -- The fair value was calculated by discounting expected future
cash flows, using discount rates based on current interest rates
offered on loans with similar terms adjusted to reflect credit quality,
and an annualized cost rate derived from operating expense allocations.
LOANS HELD FOR SALE -- Fair values were based on quoted market prices
where available.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE -- The
carrying amounts reported in the balance sheets for accrued interest
receivable and accrued interest payable approximate their fair values.
FEDERAL HOME LOAN BANK STOCK -- The carrying value of Federal Home Loan
Bank stock is considered a reasonable estimate of its fair value.
F-25
86
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DEPOSIT LIABILITIES -- The fair value was calculated by discounting
expected future cash flows using discount rates based on the interest
rates offered at the valuation date for deposits of similar remaining
maturities adjusted to reflect the creditworthiness of the Bank and an
annualized cost rate derived from operating expense allocations,
reduced by the effect of service charges on core deposits.
SHORT-TERM BORROWINGS -- The carrying amounts of federal funds
purchased, borrowings under repurchase agreements, and other short-term
borrowings, if any, are considered to approximate their fair values.
The following is a summary of the carrying amounts and estimated fair
value of the Bank's financial assets and liabilities:
December 31, 1997 December 31, 1996
-------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from
banks - noninterest-bearing $ 3,970,972 $ 3,970,972 $ 3,869,193 $ 3,869,193
Securities available-for-sale 45,101,522 45,101,522 40,625,988 40,625,988
Loans, net of unearned income
and allowance for possible
loan losses 77,260,759 77,450,000 66,556,512 69,259,000
Loans held for sale 406,717 412,701 316,650 319,798
Accrued interest receivable 1,253,495 1,253,495 1,182,005 1,182,005
Federal Home Loan Bank stock 372,900 372,900 331,700 331,700
Financial liabilities:
Deposits 115,614,090 115,729,000 103,429,902 103,543,000
Short-term borrowings 1,400,000 1,400,000 -- --
Accrued interest payable 583,132 583,132 497,777 497,777
At December 31, 1997 and 1996, the Bank had outstanding standby letters
of credit and commitments to extend credit. These off-balance-sheet
financial instruments are generally exercisable at the market rate
prevailing at the date the underlying transaction will be completed
and, therefore, are deemed to have no current fair value. See Note 7.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax assets and premises and equipment.
F-26
87
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31, 1997 and 1996:
1997 1996
--------- ---------
Current:
Federal $ 784,810 $ 662,528
State 200,753 182,938
--------- ---------
Total current 985,563 845,466
--------- ---------
Deferred:
Federal (28,236) (34,394)
State (5,378) (6,552)
--------- ---------
Total deferred (33,614) (40,946)
--------- ---------
Total provision for income taxes $ 951,949 $ 804,520
========= =========
A reconciliation of the provision for income taxes with the amount of
income taxes computed at the federal statutory rate (34%) follows:
1997 1996
----------- -----------
Tax expense at statutory rate $ 1,131,786 $ 995,216
Increase (decrease) in taxes resulting from:
Tax-exempt interest (335,936) (356,226)
State income taxes, net of federal tax benefit 128,948 116,415
Other 27,151 49,115
----------- -----------
Total provision for income taxes $ 951,949 $ 804,520
=========== ===========
Effective rate 28.6% 27.5%
F-27
88
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES (CONTINUED)
The net deferred tax asset (liability) included in other assets (other
liabilities) in the accompanying consolidated balance sheets consists
of the following amounts of deferred tax assets and liabilities as of
December 31, 1997 and 1996:
1997 1996
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 284,011 $ 241,187
Deposit base intangible 67,536 76,346
Deferred compensation 19,725 12,195
Other 10,375 1,621
--------- ---------
381,647 331,349
--------- ---------
Deferred tax liabilities:
Accumulated depreciation (106,192) (94,904)
Securities valuation (186,659) (217,189)
Federal Home Loan Bank stock (33,833) (28,437)
--------- ---------
(326,684) (340,530)
--------- ---------
Net deferred tax asset (liability) $ 54,963 ($ 9,181)
========= =========
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Bank maintains a 401(k) retirement plan for eligible employees who
have reached age 21. The plan provides for the Bank to match, on a
percentage basis, a portion of contributions made by participants.
Contributions to the plan by the Bank, amounting to $132,554 in 1997
and $98,828 in 1996, are included in salaries and employee benefits
expense.
F-28
89
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 11 - SUPPLEMENTARY CASH FLOW INFORMATION
Income tax payments made in 1997 amounted to $1,038,821 ($832,437 in
1996).
Interest paid in 1997 amounted to $4,549,708 ($4,019,467 in 1996).
NOTE 12 - CONCENTRATIONS OF CREDIT RISK
Credit risk represents the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to
perform as contracted and any collateral or security proved to be of no
value. Concentrations of credit risk (whether on- or off-balance-sheet)
arising from financial instruments exist in relation to certain groups
of customers. A group concentration arises when a number of
counterparties have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected
by changes in economic or other conditions. The Bank does not have a
significant exposure to any individual customer or counterparty. The
major concentrations of credit risk for the Bank arise by collateral
type in relation to loans. At December 31, 1997, the Bank had two areas
of significant concentrations. These were in loans secured by 1 to
4-family residential properties and loans secured by nonfarm,
nonresidential properties which totaled $21,913,283 and $21,934,000,
respectively. At December 31, 1996, the only significant concentration
that existed was in loans secured by 1 to 4-family residential
properties which totaled $19,481,000. A geographic concentration arises
because the Bank operates primarily in Dickson, Houston, and adjoining
counties in Tennessee.
The Bank maintains cash and cash equivalent balances at several
financial institutions in Tennessee and Ohio. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. Uninsured balances per bank totaled $1,847,771 and
$1,165,078 as of December 31, 1997 and 1996, respectively.
F-29
90
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 13 - BRANCH ACTIVITY
On December 16, 1996, the Bank closed its branch in Tennessee Ridge and
opened a newly constructed branch in Erin, Tennessee. The abandoned
branch facility was sold in 1997.
In December, 1997, the Bank purchased land in White Bluff, Tennessee
for the purpose of constructing a new branch office. Regulatory
approval has been obtained for the new location, which is anticipated
to be operational by September 1, 1998.
NOTE 14 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997 and 1996 that the Bank meets all
capital adequacy requirements to which it is subject.
As of May 20, 1996, the date of the most recent notification from the
Federal Deposit Insurance Corporation, the Bank was categorized as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
F-30
91
PEOPLES BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
NOTE 14 - REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- ------
AS OF DECEMBER 31, 1997
Total Capital
(to Risk Weighted Assets) $16,266,000 19.73% $6,594,000 8.0% $8,246,600 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $15,210,000 18.45% $3,297,040 4.0% $4,945,560 6.0%
Tier 1 Capital
(to Average Assets) $15,210,000 11.46% $5,308,640 4.0% $3,981,000 3.0%
AS OF DECEMBER 31, 1996
Total Capital
(to Risk Weighted Assets) $14,172,000 19.23% $5,895,000 8.0% $7,368,900 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $13,229,000 17.95% $2,947,560 4.0% $4,421,340 6.0%
Tier 1 Capital
(to Average Assets) $13,229,000 11.26% $4,701,040 4.0% $4,013,000 3.0%
NOTE 15 - DEFERRED COMPENSATION PLAN
The Bank has a deferred compensation plan which permits directors to
defer their director's fees and earn interest on the deferred amount.
Under the plan, a liability increase and expense of $19,817 for 1997
and $16,226 for 1996 were recognized in the accompanying consolidated
financial statements. To fund the plan, the Bank purchased a single
premium universal life insurance policy, naming the Bank as
beneficiary, on the life of each director who elected to participate.
Insurance premiums of $2,040 were paid in 1997 and 1996. Net non-cash
income of $23,184 in 1997 and $21,210 in 1996, is also included in the
cash surrender value of $417,239 and $396,096 at December 31, 1997 and
1996, respectively. These policies have an aggregate face amount of
$1,155,000.
F-31
92
AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 21, 1998
BETWEEN
FIRST AMERICAN CORPORATION
AND
PEOPLES BANK
A-1
93
TABLE OF CONTENTS
ARTICLE I
The Merger.........................................................................................................A-5
1.1 Effective Time of the Merger.....................................................................A-5
1.2 Closing..........................................................................................A-6
1.3 Effects of the Merger............................................................................A-6
ARTICLE II
Effect of the Merger on the Capital Stock of the Constituent Corporations; Merger of Certificates..................A-6
2.1 Effect on Capital Stock..........................................................................A-6
2.2 Exchange of Certificates.........................................................................A-8
ARTICLE III
Representations and Warranties.....................................................................................A-11
3.1 Representations and Warranties of Bank. .........................................................A-11
3.2 Representations and Warranties of FAC............................................................A-24
ARTICLE IV
Covenants Relating to Conduct of Business..........................................................................A-26
4.1 Certain Covenants of Bank and FAC................................................................A-26
4.2 Additional Covenants of Bank.....................................................................A-26
4.3 Adverse Changes in Condition.....................................................................A-28
4.4 Reports..........................................................................................A-28
4.5 Affirmative Covenants of Bank....................................................................A-29
A-2
94
4.6 No Solicitation..................................................................................A-30
4.7 Monthly Status Reports...........................................................................A-30
ARTICLE V
Additional Agreements..............................................................................................A-30
5.1 Preparation of the Offering Statement and/or Registration
Statement....................................................................................A-30
5.2 Letter of Bank's Accountants.....................................................................A-31
5.3 Access to Information............................................................................A-31
5.4 Bank Stockholders' Meeting.......................................................................A-32
5.5 Legal Conditions to Merger.......................................................................A-32
5.6 Affiliates.......................................................................................A-32
5.7 Nasdaq Listing...................................................................................A-33
5.8 Transition of Certain Employee Benefit Plans; Employment Matters.................................A-33
5.9 Expenses.........................................................................................A-34
5.10 Brokers or Finders...............................................................................A-34
5.11 Bank Accruals and Reserves.......................................................................A-34
5.12 Merger...........................................................................................A-35
5.13 Additional Agreements............................................................................A-35
5.14 Cooperation Generally............................................................................A-35
5.15 Indemnification: Directors' and Officers' Insurance..............................................A-35
ARTICLE VI
Conditions Precedent...............................................................................................A-36
6.1 Conditions to Each Party's Obligation To Effect the Merger.......................................A-36
6.2 Conditions to Obligations of FAC.................................................................A-37
6.3 Conditions to Obligations of Bank................................................................A-42
ARTICLE VII
Termination and Amendment..........................................................................................A-44
7.1 Termination......................................................................................A-44
7.2 Rights and Obligations Upon Termination..........................................................A-48
7.3 Fees and Expenses................................................................................A-48
A-3
95
7.4 Effect of Termination............................................................................A-49
ARTICLE VIII
General Provisions........................................................................................A-49
8.1 Nonsurvival of Representations, Warranties, and Agreements.......................................A-49
8.2 Notices..........................................................................................A-50
8.3 Interpretation...................................................................................A-50
8.4 Counterparts.....................................................................................A-51
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership....................................................................................A-51
8.6 Governing Law; Choice of Forum...................................................................A-51
8.7 Injunctive Relief; Limitations on Remedies.......................................................A-51
8.8 Publicity........................................................................................A-52
8.9 Assignment.......................................................................................A-52
8.10 Consents.........................................................................................A-52
8.11 Disclosures......................................................................................A-52
A-4
96
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER dated as of April 21, 1998 (the
"Agreement"), between First American Corporation, a Tennessee corporation
("FAC") and Peoples Bank, a Tennessee banking association (the "Bank").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of FAC and Bank have approved, and
deem it advisable and in the best interests of their respective stockholders to
consummate, the business combination transaction provided for herein in which
Bank would merge with and into First American Interim Bank ("Interim Bank"),
which shall be a wholly owned Tennessee state-chartered bank subsidiary of FAC
to be formed by FAC prior to Closing (as defined below), and Bank will exchange
its common stock for FAC common stock (the "Merger");
WHEREAS, FAC and Bank desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
WHEREAS, it is intended that the Merger shall qualify for
"pooling-of-interests" accounting treatment; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization under the provisions of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
The Merger
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, articles of Merger (the "Articles of Merger") including a plan of
Merger consistent with this Agreement shall be duly prepared, executed and
acknowledged by the Surviving Corporation (as defined in Section 1.3 hereof),
and thereafter delivered to the Secretary of State of the State of Tennessee,
for filing, as provided in Section 48-21-107 of the Tennessee Business
Corporation Act (the "TBCA"), as soon as practicable on or after the Closing
Date (as defined in Section 1.2 hereof). The Merger shall become effective upon
the filing of the Articles of Merger with the Secretary of State of the State of
Tennessee or at such time thereafter as is provided in the Articles of Merger
(the "Effective Time"), but, in any event, the parties intend that the Effective
A-5
97
Time shall be 12:01 a.m. Central Time of the first calendar day of the month
immediately following the month in which the Closing occurs.
1.2 Closing. The closing of the Merger (the "Closing") will take place
at 10:00 a.m. Central Time on the last business day of September 1998, or
succeeding calendar months thereafter, and at least two business days after
satisfaction or waiver of each of the conditions set forth in Sections 6.1, 6.2
and 6.3 (other than the delivery of the officers' certificate referred to in
Sections 6.2 and 6.3 provided that the other closing conditions set forth in
Article VI hereof have been met or waived as provided in Article VI at or prior
to the Closing (the "Closing Date"), at the offices of FAC, First American
Center, Nashville, Tennessee 37237, unless another time, date or place is agreed
to in writing by the parties hereto.
1.3 Effects of the Merger. At the Effective Time, Interim Bank will
merge with and into Bank ("Interim Bank" and "Bank" collectively referred to
herein as the "Constituent Corporations"), with Bank being the surviving
corporation (the "Surviving Corporation"), pursuant to the provisions of, and
with the effects provided in, Section 48-21-10 of the TBCA. At the Effective
Time, the charter and bylaws of Bank (as the Surviving Corporation) shall be the
charter and bylaws of Bank in effect immediately prior to the Effective Time. At
the Effective Time, the directors and officers of Bank shall be named by FAC
without any prejudice to the rights of FAC as the sole shareholder of the
Surviving Corporation. At the Effective Time, the name of Bank as the Surviving
Corporation following the Merger shall continue to be "Peoples Bank" unless
otherwise determined by FAC.
ARTICLE II
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
2.1 Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any shares of
Bank Common Stock:
(a) Cancellation of Stock. All shares of the $2.00 par value voting
common stock of Bank (the "Bank Common Stock") that are owned by FAC or any
subsidiary of FAC (other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third parties
(any such shares, "trust account shares")) shall be canceled and retired and
shall cease to exist and no stock of FAC or other consideration shall be
delivered in exchange therefor. All shares of $2.50 par value common stock of
FAC (the "FAC Common Stock") that are owned by Bank (other than trust account
shares) shall become authorized but unissued stock of FAC. Each share of Interim
Bank common stock, par value $10.00 per share, ("Interim Bank Common Stock"),
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of
A-6
98
the holder thereof, be converted into and exchanged for one fully paid and
non-assessable share of common stock, without par value, of the Surviving
Corporation ("Surviving Corporation Common Stock"). From and after the Effective
Time, each outstanding certificate theretofore representing shares of Interim
Bank Common Stock shall be deemed for all purposes to evidence ownership of and
to represent the number of shares of Surviving Corporation Common Stock into
which such shares of Interim Bank Common Stock shall have been converted.
Promptly after the Effective Time, the Surviving Corporation shall issue to FAC
a stock certificate or certificates representing such shares of Surviving
Corporation Common Stock in exchange for the certificate or certificates which
formerly represented shares of Interim Bank Common Stock, which shall be
canceled.
As used in this Agreement, the word "subsidiary", means any corporation
or other organization, whether incorporated or unincorporated, of which such
party or any other subsidiary of such party is a general partner or of which at
least a majority of the securities or other interests having by their terms
ordinary voting power to elect a majority of the board of directors or others
performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party and/or
by any one or more of its subsidiaries.
(b) Conversion of Bank Common Stock. Subject to Section 2.2(a) hereof,
each issued and outstanding share of Bank Common Stock (other than shares to be
canceled in accordance with Section 2.1(a) hereof) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be converted
into and exchangeable for the right to receive 3.70 fully paid and nonassessable
FAC shares.
All such shares of Bank Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
the shares of FAC Common Stock into which Bank Common Stock has been converted
and the right to cash payment for fractional shares, if any. Certificates
previously representing shares of Bank Common Stock shall be exchanged for
certificates representing whole shares of FAC Common Stock issued in
consideration therefor and cash for fractional shares, if any, upon the
surrender of such certificates in accordance with Section 2.2 hereof.
In the event that prior to the Effective Time the outstanding shares of
FAC Common Stock have been increased, decreased, changed into or exchanged for a
different number or kind of shares through a reorganization (but not a merger),
reclassification, stock dividend, stock split, reverse stock split or other
similar change, applicable adjustments shall be made to the Exchange Ratio and
the number of shares to be exchanged.
A-7
99
(c) Dissenters' Rights. Notwithstanding anything in this Agreement to
the contrary, and only to the extent required by TBCA Section 48-23-101 et seq.
("TBCA Dissenters' Provisions"), shares of Bank Common Stock which are issued
and outstanding immediately prior to the Effective Time and which are held by
stockholders who shall not have voted such shares in favor of the Merger and the
transactions related thereto and who shall have delivered to Bank a written
demand for appraisal of such shares of Bank Common Stock (collectively,
"Dissenting Shares") in the manner provided by the TBCA Dissenters' Provisions
shall not be entitled to the right to receive FAC shares in accordance with
Section 2.1(b) hereof, but the holders of the Dissenting Shares shall be
entitled to the appraised value of such shares in accordance with the TBCA
Dissenters' Provisions; provided, however, that (a) if any holder of Dissenting
Shares shall subsequently deliver a written withdrawal of his or her demand for
appraisal of such shares or (b) if any holder fails to establish his or her
entitlement to appraisal rights as provided in the TBCA Dissenters' Provisions
or (c) if neither any holder of Dissenting Shares has filed a petition demanding
a determination of the value of all Dissenting Shares within the time provided
in the TBCA Dissenters' Provisions, such holder or holders shall forfeit the
right to appraisal of such shares and such shares shall thereupon be deemed to
have been converted into and to have become exchangeable for, as of the
Effective Time, the right to receive FAC shares solely in accordance with
Section 2.1(b) hereof. Bank shall give FAC prompt written notice of any demand
received by Bank from holders of Dissenting Shares, and FAC shall have the right
to participate in all negotiations and proceedings with respect to such dissent.
Bank shall not purport to make any determination of fair value, make any payment
with respect to, or settle or offer to settle any matter arising out of such
dissent.
(d) Shares of FAC Common Stock. Each share of FAC Common Stock issued
and outstanding immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
2.2 Exchange of Certificates. (a) Exchange Agent. As of the Effective
Time, FAC shall deposit with its transfer agent (the "Exchange Agent"), for the
benefit of the holders of shares of Bank Common Stock certificates representing
the shares of FAC Common Stock (such certificates for shares of FAC Common Stock
together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section 2.1
hereof in exchange for outstanding shares of Bank Common Stock and cash for
fractional shares.
(b) Exchange Procedures. Bank shall use its best efforts to cause each
holder of record of Bank Common Stock, whose shares are to be converted into
shares of FAC Common Stock pursuant to Section 2.1 hereof and who does not
dissent pursuant to Section 48-23-101 et seq. of the TBCA, to deliver the
certificates representing shares of Bank Common Stock ("Certificate" or
"Certificates") to Bank; and Bank shall keep such Certificates in escrow for the
benefit of each holder until the Closing Date. At Closing, Bank shall deliver to
FAC the Certificates. Upon surrender of
A-8
100
a Certificate for cancellation to the Exchange Agent together with such
documentation as the Exchange Agent may reasonably require to effectuate the
exchange, the Exchange Agent shall, at or after the Effective Time, deliver to
the holder of each such Certificate a certificate representing that number of
whole shares of FAC Common Stock which such holder has the right to receive in
respect of the Certificate surrendered pursuant to the provisions of this
Article II (after taking into account all shares of Bank Common Stock then held
by such holder), and cash for fractional shares, if any, and the Certificate so
surrendered shall thereupon be canceled. In the event of a transfer of ownership
of Bank Common Stock which is not registered in the transfer records of Bank, a
certificate representing the proper number of shares of FAC Common Stock may be
issued to a transferee if the Certificate representing such Bank Common Stock is
presented to the Exchange Agent, accompanied by all documents required by the
Exchange Agent, in its sole discretion, to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered to the Exchange Agent in the manner contemplated by this Section
2.2, each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender the certificate
representing shares of FAC Common Stock and cash in lieu of any fractional
shares of FAC Common Stock, without interest, as contemplated by this Section
2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
FAC Common Stock with a record date after the Effective Time shall be paid to
the holder of any unsurrendered Certificate with respect to the shares of FAC
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.2(e) hereof until
the holder of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following proper surrender of any such Certificate,
there shall be paid to the holder of the certificates representing whole shares
of FAC Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable with respect to a
fractional share of FAC Common Stock to which such holder is entitled pursuant
to Section 2.2(e) hereof and the amount of dividends or other distributions with
a record date after the Effective Time theretofore paid with respect to such
whole shares of FAC Common Stock, and, if necessary, (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of FAC Common Stock.
(d) No Further Ownership Rights in Bank Common Stock. All shares of FAC
Common Stock issued upon conversion of shares of Bank Common Stock in accordance
with the terms hereof (including any cash paid pursuant to Section 2.2(e)
hereof) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Bank Common Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior
A-9
101
to the Effective Time which may have been declared or made by Bank on such
shares of Bank Common Stock in accordance with the terms of this Agreement on or
prior to the Effective Time and which remain unpaid at the Effective Time, and
there shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of Bank Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article II.
(e) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of FAC Common Stock shall be issued upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of FAC including,
without limitation, the right to receive dividends. Each holder of Bank Common
Stock who would otherwise have been entitled to receive a fraction of a share of
FAC Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash (without interest) in an amount
equal to such fractional part of a share of FAC Common Stock multiplied by the
market value of one share of FAC Common Stock on the trading day immediately
prior to the Effective Time. For purposes of the immediately preceding sentence
only, the market value of one share of FAC Common Stock on the trading day
immediately prior to the Effective Time shall be the closing price of FAC Common
Stock on The Nasdaq Stock Market or such other exchange on which FAC Common
Stock is then publicly traded (as reported in The Wall Street Journal or, if not
reported thereby, any other authoritative source) on the trading day immediately
preceding the Effective Time. As soon as practicable after the determination of
the amount of cash, if any, to be paid to holders of Bank Common Stock with
respect to any fractional share interests, the Exchange Agent shall make
available such amounts to such holders of Bank Common Stock subject to and in
accordance with the terms of this Article II.
(f) No Liability. Neither FAC nor Bank shall be liable to any holder of
shares of Bank Common Stock, or FAC Common Stock, as the case may be, for such
shares (or dividends or distributions with respect thereto) delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
A-10
102
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of Bank. Bank represents and
warrants to FAC as follows:
(a) Organization, Standing and Power. Bank is a Tennessee state
chartered bank. Community Credit Services, Inc. ("CCS"), a Tennessee
corporation, and Highland Rim Title Company ("HRTC"), a Tennessee corporation,
are wholly owned subsidiaries of the Bank and Bank's only subsidiaries (the
"Subsidiaries"). Each of the Bank and the Subsidiaries are duly organized,
validly existing and in good standing under the laws of Tennessee, and have all
requisite corporate power and authority to own, lease and operate their
respective properties and to carry on their business as now being conducted and
are duly qualified and in good standing to do business in each jurisdiction in
which the nature of their business or the ownership or leasing of their
properties makes such qualification necessary.
(b) Capital Structure.
(i) As of the date hereof, the authorized capital stock of Bank
consists solely of the following: 1,000,000 shares of Bank
Common Stock, $2.00 par value ("Bank Common Stock") and
1,000,000 shares of preferred stock, $.01 par value ("Bank
Preferred Stock"). There are 250,000 shares of Bank Common
Stock and no shares of Bank Preferred Stock issued and
outstanding. No shares of Bank Common Stock or Bank Preferred
Stock are held by Bank in treasury. All outstanding shares of
Bank Common Stock are validly issued, fully paid and
nonassessable and not subject to preemptive rights.
(ii) As of the date hereof, no bonds, debentures, notes or other
indebtedness having the right to vote (or convertible into or
exercisable for securities having the right to vote) on any
matters on which stockholders may vote ("Voting Debt") of Bank
or its Subsidiaries were issued or outstanding.
(iii) As of the date of this Agreement, except for this Agreement,
there are no options, warrants, calls, rights, commitments or
agreements of any character to which Bank or its Subsidiaries
is a party or by which it is bound obligating
A-11
103
Bank or its Subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, additional shares of capital
stock or any Voting Debt of Bank or its Subsidiaries or
obligating Bank or its Subsidiaries to grant, extend or enter
into any such option, warrant, call, right, commitment or
agreement. After the Closing Date and until the Effective
Time, there will be no other option, warrant, call, right or
agreement obligating Bank to issue, deliver or sell, or cause
to be issued, delivered or sold, any shares of capital stock
or any Voting Debt of Bank or its Subsidiaries, or obligating
Bank or its Subsidiaries to grant, extend or enter into any
such option, warrant, call, right or agreement. As of the date
hereof, except as set forth in this section, there are no
outstanding contractual obligations of Bank to repurchase,
redeem or otherwise acquire any shares of Bank Common Stock.
(iv) Since December 31, 1997, except as specifically permitted by
this Agreement, Bank has not (A) issued or permitted to be
issued any shares of Bank Common Stock or Bank Preferred Stock
or securities exercisable for or convertible into shares of
Bank Common Stock or Bank Preferred Stock; (B) repurchased,
redeemed or otherwise acquired, directly or indirectly any
shares of Bank Common Stock or Bank Preferred Stock; or (C)
declared, set aside, made or paid to the stockholders of Bank
dividends or other distributions on the outstanding shares of
Bank Common Stock or Bank Preferred Stock; provided, however,
Bank shall be permitted to declare and pay dividend(s) on Bank
Common Stock in 1998 to its shareholders of an aggregate of
$2.18 per share which represents the following:
(a) $0.64 per share for the period beginning January 1, 1998
until the date hereof (which represents a 10% increase, on an
annualized basis, over Bank's dividend rate in 1997); and
(b) an amount for the period beginning the first calendar day
after the date hereof and ending on the Closing (the
"Equalization Period") which is equivalent to FAC's current
annual dividend rate of $1.00 per share, pro-rated during the
Equalization Period, multiplied by the Exchange Ratio.
A-12
104
(c) Authority.
(i) Bank has all requisite corporate power and authority
to enter into this Agreement and, subject to approval
of this Agreement by the stockholders of Bank, to
consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate
action on the part of Bank, subject in the case of
this Agreement to approval of this Agreement by the
stockholders of Bank. This Agreement has been duly
executed and delivered by Bank and constitutes the
valid and binding obligation of Bank, enforceable in
accordance with its terms.
(ii) The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated
hereby will not, (A) conflict with, or result in any
violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of
any obligation or the loss of a material benefit
under, or the creation of a lien, pledge, security
interest, charge or other encumbrance on assets (any
such conflict, violation, default, right of
termination, cancellation or acceleration, loss or
creation, a "Violation") pursuant to, any provision
of the charter or by-laws of Bank or its Subsidiaries
or (B) subject to obtaining or making the consents,
approvals, orders, authorizations, registrations,
declarations and filings referred to in paragraph
(iii) below, result in any Violation of any loan or
credit agreement, note, mortgage, indenture, lease,
Benefit Plan (as defined in Section 3.1(j) hereof) or
other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation
applicable to Bank or its Subsidiaries or their
respective properties or assets which Violation would
have a material adverse effect on Bank or its
Subsidiaries, individually or in the aggregate.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court,
administrative agency or commission or other
governmental authority or instrumentality (a
"Governmental Entity"), is required by or with
respect to Bank or its Subsidiaries in connection
with the execution and delivery of this Agreement
A-13
105
and the transactions contemplated hereby the failure
to obtain which would have a material adverse effect
on Bank, except for (A) the filing of applications
with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the BHC Act and,
if necessary, the Federal Deposit Insurance Act
("FDIA") and with the U.S. Comptroller of the
Currency (the "OCC") and approval of same, (B) the
filing with the U.S. Securities and Exchange
Commission ("SEC") or an applicable state securities
Governmental Entity of a proxy statement or offering
statement in definitive form relating to the meeting
of Bank's stockholders to be held in connection with
the Merger (the "Statement"), (C) the filing of
Articles of Merger with the Secretary of State of the
State of Tennessee and appropriate documents with the
relevant authorities of other states in which Bank or
its Subsidiaries are qualified to do business, (D)
the filing of such applications, filings,
authorizations, orders and approvals as may be
required under Tennessee banking laws, with and of
state banking authorities and approval of same
("State Banking Approval") and pursuant to state
takeover or change in control laws ("State Takeover
Approval"), (E) consents, authorizations, approvals,
filings or exemptions in connection with compliance
with the applicable provisions of federal and state
securities laws relating to the regulation of
broker-dealers or investment advisers, and federal
commodities laws relating to the regulation of future
commission merchants and the rules and regulations
thereunder and of any applicable industry
self-regulatory organization, and the rules of The
Nasdaq Stock Market or such other exchange on which
FAC Common Stock is publicly traded, or which are
required under consumer finance, mortgage banking and
other similar laws, and (F) such filings,
notifications and approvals as are required in order
to terminate any Bank Benefit Plans as hereinafter
defined and described.
(d) Reporting Requirements. Included in the Bank Disclosure Schedules
as Schedule 3.1(d) is a true and complete copy of each report (other than
currency transaction reports and similar administrative reports), schedule,
registration statement and definitive proxy statement filed by Bank or its
Subsidiaries with any regulatory agency since December 31, 1995 (as such
documents have since the time of their filing been amended, the "Bank Reporting
Documents"), which are all the financial reporting or disclosure documents that
Bank was required to file with any regulatory agency since such date. For
purposes of this Agreement, the term "Bank Reporting
A-14
106
Documents" shall also include the Bank's consolidated financial statements for
the years ended December 31, 1997, 1996, and 1995 as reported by Kraft Bros.,
Esstman, Patton & Harrell, PLLC. Also included in Bank Disclosure Schedule
3.1(d) are true and complete copies of the most recent annual and quarterly
Consolidated Report of Condition and Income ("Call Reports") of Bank filed with
the FDIC and the Tennessee Department of Financial Institutions (the
"Department"). As of their respective dates, the Bank Reporting Documents
complied in all material respects with the requirements of the rules and
regulations applicable to such Bank Reporting Documents, and none of the Bank
Reporting Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The consolidated financial statements of Bank included in the
Bank Reporting Documents comply with applicable accounting requirements and with
the published rules and regulations with respect thereto, have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved ("GAAP") (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of Bank at
the dates thereof and the consolidated results of its operations and cash flows
for the periods then ended. All material agreements, contracts and other
documents required to be filed as exhibits to any of the Bank Reporting
Documents have been so filed. Except as specifically listed in Bank Disclosure
Schedule 3.1(d), Bank, as of December 31, 1997, had no off-balance sheet
financial instruments or derivative securities including, but not limited to,
letters of credit, unfunded commitments and derivative financial instruments.
There are no unasserted claims that are not disclosed in the Bank Reporting
Documents that would reasonably be expected to have, individually or in the
aggregate, a material adverse effect on Bank or its Subsidiaries, either
individually or in the aggregate.
(e) Information Supplied. None of the information supplied pursuant to this
Agreement or to be supplied by Bank for inclusion or incorporation by reference
in (i) the registration statement on Form S-4 or other applicable form to be
filed, as appropriate, with the SEC and any applicable state securities
Governmental Entity by FAC in connection with the issuance of shares of FAC
Common Stock in the Merger (the "Registration Statement" or "Statement") will,
at the time the Registration Statement is filed with the appropriate
Governmental Entities, and at the time it becomes effective under the Securities
Act of 1933 (the "Securities Act") or any applicable state law, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Statement, will, at the date of mailing to stockholders and at the
times of the meeting of stockholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information provided by the Bank for inclusion in the Statement
will comply as to form in all material respects with all rules and regulations
applicable thereto.
A-15
107
(f) Compliance with Applicable Laws. Bank and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are material to the operation of the business of
Bank and its Subsidiaries, either individually or in the aggregate (the "Bank
Permits"). Bank and its Subsidiaries are in compliance with the terms of the
Bank Permits. The business of Bank and its Subsidiaries are not being conducted
in violation of any law, ordinance or regulation of any Governmental Entity.
Except for routine examinations by federal or state Governmental Entities
charged with the supervision or regulation of banks or bank holding companies or
engaged in the insurance of bank deposits ("Bank Regulators"), as of the date of
this Agreement, to the knowledge of Bank, no investigation by any Governmental
Entity with respect to Bank or its Subsidiaries is in progress or is pending or
threatened.
(g) Litigation. Included in the Bank Disclosure Schedules as Schedule
3.1(g) is a list and description of all pending and threatened litigation and
administrative proceedings involving Bank, its Subsidiaries, or any of their
properties or assets. As of the date of this Agreement, there is no suit, action
or proceeding, pending or threatened, against or affecting Bank or its
Subsidiaries, that is expected to have, individually or in the aggregate, a
material adverse effect on Bank or its Subsidiaries, either individually or in
the aggregate, nor is there any judgment, decree, injunction, rule or order of
any Governmental Entity or arbitrator pending, threatened or outstanding against
Bank or its Subsidiaries having, or which would reasonably be expected to have,
any such effect.
(h) Taxes. Bank and each of its Subsidiaries have filed all tax returns
required to be filed by them and have paid, or have set up an adequate reserve
for the payment of, all taxes required to be paid as shown on such returns, and
the most recent consolidated financial statements contained in the Bank
Reporting Documents reflect an adequate provision for current and deferred taxes
payable by Bank and its Subsidiaries accrued through the date of such
consolidated financial statements. No deficiencies for any taxes have been
proposed, asserted or assessed against Bank and each of its Subsidiaries that
are not adequately reserved for. The federal income tax returns of Bank,
consolidated or otherwise, and each of its Subsidiaries have been examined by
and settled with the U.S. Internal Revenue Service (the "IRS"), or the statute
of limitations with respect to such years has expired (and no waiver extending
the statute of limitations has been requested or granted), for all years through
1993. No federal income tax returns of Bank, consolidated or otherwise, or each
of its Subsidiaries are currently under examination by the IRS or any state,
local, or foreign taxing authority. For the purpose of this Agreement, the term
"tax" (including, with correlative meaning, the terms "taxes" and "taxable")
shall include, except where the context otherwise requires, all federal, state,
local and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy and other
A-16
108
taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts.
(i) Certain Agreements. Except as set forth in the Bank Disclosure
Schedule as Schedule 3.1(i), and except for this Agreement, as of the date
hereof, neither Bank nor any of its Subsidiaries is a party to any oral or
written agreement (other than loans or deposits made in the ordinary course of
business) not terminable on 30 days or less notice or involving the payment of
more than $25,000 per annum.
(j) Benefit Plans.
(i) Bank has disclosed to FAC in Schedule 3.1(j) of the Bank
Disclosure Schedules and has delivered or made available to
FAC prior to the execution of this Agreement correct and
complete copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus or other
incentive plans, all other written employee programs or
agreements, all medical, vision, dental or other health plans,
all life insurance plans, and all other employee benefit plans
or fringe benefit plans, including, without limitation,
"employee benefit plans" as that term is defined in Section
3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), currently or previously adopted,
maintained by, sponsored in whole or in part by, or
contributed to by Bank for the benefit of employees, retirees,
dependents, spouses, directors, independent contractors or
other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors or
other beneficiaries are eligible to participate (collectively,
the "Bank Benefit Plans"). Any of the Bank Benefit Plans which
is an "employee welfare benefit plan," as that term is defined
in Section 3(1) of ERISA, or an "employee pension benefit
plan," as that term is defined in Section 3(2) of ERISA, is
referred to herein as a "Bank ERISA Plan."
(ii) Bank has delivered or made available to FAC prior to the
execution of this Agreement correct and complete copies of the
following documents: (a) all trust agreements or other funding
arrangements for such Bank Benefit Plans (including insurance
contracts), and all amendments thereto, (b) with respect to
any such Bank Benefit Plans or amendments, all
A-17
109
determination letters, rulings, opinion letters, information
letters, or advisory opinions issued by the IRS, the United
States Department of Labor, or the Pension Benefit Guaranty
Corporation after December 31, 1974, (c) annual reports or
returns, audited or unaudited financial statements, actuarial
valuations and reports, and summary annual reports prepared
for any Bank Benefit Plan with respect to the most recent
three plan years, and (d) the most recent summary plan
descriptions and any modifications thereto.
(iii) The form of all Bank Benefit Plans is in compliance with the
applicable terms of ERISA, the Code, and any other applicable
laws and such plans have been operated in compliance with such
laws and the written Bank Benefit Plan documents. Each Bank
ERISA Plan which is intended to be qualified under Section
401(a) of the Code has received a current favorable
determination letter from the IRS evidencing compliance with
the Tax Reform Act of 1986, and Bank is not aware of any
circumstances which will or could result in revocation of any
such favorable determination letter. Each trust created under
any Bank ERISA Plan has been determined to be exempt from
taxation under Section 501(a) of the Code and Bank is not
aware of any circumstance which will or could result in a
revocation of such exemption. With respect to each Bank
Benefit Plan, no event has occurred which will or could give
rise to a loss of any intended tax consequence or to any tax
under Section 511 of the Code. There is no material pending or
threatened litigation or administrative proceeding relating to
any Bank Benefit Plan. Neither Bank nor any fiduciary of a
Bank Benefit Plan has engaged in a transaction with respect to
any Bank Benefit Plan that, assuming the taxable period of
such transaction expired as of the date hereof, could subject
Bank to a tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA. The transaction contemplated
hereunder will not result in the assessment of a tax or
penalty under Section 4975 of the Code or Section 502(i) of
ERISA.
(iv) Neither Bank nor any of its affiliates have ever sponsored or
been liable for contributions to a plan subject to Title IV of
ERISA or to the funding requirements of Section 302 of ERISA
or Section 412 of the Code.
A-18
110
(v) Bank and its affiliates have complied with the continuation
coverage provisions of the Consolidated Omnibus Budget
Reconciliation Act of 1985 ("COBRA") with respect to all
current employees and former employees. Bank's procedures and
sample notice documents for compliance with COBRA are
disclosed on Schedule 3.1(j).
(vi) Except as required by law, the consummation of the
transactions contemplated by this Agreement will not
accelerate the time of vesting, of payment, or increase the
amount, of compensation due to any employee, officer, former
employee or former officer of Bank. There are no contracts or
arrangements providing for payments that could subject any
person to liability for tax under Section 4999 of the Code.
(vii) Full payment has been made of all amounts which are required
under the terms of each Bank Benefit Plan to have been paid as
contributions as of the last day of the most recent fiscal
year of such Bank Benefit Plan ended on or before the date of
this Agreement. The assets of each Bank Benefit Plan are
sufficient to provide the benefits under such plan and are
also sufficient to provide all other benefits, vested
(including benefits that become vested due to the transactions
contemplated under this Agreement) and nonvested, accrued
under such Bank Benefit Plan.
(viii) Except for the continuation coverage requirements under COBRA,
Bank has no obligations or potential liability for benefits to
employees or other persons following termination of employment
or retirement under any of the Bank Benefit Plans that are
"welfare benefit plans" described in Section 3(2) of ERISA.
(ix) Except as required to comply with ERISA or to maintain
qualification under Section 401(a) of the Code, Bank will not
amend, modify or terminate any of the Bank Benefit Plans
without the express written consent of FAC. None of the
transactions contemplated under this agreement will result in
an amendment, modification or termination of any of the Bank
Benefit Plans. Except as required under the provisions of any
Bank Benefit Plan and except as necessary to provide funding
that is required to
A-19
111
timely service any contractual or loan obligations of a Bank
Benefit Plan, Bank will make no contributions to or with
respect to any Bank Benefit Plan that is inconsistent with
past practice of the Bank without the express written consent
of FAC.
(x) No oral or written representation or communication with
respect to any aspect of the Bank Benefit Plans has been made
to current or former employees of Bank prior to the date
hereof which is not in accordance with the written or
otherwise preexisting terms and provisions of such plans. All
Bank Benefit Plan documents and annual reports or returns,
audited or unaudited financial statements, actuarial
valuations, summary annual reports, and summary plan
descriptions issued with respect to the Bank Benefit Plans are
correct and complete and there have been no changes in the
information set forth therein.
(xi) There are no issues or disputes with respect to any Bank
Benefit Plans, or the administration thereof, currently
between any trustee or other fiduciary thereunder, Bank and
any governmental agency or employee.
(k) Subsidiaries. Neither Bank (except for its ownership of all of the
capital stock of the Subsidiaries) nor its Subsidiaries own any equity interest
in corporation, association, partnership or other entity. Bank is an "insured
depository institution" as defined in the FDIA and applicable regulations
thereunder. All of the shares of capital stock of each Subsidiary owned by Bank
are fully paid and nonassessable and are owned by the Bank, free and clear of
any claim, lien or encumbrance.
(l) Agreement with Bank Regulators. As of the date of this Agreement,
neither Bank nor any of its Subsidiaries are a party to any written agreement or
memorandum of understanding with, or a party to any commitment letter or similar
undertaking to, or is subject to any condition imposed in writing, order or
directive by, or is a recipient of any extraordinary supervisory letter from,
any Bank Regulator which restricts the conduct of its business, or in any manner
relates to its capital adequacy, its credit policies or its management, nor has
Bank been advised by any Bank Regulator that it is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, condition, agreement, memorandum of understanding,
extraordinary supervisory letter, commitment letter or similar submission.
A-20
112
(m) Absence of Certain Changes or Events. Since December 31, 1997,
neither Bank nor any of its Subsidiaries have incurred any liability, except in
the ordinary course of its business consistent with their past practices, nor
has there been any change, nor has there occurred any event involving a
prospective change, in the business, assets, financial condition or results of
operations of Bank which has had, or is reasonably likely to have, a material
adverse effect on Bank.
(n) Vote Required. The affirmative vote of the holders of not more than
a majority of the issued and outstanding shares of Bank Common Stock are the
only votes of the holders of any class or series of Bank capital stock necessary
to approve this Agreement and the transactions contemplated hereby.
(o) Properties. Bank or one of its Subsidiaries (i) has good, clear and
marketable title to all the properties and assets which are reflected in the
latest audited consolidated balance sheet of Bank as being owned by Bank or one
its Subsidiaries, or acquired after the date thereof, free and clear of all
claims, liens, charges, security interests or encumbrances of any nature
whatsoever except statutory liens securing payments not yet due and such
imperfections or irregularities of title or encumbrances as do not affect the
use of the properties or assets subject thereto or affected thereby or otherwise
impair business operations at such properties, and (ii) is the lessee of all
leasehold estates which are reflected in the latest audited consolidated
financial statements of Bank or acquired after the date thereof and is in
possession of the properties purported to be leased thereunder, and each such
lease is valid without default thereunder by the lessee or, to Bank's knowledge,
the lessor.
(p) Ownership of FAC Common Stock. As of the date hereof, neither Bank
nor any of its Subsidiaries or affiliates or associates (as such terms are
defined under the Securities Exchange Act of 1934 (the "Exchange Act"), (i)
beneficially owns, directly or indirectly, or (ii) are parties to any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of, in each case, shares of capital stock of FAC, which in the
aggregate, represent ten percent (10%) or more of the outstanding shares of
capital stock of FAC entitled to vote generally in the election of directors
(other than trust account shares).
(q) Allowance for Possible Loan Losses. The allowance for possible loan
losses shown on the statement of financial condition of Bank as of December 31,
1997, was, in the opinion of management of Bank, consistent with applicable
regulations and adequate in all material respects to provide for all known and
reasonably anticipated possible losses, on loans and leases outstanding and
accrued interest receivable on non-performing loans as of December 31, 1997, and
as of the Effective Time will be in the opinion of management of Bank,
consistent with applicable regulations and adequate in all material respects to
provide for all known and
A-21
113
reasonably anticipated possible losses, on loans and leases outstanding and
accrued interest receivable on non-performing loans as of the Effective Time.
(r) Certain Transactions with Affiliated Persons. Except as set forth
in the Bank Disclosure Schedules as Schedule 3.1(r), there are no transactions
to which Bank or any Subsidiary was a party in which any officer or director of
Bank or any Subsidiary or any other entity controlled by, under common control
with or in control of Bank had a direct or indirect interest.
(s) Permissible Activities. All of the business activities conducted by
Bank and its Subsidiaries as of the date hereof are business activities in which
a bank is permitted to engage under Tennessee state law and all business
activities conducted by Bank and its Subsidiaries as of the date hereof are
business activities in which national banks are permitted to engage under the
rules and regulations of the OCC.
(t) Environmental Matters.
(i) The operations of Bank and its Subsidiaries have been in the
past and are now in compliance in all material respects with
all federal, state and local laws, rules and regulations and
other governmental restrictions relating to pollution or
protection of the environment or public or employee health and
safety (collectively, the "Environmental Laws") including,
without limitation, those relating to the Comprehensive
Environmental Response, Compensation and Liability Act of
1980, as amended, 42 U.S.C.ss. 9601 et seq. ("CERCLA"); the
Resource Conservation and Recovery Act of 1976, 42 U.S.C.ss.
6901 et seq. ("RCRA"), the Hazardous Materials Transportation
Act, as amended by the Solid Waste Disposal Act and as further
amended, 49 U.S.C.ss. 6901 et seq.; the Federal Water
Pollution Control Act, as amended, 33 U.S.C.ss.1251 et seq.,
the Safe Water Drinking Act, 42 U.S.C.ss. 300f-300j; the Clean
Air Act, 42 U.S.C.ss. 7401 et seq.; and the Occupational
Safety and Health Act.
(ii) Neither Bank nor any Subsidiary have been notified of an
Environmental Laws violation and, except as set forth in the
Bank Disclosure Schedules as Schedule 3.1(t), is not otherwise
aware that it is considered potentially liable under the
Environmental Laws; and neither Bank nor any Subsidiary have
received any requests for information or other correspondence
(including, without limitation, consent orders, consent
decrees, judgments, orders, injunctions, or complaints) by or
from any governmental authority or private
A-22
114
party concerning any site, facility or operation relating to
(x) the Environmental Laws, (y) environmental protection and
health or safety matters, or (z) any statutory or common law
theory of liability involving environmental or health and
safety matters.
(iii) Except as set forth in Schedule 3.1(t), no use, disposal,
releases, burial or placement of any material regulated under
or defined by any Environmental Law, including, without
limitation, asbestos (collectively, "Hazardous Materials") has
occurred on, in, at, under or about any of the property owned,
leased or operated at any time by Bank or any Subsidiary.
(iv) There has been no disposal, release, burial or placement of
Hazardous Materials on any real property not owned, leased or
operated by Bank or its Subsidiaries which may result or has
resulted in contamination of or beneath the property owned,
leased or operated at any time by Bank or any Subsidiary.
(v) Except as set forth in Schedule 3.1(t), all of the
above-ground and underground storage tanks presently on any
real property owned, leased or operated by Bank or any
Subsidiary have been properly registered.
(vi) No audit or investigation has been conducted as to
environmental matters relating to any property owned, leased
or operated by Bank or any Subsidiary by any governmental
agency.
(vii) There are no administrative, civil or criminal actions, suits
or proceedings, or demands, claims, notices or investigations
(including, without limitation, notices, demand letters or
requests for information from any environmental agency)
instituted or pending, or threatened relating to the liability
of any properties owned or operated by Bank or any Subsidiary
under any Environmental Law.
(u) Charter Provisions and State Anti-Takeover Laws. Bank and its
Subsidiaries have taken or will take all actions necessary so that the
entering into this Agreement and the consummation of the transactions
contemplated hereby (i) are exempt from any applicable state takeover law
and (ii) do not and will not result in the grant of any rights to any
person under the charter, bylaws or other governing
A-23
115
instrument of Bank or any Subsidiary thereof or restrict or impair the right of
FAC to vote or otherwise to exercise the rights of a shareholder with respect to
shares of Bank or any Subsidiary thereof that may be acquired or controlled by
FAC pursuant to this Agreement or the consummation of the transactions
contemplated hereby.
For purposes of this Section 3.1, with respect to Bank, the term
"knowledge" as used with respect to any person shall mean the knowledge after
due inquiry of the chairman, vice-chairman, president, chief or principal
financial officer, chief credit officer, general counsel, any executive
vice-president, any vice-president, and any assistant vice-president of Bank.
The term "person" shall mean a natural person or any legal, commercial, or
Governmental Entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company or
partnership, trust, business association, group acting in concert, or any person
acting in a representative capacity.
(v) Tax. All tax information returns have been timely filed by Bank and
its Subsidiaries. Bank has verified that each tax identification number relating
to an interest-bearing account at Bank is correct, and where such tax
identification number is missing, Bank has taken all necessary steps to obtain
the relevant information.
3.2 Representations and Warranties of FAC. FAC represents and warrants
to Bank as follows:
(a) Organization, Standing and Power. FAC is a Tennessee corporation
and a bank holding company registered under the BHC Act. FAC is a corporation
duly organized, in good standing under the laws of its jurisdiction of
incorporation or organization, has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary other than in such
jurisdictions where the failure so to qualify would not have a material adverse
effect on FAC.
(b) Capital Structure.
(i) As of the date hereof, the authorized capital stock of
FAC consists of 100,000,000 shares of FAC Common Stock $2.50
par value ("FAC Common Stock") and 2,500,000 shares of
preferred stock without par value (the "FAC Preferred"). As of
the close of business on March 30, 1998, 57,791,765 shares of
FAC Common Stock were outstanding and no shares of FAC
Preferred Stock were outstanding.
A-24
116
(ii) All outstanding shares of FAC capital stock are, and the
shares of FAC Common Stock to be issued pursuant to or as
specifically contemplated by this Agreement will be validly
issued, fully paid and nonassessable and not subject to
preemptive rights.
(c) Authority. FAC has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of FAC. This Agreement has been duly executed and
delivered by FAC and constitutes a valid and binding obligation of FAC,
enforceable in accordance with its terms.
(d) SEC Documents. FAC has made available to Bank a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by FAC with the SEC (other than reports filed pursuant to
Section 13(d) or 13(g) of the Exchange Act) since December 31, 1997 (the "FAC
SEC Documents"), which are all the documents (other than preliminary material
and reports required pursuant to Section 13(d) or 13(g) of the Exchange Act)
that FAC was required to file with the SEC since such date. As of their
respective dates, the FAC SEC Documents complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such FAC SEC
Documents. The consolidated financial statements of FAC included in the FAC SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except as may be
indicated in the notes thereto or, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC or normal recurring year-end adjustments) and
fairly present the consolidated financial position of FAC and its consolidated
subsidiaries as at the dates thereof and the consolidated results of their
operations and cash flows for the periods then ended.
(e) Absence of Certain Changes or Events. Except as disclosed in the
FAC SEC Documents filed prior to the date of this Agreement, since December 31,
1997, there has not been any change or any event involving a prospective change,
in the business, assets, financial condition or results of operations of FAC
which has had, or is reasonably likely to have, a material adverse effect on
FAC.
(f) No Vote Required. Under Section 48-21-103 of the TBCA, no vote of
the stockholders of FAC is required in order to enter into this Agreement or to
consummate the Merger.
A-25
117
(g) Consideration. FAC has reserved or will reserve for issuance
sufficient shares of FAC Common Stock for issuance in the Merger.
ARTICLE IV
Covenants Relating to Conduct of Business
4.1 Certain Covenants of Bank and FAC. Without the prior written
consent of the other party, prior to the Effective Time, Bank shall (a) operate
its business only in the usual, regular, and ordinary course and (b) preserve
intact its business organizations and assets and maintain its rights and
franchises. Each of Bank and FAC shall take no action which would materially (i)
adversely affect the ability of any party to obtain any consents required for
the transactions contemplated hereby; (ii) adversely affect the ability of any
party to perform its covenants and agreements under this Agreement in all
material respects and to consummate the Merger; or (iii) prevent or impede the
transactions contemplated herein from qualifying as a reorganization under
Section 368 of the Code; provided, that the foregoing shall not prevent FAC or
any of its Subsidiaries from acquiring additional assets or businesses or
discontinuing or disposing of any of its assets or businesses if such action is,
in the judgment of FAC, desirable in the conduct of the business of FAC and its
subsidiaries; and provided, further, that Bank shall be permitted to sell all or
substantially all of the assets or stock of CCS with the prior written consent
of FAC, which consent shall not be unreasonably withheld. Neither FAC nor Bank
shall intentionally take or cause to be taken any action, that would disqualify
the Merger as a "reorganization" within the meaning of Section 368(a)(1)(B) of
the Code or prevent or inhibit the Merger from qualifying from accounting
treatment as a "pooling-of-interests".
4.2 Additional Covenants of Bank. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
Bank covenants and agrees that it will not do or agree or commit to do, or
permit any of its Subsidiaries to do or agree or commit to do, any of the
following, except with the prior written consent of FAC:
(a) amend the charter, bylaws, articles of association or other
governing instruments of Bank or any Subsidiary;
(b) incur, guarantee, or otherwise become responsible for, any
additional debt obligation or other obligation for borrowed money (other than
indebtedness between Bank and any Subsidiary) except in the ordinary course of
the business of Bank and its Subsidiaries consistent with past practices, or
impose or suffer the imposition, on any share of capital stock held by Bank or
any Subsidiary of any lien or encumbrance or except to the extent such liens or
encumbrances exist on the date hereof, permit any such lien or encumbrance to
exist;
A-26
118
(c) repurchase, redeem, or otherwise acquire or exchange, directly or
indirectly, any shares, or any securities convertible into any shares, of the
Bank Common Stock, or declare or pay any dividend or make any other distribution
in respect of the Bank Common Stock except as specifically permitted by this
Agreement;
(d) except for this Agreement, issue, sell, pledge, encumber, authorize
the issuance of, enter into any contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of Bank Common Stock or any other capital stock of Bank or any
Subsidiary (except for the sale of all or substantially all of CCS's stock or
assets as contemplated in Paragraph 4.1 hereof), or any stock appreciation
rights, or any option, warrant, conversion, or other right to acquire any such
stock, or any security convertible into any such stock;
(e) adjust, split, combine, or reclassify any capital stock of Bank or
any Subsidiary or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of Bank Common Stock or sell, lease,
mortgage, or otherwise dispose of or otherwise encumber any shares of capital
stock of Bank or any Subsidiary or any assets thereof (except for the sale of
all or substantially all of CCS's stock or assets as contemplated in Paragraph
4.1 hereof);
(f) acquire direct or indirect control over, or invest in equity
securities of, any person, other than in connection with foreclosures in the
ordinary course of business;
(g) grant any increase in compensation or benefits to the employees or
officers of Bank or any Subsidiary, pay any bonus, enter into or amend any
severance agreements with officers of Bank or any Subsidiary, grant any increase
in fees or other increases in compensation or other benefits to directors of
Bank or any Subsidiary, other than in the ordinary course of business and
consistent with the past practice of the Bank or the Subsidiary, as the case may
be, and subject to Paragraph 6.2(b) hereof;
(h) enter into or amend any employment contract between Bank or any
Subsidiary and any person, prior to the Closing Date;
(i) adopt any new employee benefit plan or program or make any change
in or to any existing employee benefit plans or programs of Bank or any
Subsidiary except as may be required by law, or make any discretionary matching
contributions or discretionary contributions to any employee benefit plan of
Bank or any Subsidiary, except with the prior written consent of FAC and subject
to Paragraph 6.2(b) hereof;
(j) commence or appeal any litigation, settle any litigation involving
any liability of Bank for damages or property in excess of $25,000 or involving
any
A-27
119
material restrictions upon the operations of Bank or any Subsidiary, or modify,
amend, or terminate any material contract or waive, release, compromise, or
assign any material rights or claims;
(k) enter into or terminate any material contract or make any change in
any material lease or contract except as specifically permitted by this
Agreement; provided, however, that Bank may enter into or modify contracts
necessary and appropriate to complete construction of a bank branch office in
White Bluff, Tennessee, said contracts not exceeding $440,000 in the aggregate;
(l) change its methods of accounting in effect at December 31, 1997,
except as required by changes in GAAP concurred in by Bank's independent
auditors or change its fiscal year; or
(m) issue any letters of credit or incur any unfunded commitments other
than in the ordinary course of business or acquire any off-balance sheet or
derivative financial instruments.
4.3 Adverse Changes in Condition. FAC and Bank agree to give written
notice promptly to the other upon becoming aware of the occurrence or impending
occurrence of any event or circumstance which (i) is reasonably likely to have,
individually or in the aggregate, a material adverse effect on it or (ii) would
cause or constitute a material breach of any of its representations, warranties,
or covenants contained herein, and to use its reasonable efforts to prevent or
promptly remedy the same.
4.4 Reports. Bank and its Subsidiaries shall file all reports required
to be filed by it with Regulatory Authorities between the date of this Agreement
and the Effective Time and shall deliver to FAC copies of all such reports
promptly after the same are filed. If financial statements are contained in any
such reports filed with the Department or any other Regulatory Authority, such
financial statements will fairly present the consolidated financial position of
the entity filing such statements as of the dates indicated and the consolidated
results of operations, changes in shareholders' equity, and cash flows for the
periods then ended in accordance with GAAP (subject in the case of interim
financial statements to normal recurring year-end adjustments that are not
material). As of their respective dates, such reports filed with Regulatory
Authorities will comply in all material respects with applicable laws and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statements contained in any other reports to another
Regulatory Authority shall be prepared in accordance with laws, rules and
regulations applicable to such reports.
A-28
120
4.5 Affirmative Covenants of Bank. Bank agrees to take or cause to be
taken commencing as soon as practicable following the execution of this
Agreement, and continuing thereafter as appropriate, the following affirmative
actions prior to the Effective Time:
(a) Bank agrees to cooperate and coordinate with FAC in good faith to
adopt and implement policies and procedures pursuant to action plans acceptable
to FAC with respect to CRA, HMDA, and compliance consistent with those of FAC
and FAC's Subsidiaries and in accordance with guidelines previously provided by
FAC to Bank.
(b) No later than thirty (30) calendar days after the date of this
Agreement, Bank shall, at its cost and expense, obtain title opinions of the
real property of each branch or office owned by Bank or its Subsidiaries and
each branch or office leased by Bank or its Subsidiaries (the "Bank
Properties"), and Bank shall promptly forward such title opinions to FAC. If
requested by FAC, Bank, at its cost and expense, agrees promptly to obtain and
provide to FAC a Phase I environmental assessment of any or all of the Bank
Properties and of any property set forth on Schedule 3.1(t). Such assessments
shall include a recommendation as to whether a Phase II assessment should be
prepared. If any of the Phase I assessments recommends the undertaking of a
Phase II assessment, Bank agrees promptly to obtain and provide to FAC such
Phase II assessments at Bank's cost and expense. Should the cost of taking all
remedial and corrective actions and measures required by applicable law, health
or safety concerns exceed an amount which would have a material adverse effect
on Bank, or if the cost of such actions and measures cannot be reasonably
estimated with any reasonable degree of certainty that they would not exceed an
amount which would have such an effect on Bank, FAC shall have the right to
terminate this Agreement upon written notice to Bank.
(c) Bank agrees to maintain in effect all existing insurance coverage
including, without limitation, such coverage with respect to existing or
threatened litigation.
(d) Bank agrees to take all appropriate measures to ensure that any
restrictive covenants against it or against FAC, after the Effective Time,
including, without limitation, noncompetition agreements relating to the sale,
marketing, or promotion of securities, insurance products, mutual funds, and
annuities, are terminated and of no force and effect on or before the Closing
Date, except to the extent that the other party to such agreement is a
subsidiary of FAC.
(e) Bank, and any director or officer thereof, shall provide to FAC
information requested by FAC concerning any agreement or arrangement regarding
Bank's sale, marketing or promotion of credit-based insurance, and, at the
option of
A-29
121
FAC, shall terminate any such agreement or arrangement in accordance with the
terms thereof.
(f) Bank agrees to cooperate and coordinate with FAC in good faith to
ensure that there will be no liabilities to FAC, at and after the Effective
Time, arising from or related to any former subsidiary of Bank, wholly owned or
otherwise, that is no longer in existence as of the date of this Agreement,
whether by merger, sale, dissolution, administrative dissolution, or
divestiture.
4.6 No Solicitation. Bank will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Bank or any Subsidiary, directly or
indirectly, to initiate contact with any person or entity in an effort to
solicit, initiate or encourage any Competing Transaction (as defined in Article
VII herein). Bank will not authorize or permit any officer, director, employee,
investment banker, financial consultant, attorney, accountant or other
representative of Bank or any Subsidiary, directly or indirectly, (a) to
cooperate with, or furnish or cause to be furnished any non-public information
concerning its business, properties or assets to, any person or entity in
connection with any Competing Transaction; (b) to negotiate any Competing
Transaction with any person or entity; or (c) to enter into any agreement,
letter of intent or agreement in principle as to any Competing Transaction. Bank
will promptly give written notice to FAC upon becoming aware of any Competing
Transaction.
4.7 Monthly Status Reports. Within ten (10) calendar days after the end
of each month commencing May 1, 1998, and continuing to the Effective Time, Bank
will provide to FAC a written description of the actions taken during the
preceding month with respect to its compliance or non-compliance with the terms
of this Article IV, together with its then current estimate of the out-of-pocket
costs and expenses incurred or reasonably accruable to accomplish the above
items. The monthly status reports shall also include copies of minutes of
meetings of Bank's Board of Directors, and all committees thereof, occurring in
the month for which such report is made and shall also include all documents
presented to the directors of Bank related to such meetings.
ARTICLE V
Additional Agreements
5.1 Preparation of Offering Statement and/or Registration Statement.
(a) For purposes of (i) holding the Bank shareholders' meeting to vote
on the Merger and other matters contemplated herein, and (ii) registering the
FAC Common Stock in connection with the Merger with the SEC and with applicable
state securities Governmental Entities, the parties hereto shall cooperate in
the preparation of
A-30
122
the Statement, satisfying all applicable requirements of applicable state laws,
and of the Securities Act and the Exchange Act and the rules and regulations
thereunder.
(b) FAC shall furnish such information concerning FAC as is necessary
in order to cause the Statement, insofar as it relates to FAC, to comply with
Section 5.1(a) hereof. FAC agrees promptly to advise Bank if at any time prior
to the Effective Time any information provided by FAC in the Statement becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. FAC shall furnish Bank with such
supplemental information as may be necessary in order to cause the Statement,
insofar as it relates to FAC, to comply with Section 5.1(a).
(c) Bank shall furnish FAC with such information concerning Bank as is
necessary in order to cause the Statement, insofar as it relates to the Bank, to
comply with Section 5.1(a) hereof. Bank agrees promptly to advise FAC if at any
time prior to the Effective Time any information provided by Bank in the
Statement becomes incorrect or incomplete in any material respect and to provide
FAC with the information needed to correct such inaccuracy or omission. Bank
shall furnish FAC with such supplemental information as may be necessary in
order to cause the Statement, insofar as it relates to Bank, to comply with
Section 5.1(a).
(d) FAC and Bank, as the case may be, shall file the Statement with all
required Regulatory Authorities. FAC shall use all reasonable efforts to have
the Statement declared effective under any applicable securities laws as
promptly as practicable after such filing. FAC shall also take any action (other
than qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of FAC Common Stock in the Merger, and Bank shall
furnish all information concerning Bank and the holders of Bank Common Stock as
may be reasonably requested in connection with any such action. FAC shall advise
Bank promptly when the Statement has become effective and of any supplements or
amendments thereto, and FAC shall furnish Bank with copies of all such
documents.
5.2 Letter of Bank's Accountants. Bank shall use all reasonable efforts
to cause to be delivered to FAC a consent letter of Kraft Bros., Esstman Patton
& Harrell, PLLC, Bank's independent accountant, dated a date within two business
days before the date on which the Statement shall become effective, in form and
substance reasonably satisfactory to FAC, and in scope and substance consistent
with applicable professional standards for letters delivered by independent
public accountants in connection with registration statements similar to Form
S-4.
5.3 Access to Information. Upon reasonable notice, Bank shall afford to
the officers, employees, accountants, counsel and other representatives of FAC,
access, during normal business hours, including each weekday which is not a
legal
A-31
123
holiday as defined by the state of Tennessee during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, Bank and FAC shall make available to the other
(a) a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
federal or state securities laws or federal or state banking laws (other than
reports or documents which it is not permitted to disclose under applicable law)
and (b) all other information concerning its business, properties and personnel
as the other may reasonably request. No investigation by FAC or Bank shall
affect the representations and warranties of the other. Bank agrees to use its
best efforts to work with FAC from the execution of this Agreement until the
Effective Time to develop plans, financial and otherwise, and to communicate
those plans as FAC deems reasonably appropriate, so as to afford maximum
effectiveness in the transition contemplated by this Agreement with respect to
Bank's customers, employees, communities and shareholders.
5.4 Bank Shareholders' Meeting. Bank shall call a meeting of its
shareholders to be held as promptly as practicable on a mutually agreeable date
for the purpose of voting upon the approval of this Agreement. Bank will,
through its Board of Directors, recommend to its shareholders and Directors
constituting in excess of 32% of the Bank's outstanding shares of Bank Common
Stock have individually agreed to vote his or her shares for, approval of this
Agreement and all related matters necessary to the consummation of the
transactions contemplated hereby. Bank and FAC shall coordinate and cooperate
with respect to the timing of such meeting and Bank shall use its best efforts
to hold such meeting as soon as practicable after the date on which the
Statement becomes effective.
5.5 Legal Conditions to Merger. Each of Bank and its Subsidiaries and
FAC will use all reasonable efforts (i) to take, or cause to be taken, all
actions necessary to comply promptly with all legal requirements which may be
imposed on such party or Bank's Subsidiaries with respect to the Merger and to
consummate the transactions contemplated by this Agreement and (ii) to obtain
(and to cooperate with the other party to obtain) any consent, authorization,
order or approval of, or any exemption by, any Governmental Entity or any other
public or private third party which is required to be obtained or made by such
party or any of its Subsidiaries in connection with the Merger, and the
transactions contemplated by this Agreement. Each of Bank and FAC will promptly
cooperate with and furnish information to the other in connection with any such
burden suffered by, or requirement imposed upon, any of them or any of the
Subsidiaries in connection with the foregoing. FAC shall, as soon as practicable
following execution of this Agreement, prepare and file with appropriate
authorities, including Regulatory Authorities, such documents as may be
necessary in order to consummate the transactions contemplated hereby.
5.6 Affiliates. No later than thirty (30) calendar days prior to the
Bank shareholders' meeting regarding the Merger, Bank shall deliver to FAC a
letter
A-32
124
identifying all persons who are, at the time this Agreement is submitted for
approval to the stockholders of Bank, "affiliates" of Bank for purposes of Rule
145 under the Securities Act. Bank shall use its best efforts to cause each
person named in the letter delivered by it to deliver to FAC fifteen (15)
calendar days prior to the shareholders' meeting a written "affiliates"
agreement, in the form attached hereto as Exhibit A, restricting the disposition
by such person of the FAC Common Stock to be received by such person in the
Merger.
5.7 Nasdaq Listing. FAC shall use all reasonable efforts to cause the
shares of FAC Common Stock to be issued in the Merger to be approved for listing
on The Nasdaq Stock Market or such other exchange on which FAC Common Stock may
then be publicly traded prior to the Closing Date.
5.8 Transition of Certain Employee Benefit Plans; Directors Deferred
Compensation Plan; Employment Matters.
(a) Bank shall take all actions necessary to terminate all Bank Benefit
Plans that are "welfare benefit plans" within the meaning of Section 3(2) of
ERISA as of or prior to the Effective Time. However, FAC and Bank may otherwise
agree on or before the Effective Time to cause any Bank Benefit Plan to remain
in effect for a period of time after the Effective Time in order to allow for an
orderly and reasonable transition of benefits under the FAC benefit plans. Bank
will be entitled to make payments under the Bank's bonus plan for 1998 in
accordance with past practices and subject to Paragraphs 4.2(g) and 6.2 hereof.
Employees of Bank and its Subsidiaries shall be eligible to participate in FAC's
annual incentive plans for similarly situated employees on and after January 1,
1999. Employees of Bank and its Subsidiaries will be eligible to participate in
the pension and welfare plans maintained by FAC after the Effective Time subject
to the eligibility requirements of those plans. With respect to each FAC
"employee benefit plan," as defined in Section 3(3) of ERISA, for purposes of
determining eligibility to participate, vesting, and entitlement to benefits,
including vacation benefits (but not for accrual of benefits under FAC's Master
Retirement Plan), service with Bank or its Subsidiaries shall be treated as
service to FAC; provided, however, that such service shall not be recognized to
the extent that such recognition would result in a duplication of benefits. Such
service shall also apply for purposes of satisfying the application of
preexisting condition limitations. FAC will use its reasonable efforts to
provide employment opportunities in other FAC locations in Middle Tennessee to
qualified employees of Bank whose services in current Bank positions after the
Effective Time are no longer necessary, and from and after the Effective Time,
all employees of Bank who are terminated after the Merger will be eligible for
severance benefits under FAC's severance policy, a copy of which has previously
been provided to Bank.
(b) Bank and the executive officers of Bank shall not communicate with
employees of Bank and its Subsidiaries concerning the matters set forth in this
Section 5.8
A-33
125
except with the prior written consent of FAC. The actions prescribed by this
Section 5.8 are all contingent upon obtaining appropriate determinations and
rulings from the IRS and, if necessary, other governmental agencies as to the
effect of such actions on the qualification of the plans involved and the
compliance of such actions with other applicable law.
(c) Bank's deferred compensation agreements with certain of its
directors will be modified at the Effective Time, to discontinue the deferred
compensation, if any, earned after the Effective Time, to continue to defer
amounts in the accounts established under such agreements at the rate provided
therein until such director reaches the age of 65 or termination of the
agreement (if earlier), and to eliminate the payment of any "Projected
Benefits," as defined in such agreements. Any affected director may purchase at
fair market value from Bank or, after the Effective Time, FAC, life insurance
policies (copies of which have been provided by Bank in Bank Disclosure Schedule
3.1(j)), which were purchased to fund such agreements.)
5.9 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby and thereby shall be paid by the party incurring such
expense; provided that FAC and Bank shall equally share all expenses connected
with the printing and mailing of the Statement; and, provided, further, that in
the event the requisite vote of the Bank shareholders to approve the Merger is
not obtained, Bank shall bear all of the expenses incurred by FAC in connection
with the preparation, printing, or mailing of an offering statement to Bank
shareholders, the registration of FAC Common Stock hereunder through the
Registration Statement or other out-of-pocket expenses incurred by FAC
hereunder.
5.10 Brokers or Finders. Except as disclosed in writing to the other
party prior to the date hereof, each of FAC and Bank represents, as to itself,
Bank's Subsidiaries and affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, and each party agrees to
indemnify the other party and hold the other party harmless from and against any
and all claims, liabilities or obligations with respect to any other fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such first party or its affiliate.
5.11 Bank Accruals and Reserves. No later than five (5) business days
prior to the Closing Date, Bank shall review and, to the extent determined
necessary or advisable, consistent with GAAP, modify and change its loan,
accrual and reserve policies and practices (including loan classifications and
levels of reserves and accruals and reserves to (i) reflect FAC's plans with
respect to the conduct of Bank's business following the Merger and (ii) make
adequate provision and accrue for the costs and expenses relating thereto
including, without limitation, expenses relating to taxes, stock
A-34
126
option plans, employment agreements, severance benefits and split dollar
insurance premiums) so as to be applied consistently on a basis with those of
FAC. Bank shall also adjust loan loss and OREO reserves as may be appropriate,
consistent with GAAP and the accounting rules, regulations and interpretations
of the SEC and its staff, in light of the then anticipated post-Closing
disposition of certain Bank assets. Bank shall promptly send to FAC a summary of
the accruals, reserves, and provisions made pursuant to this Section 5.11.
Notwithstanding the foregoing, Bank shall not be obligated to take any action
pursuant to this Section 5.11 unless and until FAC acknowledges in writing that
all conditions to its obligation to consummate the Merger have been satisfied.
5.12 Merger. The parties hereto agree to use their reasonable efforts
between the date of this Agreement and the Closing Date to take all actions
necessary or desirable, including the filing of any regulatory applications, so
that, the Merger will occur as soon as practicable after the Effective Time.
5.13 Additional Agreements. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement or to vest FAC or any of its subsidiaries with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party to
this Agreement shall take all such necessary action.
5.14 Cooperation Generally. Between the date of this Agreement and the
Effective Time, FAC, Bank and Bank's Subsidiaries shall use their best efforts,
and to take all actions necessary or appropriate, to consummate the Merger and
the other transactions contemplated by this Agreement.
5.15 Indemnification: Directors' and Officers' Insurance. (a) From and
after the Effective Time, FAC shall indemnify, defend and hold harmless each
person who is now, or has been at any time prior to the date hereof or who
becomes prior to the Effective Time, an officer, director or employee of Bank or
any of its Subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, costs, expenses (including attorneys' fees), liabilities or judgments,
or amounts that are paid in settlement with the approval of FAC (which approval
shall not be unreasonably withheld), of or in connection with any claim, action,
suit, proceeding or investigation in which an Indemnified Party is, or is
threatened to be made a party or witness, based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer or employee of Bank or any Subsidiary of Bank, whether
pertaining to any matter existing or occurring at or prior to the Effective Time
and whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities"), in each case to the full extent Bank would have
been permitted under Tennessee or federal law in effect as of the date hereof or
as amended applicable to a time prior to the Effective Time, and its charter and
by-laws or the charter and by-laws
A-35
127
of the Bank Subsidiary, as applicable, to indemnify such person. Without
limiting the foregoing, in the event any such claim, action, suit, proceeding or
investigation is brought against any Indemnified Party (whether arising before
or after the Effective Time), (i) any counsel retained by the Indemnified
Parties for any period after the Effective Time shall be reasonably satisfactory
to FAC; (ii) after the Effective Time, FAC shall pay all reasonable fees and
expenses of such counsel and such other fees and expenses as are reasonable for
the Indemnified Parties promptly as statements therefor are received; and (iii)
after the Effective Time, FAC will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that FAC shall not be liable for
any settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 5.15, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify FAC (but the failure so
to notify FAC shall not relieve it from any liability which it may have under
this Section 5.15 except to the extent such failure materially prejudices FAC).
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(b) From and after the Effective Time and for a period of three years
thereafter, FAC shall use its best efforts to maintain in effect directors' and
officers' liability insurance coverage which is at least as advantageous as to
coverage and amounts as maintained by Bank immediately prior to the Effective
Time with respect to claims arising from facts or events which occurred before
the Effective Time; provided, however, that FAC shall not be obligated to make
annual premium payments for such insurance to the extent such premiums exceed
1.5 times premiums paid as of the date hereof by Bank for such insurance.
Notwithstanding anything to the contrary contained elsewhere herein, FAC's
agreement set forth above shall be limited to cover claims only to the extent
that those claims are not covered under Bank's directors' and officers'
insurance policies (or any substitute policies permitted by this Section
5.13(b)).
(c) The provisions of this Section 5.15 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, and each
Indemnified Party's heirs and representatives.
ARTICLE VI
Conditions Precedent
6.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
A-36
128
(a) Bank Stockholder Approval. This Agreement shall have been approved
and adopted by the affirmative vote of the holders of not less than a majority
of Bank Common Stock entitled to vote thereon and with no more than 5% of shares
of Bank Common Stock dissenting pursuant to the TBCA Dissenters' Provision and
Section 2.1(c) hereof and Bank shall, upon such approval and adoption,
immediately provide to FAC a written certificate attesting to the shareholders'
adoption and approval. In addition, if required by FAC, commencing three (3)
business days after the date of mailing the Statement to the holders of Bank
Common Stock and continuing to the date of the stockholders' meeting referred to
in Section 5.4 hereof, Bank shall forward to FAC, on a daily basis, a written
report concerning the number and percentage of shares of Bank Common Stock voted
with respect to the Merger and the other transactions contemplated by this
Agreement.
(b) Other Approvals. Other than the filing provided for by Section 1.1,
all authorizations, consents, orders or approvals of, or declarations or filings
with, and all expirations of waiting periods imposed by, any Governmental Entity
(all the foregoing, "Consents") which are necessary for the consummation of the
Merger, other than Consents the failure to obtain which would have no material
adverse effect on the consummation of the Merger or on FAC and its subsidiaries,
taken as a whole, shall have been filed, occurred or been obtained (all such
permits, approvals, filings and consents and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals") and all such
Requisite Regulatory Approvals shall be in full force and effect. FAC shall have
received all state securities or blue sky permits and other authorizations
necessary to issue the FAC Common Stock in exchange for Bank Common Stock and to
consummate the Merger.
(c) Registration Statement. The Statement shall have become effective
under the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order.
(d) No Injunctions or Restraints: Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding by any Governmental Entity seeking any of the foregoing be pending.
There shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger which makes the
consummation of the Merger illegal.
6.2 Conditions to Obligations of FAC. The obligation of FAC to effect
the Merger is subject to the satisfaction of the following conditions unless
waived in writing by FAC:
(a) Representations and Warranties. The representations and warranties
of Bank set forth in this Agreement shall be true and correct in all material
A-37
129
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date, and FAC shall have received a
certificate signed on behalf of Bank by J.A. Stokes, in his capacity as Chairman
of Bank and by Thomas Hayes, in his capacity as President and Chief Executive
Officer of Bank, to such effect.
(b) Bank's Realized Shareholders' Equity. As of the Closing Date and
continuing until the Effective Time, the realized shareholders' equity of Bank,
calculated on a consolidated basis in accordance with GAAP, shall not be less
than $16.4 million (exclusive of Merger-related costs in an amount not to exceed
$200,000 and exclusive of bonuses and payments made by Bank to Bank's 401(k)
Profit Sharing Plan in an aggregate amount not to exceed $250,000, said amount
subject to the terms of Paragraph 4.2(g) and (i) hereof), and FAC shall have
received a certificate signed on behalf of Bank by Thomas Hayes, in his capacity
as President and Chief Executive Officer of Bank, to such effect.
(c) Performance of Obligations of Bank. Bank shall have performed in
all material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and FAC shall have received a
certificate signed on behalf of Bank by J.A. Stokes, in his capacity as Chairman
of Bank and by Thomas Hayes, in his capacity as President and Chief Executive
Officer of Bank, to such effect.
(d) Consents Under Agreements. Prior to or on the Closing Date, Bank
shall have obtained the consent or approval of each person (other than the
Governmental Entities referred to in Section 6.1(b) hereof) whose consent or
approval shall be required in order to permit the succession by FAC after the
Effective Time to any obligation, right or interest of Bank under any loan or
credit agreement, note, mortgage, indenture, lease, license or other agreement
or instrument, and FAC shall have received a certificate on behalf of Bank
signed by J.A. Stokes, in his capacity as Chairman of Bank and by Thomas Hayes,
in his capacity as President and Chief Executive Officer of Bank, to such
effect.
(e) Opinions. FAC shall have received the opinion of the law firm of
Bass Berry & Sims, LLC, dated as of the Closing Date, to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a)(1)(B) of the Code, and that FAC and Bank
will each be a party to that reorganization within the meaning of Section 368(b)
of the Code. Bank shall have received an opinion from such firm to the foregoing
effect and to the effect that (i) the shareholders of Bank will not recognize
any gain or loss to the extent that such shareholders exchange shares of Bank
Common Stock solely for shares of FAC Common Stock in the Merger; (ii) the basis
of the FAC Common Stock received by a Bank shareholder who exchanges Bank Common
Stock solely for FAC Common Stock will be the same as the basis of the Bank
Common Stock surrendered therefor (subject
A-38
130
to any adjustments required as a result of the receipt of cash in lieu of
fractional shares); (iii) the holding period of the FAC Common Stock received by
a Bank shareholder receiving FAC Common Stock will include the period during
which the Bank Common Stock surrendered in exchange therefor was held (provided
that the Bank Common Stock was held as a capital asset at the Effective Time);
and (iv) cash received by a Bank shareholder in lieu of a fractional FAC Common
Stock share will be treated as having been received as a distribution in full
payment in exchange for such fractional share interest.
FAC also shall have received the opinion of the law firm of Bass Berry
& Sims, LLC, counsel to Bank, dated as of the Closing Date, in form reasonably
satisfactory to FAC, which shall cover the following matters:
(i) Bank is a Tennessee state chartered bank duly incorporated,
organized, validly existing, and in good standing under the laws of the State of
Tennessee;
(ii) CCS and HRTC are companies duly organized, validly existing, and
in good standing under the laws of the State of Tennessee;
(iii) The Agreement and Plan of Merger has been duly and validly
authorized, executed and delivered by Bank (assuming that this Agreement is a
binding obligation of FAC) constitutes a valid and binding obligation of Bank
enforceable in accordance with its terms, subject as to enforceability to
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and to the application
of equitable principles and judicial discretion;
(iv) The execution and delivery of this Agreement and the consummation
of the Merger have been duly and validly authorized by the shareholders of Bank
Common Stock and the Board of Directors of Bank and no other corporate action is
necessary to authorize the Agreement or to consummate the Merger by Bank. No
consent or approval, which has not already been obtained, from any governmental
authority is required for execution and delivery by Bank of the Agreement or any
of the documents to be executed and delivered by Bank or its Subsidiaries in
connection therewith and the consummation of the Merger;
(v) Immediately prior to the Effective Time (1) the authorized
capital stock of Bank consists solely of 1,000,000 shares of Bank Common Stock,
250,000 shares of which are issued and outstanding, and 1,000,000 shares of Bank
Preferred Stock, none of which are issued and outstanding, and no other shares
of capital stock of Bank are issued or outstanding; (2) there are no agreements
or understandings by Bank with respect to the voting, sale or transfer of any
shares of capital stock of Bank or any of its Subsidiaries other than as
contemplated by this Agreement; (3) except for the
A-39
131
shares of Bank Common Stock there are no shares of capital stock or securities
convertible into or evidencing the right to purchase shares of Bank Common Stock
outstanding; and (4) all shares of Bank Common Stock outstanding were duly
authorized, and nonassessable and were free of the preemptive right of any
shareholder;
(vi) Neither the execution, delivery and performance of this Agreement
by Bank nor the consummation of the Merger will (a) conflict with or result in a
breach of any provision of the charter, articles of association or bylaws of
Bank or any Subsidiary, (b) constitute or result in the breach of any term,
condition, provision of or constitute a default under, or give rise to any right
of termination, cancellation, or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of Bank
or any Subsidiary pursuant to any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation included in the Bank
Disclosure Schedule to which Bank or a Subsidiary is a party or by which Bank or
a Subsidiary is bound or to which any of their properties or assets may be
subject, or (c) violate any order, judgment or decree to which Bank or a
Subsidiary is a party or by which it or its properties or assets is bound; and
(vi) There is no litigation, proceeding or governmental investigation
pending or threatened against Bank or any Subsidiary, its properties, businesses
or assets that would reasonably be expected to have, individually or in the
aggregate, a material adverse effect on Bank or its Subsidiaries and neither
Bank nor any Subsidiary thereof have not received any notification by any
regulatory agency asserting that it is not in compliance with any applicable
laws, statutes or regulations or that seeks to revoke any license, franchise,
permit or other governmental authorization which is necessary to conduct its
businesses as presently conducted.
Such opinion (i) may expressly rely as to matters of fact upon
certificates furnished by appropriate officers of Bank or appropriate government
officials and (ii) shall incorporate, be guided by, and be interpreted in
accordance with, the Legal Opinion Accord of the American Bar Association
Section of Business Law (1991).
(f) No Material Adverse Change. There shall have been no material
adverse change in the business, financial condition, prospects or results of
operations or prospects of Bank from that reflected in the Bank Reporting
Documents or the Bank Disclosure Schedules and neither Bank nor any of its
Subsidiaries shall have suffered any substantial loss or damage to their
respective properties, or assets whether or not insured that would materially
adversely affect or impair the ability of Bank or its Subsidiaries to conduct
their business and operations except for such changes that result from changes
contemplated by this Agreement.
(g) Affiliate Agreements. FAC shall have received written affiliates
agreements as provided in Section 5.6 hereof.
A-40
132
(h) Accountants' Letter. FAC shall have received a letter from Kraft
Bros., Esstman, Patton & Harrell, PLLC, dated as of the Closing Date, in form
and substance satisfactory to FAC, stating in effect in respect of Bank that:
(1) they have examined the consolidated financial statements of Bank as of
December 31, 1997, and December 31, 1996, and for each of the years then ended
and have made a limited review in accordance with the standards established by
the American Institute of Certified Public Accountants of the latest available
unaudited consolidated interim financial statements of Bank available after
December 31, 1997; (2) on the basis of reading the latest available unaudited
consolidated interim financial statements of Bank; reading the minutes of the
meetings of the stockholders and the Board of Directors and committees thereof
of Bank for the period from December 31, 1997, to the Closing Date, and
inquiries of officers of Bank having responsibility for financial and accounting
matters as to whether the unaudited consolidated financial statements referred
to in (1) above are stated on a basis substantially consistent with that of the
audited consolidated financial statements as of December 31, 1997, and December
31, 1996, and for the years then ended, nothing came to their attention which
caused them to believe that during the period from December 31, 1997, to the
Effective Time there were any changes in the capital stock or the long term debt
of Bank or any decreases in interest income, net earnings or net assets of Bank
have occurred or are expected to occur (except for changes or decreases
resulting from securities portfolio gains or losses), the effect of transaction
costs and other costs incurred upon consummation of the Merger; and (3) on the
basis of (i) reading the latest available interim consolidated financial
statements which are referred to above and (ii) inquiries of certain officials
of Bank having responsibility for financial and accounting matters concerning
whether the unaudited consolidated interim financial statements referred to in
(1) above are presented fairly, nothing came to their attention which caused
them to believe that the latest available consolidated interim financial
statements are not fairly presented in conformity with GAAP applied on a basis
consistent with that followed in the audited consolidated financial statements
dated December 31, 1997, and December 31, 1996, and for the years then ended.
(i) Capitalization. FAC shall have received a certificate of the
President and Chief Executive Officer of Bank certifying to FAC immediately
prior to the Effective Time (1) the number of shares of Bank Common Stock issued
and outstanding; (2) that there were no options for Bank Common Stock
outstanding; (3) that no other shares of capital stock or securities convertible
into or evidencing the right to purchase or subscribe for any shares of Bank
Capital stock are outstanding and that there are no other outstanding warrants,
calls, subscriptions, rights, commitments, stock appreciation rights, phantom
stock or similar rights or any other agreements of any character obligating Bank
to issue any shares of capital stock or securities convertible into or
evidencing the right to purchase such stock; (4) no shares of Bank stock are
held by Bank in treasury; and (5) Bank owns, free and clear, all of the capital
stock of the Subsidiaries.
A-41
133
(j) Employment Agreement. The Employment Agreement with
Thomas Hayes, substantially in the form of Exhibit B, attached hereto, shall
been executed and delivered by Mr. Hayes prior to the Closing Date.
(k) Accounting Treatment. FAC shall have received (i) a
letter from Kraft Bros., Esstman, Patton & Harrell, PLLC, to the effect that
Peoples Bank has taken no action that would cause the transactions contemplated
herein not to qualify for "pooling-of-interests" accounting treatment and (ii)
the opinion of KPMG Peat Marwick, LLC to the effect that the transaction
contemplated hereby shall be accounted for as a "pooling-of-interests".
(l) Final Monthly Status Report. At Closing, Bank shall
provide to FAC a statement, dated on and as of the Closing Date, concerning the
status of each of the items required by Section 4.7 hereof.
(m) Year 2000. At Closing, FAC shall receive a statement
from the President and Chief Executive Officer of Bank certifying that Bank and
its Subsidiaries have complied in all material respects with the standards set
forth in the FFIEC Interagency Statement regarding Year 2000 compliance dated
May 5, 1997, and as revised on December 17, 1997, and as may be amended
thereafter.
6.3 Conditions to Obligations of Bank. The obligation of
Bank to effect the Merger is subject to the satisfaction of the following
conditions unless waived by Bank:
(a) Representations and Warranties. The representations and
warranties of FAC set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the extent
such representations speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, except as otherwise contemplated by
this Agreement, and Bank shall have received a certificate signed on behalf of
FAC by its Chairman, and Chief Executive Officer or President and by its
Principal Accounting Officer to such effect.
(b) Performance of Obligations of FAC. FAC shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Bank shall have
received a certificate signed on behalf of FAC by its Chairman and Chief
Executive Officer or President and by its Principal Accounting Officer to such
effect.
A-42
134
(c) Opinion. Bank shall have received the opinion of Mary
Neil Price, Esq., General Counsel to FAC, dated as of the Closing Date, in form
reasonably satisfactory to Bank, which shall cover the following matters:
(i) FAC is a corporation duly organized, validly existing
and in good standing under the laws of the State of Tennessee;
(ii) The Agreement and Plan of Merger has been duly and
validly authorized, executed and delivered by FAC (assuming that this Agreement
is a binding obligation of Bank) constitutes a valid and binding obligation of
FAC enforceable in accordance with its terms, subject as to enforceability to
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and to the application
of equitable principles and judicial discretion;
(iii) The execution and delivery of this Agreement and the
consummation of the Merger have been duly and validly authorized by the joint
Board of Directors of FAC and no other corporate action is necessary to
authorize the Agreement or to consummate the Merger by FAC. To the actual
knowledge of such counsel, no consent or approval, which has not already been
obtained, from any governmental authority is required for execution and delivery
by FAC of the Agreement or any of the documents to be executed and delivered by
FAC in connection therewith and the consummation of the Merger; and
(iv) Immediately prior to the Effective Time (1) the
authorized capital stock of FAC consists of 200,000,000 shares of FAC Common
Stock and 2,500,000 shares of FAC Preferred Stock; and there were sufficient
shares of FAC Common Stock reserved for issuance to Bank shareholders upon
consummation of the Merger; and the shares of FAC Common Stock to be issued to
the holders of Bank Common Stock pursuant hereto have been duly authorized and
when issued will be duly authorized, validly issued, non-assessable, and free of
all preemptive rights.
Such opinion (i) may expressly rely as to matters of fact upon
certificates furnished by appropriate officers of FAC, FANB or appropriate
government officials and (ii) shall incorporate, be guided by, and be
interpreted in accordance with, the Legal Opinion Accord of the American Bar
Association Section of Business Law (1991).
(d) No Material Adverse Change. There shall have been no
material adverse change in the business, financial condition, prospects or
results of operations or prospects of FAC from that reflected in the FAC SEC
Documents and FAC shall not have suffered any substantial loss or damage to its
properties, or assets whether or not insured that would materially adversely
affect or impair the ability of FAC to conduct its business and operations.
A-43
135
ARTICLE VII
Termination and Amendment
7.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval by the
shareholders of Bank:
(a) by mutual written consent of FAC and Bank; or
(b) by either FAC or Bank if (i) the Merger shall not
have been consummated on or before December 31, 1998 (the "Termination Date"),
provided the terminating party shall not have breached in any material respect
its obligations under this Agreement in a manner that proximately contributed to
the failure to consummate the Merger by such date, (ii) any governmental or
regulatory body, the consent of which is a condition to the obligations of FAC
and Bank to consummate the transactions contemplated hereby or by the plan of
Merger, shall have determined not to grant its consent and all appeals of such
determination shall have been taken and have been unsuccessful, or (iii) any
court of competent jurisdiction in the United States or any State shall have
issued an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment or decree shall have become final and nonappealable.
(c) By FAC:
(i) if any event shall have occurred as a result of which
any condition set forth in Sections 6.1 or 6.2 is no longer
capable of being satisfied;
(ii) if there has been a breach by Bank of any
representation or warranty contained in this Agreement, which
would or would be reasonably likely to have a material adverse
effect on the assets, liabilities, financial condition,
results of operations or prospects of Bank and its
Subsidiaries, taken as a whole, or there has been a material
breach of any of the covenants or agreements set forth in this
Agreement on the part of Bank;
(iii) if Bank (or its Board of Directors) shall have
authorized, recommended, proposed or publicly announced its
intention to enter into a Competing Transaction (as herein
defined);
(iv) if the Board of Directors of Bank shall have
withdrawn or materially modified its authorization, approval
or recommendation to the stockholders of Bank with respect to
the Merger or this Agreement or shall
A-44
136
have failed to make the favorable recommendation required by
Section 5.5; or
(v) as provided in Section 4.6(b).
For purposes of this Agreement, the term "Competing Transaction" means
any of the following involving Bank (other than the transactions contemplated by
this Agreement): (x) any merger, consolidation, share exchange, business
combination, or other similar transaction; (y) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the capital
stock or assets of Bank in a single transaction or series of transactions to the
same person, entity or group; or (z) any public announcement of a proposal, plan
or intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
(d) By Bank:
(i) if either:
a) both of the following conditions are
satisfied:
(1) the Average Closing Price (as defined
below) shall be less than the product of
0.80 and the Starting Price; and
(2) (i) the number obtained by dividing the
Average Closing Price by the Starting Price
(such number being referred to herein as the
"FAC Ratio") shall be less than (ii) the
number obtained by dividing the Index Price
on the Determination Date by the Index Price
on the Starting Date and subtracting 0.15
from such quotient (such number being
referred to herein as the "Index Ratio"); or
b) the Average Closing Price shall be less than
the product of 0.75 and the Starting Price.
If the Bank elects to exercise its termination right pursuant to the immediately
preceding sentence, it shall give to FAC written notice on or before the second
trading day after the Determination Date, which shall specify which of clauses
(a) or (b) is applicable (or if both would be applicable, which clause is being
invoked). During the five-day period commencing on the date of such notice, FAC
shall have the option in the case of a termination invoked under clause (a), of
adjusting the Exchange Ratio to equal the lesser of (i) a number equal to a
quotient (rounded to the nearest one-ten thousandth), the numerator of which is
the product of 0.80, the Starting Price and the Exchange Ratio (as then in
effect) and the denominator of which is the Average Closing Price, or (ii) a
number equal to a quotient (rounded to the nearest one-ten thousandth), the
numerator
A-45
137
of which is the Index Ratio multiplied by the Exchange Ratio (as then in effect)
and the denominator of which is the FAC Ratio. During such five-day period, FAC
shall have the option, in the case of a termination invoked under clause (b), to
elect to increase the Exchange Ratio to equal a number equal to a quotient
(rounded to the nearest one-ten thousandth), the numerator of which is the
product of 0.75, the Starting Price and the Exchange Ratio (as then in effect)
and the denominator of which is the Average Closing Price. If FAC makes an
election contemplated by either of the two preceding sentences, within such
five-day period, it shall give prompt written notice to the Bank of such
election and the revised Exchange Ratio, whereupon no termination shall have
occurred pursuant to this Section 7.1(d)(i) and this Agreement shall remain in
effect in accordance with its terms (except as the Exchange Ratio shall have
been so modified), and any references in this Agreement to "Exchange Ratio"
shall thereafter be deemed to refer to the Exchange Ratio as adjusted pursuant
to this Section 7.1(d)(i).
For purposes of this Section 7.1(d)(i) only, the following terms shall have the
meanings indicated:
"Average Closing Price" means the average of the last reported sale prices per
share of FAC Common Stock as reported on The Nasdaq Stock Market (as reported in
The Wall Street Journal or, if not reported therein, in another mutually agreed
upon authoritative source) for the 20 consecutive trading days on The Nasdaq
Stock Market ending at the close of trading on the Determination Date.
"Determination Date" means the date on which the approval of the Federal Reserve
Board required for consummation of the Merger shall be received by FAC, without
regard to any requisite waiting periods in respect thereof.
"Index Group" means the group of each of the 34 bank holding companies listed
below, the common stock of all of which shall be publicly traded as to which
there shall not have been, since the Starting Date and before the Determination
Date, an announcement of a the consummation of a transaction whereby such
company would be acquired or whereby such company would acquire another company
or companies in transactions with a value exceeding 25% of the acquiror's market
capitalization as of the Starting Date. In the event that the common stock of
any such company ceases to be publicly traded or any such announcement is made
with respect to any such company, such company will be removed from the Index
Group, and the weights (which have been determined based on the number of
outstanding shares of common stock) redistributed proportionately for purpose of
determining the Index Price. The 34 bank holding companies and the weights
attributed to them are as follows:
A-46
138
Bank Holding Company
- --------------------
Weighting
---------
Amsouth Bancorporation............................................................................ 1.1%
BankAmerica Corporation........................................................................... 9.1
BancOne Corporation............................................................................... 7.7
BB&T Corporation.................................................................................. 1.8
The Bank of New York Company, Inc................................................................. 4.9
BankBoston Corporation............................................................................ 1.9
Comerica, Inc..................................................................................... 1.4
Crestar Financial Corporation..................................................................... 1.4
Fifth Third Bancorp............................................................................... 2.0
First Chicago NBD Corporation..................................................................... 3.8
Fleet Financial Group............................................................................. 3.3
Firstar Corporation............................................................................... 1.9
First Union Corporation........................................................................... 7.4
First Virginia Banks, Inc......................................................................... 0.7
Huntington Bancshares, Inc........................................................................ 2.5
Hibernia Corporation.............................................................................. 1.7
KeyCorp........................................................................................... 2.9
Mellon Bank Corporation........................................................................... 3.3
Mercantile Bancorporation, Inc.................................................................... 1.7
NationsBank Corporation........................................................................... 9.2
National City Corporation......................................................................... 2.8
Norwest Corporation............................................................................... 9.8
PNC Bank Corporation.............................................................................. 4.0
Regions Financial Corporation..................................................................... 1.8
Star Banc Corporation............................................................................. 1.1
SunTrust Banks, Inc............................................................................... 2.8
UnionBanCal Corporation........................................................................... 0.7
Union Planters Corporation...................... ................................................ 0.9
U.S. Bancorp...................................................................................... 3.2
Wachovia Corporation....... ..................................................................... 2.1
Wells Fargo & Company.. .......................................................................... 1.1
---
100%
"Index Price" on a given date means the weighted average (weighted in accordance
with the factors listed above) of the closing prices of the companies comprising
the Index Group.
"Starting Date" means April 21, 1998.
"Starting Price" shall mean the last reported sale price per share of FAC Common
Stock on the Starting Date, as reported by The Nasdaq Stock Market (as reported
in The Wall Street Journal or, if not reported therein, in another mutually
agreed upon authoritative source).
A-47
139
If any company belonging to the Index Group or FAC declares or effects
a stock dividend, reclassification, recapitalization, split-up, combination,
exchange of shares or similar transaction between the Starting Date and the
Determination Date, the prices for the common stock of such company or FAC shall
be appropriately adjusted for the purposes of applying this Section 7.1(d)(i).
(ii) if any event shall have occurred as a result of which any
condition set forth in Sections 6.1 or 6.3 is no longer capable of being
satisfied; or
(iii) if there has been a breach by FAC of any representation or
warranty contained in this Agreement which would have or would be reasonably
likely to have a material adverse effect on the assets, liabilities, financial
condition, results of operations, business or prospects of FAC and FANB, taken
as a whole, or there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of FAC.
7.2 Rights and Obligations Upon Termination. If this Agreement
is terminated as provided herein, each party will deliver all documents, work
papers, and other materials of any other party relating to the transactions
contemplated hereby, whether obtained before or after the execution hereof, to
the party furnishing the same including using its best efforts to obtain and
deliver all such documents, work papers and materials, except to the extent
previously delivered to third parties in connection with the transactions
contemplated hereby, and all information received by any party hereto with
respect to the business of any other party shall not at any time be used for the
advantage of, or disclosed to third parties by, such party to the detriment of
the party furnishing such information; provided, however, that this Section 7.2
shall not apply to any documents, work papers, material, or information which is
a matter of public knowledge or which heretofore has been or hereafter is
published in any publication for public distribution or filed as public
information with any governmental agency.
7.3 Fees and Expenses. Bank acknowledges that FAC has spent,
and will be required to spend, substantial time and effort in examining the
business, properties, affairs, financial condition and prospects of Bank, has
incurred, and will continue to incur, substantial fees and expenses in
connection with such examination, the preparation of this Agreement and the
accomplishment of the transactions contemplated hereunder, and will be unable to
evaluate and, possibly, make investments in or acquire other entities due to the
limited number of personnel available for such purpose and the constraints of
time. Therefore, to induce FAC to enter this Agreement,
(a) If FAC terminates this Agreement pursuant to:
(i) Sections 7.1(c)(i) or (c)(ii) by reason of the failure to
meet any condition contained in Section 6.2(a) or (b) due to
Bank's knowing and
A-48
140
intentional misrepresentation or knowing and intentional breach
of warranty or breach of any covenant or agreement and within
twelve (12) months from the date of termination a Competing
Transaction is consummated or Bank shall have directly or
indirectly solicited bids for a Competing Transaction or shall
have entered into an agreement or an agreement in principle
which if consummated would constitute a Competing Transaction;
(ii) Section 7.1(c)(iv);
(iii) Section 7.1(c)(iii) and within twelve (12) months from
the date of termination a Competing Transaction is consummated
or Bank shall have entered into an agreement which if
consummated would constitute a Competing Transaction; or
(b) if Bank terminates this Agreement pursuant to Section
7.1(d) because this Agreement did not receive the requisite vote of the Bank
stockholders and within twelve (12) months from the date of termination a
Competing Transaction is consummated or Bank shall have entered into an
agreement which if consummated would constitute a Competing Transaction; then
Bank shall pay to FAC a fee in the amount of $2 million (the "Fee"), which
amount is inclusive of the FAC expenses, not as a penalty but as full and
complete liquidated damages. Any payment required pursuant to this Section 7.3
shall be made no later than two business days after the date due and shall be
made by wire transfer of immediately available funds to an account designated by
FAC. In the event that FAC is entitled to the Fee, Bank shall also pay to FAC
interest at the rate of 9% per year on any amounts that are not paid when due,
plus all costs and expenses in connection with or arising out of the enforcement
of the obligation of Bank to pay the Fee or such interest.
7.4 Effect of Termination. Except for such provisions of
this Agreement which by their terms expressly survive the termination hereof and
the provisions of Sections 8.8, 7.2, 7.3 and this Section 7.4, which shall
survive any termination of this Agreement. In the event of a termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith become void
and have no further effect.
ARTICLE VIII
General Provisions
8.1 Nonsurvival of Representations, Warranties, and
Agreements. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except
A-49
141
for those agreements and covenants which by their terms apply or are intended to
be performed in whole or in part after the Effective Time.
8.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with prior telephonic confirmation) or mailed by registered or
certified mail (return receipt requested) or sent by a nationally recognized
expedited courier to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to FAC, to
First American Corporation
615 First American Center
Nashville, Tennessee 37237-0615
Attention: Dale W. Polley, President
with a copy to
Mary Neil Price, Esq.
General Counsel and Secretary
721 First American Center
Nashville, Tennessee 37237-0721
and
(b) if to Bank, to
Peoples Bank
601 Highway 46, South
Dickson, TN 37056
Attention: Thomas Hayes
with a copy to
Bass Berry & Sims
2700 First American Center
Nashville, TN 37238-2700
Attention: Bob F. Thompson, Esq.
8.3 Interpretation. When a reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference shall be to a
Section of or Exhibit or Schedule to this Agreement unless otherwise indicated.
The table of contents and headings contained in this Agreement are for reference
purposes only and shall not
A-50
142
affect in any way the meaning or interpretation of this Agreement. Whenever the
words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation". The phrase
"made available" in this Agreement shall mean that the information referred to
has been made available if requested by the party to whom such information is to
be made available. The phrases "the date of this Agreement, "the date hereof"
and terms of similar import, unless the context otherwise requires, shall be
deemed to refer to April 21, 1998.
8.4 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership. This Agreement (including the documents and the instruments
referred to herein) (a) constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter hereof, and (b) except as expressly provided
herein, is not intended to confer upon any person other than the parties hereto
any rights or remedies hereunder. The parties hereby acknowledge that, except as
hereinafter agreed upon in writing, no party shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
8.6 Governing Law; Choice of Forum. This Agreement shall
be governed and construed in accordance with the laws of the State of Tennessee,
without regard to any applicable conflicts of law. All matters arising out of
this Agreement and the transactions contemplated hereby shall be heard before a
federal or Tennessee state court with competent jurisdiction residing in
Davidson County, Tennessee.
8.7 Injunctive Relief; Limitations on Remedies. The
parties hereto acknowledge and agree that since a remedy at law for any breach
or attempted breach of the provisions hereof shall be inadequate, the parties
shall be entitled to specific performance and injunctive or other equitable
relief in case of any such breach or attempted breach, in addition to whatever
other remedies may exist at law. The parties hereto also waive any requirement
for the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. Each party further agrees that,
should any court or other competent authority hold any provision of this
Agreement or part hereof to be null, void or unenforceable (as defined in
Section 8.6 hereof), or order any party to take any action inconsistent herewith
or not to take any action required herein, the other party shall not be entitled
to specific performance of such provision or part hereof or thereof or to any
other remedy, including but not limited to money damages, for breach hereof or
thereof or of any other provision of this Agreement or parts hereof as a result
of such holding or order. This provision is not
A-51
143
intended to render null or unenforceable any obligation hereunder that would be
valid and enforceable if this provision were not in this Agreement.
8.8 Publicity. Except as otherwise required by law,
neither party shall issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without the prior written consent of the other party, which consent
shall not be unreasonably withheld.
8.9 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
8.10 Consents. For purposes of any provision of this
Agreement requiring, permitting or providing for the consent of FAC or Bank, the
written consent of the Chairman and Chief Executive Officer of FAC or the
President and Chief Executive Officer of Bank, as the case may be, shall be
sufficient to constitute such consent.
8.11 Disclosures. No fact or event shall be deemed to have
been disclosed by one party to the other party for purposes of this Agreement
unless such fact or event is disclosed in a writing delivered to such party.
A-52
144
(b) Conversion of Peoples Common Stock. Subject to Section 3.2(a) hereof,
each issued and outstanding shares of Peoples Common Stock (other than shares to
be canceled in accordance with Section 3.1(a) hereof) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be converted
into and exchangeable for the right to receive 3.70 fully paid and nonassessable
First American shares (the "Exchange Ratio").
All such shares of Peoples Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
the shares of First American Common Stock into which Peoples Common Stock has
been converted and the right to cash payment for fractional shares, if any.
Certificates previously representing whole shares of Peoples Common Stock shall
be exchanged for certificates representing whole shares of Common Stock issued
in consideration therefor and cash for fractional shares, if any, upon the
surrender of such certificates in accordance with Section 3.2 hereof.
In the event that prior to the Effective Time the outstanding shares of
First American Common Stock have been increased, decreased, changed into or
exchanged for a different number of kind of shares through a reorganization (but
not a merger), reclassification, stock dividend, stock split, reverse stock
split or other similar change, applicable adjustments shall be made to the
Exchange Ratio and the number of shares to be exchanged.
3.2 Exchange of Certificates. (a) Exchange Agent. As of the Effective
Time, First American shall deposit with its transfer agent (the "Exchange
Agent"), for the benefit of the holders of shares of Peoples Common Stock,
certificates representing the shares of First American Common Stock (such
certificates for shares of First American Common Stock together with any
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund") issuable pursuant to Section 3.1 hereof in exchange for
outstanding shares of Peoples Common Stock and cash for fractional shares.
(b) Exchange Procedures. Peoples shall use its best efforts to cause each
holder of record in Peoples Common Stock, whose shares are to be converted into
shares of First American Common Stock pursuant to Section 3.1 hereof and who
does not dissent pursuant to Section 48-23-1 01 et seq of the Tennessee Business
Corporations Act (the "TBCA"), to deliver the certificates representing shares
of Peoples Common Stock ("Certificate" or "Certificates") to Peoples; and
Peoples shall keep such Certificates in escrow for the benefit of each holder
until the Closing Date. At Closing, Peoples shall deliver to First American the
Certificates. Upon surrender of a Certificate for cancellation to the Exchange
Agent together with such documentation as the Exchange Agent may reasonably
require to effectuate the exchange, the Exchange Agent shall, at or after the
Effective Time, deliver to the holder of each such Certificate a certificate
representing that number of whole shares of First American Common Stock which
such holder has the right to receive in respect of the Certificate surrendered,
and cash for fractional shares, if any, and the Certificate so surrendered shall
thereupon be canceled. In the event of a transfer of ownership of Peoples
Common Stock which is not registered in the transfer records of Peoples, a
certificate representing the proper number of shares of First American Common
Stock may be issued to a transferee if the Certificate representing such Peoples
Common Stock is presented to the Exchange Agent, accompanied by all documents
required by the Exchange Agent, in its sole discretion, to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have
been paid. Until surrendered to the Exchange Agent in the manner contemplated by
this Section 3.2, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
certificate representing shares of First American Common Stock and cash in lieu
of any fractional shares of First American Common Stock, without interest, as
contemplated by this Section 3.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
First American Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of First American Common Stock represented thereby, and no cash payment in lieu
of fractional shares shall be paid to any such holder pursuant to Section 3.2(e)
hereof until the holder of such Certificate shall surrender such Certificate.
Subject to the effect of applicable laws, following proper surrender of any such
Certificate, there shall be paid to the holder of the certificates representing
whole shares of First American Common Stock issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of any cash payable with
respect to a fractional share of First American Common Stock to which such
holder is entitled pursuant to Section 3.2(e) hereof and the amount of dividends
or other distributions with a record date after the Effective Time theretofore
paid with respect to such whole shares of First American Common Stock, and, if
necessary, (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of First American Common Stock.
(d) No Further Ownership Rights in Peoples Common Stock. All shares of
First American Common Stock issued upon conversion of shares of Peoples Common
Stock in accordance with the terms hereof shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Peoples Common
Stock, subject, however, to the Resulting Bank's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which may have been declared or made by Peoples on such shares of Peoples Common
Stock in accordance with the terms of the First American Agreement on or prior
to the Effective Time and which remain unpaid at the Effective Time, and there
shall be no further registration or transfers on the stock transfer books of the
Resulting Bank of the shares of Peoples
AA-4
145
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Resulting Bank
for any reason, they shall be canceled and exchanged as provided in this
Article III.
(c) No Fractional Shares. No certificates or scrip representing
fractional shares of First American Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interests
will not entitle the owner thereof to vote or to any rights of a stockholder of
First American, including, without limitation, the right to receive dividends.
Each holder of Peoples Common Stock who would otherwise have been entitled to
receive a fraction of a share of First American Common Stock shall receive, in
lieu thereof, cash (without interest) in an amount equal to such fractional
part of a share of First American Common Stock multiplied by the market value of
one share of First American Common Stock on the trading day immediately prior
to the Effective Time.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1 Approval by the Commissioner. This Interim Bank Agreement and the
First American Agreement are subject to the approval of the Commissioner of
Financial Institutions of the State of Tennessee (the "Commissioner") in
accordance with the Tennessee Banking Act, and any amendments thereto.
4.2 Stockholder Approval. This Interim Bank Agreement and the First
American Agreement, by and between Peoples and First American, shall have been
approved and adopted by the affirmative vote of the holders of not less than a
majority of the voting shares of Peoples common stock, par value $2.00 per
share, provided, however, that the First American Agreement is also subject to
other restrictions and limitations regarding Peoples stockholder approval as
described in Section 6.1 of the First American Agreement. This Interim Bank
Agreement is subject to the approval of the affirmative vote of the holders of
not less than a majority of the voting shares of Interim Bank common stock,
par value $10.00 per share.
ARTICLE V
DISSENTERS' RIGHTS
------------------
Notwithstanding anything in this Agreement to the contrary, and only to
the extent required by Section 48-23-101 et. seq. of the Tennessee Business
Corporations Act (the "TBCA Dissenters' Provisions"), shares of voting common
stock of either Peoples or Interim Bank held by stockholders of Peoples or
Interim Bank who shall not have voted such shares in favor of the Merger and
the transactions related thereto and who shall have complied with the TBCA
Dissenters' Provisions shall be entitled to the appraisal value of such shares
in accordance with the TBCA Dissenters' Provisions; provided, however, that
this Article V is qualified by and limited by any and all provisions describing
the rights of dissenting shareholders provided for in the First American
Agreement.
ARTICLES VI
MISCELLANEOUS PROVISIONS
------------------------
6.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
prior telephonic confirmation) or mailed by registered or certified mail
(return receipt requested) or sent by a nationally recognized expedited
courier to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice):
(a) If to First American or to Interim Bank:
First American Corporation
615 First American Center
Nashville, Tennessee 37237
Attention: Dale W. Polley, President
with a copy to
Mary Neil Price, Esq.
General Counsel and Secretary
721 First American Center
Nashville, Tennessee 37237
AA-5
146
and
(b) if to Peoples, to
Peoples Bank
601 Highway 46, South
Dickson, Tennessee 37056
Attention: Thomas Hayes
with a copy to
Bass, Berry & Sims
First American Center
Nashville, Tennessee 37238
Attention: Bob F. Thompson, Esq.
6.2 Section Headings. The section and article headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
6.3 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
6.4 First American Agreement Controls. This Agreement is subject to all
of the terms and conditions of the First American Agreement, which is
incorporated herein by reference. If any of the provisions of this Agreement
conflict with or are inconsistent with the provisions of the First American
Agreement, the provisions of the First American Agreement shall be controlling.
6.5 Governing Law: Choice of Forum. This Agreement shall be governed and
construed in accordance with the laws of the State of Tennessee, without regard
to any applicable conflicts of law. All matters arising out of this Agreement
and the transactions contemplated hereby shall be heard before a federal or
Tennessee state court with competent jurisdiction residing in Davidson County,
Tennessee.
6.6 Injunctive Relief: Limitations on Remedies. The parties hereto
acknowledge and agree that since a remedy at law for any breach or attempted
breach of the provisions hereof shall be inadequate, the parties shall be
entitled to specific performance and injunctive or other equitable relief in any
case of any such breach or attempted breach, in addition to whatever other
remedies may exist at law. The parties hereto also waive any requirement for the
securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief. Each party further agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof to be null, void or unenforceable (as defined in Section 6.5 hereof), or
order any party to take any action inconsistent herewith or not to take any
action required herein, the other party shall not be entitled to specific
performance of such provision or part hereof or thereof or to any other remedy,
including but not limited to money damages, for breach hereof or thereof or of
any other provision of this Agreement or parts hereof as a result of such
holding or order. This provision is not intended to render null or unenforceable
any obligation hereunder that would be valid and enforceable if this provision
were not in this Agreement.
6.7 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors an assigns.
[remainder of page left blank intentionally]
AA-6
147
IN WITNESS WHEREOF, Peoples and Interim Bank have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of
September __, 1998.
FIRST AMERICAN INTERIM BANK
By:
----------------------------
[__________________]
President
ATTEST:
- -----------------------------
Title:
------------------------
PEOPLES BANK
By:
-----------------------------
Thomas Hayes
President
ATTEST:
- -----------------------------
Title:
-----------------------
AA-7
148
IN WITNESS WHEREOF, FAC and Bank have caused this Agreement to be
signed by their respective officers thereunto duly authorized, all as of April
21, 1998.
FIRST AMERICAN CORPORATION
BY: /s/ Dale W. Polley
------------------------
DALE W. POLLEY
PRESIDENT
ATTEST:
/s/ Pamela R. Welch
- ---------------------------------------
Title: Assistant Secretary
---------------------------------
PEOPLES BANK
BY: /s/ Thomas Hayes
-----------------------
THOMAS HAYES
PRESIDENT
ATTEST:
/s/ Ted H. Williams
- ---------------------------------------
Title: Executive Vice President and COO
--------------------------------
A-53
149
ANNEX 1
FORM OF
MERGER AGREEMENT
DATED AS OF SEPTEMBER ___, 1998
BETWEEN
FIRST AMERICAN INTERIM BANK
AND
PEOPLES BANK
AA-1
150
FORM OF
MERGER AGREEMENT
This Merger Agreement, dated as of September __, 1998 (the "Interim Bank
Agreement" or "Agreement"), is made and entered into by and between Peoples
Bank, a Tennessee banking corporation ("Peoples") and First American Interim
Bank ("Interim Bank"), a wholly-owned Tennessee state-chartered bank subsidiary
of First American Corporation ("First American"), a Tennessee corporation, with
reference to the following facts:
W I T N E S S E T H:
WHEREAS, on or about April 21, 1998, Peoples and First American entered
into an Agreement and Plan of Merger (the "First American Agreement";
collectively with the Interim Bank Agreement, the "Agreements") pursuant to
which Peoples agrees to merge and into Interim Bank with Peoples being the
surviving bank (the "Resulting Bank");
WHEREAS, under the First American Agreement the shareholders of Peoples
will exchange their shares for shares of First American based on an exchange
ratio described in that agreement (the proposed merger and share exchange,
collectively, are the "Merger");
WHEREAS, Interim Bank and Peoples desire to enter into this Interim Bank
Agreement to comply with Tennessee banking law in order to effectuate the First
American Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, covenants, warranties and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
---------
NAME AND LOCATION OF EACH BANK
------------------------------
1.1 Name and Location of Peoples:
The main office of Peoples is the following:
Peoples Bank
601 Highway 46 South
Dickson, Tennessee 37056
1.2 Name and Location of Interim Bank:
The main office of Interim Bank is the following:
First American Interim Bank
721 First American Center
Nashville, Tennessee 37237-0721
ARTICLE II
----------
REPRESENTATIONS OF PEOPLES - THE RESULTING BANK
-----------------------------------------------
2.1 Location of Offices. The location of the main office of the
Resulting Bank upon completion of the Merger shall be the same as the main
office of Peoples identified in Section 1.1. The Resulting Bank shall have no
additional offices as a result of the Merger and shall continue to maintain
those offices currently occupied by Peoples.
2.2 Directors. Listed below is the name and residence of each person
who shall serve as a director of the Resulting Bank upon completion of the
Merger until the next annual meeting of the shareholders of the Resulting Bank
following the Merger:
AA-2
151
NAME RESIDENCE
--------------------------- ----------------------------
2.3 Officers. Below is listed the name and residence of each officer of
Peoples who shall serve in such capacity with the Resulting Bank upon completion
of the Merger:
NAME OFFICE RESIDENCE
--------------------------- ---------------------------- --------------------------------
2.4 Capital. The Resulting Bank shall have shares of common stock,
par value $2.00 per share, issued and outstanding which shall constitute $
in capital. The Resulting Bank shall have $ of additional paid-in capital.
2.5 Preferred Stock. No Preferred Stock of any kind will be issued by the
Resulting Bank as a result of the Merger.
2.6 Charter. The Charter and Bylaws of Peoples currently in effect shall
be the Charter and Bylaws of the Resulting Bank following the Merger.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS: EXCHANGE OF CERTIFICATES
3.1 Effect on Capital Stock. As of the Effective time, by virtue of the
Merger and without any action on the part of the holder of any shares of Peoples
Common Stock:
(a) Cancellation of Stock. All shares of Peoples Common Stock that are
owned by First American or any subsidiary of (other than shares in trust
accounts, managed accounts, custodial accounts and the like that are
beneficially owned by third parties (any such shares, "trust account shares"))
shall be canceled and retired and shall cease to exist and no stock of First
American or other consideration shall be delivered in exchange therefor. All
shares of $2.50 par value common stock of First American (the "First American
Common Stock") that are owned by Peoples (other than trust account shares) shall
become authorized but unissued stock of First American. Each share of Interim
Bank common stock, par value $10.00 per share, ("Interim Bank Common Stock"),
issued and outstanding immediately prior to the effective time of the Merger
(the "Effective Time") shall, by virtue of the Merger and without any action on
the part of the holder thereof, be converted into and exchanged for one fully
paid and non-assessable share of common stock, without par value, of the
Resulting Bank ("Resulting Bank Common Stock"). From and after the Effective
Time, each outstanding certificate theretofore representing shares of Interim
Bank Common Stock shall be deemed for all purposes to evidence ownership of and
to represent the number of shares of Resulting Bank Common Stock into which such
shares of Resulting Bank Common Stock shall have been converted. Promptly after
the Effective Time, the Resulting Bank shall issue to First American a stock
certificate or certificates representing such shares of Resulting Bank Common
Stock in exchange for the certificate or certificates which formerly represented
shares of Interim Bank Common Stock, which shall be canceled.
As used in this Agreement, the word "subsidiary," means any corporation or
other organization, whether incorporated or unincorporated, of which such party
or any other subsidiary of such party is a general partner or of which at least
a majority of the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or others performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such party and/or by any one or
more of its subsidiaries.
AA-3
152
APPENDIX B
OPINION OF PROFESSIONAL BANK SERVICES, INC.
April 14, 1998
Board of Directors
Peoples Bank
601 Highway 46 South
Dickson, Tennessee 37055
Dear Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial perspective, to the common shareholders of Peoples
Bank, Dickson, Tennessee (the "Company") of the proposed merger of the Company
with First American Corporation, Nashville, Tennessee ("FATN"). In the proposed
merger, Company shareholders will receive an aggregate of 925,000 FATN common
shares for all 250,000 Company common shares outstanding as further defined in
the Agreement and Plan of Merger between FATN and the Company (the "Agreement").
On April 13, 1998, the proposed consideration to be received represents an
aggregate value of $46,795,750 or $187.18 per Company common share based on the
average of the bid / ask price for FATN common stock of $50.59 as quoted on the
National Association of Securities Dealers Automated Quotation System.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and
as part of its investment banking business is continually engaged in reviewing
the fairness, from a financial perspective, of bank acquisition transactions and
in the valuation of banks and other businesses and their securities in
connection with mergers, acquisitions, estate settlements and other purposes. We
are independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of
the historic performance of the Company:(i) December 31, 1997 Consolidated
Reports of Condition and Income filed by the Company with the FDIC; (ii)
December 31, 1997 and 1996 audited annual reports of the Company; and (iii)
December 31, 1997 Uniform Bank Performance Report of the Company. We have
reviewed and tabulated statistical data regarding the loan portfolio, securities
portfolio and other performance ratios and statistics. Financial projections
were prepared and analyzed as well as other financial studies, analyses and
investigations as deemed relevant for the purposes of this opinion. In review of
the aforementioned information, we have taken into account our assessment of
general market and financial conditions, our experience in other Board of
Directors transactions, and our knowledge of the banking industry generally. We
have also taken into consideration other offers received by the Company.
We have not compiled, reviewed or audited the financial statements of
the Company or FATN, nor have we independently verified any of the information
reviewed; we have relied upon such information as being complete and accurate in
all material respects. We have not made independent evaluation of the assets of
the Company or FATN.
Based on the foregoing and all other factors deemed relevant, it is our
opinion as investment bankers, that, as of the date hereof, the consideration
proposed to be received by the shareholders of the Company under the Agreement
is fair and equitable from a financial perspective.
Very truly yours,
/s/ Professional Bank Services, Inc.
Professional Bank Services, Inc.
B-1
153
APPENDIX B
August 24, 1998
Board of Directors
Peoples Bank
601 Highway 46 South
Dickson, Tennessee 37055
Dear Members of the Board:
To our knowledge, nothing has occurred since the issuance of our
Fairness Opinion (the "Opinion") to the common shareholders of Peoples Bank,
Dickson, Tennessee (the "Company") dated April 14, 1998, that would cause us to
alter or rescind the Opinion, and the Opinion is affirmed as of this date. The
Opinion is related to the fairness from a financial point of view, to the common
shareholders of the Company, regarding the proposed transaction outlined in the
Agreement and Plan of Merger between First American Corporation, Nashville,
Tennessee and the Company.
Very truly yours,
/s/ Professional Bank Services, Inc.
Professional Bank Services, Inc.
B-2
154
APPENDIX C
CHAPTER 23 OF THE TENNESSEE BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
TENNESSEE CODE ANNOTATED
TITLE 48. CORPORATIONS AND ASSOCIATIONS
CHAPTER 23. BUSINESS CORPORATIONS-- DISSENTERS' RIGHTS
PART 1-- RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SS. 48-23-101. DEFINITIONS
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss.48-23-102 and who exercises that right when and in the
manner required by part 2 of this chapter;
(4) "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;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "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; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 48-23-102. RIGHT TO DISSENT
(a) A shareholder is entitled to dissent from, and obtain payment of
the fair value of the shareholder's shares in the event of, any of the following
corporate actions:
(1) Consummation of a plan of merger to which the corporation
is a party:
(A) If shareholder approval is required for the
merger by ss.48-21-104 or the charter and the shareholder is entitled to vote on
the merger; or
(B) If the corporation is a subsidiary that is merged
with its parent under ss. 48-21-105;
(2) 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;
(3) 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;
(4) An amendment of the charter that materially and adversely
affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the
shares;
(B) 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;
C-1
155
(C) Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to
vote on any matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the
shareholder to a fraction of a share, if the fractional share is to be acquired
for cash under ss. 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote
to the extent the charter, 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.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder
may dissent as to any shares of a security which, as of the date of the
effectuation of the transaction which would otherwise give rise to dissenters'
rights, is listed on an exchange registered under ss. 6 of the Securities
Exchange Act of 1934, as amended, or is a "national market system security," as
defined in rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
SS. 48-23-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the record shareholder asserts dissenters' rights.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the partial dissenter dissents and the partial dissenter's
other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
of any one (1) or more classes held on the beneficial shareholder's behalf only
if the beneficial shareholder:
(1) 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
(2) Does so with respect to all shares of the same class of
which the person is the beneficial shareholder or over which the person has
power to direct the vote.
SS. 48-23-201. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 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 chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102
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 ss. 48-23-203.
(c) A corporation's failure to give notice pursuant to this section
will not invalidate the corporate action.
SS. 48-23-202. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken,
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed
action. No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provide the notice required by ss.
48-23-201.
C-2
156
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this chapter.
SS. 48-23-203. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days
after the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date
of the first announcement to news media or to shareholders of the principal
terms of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person asserting dissenters'
rights acquired beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than one (1) nor more than two (2)
months after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the
corporation has not previously sent a copy of this chapter to the shareholder
pursuant to ss.48-23-201.
SS. 48-23-204. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in ss. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to ss. 48-23-203(b)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits the shareholder's
share certificates under subsection (a) retains all other rights of a
shareholder until these rights are canceled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
SS. 48-23-205. SHARE RESTRICTIONS
(a) 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 effectuated or the restrictions released under ss.
48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed corporate
action.
SS. 48-23-206. PAYMENT
(a) Except as provided in ss. 48-23-208, as soon as the proposed
corporate action is effectuated, or upon receipt of a payment demand, whichever
is later, the corporation shall pay each dissenter who complied with ss.
48-23-204 the amount the corporation estimates to be the fair value of each
dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) 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;
C-3
157
(2) A statement of the corporation's estimate of the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
under ss. 48-23-209; and
(5) A copy of this chapter if the corporation has not
previously sent a copy of this chapter to the shareholder pursuant
to ss.48-23-201 or ss.48-23-203.
SS. 48-23-207. FAILURE TO TAKE ACTION
(a) If the corporation does not effectuate the proposed action that
gave rise to the dissenters' rights within two (2) months 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.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
SS. 48-23-208. AFTER-ACQUIRED SHARES
(a) A corporation may elect to withhold payment required by ss.
48-23-206 from a dissenter unless the dissenter 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 principal terms of
the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating 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 the
dissenter's 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 ss.
48-23-209.
SS. 48-23-209. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER
(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and amount
of interest due, and demand payment of the dissenter's estimate (less any
payment under ss. 48-23-206), or reject the corporation's offer under ss.
48-23-208 and demand payment of the fair value of the dissenter's shares and
interest due, if:
(1) The dissenter believes that the amount paid
under ss.48-23-206 or offered under ss.48-23-208 is less than the fair value of
the dissenter's shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss.48-23-206
within two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed
action, does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after the
date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection (a) within one (1) month after the
corporation made or offered payment for the dissenter's shares.
SS. 48-23-301. COURT ACTION
(a) If a demand for payment under ss. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months 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 two-month period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the 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.
C-4
158
(c) 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 must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is 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 are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair
value of the dissenter's shares, plus accrued interest, exceeds the amount paid
by the corporation; or
(2) For the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to withhold
payment under ss. 48-23-208.
SS. 48-23-302. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under ss. 48-23-301
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 ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable
against:
(1) The corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of part 2 of this chapter; or
(2) 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 chapter.
(c) 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 to the dissenters who were benefited.
C-5