1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 6711 62-079975
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0700
(615) 748-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------------
MARY NEIL PRICE, ESQ., GENERAL COUNSEL
FIRST AMERICAN CORPORATION
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0721
(615) 748-2049
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------------
COPIES TO:
STEVEN KAPLAN, ESQ. RALPH F. MACDONALD, III, ESQ.
ARNOLD & PORTER ALSTON & BIRD LLP
555 TWELFTH STREET, N.W. ONE ATLANTIC CENTER
WASHINGTON, D.C. 20004-1202 1201 WEST PEACHTREE STREET
(202) 942-5998 ATLANTA, GA 30309
(404) 881-7582
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(2) PRICE PER SHARE(3) PRICE(3) REGISTRATION FEE(4)
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock(1)................. 6,425,000 $16.62 $106,810,758 $29,693
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
(1) Also includes associated Rights to purchase shares of the Registrant's
Series A Junior preferred stock, which Rights are not currently separable
from shares of Common Stock and are not currently exercisable. See
"COMPARATIVE RIGHTS OF SHAREHOLDERS OF FIRST AMERICAN AND
PIONEER -- Shareholder Rights Plan."
(2) Based upon the maximum number of shares that may be issued upon consummation
of the transaction described herein.
(3) Estimated solely for the purpose of computing the registration fee. Computed
in accordance with Rule 457(f)(2) under the Securities Act of 1933, as
amended, on the basis of the book value of $27.43 per share of common stock,
par value $.01 per share, of Pioneer Bancshares, Inc., as of June 30, 1998.
The proposed maximum aggregate offering price per share has been determined
by dividing the proposed maximum aggregate offering price by the number of
shares being registered.
(4) In accordance with Rule 457(b), the total registration fee of $29,693 has
been reduced by $20,627, which was previously paid by the Registrant on
September 24, 1998 upon filing under the Securities Exchange Act of 1934, as
amended, of preliminary copies of proxy materials of Pioneer Bancshares,
Inc.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
(PIONEER LOGO)
October , 1998
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting and Prospectus/Proxy
Statement for the Special Meeting of Shareholders of Pioneer Bancshares, Inc.
("Pioneer" or the "Company") to be held on November 19, 1998 at 9:00 a.m., local
time, at Pioneer's main office at 801 Broad Street, Chattanooga, Tennessee (the
"Special Meeting").
At the Special Meeting you will be asked to consider and vote on a proposal to
approve and adopt an Agreement and Plan of Merger (the "Agreement") which
provides for the merger (the "Merger") of Pioneer with and into First American
Corporation ("First American"), a Tennessee corporation. Upon consummation of
the Merger, each share of Pioneer Common Stock, par value $.01 per share
("Pioneer Common Stock") outstanding immediately prior to the Merger will be
converted into the right to receive 1.65 shares of common stock of First
American, par value $2.50 per share ("First American Common Stock"). We
anticipate that the maximum number of shares of First American Common Stock to
be issued to holders of Pioneer Common Stock in connection with the Merger will
be 6,425,000. 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.l 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 October , 1998 was $ per share, as reported in
The Wall Street Journal. Pioneer Common Stock is neither listed nor publicly
traded on any exchange or active market.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED MERGER AND
RECOMMENDS A VOTE "FOR" THE AGREEMENT. The proposed Merger has been approved by
the Pioneer Board of Directors (the "Pioneer Board") as being in the best
interests of Pioneer and its shareholders. The Pioneer Board reached this
decision after careful consideration of a number of factors. The enclosed
Prospectus/Proxy Statement contains more detailed information concerning the
Pioneer Board's decision and the Merger. We urge you to consider it carefully.
Approval of the Merger is subject to certain conditions, including (i) the
approval of the Merger by various regulatory agencies and (ii) the affirmative
vote of the holders of a majority of Pioneer Common Stock entitled to vote
thereon in favor of the Agreement. Pioneer and First American intend to
consummate the Merger on November 20, 1998 assuming satisfaction or waiver of
all closing conditions.
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. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES AT THIS TIME.
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,
(RODGER B. HOLLEY SIG)
Rodger B. Holley
Chairman of the Board, 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.
This Prospectus/Proxy Statement is dated October , 1998 and
was first mailed to shareholders on or about October , 1998.
3
PIONEER BANCSHARES, INC.
801 BROAD STREET
CHATTANOOGA, TN 37402
(423) 755-0000
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON NOVEMBER 19, 1998
To the Shareholders of
Pioneer Bancshares, Inc.
NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders of Pioneer
Bancshares, Inc. ("Pioneer") will be held at Pioneer's main office at 801 Broad
Street, Chattanooga, Tennessee on November 19, 1998 at 9:00 a.m., local time
(the "Special Meeting"), for the purpose of considering and voting upon the
following matters:
1. To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger (the "Agreement"), dated as of May 28, 1998, between
Pioneer and First American Corporation ("First American"), a copy of
which is included as Appendix A to the accompanying Prospectus/Proxy
Statement and incorporated by reference herein, pursuant to which, among
other things, (i) Pioneer will be merged with and into First American
(the "Merger") and each outstanding share of common stock of Pioneer,
par value $.01 per share ("Pioneer Common Stock"), will be converted
into and exchanged for the right to receive 1.65 shares of common stock
of First American, par value $2.50 per share, plus an associated right
to purchase shares of First American Series A Junior Preferred Stock,
and cash in lieu of any fractional share determined in accordance with
the terms of the Agreement.
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 Pioneer Common Stock at the close of business on
October 16, 1998, are entitled to notice of and to vote at the Special Meeting
or any adjournments or postponements of the Special Meeting. A list of Pioneer
shareholders entitled to vote at the Special Meeting will be available for
inspection for any purpose germane to the Special Meeting and will be available
for examination during ordinary business hours, at the principal executive
offices of Pioneer, located at 801 Broad Street, Chattanooga, Tennessee, for ten
days prior to 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.
Pursuant to Section 262 of the Delaware General Corporation Law (the "DGCL"),
holders of Pioneer Common Stock who comply with the requirements of Section 262
will have the right to dissent from the Merger and to obtain payment of the fair
value of their shares. A copy of Section 262 of the DGCL is attached as Appendix
E 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
(Ralph M. West Sig)
Secretary
October , 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 PIONEER UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE AGREEMENT.
4
QUESTIONS AND ANSWERS
ABOUT THE FIRST AMERICAN/PIONEER TRANSACTION
Q: WHY IS PIONEER CHOOSING TO COMBINE WITH FIRST AMERICAN?
A: We have approved the Merger based upon our assessment of the competitive and
regulatory environment for financial institutions generally, and Pioneer's
opportunities and prospects as an independent entity. Combining with First
American is expected to provide better service to our customers and markets.
In addition, Pioneer's financial advisors have advised that the exchange
ratio of 1.65 shares of First American Common Stock for each share of Pioneer
Common Stock to be received by Pioneer's shareholders in connection with the
Merger is fair, from a financial point of view, to the holders of Pioneer
Common Stock. The nonfinancial terms of the Merger, including the expected
treatment of the Merger as a tax-free exchange of Pioneer Common Stock for
First American Common Stock for federal income tax purposes (except in
respect of cash received for Pioneer Common Stock), are also favorable to
Pioneer's shareholders. The Merger will enable Pioneer's shareholders to
exchange their shares of common stock for stock in a larger and more
diversified entity, the stock of which is more widely held and more actively
traded. Based upon these and other factors, we believe that combining with
First American is in the best interests of Pioneer and Pioneer's
shareholders.
Q: AS A PIONEER SHAREHOLDER, WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive 1.65 shares of First American Common Stock in exchange for
each share of Pioneer Common Stock you own, assuming that you do not exercise
statutory dissenters' rights. However, First American will not issue any
fractional shares in the Merger. 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 Pioneer Common Stock, upon completion of
the Merger you'll have the right to receive one share of First American
Common Stock and a check for the market value of 0.65 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 1.65. Since the market value of First American
Common Stock will fluctuate before and after the closing of the Merger, the
value of the stock Pioneer shareholders will receive in the Merger will
fluctuate as well and could decrease.
Q: WHAT HAPPENS TO MY DIVIDENDS IN THE FUTURE?
A: In the periods following 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 cannot 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.
Under the terms of the Agreement, prior to the Merger Pioneer may declare and
pay regular quarterly dividends on the shares of Pioneer Common Stock in
accordance with past practice. Pioneer paid a quarterly cash dividend of $.25
per share to its shareholders in the first, second and third quarters of this
year.
First American has declared a dividend of $.25 per share payable to
shareholders of record as of November 20, 1998. Assuming the Merger becomes
effective on November 20, 1998, this means that a Pioneer shareholder would
receive a dividend of $.4125 for each share of Pioneer
2
5
Common Stock that is exchanged for First American Common Stock in the Merger.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the Merger on November 20, 1998 following the special
meeting of Pioneer's shareholders. The Merger still requires the approval of
the Pioneer shareholders.
Q: AS A PIONEER 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 Pioneer Common Stock for shares of First American Common Stock pursuant to
the Merger generally will not cause you to recognize any gain or loss. You
will, however, have to recognize gain or loss in connection with any cash
received instead of a fractional share interest of First American Common
Stock. The tax treatment described in the preceding sentences will not apply
to you if you dissent from the Merger under Delaware law or if your
individual circumstances or tax status causes you to be subject to special
treatment under U.S. federal income tax laws.
A more detailed review of these and certain other U.S. federal income tax
consequences of the Merger is provided at page [ ] of this document.
Q: AS A PIONEER SHAREHOLDER, DO I HAVE TO ACCEPT FIRST AMERICAN COMMON STOCK IN
EXCHANGE FOR MY PIONEER SHARES IF THE MERGER IS APPROVED?
A: No. If you are a Pioneer shareholder and you follow the procedures prescribed
by Delaware law, including refraining from voting for the Merger Agreement,
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
will not receive First American Common Stock. The fair value of your Pioneer
Common Stock, determined in the manner prescribed by Delaware law, will be
paid to you in cash. For a more complete description of these dissenters'
rights, see page [ ] of this document.
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 do not indicate how you want to vote, your proxy will be
counted as a vote in favor of the Merger. If you do not vote on the Merger or
if you abstain, the effect will be a vote against the Merger.
The Special Meeting will take place on November 20, 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 the Special Meeting and either
change your vote or attend the Special Meeting and vote in person. We provide
more detailed instructions about voting on page [ ].
Delaware 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
execute a proxy card and desire to effect your appraisal rights, you must
either mark the proxy card "Abstain," or 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 Pioneer 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 [ ].
3
6
THE BOARD OF DIRECTORS OF PIONEER 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: No. After the Merger is completed, First American will send you written
instructions on how to exchange your Pioneer Common Stock for First American
Common Stock.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the Merger, you should contact:
PIONEER BANCSHARES, INC.
801 Broad Street
Chattanooga, TN 37402
Attention: Gregory B. Jones
Phone Number: (423) 755-0000
4
7
TABLE OF CONTENTS
PAGE
-----
SUMMARY
The Companies...................... 1
First American Corporation....... 1
Pioneer Bancshares, Inc. ........ 1
Our Reason for the Merger.......... 1
The Shareholders' Meeting.......... 1
Pioneer's Recommendation to
Shareholders..................... 1
Record Date; Voting Power.......... 1
Vote Required...................... 1
The Merger......................... 2
The Exchange Ratio............... 2
Conditions to Completion of the
Merger........................ 2
Termination of the Agreement..... 2
Federal Income Tax
Consequences.................. 3
Accounting Treatment............. 3
Opinions of Pioneer's Financial
Advisors...................... 3
Board of Directors and Management
of First American Following
the Merger.................... 3
Interests of Other Persons in the
Merger That are Different from
Yours......................... 3
Dissenters' Appraisal Rights..... 4
Regulatory Approvals............. 5
First American's Option to
Purchase Pioneer Common
Stock......................... 5
Comparative Per Share Market
Price Information............. 5
Forward-Looking Statements May
Prove Inaccurate.............. 5
Comparative Unaudited Per Share
Data............................. 7
Selected Financial Data............ 9
Selected Historical Financial
Data of First American........ 9
PAGE
-----
Selected Historical Financial Data
of Pioneer....................... 11
THE PIONEER SPECIAL MEETING
General............................ 12
Proxies............................ 12
Solicitation of Proxies............ 12
Record Date and Voting Rights...... 13
Dissenters' Rights................. 14
Recommendation of the Pioneer
Board............................ 14
THE MERGER
Description of the Merger.......... 14
Background of the Merger........... 16
Reasons of Pioneer for the
Merger........................... 18
Reasons of First American for the
Merger........................... 19
Opinion of Pioneer's Financial
Advisors......................... 20
Opinion of Keefe, Bruyette &
Woods, Inc. .................. 20
Opinion of The Carson Medlin
Company....................... 24
Valuation Methodologies.......... 26
The Effective Time................. 30
Exchange of Certificates........... 30
Conduct of Business Prior to the
Merger and Other Covenants....... 31
Conditions to the Merger........... 32
Termination of the Agreement....... 33
Amendment; Waiver; Expenses........ 34
Certain Federal Income Tax
Consequences..................... 35
Stock Option Agreement............. 36
Interests of Certain Persons in the
Merger........................... 37
Accounting Treatment............... 41
Regulatory Matters................. 41
Restrictions on Resales by
Affiliates....................... 42
i
8
PAGE
-----
INFORMATION ABOUT FIRST AMERICAN
AND PIONEER
Information About First American... 43
General.......................... 43
Recent Acquisitions.............. 43
Information About Pioneer.......... 44
Management and Operations After the
Merger........................... 44
Price Range of Common Stock and
Dividends........................ 44
Market Prices.................... 44
Dividends........................ 46
Recent Developments................ 47
Supervision and Regulation of First
American and Pioneer............. 48
General.......................... 48
Capital and Operational
Requirements.................. 50
Enforcement Powers of the Banking
Agencies...................... 52
Comparative Rights of Shareholders
of First American and Pioneer.... 57
Board of Directors............... 57
Business Combination
Provisions.................... 58
Shareholder Rights Plan.......... 59
Shareholder Meetings............. 63
Dissenters' Appraisal Rights..... 63
Consideration of Non-Shareholder
Interests by Board of
Directors..................... 63
Certain Purchases of the
Corporation's Securities...... 64
Indemnification.................. 64
Amendments to Articles of
Incorporation and Bylaws...... 66
ADDITIONAL INFORMATION ABOUT FIRST
AMERICAN
Business and Properties.......... 67
Legal Proceedings................ 70
PAGE
-----
Management....................... 71
Directors and Executive
Officers.................... 71
Executive Compensation........ 80
Compensation of Directors..... 83
Certain Relationships and Related
Transactions.................. 85
Security Ownership of
Management.................... 89
First American Capital Stock..... 92
First American Common Stock... 92
First American Preferred
Stock....................... 93
First American Management's
Discussion and Analysis of
Financial Condition and Results
of Operations.................... 94
Comparison of Six Months Ended
June 30, 1998 and 1997........ 94
Comparison of Years Ended
December 31, 1997, 1996 and
1995.......................... 108
ADDITIONAL INFORMATION ABOUT
PIONEER
Business......................... 143
Properties....................... 149
Legal Proceedings................ 150
Voting Securities and Principal
Shareholders.................. 150
Pioneer Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 154
Interim Periods Ended June 30,
1998 and 1997................. 154
Years Ended December 31, 1997,
1996 and 1995................. 169
ii
9
PAGE
-----
ADDITIONAL INFORMATION
Dissenters' Appraisal Rights....... 201
Legal Opinion...................... 204
Experts............................ 204
Other Matters...................... 204
Where You Can Find More
Information...................... 205
Cautionary Statement Concerning
Forward-Looking Information...... 206
Index to Financial Statements...... F-1
APPENDICES
APPENDIX A Agreement and Plan of
Merger........................... A-1
PAGE
-----
APPENDIX B Stock Option
Agreement........................ B-1
APPENDIX C Opinion of Keefe,
Bruyette & Woods, Inc. .......... C-1
APPENDIX D Opinion of The Carson
Medlin Company................... D-1
APPENDIX E Section 262 of the
Delaware General Corporation
Law.............................. E-1
iii
10
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 [ ]). 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 )
FIRST AMERICAN CORPORATION
First American Center
Nashville, Tennessee 37237-0700
(615) 748-2000
First American is incorporated in Tennessee and is a registered bank holding
company. We provide banking and other financial services. Our 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, our total assets were about $19.1 billion, our deposits
were about $13.6 billion and shareholders' equity was about $1.6 billion.
PIONEER BANCSHARES, INC.
801 Broad Street
Chattanooga, TN 37402
(423) 755-0000
Pioneer is incorporated in Delaware and is a registered bank holding company.
Through its bank subsidiaries, Pioneer Bank and Valley Bank, and its federal
savings bank subsidiary, Pioneer Bank f.s.b., Pioneer provides banking services
through 34 offices in southeast Tennessee and northwest Georgia. As of June 30,
1998, Pioneer's total assets were about $1.0 billion, its deposits were about
$804.2 million and its shareholders' equity was about $103.1 million.
OUR REASONS FOR THE MERGER (PAGE )
The Pioneer Board formed a Strategic Planning Committee in 1996 to explore
methods of increasing shareholder value and adopted a long-range strategic plan.
Between April 1, 1998 and May 26, 1998, the Pioneer Board, together with its
legal and financial advisors, considered numerous acquisition proposals. The
Pioneer Board approved the First American offer on May 28, 1998.
To review the background of, and reasons for, the Merger in greater detail,
please see pages [ through .]
THE SHAREHOLDERS' MEETING (PAGE )
The Pioneer Special Meeting will be held at Pioneer's main office at 801 Broad
Street, Chattanooga, Tennessee on November 20, 1998 at 9:00 a.m. local time. At
the Special Meeting, Pioneer shareholders will be asked to approve the
Agreement.
PIONEER'S RECOMMENDATION TO SHAREHOLDERS (PAGES AND )
The Pioneer Board believes that the Merger is fair to you and in your best
interest and unanimously recommends that you vote "FOR" the proposal to approve
the Agreement.
RECORD DATE; VOTING POWER
(PAGES AND )
You can vote at the Special Meeting if you owned Pioneer Common Stock as of the
close of business on October 16, 1998, the record date. On that date, 3,759,912
shares of Pioneer 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
Pioneer Common Stock you owned on October 16, 1998.
VOTE REQUIRED (PAGES AND )
In order for the Agreement to be approved, Pioneer shareholders holding a
majority of the outstanding shares of Pioneer Common Stock on the record date
must vote in favor of the Agreement.
1
11
All together, the directors and officers of Pioneer can cast approximately
18.49% of the votes entitled to be cast at the Special Meeting. We expect that
they will vote all of their shares in favor of the Merger.
THE MERGER (PAGE )
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 )
In this Merger, you will receive 1.65 shares of First American Common Stock in
exchange for each share of Pioneer Common Stock you own if you do not exercise
statutory dissenters' rights. However, First American will not 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.
The exchange ratio is fixed at 1.65. Since the market value of First American
Common Stock will fluctuate before and after the closing of the Merger, the
value of the stock Pioneer shareholders will receive in the Merger will
fluctuate as well and could decrease.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE )
The completion of the Merger depends on a number of conditions being met,
including the following:
1. Pioneer shareholders approving the Merger;
2. The NYSE approving for listing the shares First American will issue to
Pioneer shareholders in 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 from the law firm of Arnold & Porter that the U.S.
federal income tax treatment of Pioneer shareholders, Pioneer and First
American in the Merger will generally be as we have 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 do so. We cannot be certain whether or when any of the
conditions we have listed will be satisfied (or waived, where permissible), or
that the Merger will be completed.
TERMINATION OF THE AGREEMENT (PAGE )
First American and Pioneer can mutually agree at any time to terminate the
Agreement without completing the Merger, even if the Pioneer shareholders have
already voted to approve it. Also, First American can terminate the Agreement if
the Pioneer Board fails to reaffirm its recommendation that Pioneer shareholders
approve the Agreement.
Either First American or Pioneer can terminate the Agreement in the following
circumstances:
1. after a final decision by a governmental authority to prohibit the Merger, or
after the withdrawal of any governmental approval required to complete the
Merger;
2. if the Merger is not 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 Pioneer shareholders do not approve the Agreement; or
4. if the other party violates, in a significant way, any of its
representations, warranties or obligations under the Agreement.
2
12
Generally, a party can only terminate the Agreement in one of the preceding four
situations if that party is not in violation of the Agreement or if its
violations of the Agreement are not the cause of the event permitting
termination.
FEDERAL INCOME TAX CONSEQUENCES (PAGE )
We have structured the transaction with the intent that Pioneer's shareholders
generally will not recognize any gain or loss for U.S. federal income tax
purposes in the Merger, except in connection with cash received by Pioneer
shareholders instead of a fractional share of First American Common Stock or
following the exercise of dissenters' rights. We have conditioned the
consummation of the Merger on the receipt of a legal opinion that this will be
the case. This opinion, however, will not bind the Internal Revenue Service,
which could take a different view.
The tax treatment described above may not apply to certain Pioneer shareholders,
including the types of Pioneer shareholders discussed on page [ ] and will not
apply to any Pioneer shareholder who dissents from the Merger under Delaware
law. Determining the actual tax consequences of the Merger to you can be
complicated. Those consequences will depend on your specific situation and many
variables which are not within our control. You should consult your own tax
advisor for a full understanding of the Merger's tax consequences.
ACCOUNTING TREATMENT (PAGE )
First American expects the Merger to qualify as a pooling-of-interests, which
means that, for accounting and financial reporting purposes, we will treat First
American and Pioneer as if they had always been one company. We have conditioned
the Merger on the receipt of a letter from First American's independent
certified public accountants that the Merger will qualify as a
pooling-of-interests and a letter from each of First American's and Pioneer's
independent certified public accountants, indicating that they have examined
certain financial information with respect to First American and Pioneer,
respectively (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.
OPINIONS OF PIONEER'S FINANCIAL ADVISORS (PAGES AND )
In deciding to approve the Merger, the Pioneer Board considered the opinion of
its financial advisors, Keefe, Bruyette & Woods, Inc. ("KEEFE BRUYETTE") and The
Carson Medlin Company ("CARSON MEDLIN"), that as of the date of the opinions,
the Merger was fair from a financial point of view to Pioneer's shareholders. We
have attached these opinions as Appendices C and D to this document. You should
read them carefully.
BOARD OF DIRECTORS AND MANAGEMENT OF FIRST AMERICAN FOLLOWING THE MERGER (PAGE
)
The Board of Directors and executive officers of First American immediately
prior to the Merger shall continue to hold such positions following the Merger,
with the following addition: Mr. George M. Clark, III, a director of Pioneer,
who has been selected by First American to be a new member of First American's
Board of Directors as of the effective time of the Merger.
INTERESTS OF OTHER PERSONS IN THE MERGER THAT ARE DIFFERENT FROM YOURS (PAGE )
After the Merger, it is currently anticipated that certain members of Pioneer's
management will be employed by First American National Bank ("FANB"), a national
banking association of which First American is the sole shareholder.
Rodger B. Holley, who is the Chairman, Chief Executive Officer and President and
a director of Pioneer, has been offered an employment agreement with FANB that
would become effective upon the Merger's Effective Time. During the term of his
agreement, Mr. Holley would receive an annual base salary of $290,000 and a
one-time bonus of $87,000 payable on January 15, 1999; Mr. Holley's bonus would
be contingent upon his meeting certain criteria set forth in his agreement.
Subject to the provisions
3
13
of his employment agreement, each of Mr. Holley's options for Pioneer Common
Stock that would have vested in 1998 and 1999 notwithstanding the Merger would
be vested as of January 1, 1999. In addition, at the end of his employment with
FANB, FANB would provide Mr. Holley with title to the automobile he used while
he was employed by Pioneer, at no cost to Mr. Holley.
Ralph M. West, who is an Executive Vice President and Secretary and a director
of Pioneer, has been offered an employment agreement with FANB that would become
effective after the Merger. During the term of his agreement, Mr. West would
receive an annual base salary of $116,987 and would be entitled to receive a
one-time bonus payment of 30% of his base salary amount, payable on January 15,
1999. Larry R. Belk, Kenneth C. Dyer, III and Routon Mathis, the current
President of Valley Bank, President of Pioneer Bank and Executive Vice
President -- Operations of Pioneer, respectively, have been offered employment
agreements with FANB on terms substantially similar to those of Mr. West, except
that Messrs. Belk, Dyer and Mathis would receive annual salaries of $138,565,
$152,470, and $95,395, respectively. The bonus payment of each of these
executives would be contingent on each executive meeting certain criteria set
forth in his respective employment agreement. George M. Clark, III, an Executive
Vice President -- Private Banking and a director of Pioneer, has been offered a
consulting agreement with FANB for a scheduled term beginning on March 1, 1999
and ending on December 31, 2000, pursuant to which he would receive an annual
salary of $83,051 and a signing bonus of $2,000. Reasonable out-of-pocket travel
and business expenses will be reimbursed in accordance with FANB's policies.
FANB and Gregory B. Jones, Pioneer's Chief Financial Officer, are discussing
possible opportunities of mutual interest, and Mr. Jones may be offered an
employment agreement with FANB or one of its affiliates.
FANB intends to continue to honor the employment arrangement (except with
respect to his current position) with James D. Renegar, who is currently the
President of Pioneer Bank, f.s.b. Mr. Renegar currently receives an annual base
salary of $75,000 and fringe benefits valued at $1,380, and his employment
arrangement is scheduled to end in October 2001, unless extended.
In addition, Mr. George M. Clark, III has been selected by First American to be
a new member of the First American Board as of the effective time of the Merger.
FANB further intends to honor Pioneer's consulting agreement with George M.
Clark, Jr., the former Chairman of Pioneer, and a current director of Pioneer
and Pioneer Bank. This agreement provides health insurance for Mr. Clark and his
wife until each of them reaches 65 years of age, and provides Mr. Clark an
office, reasonable travel expenses and certain club fees and dues for a period
ending not later than May 2002.
For a period of 12 months after the Merger, each officer and employee of Pioneer
whose service is terminated will receive severance in accordance with the First
American or Pioneer severance policy, whichever provides the greatest benefits.
Members of the Pioneer Board and Pioneer's officers also are entitled to
indemnification and liability insurance under the Agreement. Members of the
Pioneer Board will also be offered the opportunity to continue as advisory
directors of FANB and will receive a fee for such services comparable to that
received by current FANB advisory directors.
Please refer to pages [ ] through [ ] for more information concerning
employment arrangements and other interests of Pioneer directors and officers in
the Merger.
DISSENTERS' APPRAISAL RIGHTS (PAGE )
Delaware law permits you to dissent from the Merger and to have the fair value
of your Pioneer Common 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 not voting your shares in favor of the Merger. If you dissent
4
14
from the Merger, your shares of Pioneer 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. Such cash payment will be
taxable as discussed on page .
REGULATORY APPROVALS (PAGE )
We cannot complete the Merger unless we obtain the approval of the Board of
Governors of the Federal Reserve System (the "FEDERAL RESERVE BOARD"), the
Commissioner of Financial Institutions of the State of Tennessee (the
"COMMISSIONER") and the Georgia Department of Banking and Finance. All of the
requisite regulatory approvals have been received.
FIRST AMERICAN'S OPTION TO PURCHASE PIONEER COMMON STOCK (PAGE )
As an inducement to First American to enter into the Agreement, Pioneer granted
a stock option to First American to purchase up to 19.9% of the outstanding
Pioneer Common Stock. The exercise price of the option is $67.50 per share.
First American can only exercise the option if certain specific events take
place. These events are generally related to a competing transaction involving a
merger, business combination or other acquisition of Pioneer or its stock or
assets. As of the date of this Prospectus/Proxy Statement, we do not believe any
event of that kind has occurred. The option has the effect of discouraging other
companies that might want to combine with or acquire Pioneer. The option
agreement is attached as Appendix B to this Prospectus/Proxy Statement.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE )
Shares of First American are quoted on the NYSE. Shares of Pioneer are neither
listed nor publicly traded. On May 27, 1998, the last full trading day prior to
the public announcement of the Merger, First American stock closed at $46.25 per
share. On October , 1998, First American stock closed at [$ ] per share.
For the period from January 1, 1996 to the date of this Prospectus/Proxy
Statement, $ per share is the lowest price, and $ per share is the
highest price, at which Pioneer Common Stock has been transferred in a
transaction of which management of Pioneer is aware.
Based on the exchange ratio in the Agreement, which is 1.65, the market value of
the consideration that Pioneer shareholders will receive in the Merger for each
share of Pioneer Common Stock would be $76.31 based on First American's May 27,
1998 closing price and [$ ] based on First American's October , 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 )
Pioneer and First American have made forward-looking statements 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" "intends", "estimates", "plans",
"predicts", 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 possibility that our analyses of these risks and forces could be
incorrect, or that the strategies we have developed to deal with them may not
succeed; and
5
15
4. costs and difficulties associated with the integration of the businesses of
First American with those of Deposit Guaranty Corp. ("Deposit Guaranty"),
Pioneer and other recently acquired companies may be greater than expected,
or benefits associated with these acquisitions may be less than expected.
6
16
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information about each of our respective company's
income per share, dividends per share and book value per share. In connection
with the Merger, First American will exchange 1.65 shares of First American
Common Stock for each of the outstanding shares of Pioneer Common Stock.
The information listed as "equivalent" was obtained by multiplying the
historical amounts of First American by the exchange ratio of 1.65. It is
intended to reflect the fact that Pioneer shareholders will be receiving more
than one share of First American Common Stock for each share of Pioneer Common
Stock exchanged in the Merger.
The information we have set forth for the six-month period ended June 30, 1998
does not indicate what the results will be for the full 1998 fiscal year. See
"ADDITIONAL INFORMATION -- Cautionary Statement Concerning Forward-Looking
Information".
The information in the following table is based on the historical financial
information of First American and Pioneer that has been presented in their prior
Securities and Exchange Commission filings. In the case of First American, this
financial information is set forth on pages F-2 to F-64 of this Prospectus/Proxy
Statement. In the case of Pioneer, this financial information is set forth on
pages F-65 to F-105 of this Prospectus/Proxy Statement.
AT OR FOR THE YEARS ENDED
AT OR FOR THE SIX DECEMBER 31
MONTHS ENDED ---------------------------
JUNE 30, 1998 1997(A) 1996(A) 1995(A)
----------------- ------- ------- -------
(UNAUDITED)
FIRST AMERICAN COMMON STOCK
Income from continuing operations per common
share:
Basic:
Historical.................................. $ 0.77 $ 2.23 $1.96 $1.73
Historical -- exclusive of merger and
integration charges........... $ 1.24 $ 2.23 $1.96 $1.79
Diluted:
Historical.................................. $ 0.75 $ 2.18 $1.93 $1.70
Historical -- exclusive of merger and
integration charges........... $ 1.22 $ 2.18 $1.93 $1.75
Cash dividends declared per common share:........ $ 0.45 $ 0.76 $0.61 $0.53
Book value per common share as of end of
period:........................................ $14.59 $14.56
7
17
AT OR FOR THE YEARS ENDED
AT OR FOR THE SIX DECEMBER 31
MONTHS ENDED ---------------------------
JUNE 30, 1998 1997 1996 1995
----------------- ------- ------- -------
(UNAUDITED)
PIONEER COMMON STOCK
Income from continuing operations per common
share:
Basic:
Historical.................................. $ 1.32 $ 2.62 $2.40 $1.89
Equivalent(b)............................... 1.27 3.68 3.23 2.85
Equivalent -- exclusive of merger and
integration charges(b)........ 2.05 3.68 3.23 2.95
Diluted:
Historical.................................. $ 1.32 $ 2.62 $2.40 $1.89
Equivalent(b)............................... 1.24 3.60 3.18 2.81
Equivalent -- exclusive of merger and
integration charges(b)........ 2.01 3.60 3.18 2.89
Cash dividends declared per common share:
Historical.................................. $ 0.50 $ 0.92 $0.87 $0.83
Equivalent(b)............................... 0.74 1.25 1.01 0.87
Book value per common share as of end of period:
Historical.................................. $27.60 $26.78
Equivalent(b)............................... 24.07 24.02
- -------------------------
(a) First American 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) Pioneer equivalent amounts are computed by multiplying the First American
historical amounts by the exchange ratio of 1.65.
8
18
SELECTED FINANCIAL DATA
The following tables show summarized unaudited historical financial data for
First American and Pioneer. The information we have set forth for the six-month
period ended June 30, 1998 does not 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 and Pioneer. Summary financial information
provided in the following tables should be read in connection with this
historical financial information. For historical financial information of First
American, see pages F-2 to F-64 of this Prospectus/Proxy Statement. For
historical financial information of Pioneer, see pages F-65 to F-105 of this
Prospectus/Proxy Statement. First American's audited historical financial
statements were audited by KPMG Peat Marwick LLP, independent certified public
accountants, and Pioneer's audited historical financial statements were audited
by Joseph Decosimo and Company, LLP, 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 of normal recurring adjustments)
necessary to a fair presentation of such data.
SELECTED HISTORICAL FINANCIAL DATA OF FIRST AMERICAN
AS OF AND 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.................... 355,143 330,323 669,731 571,663 456,631 419,317 419,794
Merger and integration charges.......... 72,043 -- -- -- 7,269 -- --
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
(MILLIONS):
Assets.................................. $ 19,060 $ 17,089 $ 17,834 $ 16,806 $ 15,728 $ 13,417 $ 12,613
Loans, net of unearned discount and net
deferred loan fees.................... 11,100 11,318 11,642 10,633 10,000 8,027 7,085
Deposits................................ 13,642 14,104 13,405 12,848 12,180 10,354 10,082
Long-term debt.......................... 600 417 596 431 422 271 77
Shareholders' equity.................... 1,557 1,474 1,544 1,450 1,335 1,111 1,019
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
9
19
AS OF AND 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)
-------- -------- -------- -------- -------- -------- --------
Income per share exclusive of merger and
integration charges
Basic................................... 1.24 1.06 2.23 1.96 1.79 1.67 1.77
Diluted................................. 1.22 1.04 2.18 1.93 1.76 1.64 1.75
Cash dividends
declared(b)........................... 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 Corp.,
effective May 1, 1998, accounted for using the pooling-of-interests method
of accounting.
(b) Cash dividends declared represents historical dividends declared by First
American without any effect given to the acquisition of Deposit Guaranty
Corp.
10
20
SELECTED HISTORICAL FINANCIAL DATA OF PIONEER
AS OF AND 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.................... $ 20,409 $ 17,366 $ 37,037 $ 30,709 $ 25,991 $ 25,295 $ 24,324
Provision for loan losses.............. 2,275 1,621 3,609 1,709 619 1,457 941
Non-interest income.................... 5,629 4,291 9,872 8,178 6,982 6,772 6,301
Non-interest expense................... 16,393 13,709 29,373 25,739 22,848 19,472 18,825
Income tax expense..................... 2,440 1,871 4,165 3,054 2,424 3,079 3,062
---------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
changes in accounting principles, net
of tax............................... 4,930 4,456 9,762 8,997 7,082 8,059 7,797
Cumulative effect of changes in
accounting principles, net of tax.... -- -- -- -- -- -- 1,297
---------- -------- -------- -------- -------- -------- --------
Net income............................. $ 4,930 $ 4,456 $ 9,762 $ 8,997 $ 7,082 $ 8,059 $ 9,094
---------- -------- -------- -------- -------- -------- --------
END OF PERIOD BALANCE SHEET ITEMS
(THOUSANDS):
Assets................................. $1,004,551 $956,850 $956,890 $867,240 $799,268 $695,543 $632,554
Loans, net of unearned interest........ 700,435 591,873 649,758 523,253 421,503 335,910 287,034
Deposits............................... 804,213 742,180 748,421 692,567 662,095 575,249 535,620
Long-term debt......................... 20,000 28,000 38,000 10,000
Shareholders' equity................... 103,124 96.205 99,916 93,923 87,625 77,905 79,193
PER SHARE DATA:
Income per share:
Basic................................ $ 1.32 $ 1.19 $ 2.62 $ 2.40 $ 1.89 $ 2.15 $ 2.43
Diluted.............................. 1.32 1.19 2.62 2.40 1.89 2.15 2.43
Cash dividends declared................ .50 .46 .92 .87 .83 .80 .76
Book value, end of period.............. 27.60 25.76 26.78 25.08 23.36 20.72 21.06
SHARES OUTSTANDING (THOUSANDS):
Basic -- Average..................... 3,736 3,734 3,730 3,745 3,750 3,760 3,760
Diluted -- Average................... 3,738 3,734 3,732 3,745 3,750 3,760 3,760
End of period........................ 3,736 3,734 3,730 3,745 3,750 3,760 3,760
11
21
THE PIONEER SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is first being mailed to the holders (the
"PIONEER SHAREHOLDERS") of shares of common stock, par value $.01 ("PIONEER
COMMON STOCK"), of Pioneer Bancshares, Inc. ("PIONEER" or the "COMPANY") on or
about October [ ], 1998, and is accompanied by the Notice of Special Meeting
and a form of proxy that is solicited by the Board of Directors of Pioneer (the
"PIONEER BOARD") for use at the special meeting of Pioneer Shareholders to be
held on November 19, 1998, at 9:00 a.m., local time, at Pioneer's main office at
801 Broad Street, Chattanooga, Tennessee, and at any adjournments or
postponements thereof (the "SPECIAL MEETING"). At the Special Meeting, Pioneer
Shareholders will consider and vote upon a proposal to approve the proposed
merger (the "MERGER") of Pioneer with and into First American Corporation
("FIRST AMERICAN") as contemplated in the Agreement and Plan of Merger, dated as
of May 28, 1998, by and between Pioneer and First American (the "AGREEMENT").
The Pioneer 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 Merger.
PROXIES
A Pioneer Shareholder may use the accompanying form of proxy if such Pioneer
Shareholder is unable to attend the Special Meeting in person or wishes to have
his or her shares voted by proxy even if such Pioneer Shareholder does attend
the meeting. A Pioneer Shareholder may revoke any proxy given pursuant to this
solicitation by delivering to the Secretary of Pioneer, 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 Pioneer proxies should be addressed to Ralph M. West, Jr., at
Pioneer Bancshares, Inc., 801 Broad Street, Chattanooga, Tennessee 37402. For
such notice of revocation or later proxy to be valid, however, it must actually
be received by Pioneer prior to the vote of the Pioneer 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 Pioneer 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 Pioneer Shareholders will be
borne by Pioneer, except that Pioneer and First American will each bear half of
the expenses associated with the printing and mailing of this Prospectus/Proxy
Statement and the
12
22
registration statement and all filing fees in connection therewith. In addition
to the solicitation of proxies by mail, Pioneer 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. Pioneer will
reimburse such record holders for their reasonable expenses. If necessary,
Pioneer may also use several of its regular employees, who will not be specially
compensated, to solicit proxies from Pioneer Shareholders, either personally or
by telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
The Pioneer Board has fixed October 16, 1998 as the record date (the "PIONEER
RECORD DATE") for the determination of the Pioneer Shareholders entitled to
receive notice of and to vote at the Special Meeting. Accordingly, only Pioneer
Shareholders of record at the close of business on the Pioneer Record Date will
be entitled to notice of and to vote at the Special Meeting. At the close of
business on the Pioneer Record Date, there were 3,759,912 shares of Pioneer
Common Stock entitled to vote at the Special Meeting held by approximately 792
holders of record. The presence, in person or by proxy, of shares of Pioneer
Common Stock representing a majority of the votes entitled to be cast on the
Agreement and the transactions contemplated thereby on the Pioneer Record Date
is necessary to constitute a quorum at the Special Meeting. Each share of
Pioneer Common Stock outstanding on the Pioneer Record Date entitles its holder
to one vote on the Agreement and the transactions contemplated thereby and any
other proposal that may properly come before the Special Meeting.
Pioneer will count shares of Pioneer Common Stock present in person at the
Special Meeting but not voting, and shares of Pioneer 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
Pioneer Common Stock in "street" name for customers who are the beneficial
owners of such shares are prohibited from 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 DELAWARE GENERAL CORPORATION LAW (THE "DGCL"), 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 PIONEER COMMON STOCK, ABSTENTIONS AND BROKER
NON-VOTES WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. ACCORDINGLY, THE PIONEER
BOARD URGES PIONEER SHAREHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID RETURN ENVELOPE.
As of the Pioneer Record Date, approximately 690,623 shares of Pioneer Common
Stock, or approximately 18.49% of the shares entitled to vote at the Special
Meeting, were beneficially owned by directors and executive officers of Pioneer.
It is currently expected that each such director and executive officer of
Pioneer will vote the shares of Pioneer Common Stock beneficially owned by him
or her for approval of the Agreement and the
13
23
transactions contemplated thereby. In addition, as of the Pioneer Record Date,
the bank and trust subsidiaries of First American held no shares of Pioneer
Common Stock.
DISSENTERS' RIGHTS
Under the DGCL, holders of Pioneer Common Stock who vote against the Merger and
who deliver to Pioneer the required written demand and who otherwise comply with
the requirements of the DGCL will be entitled to receive the value of their
shares in cash as determined under the provisions of the DGCL. SUCH RIGHT WILL
BE LOST, HOWEVER, IF THE PROCEDURAL REQUIREMENTS OF THE DGCL ARE NOT FULLY AND
PRECISELY SATISFIED. See "ADDITIONAL INFORMATION -- Dissenters' Appraisal
Rights."
RECOMMENDATION OF THE PIONEER BOARD
The Pioneer Board has unanimously approved the Agreement and the transactions
contemplated thereby. The Pioneer Board believes that the Merger is fair to, and
in the best interests of, Pioneer and the Pioneer Shareholders and unanimously
recommends that the Pioneer Shareholders vote "FOR" approval and adoption of the
Merger and the transactions contemplated thereby. See "THE MERGER -- Reasons of
Pioneer for the Merger."
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"), Pioneer will be
merged with and into First American, with First American as the surviving
corporation. 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 articles of merger
for the Merger (the "ARTICLES OF MERGER") in the offices of the Secretary of
State of the State of Tennessee in accordance with the Tennessee Business
Corporation Act (the "TBCA") and the filing of the certificate of merger for the
Merger (the "Certificate of Merger") in the offices of the Secretary of State of
the State of Delaware in accordance with the DGCL.
It is contemplated that, at or after the consummation of the Merger, Pioneer's
subsidiary banks, Pioneer Bank and Valley Bank, will be merged with and into
First American's national banking association subsidiary, First American
National Bank ("FANB"), and Pioneer's federal savings bank subsidiary, Pioneer
Bank f.s.b., will be merged with and into First American's federal savings bank
subsidiary, First American Federal Savings Bank.
At the Effective Time, automatically by virtue of the Merger and without any
action on the part of any party or Pioneer Shareholder, each share of Pioneer
Common Stock (excluding shares of Pioneer Common Stock with respect to which
dissenters' rights have been properly demanded in accordance with Section 262 of
the DGCL ("DISSENTING SHARES"), or held by Pioneer or by First American or any
of its subsidiaries, in each case,
14
24
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 shall cease to be outstanding and shall be converted into and
exchanged for the right to receive 1.65 (the "EXCHANGE RATIO") shares of common
stock of First American, par value $2.50 per share ("FIRST AMERICAN COMMON
STOCK"), plus associated rights to purchase shares of First American's Series A
Junior Preferred Stock, and cash in lieu of any fractional share (together, 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 due to a stock dividend, stock split, or
similar recapitalization, the Exchange Ratio will be adjusted accordingly.
No fractional shares of First American Common Stock will be issued in connection
with the Merger. In lieu of issuing fractional shares, First American will make
a cash payment (without interest) equal to the fractional part of a share which
a Pioneer shareholder would otherwise receive multiplied by the closing price of
First American Common Stock on the NYSE-Composite Transactions List (as reported
in The Wall Street Journal, or, if not reported thereby, any other authoritative
source selected by First American) on the second trading day immediately
preceding but not including the Effective Time.
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 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 Pioneer 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 Pioneer 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.
In addition, at the Effective Time, all options to purchase shares of Pioneer
Common Stock (each a "PIONEER STOCK OPTION") that have been granted under the
Pioneer Bancshares, Inc. 1994 Long-Term Incentive Plan and the Pioneer 401(k)
and Employee Stock Ownership Plan (together, the "PIONEER STOCK OPTION PLANS")
that are then outstanding will cease to represent rights to acquire shares of
Pioneer Common Stock and will be automatically converted into stock options to
purchase shares of First American Common Stock, but such Pioneer Stock Options
will otherwise remain subject to the terms of the Pioneer Stock Option Plans,
the agreements evidencing grants thereunder and any other agreements between
Pioneer and an optionee, except that from and after the Effective Time (i) the
number of shares of First American Common Stock purchasable upon exercise of
such a Pioneer Stock Option will be equal to the number of shares of Pioneer
Common Stock purchasable under such Pioneer Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio (rounded down to the nearest
whole share), and (ii) the per share exercise price under each such Pioneer
Stock Option will be adjusted by dividing such exercise price by the Exchange
Ratio (rounded up to the nearest cent). Notwithstanding the foregoing, each
Pioneer Stock Option that is an "incentive stock option" will be adjusted as
required by Section 424 of the Internal Revenue Code of 1986, as amended (the
"CODE"), and the regulations promulgated thereunder, so as not to constitute a
modification, extension or renewal of the option, within the meaning of Section
424(h) of the Code. In connection with the conversion of the Pioneer Stock
Options in the Merger, First American will (i) reserve for issuance a sufficient
number shares of First American Common Stock necessary to satisfy First
15
25
American's obligations with respect to the Pioneer Stock Options, and (ii) as
soon as practicable after the Effective Time file a registration statement with
respect to the shares of First American Common Stock subject to such options
under the Securities Act of 1933, as amended (the "SECURITIES ACT"), and use its
reasonable efforts to maintain the effectiveness of the registration statement
(and maintain the current status of the prospectus contained in the registration
statement) for so long as such options remain outstanding.
As of the Effective Time, by virtue of the Merger and without any action on the
part of the Pioneer Shareholders, all shares of Pioneer Common Stock that are
owned by Pioneer or any subsidiary or affiliate of Pioneer 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") or shares held as a
result of debts previously contracted) 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 First American Common Stock that
are owned by Pioneer (other than Trust Account Shares or shares held as a result
of debts previously contracted) 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 Pioneer in accordance with Section 262 of the DGCL.
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 Section 262 of the DGCL, 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 Section 262 of the DGCL, 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."
BACKGROUND OF THE MERGER
Pioneer Bank was founded in 1916, and through 1994 conducted its business from
its main office and branches in the City of Chattanooga and surrounding areas of
Hamilton County, Tennessee. Pioneer Bank formed Pioneer as a bank holding
company in 1992 to increase its corporate flexibility and permit acquisitions.
In June 1995, Pioneer was considering opening a new branch in Marion County,
Tennessee when it was offered an opportunity to acquire three NationsBank
offices and approximately $71 million in deposits in Marion County, with a
market share in excess of 50% of the deposits in that county. Pioneer was the
successful bidder on these branches, and this transaction closed in the Summer
of 1995. During the same year, Pioneer began discussions with Sweetwater Valley
Corp. to acquire Sweetwater Valley Corp. and its subsidiary, Valley Bank in
Sweetwater, Tennessee. Pioneer acquired Valley Bank on December 1, 1995, which
expanded Pioneer's operations into McMinn and Monroe Counties, Tennessee. These
acquisitions were part of an informal strategy to expand Pioneer into contiguous
and complementary markets.
In 1996, the Pioneer Board established a Strategic Planning Committee to look at
acquisitions and other means of expansion and increasing shareholder value, and
otherwise
16
26
to exercise generally all powers of the Pioneer Board between meetings of the
Pioneer Board. The Strategic Planning Committee developed and adopted a long
term strategy to remain independent (the "STRATEGIC PLAN"). This strategy was
approved by the Pioneer Board and remained Pioneer's strategy through Spring
1998. Key elements of the Strategic Plan included expansion north on the
Interstate Highway 75 ("I-75") corridor in Tennessee and south along I-75 into
nearby markets in the State of Georgia. Further expansion into attractive areas
in contiguous markets by de novo branching were also contemplated by the
Strategic Plan.
Pioneer discussed acquisitions with various community banks and thrifts in
northwest Georgia, but none were interested in selling and all remain
independent today. Further discussions were pursued with various financial
institutions in Tennessee in furtherance of the Strategic Plan, but the
potential targets either were not interested in a sale, sought higher prices
than Pioneer believed reasonable, or were already in discussions with third
parties. Pioneer's ability to make acquisitions was further limited because the
increasing premiums sought by sellers were often higher than the Pioneer Board
considered reasonable, and because of the rapid increase in the stock prices of
larger regional bank holding companies competing for acquisitions, and because
Pioneer's common stock had little trading volume and was not listed on any
national securities market or exchange.
Pioneer did expand by establishing new branches in Sequatchie County, Tennessee,
which is west of Chattanooga, and in Meigs County, Tennessee. It also
established a loan production office ("LPO") in Dalton, Georgia, which is about
22 miles south of Chattanooga on I-75. New services were provided in the areas
of securities brokerage and plans for selling insurance were being implemented.
As a result of legal restrictions on branching across state lines, neither of
Pioneer's bank subsidiaries were able to establish the desired Georgia presence.
However, in early 1997, following Congressional action substantially equalizing
the costs of deposit insurance for banks and thrifts, Pioneer determined that it
could branch economically in Georgia by forming a federal savings bank. At the
same time, Congress was considering eliminating the thrift charter, so Pioneer
moved quickly to establish a federal savings bank. In September 1997, Pioneer
Bank, f.s.b. opened offices in East Ridge, Tennessee, and took over the Dalton,
Georgia LPO, and an additional branch was approved for Fort Oglethorpe, Georgia.
During Fall 1997, several members of the Pioneer Board began voicing concerns
regarding the cost of expansion, together with the cost of preparing for the
Year 2000 issue and otherwise upgrading Pioneer's computer and other processing
systems to handle a more diversified product line and to support growth and
customer service. Similar concerns were raised about the costs of possible
acquisitions.
On April 1, 1998, Pioneer received a letter from a large, well regarded regional
bank holding company expressing an interest in a possible acquisition. The
Strategic Planning Committee met the following day and considered, with
Pioneer's financial and legal advisors, possible responses and possible other
capable acquirers. The list of possible acquirers to whom an information package
regarding Pioneer would be sent subject to a confidentiality agreement was
narrowed to four. Ultimately, three of the four potential acquirers that
received the information package submitted bids and on April 15, 1998, the
Pioneer Board met with Pioneer's legal and financial advisors, and voted
unanimously to proceed with negotiating a merger agreement with a North
Carolina-based bank holding company. Following this meeting, various discussions
and meetings were held between
17
27
Pioneer and representatives of Pioneer and the Clark family (the largest
shareholder group of Pioneer) with the North Carolina institution regarding the
possible acquisition.
On or about April 24, 1998, a member of the Clark family requested that a
special committee of outside directors of the Pioneer Board be appointed (the
"SPECIAL COMMITTEE") to consider acquisition proposals from an expanded group of
companies. The Pioneer Board appointed the Special Committee on April 27, and
the Special Committee hired Sullivan & Cromwell, New York, New York, as its
special counsel. At the Special Committee's request, Pioneer's investment
bankers, The Carson Medlin Company ("CARSON MEDLIN"), thereupon delivered
confidential information subject to confidentiality agreements to three
additional potential acquirers, and received three additional bids. These bids
were considered by the Pioneer Board at a meeting on May 7, 1998. At that time,
representatives of the Clark family stated their belief that the process would
be enhanced by adding an additional investment banker and the Pioneer Board
voted to hire Keefe, Bruyette & Woods, Inc. ("KEEFE BRUYETTE") to lead the
effort assisted by Carson Medlin.
Keefe Bruyette then proceeded to contact a number of additional potential
acquirers. In all, 18 potential acquirers were contacted and executed
confidentiality agreements, and eight submitted bids or reaffirmed existing
bids. First American and the North Carolina bank holding company whose bid was
approved by the Pioneer Board on April 15, 1998, (the "NORTH CAROLINA OFFER"),
were the highest bidders, and merger agreements were negotiated with each of
them. After evaluating its possibilities and the factors discussed below under
"-- Reasons of Pioneer for the Merger," and following a series of meetings
between representatives of Pioneer and the Clark family with the North
Carolina-based holding company and First American, the Pioneer Board met with
its financial and legal advisors, and the Special Committee's counsel, and the
Pioneer Board determined that First American had made the best offer at a
meeting held on May 26, 1998. At that meeting, the Pioneer Board voted to pursue
a transaction with First American. The final negotiations with respect to the
Agreement were conducted and the transaction and a definitive Agreement were
further considered with Pioneer's financial and legal advisors and approved
unanimously by all Pioneer Board members in attendance at a meeting on May 28,
1998.
REASONS OF PIONEER FOR THE MERGER
The Pioneer Board believes that the Merger with First American offers
substantial opportunity to its shareholders to obtain a liquid stock which is
readily marketable and is listed on the NYSE and has a history of paying regular
dividends. Both of Pioneer's financial advisors indicated to the Board that
based on various assumptions and projections, that First American's offer and
the North Carolina Offer would provide superior long term value to Pioneer's
shareholders, compared to remaining independent. Based on evaluations and
discussions with its financial advisors, the Board believed that First American
stock provided a good long term value. At the same time, Pioneer's directors and
executive officers were willing to commit to shareholder support agreements and
agreed to vote their shares of Pioneer Common Stock in favor of the transaction.
Certain of such persons have other interests in the transaction. See
"-- Interests of Certain Persons in the Merger" and "-- Background of the
Merger" for additional information.
THE PIONEER BOARD BELIEVES THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF,
PIONEER AND THE PIONEER SHAREHOLDERS. THE PIONEER BOARD UNANIMOUSLY RECOMMENDS
THAT PIONEER SHARE-
18
28
HOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE AGREEMENT AND THE CONSUMMATION
OF THE TRANSACTIONS CONTEMPLATED THEREBY.
REASONS OF FIRST AMERICAN FOR THE MERGER
In reaching its determination to approve the Merger, the board of directors of
First American (the "FIRST AMERICAN BOARD") consulted with First American
management, as well as its legal advisors, and considered the following factors,
which constitute the material factors considered by the First American Board in
approving the Agreement:
(i) First American's business, operations, financial condition, earnings,
and acquisition strategy, including the desirability of achieving an
expanded market presence in southeast Tennessee and northwest
Georgia;
(ii) the current and prospective economic, regulatory and competitive
climate facing banking institutions, including without limitation the
consolidation currently underway in the banking industry and
competition from larger institutions and from nonbank providers of
financial services;
(iii) the presentations by First American management as to (a) the
business operations, asset quality, earnings and financial condition
of Pioneer, and (b) the competitive position of Pioneer;
(iv) the anticipated cost savings, revenue enhancements and other economic
synergies available to the combined institution;
(v) the common philosophies and cultures of First American and Pioneer,
particularly with respect to customer satisfaction, efficiency and
credit quality;
(vi) the Exchange Ratio in the Merger; and
(vii) the terms of the Agreement, including the termination fee provisions
thereof; the regulatory and shareholder approval processes; the
treatment of the Merger as a pooling-of-interests for financial
accounting purposes; and the nature of the Merger as a tax-free
reorganization for federal income tax purposes (see "-- Certain
Federal Income Tax Consequences" and "-- Accounting Treatment").
The foregoing discussion of the information and factors considered by the First
American Board is not intended to be exhaustive but includes all material
factors considered by the First American Board. The First American Board
considered a number of factors which, taken in totality, led to the
determination by the First American Board that the Merger is in the best
interests of First American and its shareholders, customers and communities
served. In reaching its determinations to approve the Agreement, the First
American Board did not assign relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors. After deliberating with respect to the Merger and the other
transactions contemplated by the Agreement, considering, among other things, the
matters discussed above, the First American Board, by unanimous vote of all
directors present, approved the Agreement as being in the best interests of
First American and its shareholders.
19
29
OPINIONS OF PIONEER'S FINANCIAL ADVISORS
OPINION OF KEEFE, BRUYETTE & WOODS, INC.
The Pioneer Board has retained Keefe Bruyette, an independent financial advisor,
to evaluate the Exchange Ratio offered to Pioneer's shareholders by First
American.
On May 28, 1998, at a meeting of the Pioneer Board held to evaluate the proposed
Merger, Keefe Bruyette delivered an oral opinion to the effect that, as of the
date of such opinion and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair, from a financial point of view, to the
holders of Pioneer Common Stock. Keefe Bruyette has delivered to the Pioneer
Board its updated written opinion dated the date of this Prospectus/Proxy
Statement to the effect that as of such date the Exchange Ratio is fair, from a
financial point of view, to the holders of Pioneer Common Stock. In connection
with its opinion dated the date of this Prospectus/Proxy Statement, Keefe
Bruyette updated certain analyses performed in connection with its opinion dated
May 28, 1998, and reviewed the assumptions on which such analyses were based and
the factors considered in connection therewith.
Keefe Bruyette's opinion is addressed to the Pioneer Board and does not
constitute a recommendation as to how any shareholder of Pioneer should vote
with respect to the Agreement. No limitations were imposed by the Pioneer Board
upon Keefe Bruyette with respect to the investigations made or procedures
followed by Keefe Bruyette in rendering its opinions.
THE FULL TEXT OF THE OPINION OF KEEFE BRUYETTE, WHICH SETS FORTH A DESCRIPTION
OF THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS
APPENDIX C AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO
READ THE OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering its opinion, Keefe Bruyette (i) reviewed, among other things, the
Agreement, Annual Reports to Shareholders and Annual Reports on Form 10-K of
Pioneer and Annual Reports on Form 10-K of First American for the four years
ended December 31, 1997, certain interim reports to shareholders and Quarterly
Reports on Form 10-Q of Pioneer and Quarterly Reports on Form 10-Q of First
American and certain internal financial analyses and forecasts for Pioneer
prepared by management; (ii) held discussions with members of senior management
of Pioneer and First American regarding past and current business operations,
regulatory relationships, financial condition and future prospects of the
respective companies; (iii) compared certain financial and stock market
information of Pioneer and First American with similar information for certain
other companies, the securities of which are publicly traded; (iv) reviewed the
financial terms of certain recent business combinations in the banking industry;
and (v) performed such other studies and analyses as it considered appropriate.
The following is a summary of the material financial analyses presented by Keefe
Bruyette to the Pioneer Board on May 28, 1998 in connection with providing its
opinion. For purposes of these analyses, data with respect to First American
reflected First American's acquisition of Deposit Guaranty, effective May 1,
1998.
SUMMARY OF PROPOSAL. Keefe Bruyette calculated multiples which were based on
the assumed per share purchase price of $76.31 (derived by multiplying the
Exchange Ratio of 1.65 by $46.25, the last reported sale price for First
American Common Stock on the last
20
30
day of trading prior to Keefe Bruyette's presentation). Pioneer's March 31, 1998
stated book value was $26.52, tangible book value was $25.09, trailing 12 months
(from April 1, 1997 to March 31, 1998) earnings per share were $2.59, and the
1998 earnings per share estimate (provided by Pioneer) was $2.87. Based on this
data, the price to book value multiple was 2.88 times, the price to tangible
book value multiple was 3.04 times, the price to trailing 12 months earnings per
share was 29.46 times, and the price to 1998 estimated earnings per share was
26.59 times.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Keefe Bruyette reviewed certain
financial data related to comparable nationwide acquisitions of bank holding
companies with seller total asset size between $500 million and $2 billion
announced after December 12, 1997. The following transactions comprised the
group: Mercantile Bancorp/First Financial Bancorp, BancFirst Corp./AmQuest
Financial Corp., Old Kent Financial/First Evergreen Corp., Union Planters
Corp./AMBANC Corp., St. Paul Bancorp/Beverly Bancorporation, First Security
Corp./California State Bank, SouthTrust Corp./American Banks of Florida,
Cullen/Frost Bankers/Overton Bancshares, Union Planters Corp./Merchants
Bancshares, First Midwest Bancorp/Heritage Financial Services, BB&T
Corp./Franklin Bancorp, and Regions Financial/First State Corp.
Keefe Bruyette calculated an average and median of the nationwide groups'
multiples of price to the targets' earnings (trailing 12 months) as 25.09 and
25.30, respectively, compared to a multiple of 29.47 for the Merger; an average
and median premium to the targets' stated book value of 306% and 292%,
respectively, compared to a premium of 288% associated with the Merger; an
average and median premium to the targets' tangible book value of 328% and 326%,
respectively, compared to a premium of 304% associated with the Merger; and an
average and median premium to the targets' deposits (net of tangible equity) of
27.39% and 26.89%, respectively, compared to 38.89% associated with the Merger.
No company or transaction used as a comparison in the above analysis is
identical to Pioneer, First American or the Merger. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
SELECTED PEER GROUP ANALYSIS. Keefe Bruyette compared the financial performance
and market performance of First American to a group of comparable bank holding
companies based on various financial measures of earnings performance, operating
efficiency, capital adequacy and asset quality and various measures of market
performance, including market/book values, price to earnings and dividend yields
to those of selected bank holding companies. For purposes of such analysis, the
financial information used by Keefe Bruyette was as of and for the quarter ended
March 31, 1998. Market price information was as of May 27, 1998. The companies
in the First American peer group were Regions Financial Corp., Summit Bancorp,
Fifth Third Bancorp, Union Planters Corp., Huntington Bancshares Inc., Crestar
Financial Corp., AmSouth Bancorporation, First Tennessee National Corp., Compass
Bancshares, Inc., Star Banc Corp., Synovus Financial Corp., and First Virginia
Banks, Inc. First American was also compared to BB&T Corporation and SouthTrust
Corp. individually.
Keefe Bruyette's analysis showed the following concerning First American's
financial performance: return on assets on an annualized basis was 1.40%,
compared with a group average of 1.51% and median of 1.40%; return on equity on
an annualized basis was
21
31
16.98%, compared with a group average of 17.31% and median of 17.22%; net
interest margin on an annualized basis was 4.18%, compared with a group average
of 4.39% and median of 4.23%; efficiency ratio on an annualized basis was
61.02%, compared with a group average of 54.53% and median of 53.44%; ratio of
equity to total assets was 8.06%, compared with a group average of 8.75% and
median of 8.58%; ratio of tangible equity to total assets was 7.15%, compared
with a group average of 7.11% and median of 7.53%; ratio of loan loss reserve to
nonperforming loans was 745%, compared with a group average of 364% and median
of 360%; ratio of net charge offs to average loans was 0.25%, compared with a
group average of 0.43% and median of 0.44%; ratio of non-performing assets to
loans plus other real estate owned was 0.28%, compared with a group average of
0.55% and median of 0.49%.
Keefe Bruyette's analysis further showed the following concerning First
American's market performance: that First American's price to 1998 estimated
earnings per share multiple was 17.45 times compared to a group average of 20.19
times and median of 18.52 times; price to 1999 estimated earnings per share
multiple was 15.16 times compared to a group average of 17.84 times and median
of 16.92 times; estimated 1998 to 1999 earnings per share growth rate was 15.09%
compared to a group average of 13.04% and median of 12.47%; price to book value
per share was 3.00 times compared to a group average of 3.62 times and median of
3.19 times; price to tangible book value per share was 3.41 times compared to a
group average of 3.95 times and median of 3.55 times; and dividend yield was
1.73% compared to a group average of 2.16% and median of 2.21%. For purposes of
the above calculations, all earnings estimates were based upon the published
estimates of Keefe Bruyette's equity research department.
PRO FORMA DIVIDEND ANALYSIS. Based on the Exchange Ratio of 1.65 and given
First American's announced annualized dividend of $1.00 per share, Pioneer's
1998 dividend per share equivalent would be $1.65, a 65% increase from its
stand-alone 1998 dividend of $1.00.
CONTRIBUTION ANALYSIS. Keefe Bruyette calculated the relative contribution of
Pioneer and First American to the pro-forma balance sheet, income statement and
market capitalization of the combined entity. Pioneer contributed 5.0% of the
total assets, 5.4% of gross loans, 4.2% of the loan loss reserve, 5.2% of
deposits, 6.1% of common equity, 5.4% of net interest income, 2.5% of non
interest income, 4.6% of non interest expense, 3.7% of net income, 5.4% of
nonperforming assets and 5.7% of the market capitalization.
DIVIDEND DISCOUNT ANALYSIS. Keefe Bruyette estimated the present value of the
future cash flows that would accrue to a holder of a share of Pioneer Common
Stock assuming the shareholder held the stock through the year 2003 and then
sold it at the end of year 2003. The analysis was based on several assumptions,
including earnings per share projections for Pioneer of $2.77 in 1998, $3.30 in
1999, $3.86 in 2000, $4.39 in 2001, $4.78 in 2002, a 10% earnings per share
growth rate from 2002 to 2003, and a 20% dividend growth rate from 1998 to 2003.
A market multiple terminal value was calculated for 2003 by multiplying
Pioneer's projected 2003 earnings per share by the current price/earnings
multiple of 20.58 times 1998 earnings. An acquisition multiple terminal value
was calculated for 2003 by multiplying Pioneer's projected 2003 earnings per
share by a price/ earnings multiple of 23 times earnings. The terminal valuation
and the estimated dividends were discounted at a rate of 12%, producing a
present value of $61.25 based on a market terminal value and $67.70 based on an
acquisition terminal value. Keefe Bruyette also presented a table showing the
foregoing analysis with a range of discount rates from 10% to 15% and a range of
price-to-earnings terminal multiples of 18x to 23x, resulting in a
22
32
range of present values for a share of Pioneer Common Stock of $46.75 to $75.14.
These values were determined by adding (i) the present value of the estimated
future dividend stream that Pioneer could generate over the period beginning
January 1998 and ending in December 2003, and (ii) the present value of the
"terminal value" of the Pioneer Common Stock.
Keefe Bruyette also estimated the present value of future cash flows that would
accrue to a holder of 1.65 shares of First American assuming the stockholder
held the stock through the year 2003 and then sold it at the end of 2003. This
analysis was based on several assumptions, including First American 1998
earnings per share of $2.65, 1999 earnings per share of $3.05, a 12.0% earnings
per share growth rate thereafter, and a 20% dividend growth rate from 1998 to
2003. A market multiple terminal value was calculated for 2003 by multiplying
First American projected 2003 earnings per share by the current price/earnings
multiple of 17.5 times 1998 earnings. An acquisition multiple terminal value was
calculated for 2003 by multiplying First American projected 2003 earnings per
share by a price/earnings multiple of 21 times earnings. The terminal valuation
and the estimated dividends were discounted at a rate of 12%, producing a
present value of $80.59 based on a market terminal value and $94.83 based on an
acquisition terminal value.
Keefe Bruyette stated that dividend discount analysis is a widely used valuation
methodology but noted that it relies on numerous assumptions, including asset
and earnings growth rates, dividend payout rates, terminal values and discount
rates. The analysis did not purport to be indicative of the actual values or
expected values.
OTHER ANALYSIS. Keefe Bruyette also reviewed First American's five year
financial highlights, loan and deposit composition, historical stock price
performance relative to the S&P 500 and the Keefe Bank Index, and the pro-forma
earnings per share for the merger of Pioneer with First American.
The summary contained herein provides a description of the material analyses
prepared by Keefe Bruyette in connection with the rendering of its opinion. The
summary set forth above does not purport to be a complete description of the
analyses performed by Keefe Bruyette in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description. Keefe Bruyette believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting portions of its analyses without considering all analyses, or
selecting part of the above summary, without considering all factors and
analyses, would create an incomplete view of the processes underlying the
analyses set forth in Keefe Bruyette's presentations and opinion. The ranges of
valuations resulting from any particular analysis described above should not be
taken to be Keefe Bruyette's view of the actual value of Pioneer and First
American. The fact that any specific analysis has been referred to in the
summary above is not meant to indicate that such analysis was given greater
weight than any other analyses.
In performing its analyses, Keefe Bruyette made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Pioneer and First
American. The analyses performed by Keefe Bruyette are not necessarily
indicative of actual values or actual future results which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Keefe Bruyette's analysis of the fairness, from a
financial point of view, of the Exchange Ratio in the Merger. These analyses
were provided to the Pioneer Board in connection with the delivery of Keefe
Bruyette's opinion. The analyses do not purport to be appraisals or to reflect
the prices at which Pioneer actually might be sold
23
33
or the prices at which any securities may trade at the present time or at any
time in the future. In addition, Keefe Bruyette's opinion, along with its
presentation to the Pioneer Board, was just one of various factors taken into
consideration by the Pioneer Board in unanimously approving the Agreement.
Keefe Bruyette, as part of its investment banking business, is continually
engaged in the valuation of banking businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. As
specialists in the securities of banking companies, Keefe Bruyette has
experience in, and knowledge of, the valuation of banking enterprises. In the
ordinary course of its business as a broker-dealer, Keefe Bruyette may, from
time to time, purchase securities from, and sell securities to, First American,
and as a market maker in securities, Keefe Bruyette may from time to time have a
long or short position in, and buy or sell, debt or equity securities of First
American for Keefe Bruyette's own account and for the accounts of its customers.
Pioneer agreed to pay Keefe Bruyette at the signing of the engagement agreement
between Keefe Bruyette and Pioneer, a cash fee ("CASH FEE") of $500,000 plus an
incentive fee ("INCENTIVE FEE") of 2% of the aggregate consideration offered in
the Merger in excess of $77 per share for each share of Pioneer. The Cash Fee
will be payable in three parts, with 25% payable with the execution of a
definitive agreement, 25% payable upon the mailing of a proxy to Pioneer
shareholders and 50% payable at the time of closing of the Merger. The incentive
fee will be payable at closing. Based on the closing price of First American on
October , 1998, Keefe Bruyette will not receive an Incentive Fee.
In addition to any fees payable to Keefe Bruyette pursuant to the foregoing, and
regardless of whether the Merger is consummated, Pioneer also agreed to
reimburse Keefe Bruyette for reasonable out-of-pocket expenses and
disbursements, including fees and reasonable expenses of counsel incurred in
connection with its retention.
OPINION OF THE CARSON MEDLIN COMPANY
Pursuant to a letter agreement dated April 2, 1998, Carson Medlin was engaged to
represent Pioneer to search for parties who might wish to acquire Pioneer and to
assist Pioneer in negotiations with such parties. In a letter agreement dated
May 13, 1998, which superseded the April 2, 1998 agreement, Pioneer engaged
Carson Medlin, together with Keefe Bruyette, to render financial advisory and
investment banking services in connection with the possible sale of Pioneer and
to render its opinion as to the fairness, from a financial point of view, of the
Exchange Ratio in a resulting transaction. Pioneer selected Carson Medlin as its
financial adviser on the basis of Carson Medlin's historical relationship with
Pioneer and Carson Medlin's experience and expertise in representing community
banks in acquisition transactions. Carson Medlin is an investment banking firm
which specializes in the securities of financial institutions located in the
southeastern United States. As part of its investment banking activities, Carson
Medlin is regularly engaged in the valuation of financial institutions and
transactions relating to their securities.
Carson Medlin delivered its written opinion dated May 28, 1998 to the Pioneer
Board stating that the Exchange Ratio provided in the Agreement is fair, from a
financial point of view, to the shareholders of Pioneer. Carson Medlin
subsequently confirmed such opinion in writing as of the date of this
Prospectus/Proxy Statement.
24
34
The full text of Carson Medlin's written opinion, dated the date of this
Prospectus/Proxy Statement, is attached as Appendix D to this Prospectus/Proxy
Statement and should be read in its entirety with respect to the procedures
followed, assumptions made, matters considered and qualification and limitation
on the review undertaken by Carson Medlin in connection with its opinion. Carson
Medlin's opinion, dated the date of this Prospectus/Proxy Statement, is
addressed to the Pioneer Board and is substantially identical to the written
opinion delivered to the Pioneer Board dated May 28, 1998. The summary of the
opinion of Carson Medlin set forth in this Prospectus/Proxy Statement is
qualified in its entirety by reference to the full text of such opinion. Carson
Medlin's opinions to the Pioneer Board rendered in connection with the Merger do
not constitute a recommendation to any Pioneer Shareholder regarding how such
shareholder should vote at the Special Meeting.
No limitations were imposed by the Pioneer Board or management of Pioneer upon
Carson Medlin with respect to the investigations made or the procedures followed
by Carson Medlin in rendering its opinions.
The preparation of a financial fairness opinion involves various determinations
as to the most appropriate methods of financial analysis and the application of
those methods to the particular circumstances and, therefore, is not readily
susceptible to partial analysis or summary description. In connection with
rendering its opinions, Carson Medlin performed a variety of financial analyses.
Carson Medlin believes that its analyses must be considered together as a whole
and that selecting portions of such analyses and the facts considered therein,
without considering all other factors and analyses, could create an incomplete
or inaccurate view of the analyses and the process underlying the rendering of
Carson Medlin's opinions. In performing its analyses, Carson Medlin made
numerous assumptions with respect to industry performance, business and economic
conditions, and other matters, many of which are beyond the control of First
American and Pioneer and which may not be realized. Any estimates contained in
Carson Medlin's analyses are not necessarily predictive of future results or
values, which may be significantly more or less favorable than such estimates.
Estimates of values of companies do not purport to be appraisals or necessarily
reflect the prices at which such companies or their securities may actually be
sold. Except as described below, none of the analyses performed by Carson Medlin
were assigned a greater significance by Carson Medlin than any other.
Carson Medlin has relied upon, without independent verification, the accuracy
and completeness of the information reviewed by it for the purpose of rendering
its opinions. Carson Medlin did not undertake any independent evaluation or
appraisal of the assets and liabilities of First American or Pioneer, nor was it
furnished with any such appraisals. Carson Medlin is not expert in the
evaluation of loan portfolios, including underperforming or nonperforming
assets, charge-offs or the allowance for loan losses, has not reviewed any
individual credit files of First American or Pioneer and has assumed that the
allowances for each of First American and Pioneer are in the aggregate adequate
to cover such losses. Carson Medlin's opinion is necessarily based on economic,
market and other conditions existing on the date of its opinion, and on
information as of various earlier dates made available to it. Carson Medlin
reviewed certain financial projections prepared by First American and Pioneer.
Carson Medlin assumed that these projections were prepared on a reasonable basis
using the best and most current information available to the management of First
American and Pioneer, and that such projections will be realized in the amounts
and at the times contemplated thereby. Neither First American nor Pioneer
publicly discloses internal management projections of the type provided to
Carson Medlin. Such projections were not prepared for, or with a view toward,
public disclosure. Carson Medlin
25
35
assumed that the Merger will be recorded as a pooling-of-interests under
generally accepted accounting principles.
In connection with its opinion, dated as of the date hereof, Carson Medlin
reviewed: (i) the Agreement; (ii) the annual reports to shareholders of First
American, including the audited financial statements for the five years ended
December 31, 1997; (iii) audited financial statements of Pioneer for the five
years ended December 31, 1997; (iv) the unaudited interim financial statements
of First American for the six months ended June 30, 1998; (v) the unaudited
interim financial statements of Pioneer for the six months ended June 30, 1998;
(vi) certain financial and operating information with respect to the business,
operations and prospects of First American and Pioneer; and (vii) this
Prospectus/Proxy Statement. In addition, Carson Medlin: (a) held discussions
with members of the senior management of First American and Pioneer regarding
the historical and current business operations, financial condition and future
prospects of their respective companies; (b) reviewed the historical market
prices and trading activity for the common stock of First American and Pioneer
and compared them with those of certain publicly traded companies which it
deemed to be relevant; (c) compared the results of operations of First American
and Pioneer with those of certain financial institutions which it deemed to be
relevant; (d) compared the financial terms of the Merger with the financial
terms, to the extent publicly available, of certain other recent business
combinations of financial institutions; (e) analyzed the pro forma financial
impact of the Merger on First American; and (f) conducted such other studies,
analyses, inquiries and examinations as Carson Medlin deemed appropriate.
VALUATION METHODOLOGIES
The following is a summary of the principal analyses performed by Carson Medlin
in connection with its opinion provided to the Pioneer Board on May 28, 1998.
SUMMARY OF PROPOSAL. Carson Medlin reviewed the terms of the proposed Merger,
including the form of consideration, the Exchange Ratio, the closing price of
First American Common Stock as of May 27, 1998, and the resulting price per
share of Pioneer Common Stock pursuant to the proposed Merger. Under the terms
of the Agreement, each outstanding share of Pioneer Common Stock will be
converted into 1.65 shares of First American Common Stock resulting in an
indicated value of $76.31 per share based on the closing price of First American
Common Stock on May 27, 1998 of $46.25 per share. Carson Medlin calculated that
the indicated value represented 288% of stated book value at March 31, 1998,
26.6 times 1998 estimated earnings, a 28.0% core deposit premium at March 31,
1998 (defined as the aggregate transaction value minus stated book value divided
by core deposits) and 29.9% of total assets of Pioneer at March 31, 1998.
INDUSTRY COMPARATIVE ANALYSIS. In connection with rendering its opinion, Carson
Medlin compared selected operating results of Pioneer to those of 50
publicly-traded community commercial banks in Alabama, Florida, Georgia,
Mississippi, North Carolina, South Carolina, Virginia and West Virginia (the
"SIBR BANKS") as contained in the Southeastern Independent Bank Review(TM), a
proprietary research publication prepared by Carson Medlin quarterly since 1991.
The SIBR Banks range in asset size from approximately $125 million to $2.5
billion and in shareholders' equity from approximately $13.4 million to $247.8
million. Carson Medlin considers this group of financial institutions more
comparable to Pioneer than larger, more widely traded regional financial
institutions. Carson Medlin compared, among other factors, profitability,
capitalization, and asset
26
36
quality of Pioneer to these financial institutions, Carson Medlin noted that
based on results for 1997, the most recent full year of operations:
- Pioneer had a return on average assets (ROA) of 1.07%, compared to mean
ROA of 1.25% for the SIBR Banks;
- Pioneer had a return on average equity (ROE) of 10.2%, compared to mean
ROE of 12.5% for the SIBR Banks;
- Pioneer had common equity to total assets at December 31, 1997 of 10.4%,
compared to mean common equity to total assets of 9.93% for the SIBR
Banks; and
- Pioneer had nonperforming assets (defined as loans 90 days past due,
nonaccrual loans and other real estate) to total loans net of unearned
income and other real estate at December 31, 1997 of 0.73%, compared to
mean nonperforming assets to total loans net of unearned income and other
real estate of 0.92% for the SIBR Banks.
This comparison indicated that Pioneer's financial performance was below the
average SIBR Bank for profitability factors and above the average for asset
quality and capitalization.
Carson Medlin also compared selected operating results of First American to
those of five other publicly-traded bank holding companies in the southeast (the
"PEER BANKS"). The Peer Banks include: AmSouth Bancorporation, Inc., First
Tennessee National Corp., Regions Financial Corp., SouthTrust Corporation, and
Union Planters Corp. Carson Medlin considers this group of financial
institutions comparable to First American as to financial characteristics,
operating philosophy, and the market for its stock. Carson Medlin compared
selected balance sheet data, asset quality, capitalization, profitability ratios
and market statistics using financial data at or for the three-month period
ended March 31, 1998 and market data as of May 27, 1998. This comparison showed,
among other things, that:
- for the three months ended March 31, 1998, First American's ROA was 1.43%
compared to a mean of 1.35% and a median of 1.33% for the Peer Banks;
- for the three months ended March 31, 1998, First American's ROE was
16.50% compared to a mean of 17.30% and a median of 17.50% for the Peer
Banks;
- for the three months ended March 31, 1998, First American's efficiency
ratio (defined as noninterest expense divided by the sum of noninterest
income and taxable equivalent net interest income before provision for
loan losses) was 58.0% compared to a mean of 58.8% and a median of 55.0%
for the Peer Banks;
- at March 31, 1998, First American's shareholders' equity to total assets
was 8.46% compared to a mean of 7.85% and a median of 7.60% for the Peer
Banks;
- at March 31, 1998, First American's nonperforming assets to total assets
were 0.25% compared to a mean of 0.49% and a median of 0.51% for the Peer
Banks;
- at May 21, 1998, First American's price to trailing twelve months
earnings was 20.7 times compared to a mean of 21.1 times and a median of
21.3 times for the Peer Banks;
- at May 21, 1998, First American's price to book value was 317% compared
to a mean of 316% and a median of 287% for the Peer Banks.
27
37
This comparison indicated that First American's financial and stock performance
was comparable to the Peer Banks for most of the factors considered.
COMPARABLE TRANSACTION ANALYSIS. Carson Medlin reviewed certain information
relating to 14 selected merger transactions involving southeastern commercial
banks with total assets exceeding $500 million announced since January 1996 (the
"COMPARABLE TRANSACTIONS"). The Comparable Transactions were
(acquiree/acquirer): First Commercial Corp./Regions Financial Corp., Deposit
Guaranty Corp./First American Corporation, United Carolina Bancshares/BB&T
Corp., TransFinancial Inc./Star Banc Corp., Jefferson Bankshares/Wachovia
Corp., Capital Bancorp/Union Planters Corp., George Mason Bankshares/United
Bankshares, Inc., Premier Bankshares, Inc./First Virginia Banks, 1st United
Bancorp/Wachovia Corp., Allied Bankshares/Regions Financial Corp., American
Banks of Florida/SouthTrust Corp., First State Corp./Regions Financial Corp.,
CitiBancshares, Inc./Huntington Bancshares, Inc., and Franklin Bancorp/BB&T
Corp. Carson Medlin considered, among other factors, the earnings, capital
level, asset size and quality of assets of the acquired financial institutions.
Carson Medlin compared the transaction prices at the time of announcement to the
stated book value, earnings, core deposits and total assets of the acquired
institutions.
On the basis of the Comparable Transactions, Carson Medlin calculated a range of
purchase prices as a percentage of stated book value for the Comparable
Transactions from a low of 200.6% to a high of 434.0%, with a mean of 315.8%.
These transactions indicated a range of values for Pioneer from $53.20 per share
to $115.10 per share, with a mean of $83.75 per share (based on Pioneer's stated
book value of $26.52 per share at March 31, 1998). The consideration implied by
multiplying the Exchange Ratio and the price of First American Common Stock as
of May 27, 1998 was $76.31 per share and implies a price to stated book value
multiple of 288% which is below the average of the range for the Comparable
Transactions.
Carson Medlin calculated a range of purchase prices as a multiple of earnings
for the Comparable Transactions, from a low of 14.8 times to a high of 29.8
times, with a mean of 22.3 times. These transactions indicated a range of values
for Pioneer from $42.48 to $85.53 per share, with a mean of $64.00 per share
(based on Pioneer's 1998 estimated earnings per share of $2.87 per share). The
consideration implied by the terms of the Agreement is $76.31 per share and
implies a price to earnings multiple of 26.6 times, which is above the average
for the Comparable Transactions.
Carson Medlin calculated the core deposit premiums for the Comparable
Transactions and found a range of values from a low of 16.1% to a high of 50.3%,
with a mean of 28.2%. The premium on Pioneer's core deposits implied by the
terms of the Agreement is 28.0%, near the average of the range for the
Comparable Transactions.
Finally, Carson Medlin calculated a range of purchase prices as a percentage of
total assets for the Comparable Transactions from a low of 20.6% to a high of
39.4%, with a mean of 28.9%. The percentage of total assets implied by the terms
of the Agreement is approximately 29.9%, above the average of the range for the
Comparable Transactions.
No company or transaction used in Carson Medlin's analyses is identical to First
American, Pioneer or the contemplated transaction. Accordingly, the results of
these analyses necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of First
American and Pioneer and other factors that could affect the value of the
companies to which they have been compared.
28
38
PRESENT VALUE ANALYSIS. Carson Medlin calculated the present value of Pioneer
assuming that Pioneer remained an independent bank. For purposes of this
analysis, Carson Medlin utilized certain projections of Pioneer's future growth
of assets, earnings and dividends and assumed that the Pioneer Common Stock
would be sold at the end of 5 years at 22.3 times of projected 2002 earnings
(based on the average of the Comparable Transactions). This value was then
discounted to present value utilizing discount rates of 14% through 16%. These
rates were selected because, in Carson Medlin's experience, they represent the
rates that investors in securities such as Pioneer Common Stock would demand in
light of the potential appreciation and risks. On the basis of these
assumptions, Carson Medlin calculated that the present value of Pioneer as an
independent bank ranged from $56.16 per share to $61.12 per share. The
consideration implied by the terms of the Agreement was $76.31 per share which
falls above the high end of the range under present value analysis. Carson
Medlin noted that the present value analysis was included because it is a widely
used valuation methodology, but noted that the results of such methodology are
highly dependent upon the numerous assumptions that must be made, including
assets and earnings growth rates, dividend payout rates, terminal values and
discount rates.
CONTRIBUTION ANALYSIS. Carson Medlin reviewed the relative contributions in
terms of various balance sheet and income statement components to be made by
Pioneer and First American to the combined institution based on (i) balance
sheet data at March 31, 1998, and (ii) net income for the three months ended
March 31, 1998. In this analysis, Carson Medlin estimated pro forma adjustments
for First American's financial statements to reflect the acquisition of Deposit
Guaranty Corp., which was consummated on May 1, 1998. The income statement and
balance sheet components analyzed included total assets, net loans, total
deposits, shareholders' equity, and net income. This analysis showed that, while
Pioneer shareholders would own approximately 5.6% of the aggregate outstanding
shares of the combined institution based on the Exchange Ratio, Pioneer was
contributing 5.2% of total assets, 5.5% of loans, net of unearned income, 5.5%
of total deposits, 6.2% of shareholders' equity, and 3.7% of net income for the
three months ended March 31, 1998.
OTHER ANALYSIS. Carson Medlin also reviewed selected investment research
reports on and earnings estimates for First American and prepared a shareholder
claims analysis.
The opinion expressed by Carson Medlin was based upon market, economic and other
relevant considerations as they existed and have been evaluated as of the date
of the opinion. Events occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the securities markets, the
results of operations or material changes in the assets or liabilities of
Pioneer could materially affect the assumptions used in preparing the opinion.
In connection with its opinion dated as of the date of this Prospectus/Proxy
Statement, Carson Medlin confirmed the appropriateness of its reliance on the
analyses used to render its May 28, 1998 opinion by performing procedures to
update certain of such analyses and reviewing the assumptions on which its
analyses were based and the factors considered in connection therewith.
Pioneer has agreed to pay Carson Medlin a fee equal to three quarters of one
percent (0.75%) of the aggregate consideration received by the shareholders and
optionholders of Pioneer as a result of the Merger, subject to certain
adjustments. The fee is payable $50,000 at the time of Pioneer's execution of
the Agreement and the balance upon closing of the Merger. In addition to the
fees payable pursuant to the foregoing and regardless of whether the Merger is
consummated, Pioneer has also agreed to reimburse Carson Medlin
29
39
for its reasonable out-of-pocket expenses, including expenses of counsel,
incurred in connection with its retention.
THE EFFECTIVE TIME
The Effective Time of the Merger will be the date and time that the Articles of
Merger reflecting the Merger shall become effective with the Secretary of State
of the State of Tennessee and the Certificate of Merger reflecting the Merger
shall become effective with the Secretary of State of the State of Delaware. The
Agreement provides that the parties will use their reasonable best efforts,
subject to the terms and conditions of the Agreement and unless otherwise
mutually agreed to in writing by Pioneer and First American, to cause the
Effective Time to occur on the first business day following the last to occur of
(i) the effective date (including the expiration of any applicable waiting
period) of the last required approval of any government regulatory authority
having authority over the Merger, and (ii) the date on which the shareholders of
Pioneer approve the Agreement to the extent such approval is required by
applicable law. Currently, it is anticipated that the closing of the Merger (the
"CLOSING") will occur on the day the Effective Time occurs, or at such other
time as Pioneer and First American may agree (the date of the Closing being the
"CLOSING DATE").
Pioneer and First American each anticipate that the Merger will be consummated
on or about November 20, 1998. However, consummation of the Merger could be
delayed as a result of delays in satisfying the other conditions to consummation
set forth in the Agreement. There can be no assurance as to if or when such
conditions will be satisfied or that the Merger will be consummated. See
"-- Regulatory Approvals" and "-- Conditions to Completion of the Merger.
At the Effective Time, Pioneer Shareholders (other than those who perfect
dissenters' rights under the DGCL -- see "ADDITIONAL INFORMATION -- Dissenters'
Appraisal Rights") will cease to be, and will have no rights as Pioneer
Shareholders other than to receive (i) any dividend or other distribution with
respect to Pioneer Common Stock with a record date occurring prior to the
Effective Time and (ii) the Merger Consideration.
EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, First American will cause the "EXCHANGE
AGENT" selected by First American to mail to the former Pioneer Shareholders a
form letter of transmittal, together with instructions for the exchange of such
shareholders' certificates representing shares of Pioneer Common Stock for
certificates representing shares of First American Common Stock.
PIONEER SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
THE FORM LETTER OF TRANSMITTAL AND INSTRUCTIONS. Upon surrender to the Exchange
Agent of certificates for Pioneer Common Stock, together with a properly
completed letter of transmittal, there will be issued and mailed to each holder
of Pioneer Common Stock surrendering such items a certificate or certificates
representing the number of shares of First American Common Stock to which such
holder is entitled, if any, and a check for the amount to be paid in lieu of any
fractional share interest, without interest. After the Effective Time, to the
extent permitted by law, Pioneer Shareholders of record as of the Effective Time
will be entitled to vote at any meeting of holders of First American Common
Stock the number of whole shares of First American Common Stock into which their
Pioneer Common Stock
30
40
has been converted, regardless of whether such shareholders have surrendered
their Pioneer Common Stock certificates. Whenever any dividend or other
distribution with respect to First American Common Stock is declared with a
record date after the Effective Time, such declaration will apply to all shares
of First American Common Stock issuable upon consummation of the Merger.
However, beginning after the Effective Time, no dividend or distribution will be
paid to the holder of any unsurrendered Pioneer certificate until the holder
duly surrenders such certificate. Upon such surrender, all undelivered dividends
and other distributions and, if applicable, a check for the amount to be paid in
lieu of any fractional share interest will be delivered to such shareholder, in
each case without interest. First American has declared a dividend payable to
shareholders of record as of November 20, 1998, which is the date the parties
currently anticipate the Merger will be completed.
At the Effective Time, the stock transfer books of Pioneer will be closed as to
holders of Pioneer Common Stock immediately prior to the Effective Time, and
after the Effective Time, there will be no transfers of shares of Pioneer Common
Stock by any such holder on Pioneer's stock transfer books. If certificates
representing shares of Pioneer Common Stock are presented for transfer after the
Effective Time, they will be canceled and exchanged for the shares of First
American Common Stock and a check for the amount due in lieu of fractional
shares, if any, deliverable in respect thereof.
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
The Agreement contains negative and affirmative covenants that are customary in
transactions of the nature of the Merger. Under the terms of the Agreement, both
Pioneer and First American have agreed to use their reasonable efforts to obtain
all consents and approvals of any person necessary or desirable for consummation
of the Merger, including, but not limited to, obtaining the approval of
Pioneer's shareholders and all required regulatory approvals. Neither Pioneer
nor First American may take any action that would substantially impair the
prospects of completing the Merger pursuant to the Agreement or that would cause
the Merger not to qualify for treatment as a pooling-of-interests for accounting
purposes or as a "reorganization" within the meaning of Section 368(a) of the
Code.
The Agreement provides that Pioneer will, and will cause each of its
subsidiaries to, operate its business only in the usual, regular or ordinary
course and use all reasonable efforts to preserve intact its business
organization and assets and maintain its rights and franchises. The Agreement
also provides that First American will continue to conduct its business and the
business of its subsidiaries in a manner designed, in its reasonable judgment,
to enhance the long-term value of the First American Common Stock and the
business prospects of First American and its subsidiaries and to the extent
consistent therewith use all reasonable efforts to preserve intact the core
business and goodwill of First American and its subsidiaries with their
respective employees and the communities they serve. The Agreement also provides
that both Pioneer and First American will take no action that would materially
adversely affect the ability of either party to obtain any required consents or
materially adversely affect the ability of either party to perform its covenants
and agreements under the Agreement; provided, however, that the foregoing
generally does not prevent First American or its subsidiaries from acquiring or
disposing of assets or businesses. Further, without the prior written consent of
First American, or as otherwise provided in the Agreement, Pioneer generally may
not incur new debt in excess of an aggregate of $500,000 other than in the
ordinary course of business; declare or pay
31
41
dividends other than a regular quarterly cash dividend in accordance with past
practice (and provided that any such dividend shall be declared with a record
date prior to the Effective Time only if the normal record date for payment of
the corresponding quarterly dividend to holders of First American Common Stock
is before the Effective Time, or if First American agrees that Pioneer
Shareholders shall be entitled to receive such dividend or First American Common
Stock as if Pioneer Shareholders had been holders of record of First American
Common Stock on the record date for such 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 Pioneer.
In addition, the Agreement provides that neither Pioneer nor any if its
subsidiaries, directors, officers, owners of more than 10% of Pioneer Common
Stock or other affiliates of Pioneer, nor any investment banker, financial
advisor, attorney, accountant, consultant or other representative thereof
retained by Pioneer or any of its subsidiaries may directly or indirectly
solicit any "Acquisition Proposal" (as defined below) by any person. In
addition, except to the extent the Pioneer Board, after having consulted with
and considered the advice of outside counsel, reasonably determines in good
faith that the failure to take such actions would constitute a breach of the
fiduciary duties of the members of the Pioneer Board to Pioneer's shareholders
under applicable law, neither Pioneer nor its subsidiaries nor any affiliates or
representatives of Pioneer may furnish any non-public information that it is not
legally obligated to furnish, negotiate with respect to, or enter into any
contract with respect to, any Acquisition Proposal. Pioneer may, however,
communicate information about such an Acquisition Proposal to its shareholders
if and to the extent required to comply with its legal obligations as advised by
outside counsel. Pioneer must promptly inform First American of any Acquisition
Proposal and any developments with respect to that proposal. For purposes of the
Agreement, "ACQUISITION PROPOSAL" means any tender offer or exchange offer or
any proposal for a merger, acquisition of all of the stock or assets of, or
other business combination involving the acquisition of Pioneer or any of its
subsidiaries or the acquisition of a substantial equity interest in, or a
substantial portion of the assets of, Pioneer or any of its subsidiaries.
CONDITIONS TO THE MERGER
The obligations of First American and Pioneer 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, but not limited to (i) adoption of the Agreement and the consummation
of the transactions contemplated thereby, including the Merger, by the
affirmative vote of the holders of not less than a majority of the shares of
Pioneer Common Stock entitled to vote thereon; (ii) all consents of, filings and
registrations with, and notifications to, all regulatory authorities required
for consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by law shall have
expired; (iii) Pioneer and First American shall have obtained any and all
consents (other than those referred to in the preceding clause (ii)) required
for consummation of the Merger or for the preventing of any default under any
contract or permit of Pioneer or First American which, if not obtained or made,
is reasonably likely to have, individually or in the aggregate, a material
adverse effect on Pioneer or First American, as applicable; (iv) no court or
governmental or regulatory authority of competent jurisdiction shall have
enacted, issued, promulgated, enforced or entered any law or order (whether
temporary, preliminary or permanent) or
32
42
taken any other action which prohibits, restricts or makes illegal consummation
of the transactions contemplated by the Agreement; (v) the Registration
Statement shall be effective under the Securities Act, no stop orders suspending
the effectiveness of the Registration Statement shall have been issued, no
action, suit, proceeding or investigation by the Securities and Exchange
Commission (the "COMMISSION") to suspend the effectiveness of the Registration
Statement shall have been initiated and be continuing and all necessary
approvals under state securities laws or the Securities Act of 1933, as amended
(the "Securities Act"), or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), relating to the issuance or trading of shares of First American
Common Stock issuable pursuant to the Merger shall have been received; (vi) the
shares of First American Common Stock issuable pursuant to the Merger shall have
been approved for listing on the NYSE; (vii) First American and Pioneer shall
each have received letters from KPMG Peat Marwick LLP, First American's
independent auditors, addressed to First American and in form and substance
reasonably acceptable to First American, dated as of the date of filing of the
Registration Statement with the Commission and as of the Effective Time, to the
effect that the Merger will qualify for pooling-of-interests accounting
treatment; (viii) First American and Pioneer shall each have received letters
from Joseph Decosimo and Company, LLP, Pioneer's independent auditors, addressed
to First American and in form and substance reasonably acceptable to First
American, dated as of the date of filing of the Registration Statement with the
Commission and as of the Effective Time, to the effect that Joseph Decosimo and
Company, LLP is not aware of any matters relating to Pioneer and its
subsidiaries which would preclude the Merger from qualifying for
pooling-of-interests accounting treatment; and (ix) Pioneer and First American
shall have received a satisfactory opinion of Arnold & Porter that the Merger
qualifies for federal income tax treatment as a reorganization under Section
368(a) of the Code, with the effect described in "-- Federal Income Tax
Consequences," including, among others, that the exchange of Pioneer Common
Stock for First American Common Stock will not give rise to recognition of any
gain or loss to Pioneer Shareholders, except to the extent of any cash received.
Consummation of the Merger also is subject to the satisfaction or waiver of
various other conditions specified in the Agreement which are customary in
transactions of this nature, including, among others: (i) delivery of
certificates executed by Pioneer's and First American's respective duly
authorized officers as to the satisfaction of certain conditions and obligations
set forth in the Agreement and (ii) as of the Effective Time, the accuracy of
certain representations and warranties and the compliance in all material
respects with the agreements and covenants of each party.
No assurance can be provided as to if or when the required regulatory approvals
will be obtained or whether all of the other 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 Pioneer: (i) by the mutual
consent of Pioneer and First American; (ii) by either Pioneer or First American
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained in the
Agreement) in the event of a material breach by the other party of any
representation or warranty in the Agreement that cannot be or has not been cured
within 30 days after the date of giving written notice to the breaching party
and which breach is reasonably likely, in the judgment of the non-breaching
party, to have, individually or in the aggregate, a material adverse effect on
the breaching party; (iii) by
33
43
either Pioneer or First American (provided that the terminating party is not
then in material breach of any representation, warranty, covenant, or other
agreement contained in the Agreement) in the event of a material breach by the
other party of any covenant or agreement contained in the Agreement which cannot
be or has not been cured within 30 days after the giving of written notice to
the breaching party of such breach; (iv) by either Pioneer or First American
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained in the
Agreement) in the event that (a) any consent of any regulatory agency required
for consummation of the Merger and the other transactions contemplated by the
Agreement shall have been denied by final nonappealable action of such authority
or if any action taken by such authority is not appealed within the time limit
for appeal, or (b) the shareholders of Pioneer fail to approve the Agreement;
(v) by either Pioneer or First American if the Merger shall not have been
consummated by December 31, 1998; (vi) by either Pioneer or First American
(provided that the terminating party is not then in material breach of any
representation, warranty, covenant or other agreement contained in the
Agreement) in the event that any of the conditions precedent to the obligations
of the terminating party to consummate the Merger cannot be satisfied or
fulfilled by December 31, 1998; or (vii) by First American in the event that the
Pioneer Board shall have failed to reaffirm its approval of the Merger and the
transactions contemplated by the Agreement (to the exclusion of any other
Acquisition Proposal), or shall have resolved not to reaffirm the Merger, or
shall have affirmed, recommended or authorized entering into any other
Acquisition Proposal or other transaction involving a merger, share exchange,
consolidation or transfer of substantially all of the assets of Pioneer.
In the event of termination of the Agreement, the Agreement will become void and
have no effect, except with respect to the parties' obligations with respect to
confidential information and expenses set forth in the Agreement and except that
termination will not relieve a breaching party from liability for an uncured
willful breach of a representation, warranty, covenant or agreement giving rise
to such termination.
AMENDMENT; WAIVER; EXPENSES
To the extent permitted by law, the Agreement may be amended by a subsequent
writing signed by each of the parties thereto upon the approval of each of the
parties, whether before or after shareholder approval of the Agreement has been
obtained; provided, however, that after any such approval by the holders of
Pioneer Common Stock, no amendment can be made that reduces or modifies in any
material respect the consideration to be received by the holders of Pioneer
Common Stock without further approval of such shareholders.
Prior to or at the Effective Time, each of the parties to the Agreement may
waive any default in the performance of any term of the Agreement by the other
party, may waive or extend the time for the compliance or fulfillment by the
other party of any and all of its obligations under the Agreement, and may waive
any or all of the conditions precedent to the obligations of the other party
under the Agreement, except that no condition can be waived if failure to
satisfy that condition would result in a violation of law. All waivers must be
in writing and signed by a duly authorized officer of the waiving party.
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; except that each of Pioneer and First
American will bear one half
34
44
of the costs relating to the filing of the Registration Statement and the
printing of the Registration Statement and the Prospectus/Proxy Statement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of the
Merger to shareholders of Pioneer. The federal income tax laws are complex and
the tax consequences of the Merger may vary depending upon each shareholder's
individual circumstances or tax status. Moreover, some shareholders such as
foreign persons, financial institutions, tax-exempt organizations, insurance
companies and persons who acquired shares of Pioneer Common Stock pursuant to
the exercise of employee stock options or rights or otherwise as compensation
may be subject to special rules. Therefore, each shareholder is urged to consult
a tax advisor regarding the federal, state, local, foreign and other tax
consequences of the Merger in light of the particular circumstances of such
shareholder.
Arnold & Porter, counsel to First American, has rendered an opinion to First
American and Pioneer regarding certain federal income tax consequences of the
Merger, which opinion is described below. That opinion is based on laws,
regulations, rulings and judicial decisions as they now exist. These authorities
are all subject to change and such change may be made with retroactive effect.
Arnold & Porter cannot give any assurance that, after any such change, its
opinion would not be different, and does not undertake any responsibility to
update or supplement its opinion. Moreover, Arnold & Porter's opinion does not
address the consequences of the Merger under state, local, foreign or other tax
laws, to the extent such laws may apply.
First American and Pioneer have provided Arnold & Porter with the facts,
representations, and assumptions on which Arnold & Porter has relied in
rendering its opinion, which information is consistent with the state of facts
that First American and Pioneer believe will be existing as of the Effective
Time. Based on such facts, representations and assumptions, Arnold & Porter has
opined that, for federal income tax purposes: (i) the Merger, when consummated
in accordance with the Agreement, will constitute a reorganization within the
meaning of section 368(a) of the Code; (ii) the exchange in the Merger of
Pioneer Common Stock for First American Common Stock will not give rise to gain
or loss to the shareholders of Pioneer with respect to such exchange (except as
described below with respect to any cash received in lieu of fractional share
interests of First American Common Stock); (iii) the aggregate adjusted tax
basis of the First American Common Stock received by a shareholder who exchanges
all of the shareholder's Pioneer Common Stock solely for First American Common
Stock in the Merger will be the same as the aggregate adjusted tax basis of the
Pioneer Common Stock surrendered in exchange therefor, reduced by any amount
allocable to a fractional share interest for which cash is received; and (iv)
the holding period of First American Common Stock received in exchange for
Pioneer Common Stock will include the period during which the shareholder held
the Pioneer Common Stock surrendered in the exchange, provided that the Pioneer
Common Stock was held as a capital asset at the Effective Time.
For federal income tax purposes, a shareholder of Pioneer who receives cash in
lieu of a fractional share interest in First American Common Stock will be
treated as having received such fractional share interest from First American in
the Merger. The cash received by such shareholder in lieu of a fractional share
interest in First American Common Stock will be treated as having been received
in exchange for such fractional
35
45
share interest, and the gain or loss generally will be recognized for federal
income tax purposes measured by the difference between the amount of cash
received and the portion of the basis of the shares of Pioneer Common Stock
allocable to such fractional share interest. Such gain or loss should be long
term capital gain or loss if the shareholder's shares of Pioneer Common Stock
are held as capital assets and have been held for more than one year at the
Effective Time. If, however, the cash received has the effect of the
distribution of a dividend with respect to a shareholder, part or all of the
cash received may be treated as a dividend.
A holder of Pioneer Common Stock who exercises dissenters' rights under
applicable Delaware law and who receives cash payment of the fair value of the
holder's shares of Pioneer Common Stock will be treated as having received such
payment in redemption of such shares. Such redemption will be subject to the
conditions and limitations of Section 302 of the Code, including the ownership
attribution rules of Section 318 of the Code. In general, if the shares of
Pioneer Common Stock are held by the holder as a capital asset at the Effective
Time, a dissenting holder will recognize capital gain or loss measured by the
difference between the amount of cash received by such holder and the basis for
such shares. If, however, such holder owns, either actually or constructively,
any other Pioneer Common Stock or First American Common Stock, the payment made
to such holder could be treated as dividend income. In general, under the
constructive ownership rules of the Code, a holder may be considered to own
stock that is owned, and in some cases constructively owned, by certain related
individuals and entities, as well as stock that such holder (or related
individuals or entities) has the right to acquire by exercising an option or
converting a convertible security. Each holder of Pioneer Common Stock who
contemplates exercising dissenters' rights should consult his or her own tax
advisor as to the possibility that the payment will be treated as dividend
income.
STOCK OPTION AGREEMENT
The information in this Prospectus/Proxy Statement concerning the Stock Option
Agreement is qualified in its entirety by reference to the full text of such
agreement, which is attached hereto as Appendix B.
The Stock Option Agreement provides for the grant by Pioneer to First American
of an option to purchase up to 748,222 shares (such number subject to adjustment
upon changes in capitalization or in certain other circumstances) of Pioneer
Common Stock, at an exercise price of $67.50 per share (the "OPTION").
The purpose of the Option is to increase the likelihood that the Merger will be
consummated by making it more difficult and more expensive for a third party to
gain control of Pioneer. Accordingly, the Option is exercisable only on the
occurrence of certain events that generally involve the acquisition or attempted
acquisition by a third party of Pioneer or of all or a significant portion of
the then-outstanding Pioneer Common Stock or of Pioneer's assets. Although the
shares issuable upon exercise of the Option represent approximately 16.6% of the
Pioneer Common Stock that would be outstanding after such exercise, First
American may not acquire more than 5% of the stock of Pioneer, pursuant to the
exercise of the Option or otherwise, without prior approval of the Federal
Reserve Board. See Appendix B.
36
46
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Pioneer's management and the Pioneer Board may be deemed to
have certain interests in the Merger that are in addition to their interests as
Pioneer Shareholders generally. The Pioneer Board was aware of these interests
and considered them, among other matters, in approving the Agreement and the
transactions contemplated thereby.
EMPLOYMENT AGREEMENTS. In connection with the Merger, certain members of
Pioneer's management, including Rodger B. Holley, Ralph M. West, Larry R. Belk,
Kenneth C. Dyer, III, and Routon Mathis, have been offered employment agreements
("EMPLOYMENT AGREEMENTS") with FANB providing for their continued employment
with FANB following the Merger. In addition, George M. Clark, III has been
offered a consulting agreement with FANB. FANB and Gregory B. Jones, Pioneer's
Chief Financial Officer, are discussing possible opportunities of mutual
interest, and Mr. Jones may be offered an employment agreement with FANB or one
of its affiliates.
Rodger B. Holley is the Chairman, Chief Executive Officer and President and a
director of Pioneer. Pursuant to his proposed Employment Agreement, Mr. Holley
would be employed by FANB to render executive services as FANB and Mr. Holley
may mutually agree upon under the general direction of the President of First
American (or his designee); however, Mr. Holley would not have an office at
FANB.
The term of Mr. Holley's Employment Agreement would commence on the Effective
Time and continue until ninety (90) days after the Effective Time, and the terms
of the Employment Agreement would be of no force and effect until the occurrence
of the Effective Time.
Mr. Holley's base salary would be $290,000 per year or such higher rate as may
be determined from time to time in accordance with the policies and procedures
of FANB, payable in regular installments in accordance with FANB's general
payroll practices. Subject to the provisions of the Employment Agreement, each
of Mr. Holley's options for Pioneer Common Stock that would have vested in 1998
and 1999 notwithstanding the Merger ("VESTED OPTIONS") would be vested as of
January 1, 1999. Moreover, during the term of his employment with FANB, Mr.
Holley would be entitled to participate in all of FANB's benefit programs for
which similarly situated employees of FANB and its subsidiaries are generally
eligible. On January 15, 1999, if he is not in material breach of any of the
terms of his Employment Agreement and certain other conditions are satisfied,
Mr. Holley would receive a one-time bonus payment of $87,000. In addition, upon
the end of his employment with FANB and so long as Mr. Holley is not in material
breach of the terms of his Employment Agreement, FANB would provide Mr. Holley
with title to the automobile he used while he was employed by Pioneer, at no
cost to Mr. Holley.
Mr. Holley's Employment Agreement provides standard non-compete provisions for
Mr. Holley during his employment with FANB and until June 30, 1999 (the "FIRST
NONCOMPETE PERIOD") within the metropolitan statistical area of Chattanooga,
Tennessee. Mr. Holley's Employment Agreement also sets forth standard
non-solicitation provisions within the metropolitan statistical area of
Chattanooga, Tennessee to take effect during the First Noncompete Period and for
the period immediately following that period, ending 24 calendar months after
the date of execution of his Employment Agreement (the "SECOND NONCOMPETE
PERIOD"). In consideration for Mr. Holley's compliance with these non-compete
and non-solicitation provisions, he would be entitled to receive his base salary
until the end of the Second Noncompete Period ("NONCOMPETE PAYMENTS").
37
47
Under the proposed Employment Agreement, FANB would be entitled to terminate Mr.
Holley's employment at any time for cause (as defined in the Employment
Agreement) or without cause. If his employment were to be terminated by FANB
without cause prior to the end of the term of his Employment Agreement, Mr.
Holley would be entitled to receive his bonus payment, the Noncompete Payments
and his base salary through the term of his Employment Agreement, and he would
further be entitled to exercise the Vested Options for ninety (90) calendar days
after such termination. His base salary payments would be payable in regular
installments in accordance with FANB's general payroll practices. If Mr.
Holley's employment were to be terminated as a result of his death or permanent
disability or incapacity, Mr. Holley or his estate would be entitled to receive
his bonus payment, the Noncompete Payments and his base salary through the term
of his Employment Agreement, and would further be entitled to exercise the
Vested Options for ninety (90) calendar days after such termination. Except for
any rights that Mr. Holley would have under the Consolidated Omnibus Budget
Reconciliation Act of 1985 relating to FANB's obligations to provide access to
health insurance, and except as specifically provided for in the non-compete
provisions of the Employment Agreement, all of Mr. Holley' rights to benefits
and bonuses under his Employment Agreement (if any) accruing after the date of
his termination from employment with FANB would cease upon such termination.
Ralph M. West, Jr., is an Executive Vice President and Secretary and a director
of Pioneer. Pursuant to his proposed Employment Agreement, Mr. West would be
employed as Executive Vice President and Manager of FANB's Chattanooga,
Tennessee-based personal trust operations, would serve as an Advisory Director
on FANB's Chattanooga Advisory Board of Directors and would render other
executive services. The term of his Employment Agreement would commence on the
Closing Date and continue until December 31, 2000, unless renewed by FANB prior
to that date (or any subsequent date on which Mr. West 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. West's term of
employment pursuant to the Employment Agreement (the "EMPLOYMENT PERIOD") would
terminate prior to such date upon Mr. West's resignation, death or permanent
disability or incapacity and (ii) the Employment Period could be terminated by
FANB at any time prior to such date for cause (as defined in the Employment
Agreement) or without cause.
Mr. West's base salary would be $116,987 per year or such higher rate as may be
determined from time to time in accordance with the policies and procedures of
FANB during the Employment Period, payable in regular installments in accordance
with FANB's general payroll practices. During the Employment Period, Mr. West
would be entitled to participate in all of FANB's benefit programs for which
similarly situated employees of FANB and its subsidiaries are generally
eligible. Mr. West would also be entitled to participate in any annual incentive
plan for similarly situated employees during the term of his Employment
Agreement. The proposed Employment Agreement also provides standard non-compete
and non-solicitation provisions for Mr. West for twelve months after the end of
the Employment Period within thirty miles of areas in which FANB or its
subsidiaries engage in business. On January 15, 1999, if he is not in breach of
any of the terms of his Employment Agreement and certain other conditions are
satisfied, Mr. West would receive a one-time bonus payment of 30% of his base
salary.
If the Employment Period were to be terminated by FANB without cause prior to
the Termination Date, Mr. West would be entitled to receive his base salary, as
in effect immediately prior to the Termination Date, through the Termination
Date, so long as he
38
48
had not materially breached the provisions of the Employment Agreement. Such
base salary payments would be payable in regular installments in accordance with
FANB's general payroll practices. If the Employment Period were to be terminated
as a result of Mr. West's death or permanent disability or incapacity, Mr. West
or his estate would be entitled to receive his base salary, as in effect
immediately prior to the Termination Date through the Termination Date. All of
Mr. West's rights to benefits and bonuses under the Employment Agreement (if
any) accruing after the Termination Date would cease upon such termination.
Larry R. Belk is President of Valley Bank, a bank subsidiary of Pioneer.
Pursuant to the terms of his proposed Employment Agreement, he would be employed
as FANB's City President for Monroe, Meigs and McMinn Counties, Tennessee, would
serve as an Advisory Director on FANB's Advisory Board of Directors for Monroe,
Meigs and McMinn Counties, Tennessee, and would render other executive services.
Mr. Belk's base salary would be $138,565 per year. In all other material
respects, the terms of Mr. Belk's Employment Agreement would be substantially
similar to Mr. West's Employment Agreement, as described above.
George M. Clark, III, 40, is an Executive Vice President-Private Banking and a
director of Pioneer. He has served as a director of Pioneer since January, 1997.
Pursuant to the terms of his consulting agreement, Mr. Clark would be employed
as a consultant, would serve as a Director of First American and FAM, and as an
Advisory Director on FANB's Chattanooga Advisory Board of Directors and would
render consulting services. Mr. Clark's consulting fees would be $83,051 per
year and a one-time signing bonus of $2,000, plus reimbursement of reasonable
out-of-pocket travel and business expenses in accordance with FANB's policies
for a term scheduled to end December 2000. Mr. Clark's consulting agreement also
contains confidentiality provisions restricts and competition by Mr. Clark
during its term and for one year thereafter.
Kenneth C. Dyer, III, serves as President of Pioneer Bank, a bank subsidiary of
Pioneer. Pursuant to the terms of his proposed Employment Agreement, Mr. Dyer
would be employed as FANB's City President for Hamilton, Marion and Sequatchie
Counties, Tennessee, would serve on FANB's Chattanooga Advisory Board and would
render other executive services. Mr. Dyer's base salary would be $152,470 per
year. In all other material respects, the terms of Mr. Dyer's Employment
Agreement would be substantially similar to Mr. West's Employment Agreement, as
described above.
Routon Mathis is an Executive Vice President-Operations of Pioneer. Pursuant to
the terms of his proposed Employment Agreement, Mr. Mathis would be employed by
FANB in an executive capacity. Mr. Mathis' base salary would be $95,395 per
year. In all other material respects, the terms of Mr. Mathis' Employment
Agreement would be substantially similar to Mr. West's Employment Agreement, as
described above.
James D. Renegar is President of Pioneer Bank, f.s.b. First American will honor
Pioneer's current employment arrangement (except with respect to his current
position) with Mr. Renegar after the Merger. Mr. Renegar currently receives an
annual base salary of $75,000 and fringe benefits valued at $1,380 pursuant to
an unexecuted employment agreement with Pioneer.
It is not a condition to the Merger that Messrs. Holley, West, Dyer, Mathis
and/or Belk execute the proposed employment agreements. In the event that some
or all such persons do not enter into the proposed employment agreements, such
persons will be eligible for severance in accordance with First American's
severance policies, under which, depending
39
49
upon their years of service, they would be entitled to up to one year of pay. In
addition, even if such persons do not execute the proposed employment
agreements, such persons who stay through the closing of the Merger will, based
on achievement of certain performance-based criteria, receive stay bonuses of
30% of their current salary.
First American also will honor Pioneer's consulting agreement with George D.
Clark, Jr., the former Chairman of Pioneer, a director of Pioneer and Pioneer
Bank, and a principal shareholder of Pioneer. This agreement provides health
insurance for Mr. Clark and his wife until each of them reaches 65 years of age,
and provides Mr. Clark an office, reasonable travel expenses and certain club
fees and expenses for a period ending not later than May 2002.
ELECTION OF DIRECTOR. The Agreement provides that the First American Board,
prior to the closing of the Merger, shall take all requisite action to elect as
a director of First American effective as of the Effective Time, an individual,
chosen in the sole discretion of First American's Committee on Directors, who is
either (a) a member of the Pioneer Board prior to the Effective Time or (b)
George M. Clark, Jr. (or a member of the immediate family of George M. Clark,
Jr.). First American's Committee on Directors has selected George M. Clark, III
to become a member of the First American Board at the Effective Time.
For more information regarding the current directors of First American, see
"ADDITIONAL INFORMATION ABOUT FIRST AMERICAN -- Management -- Directors and
Executive Officers."
SEVERANCE ARRANGEMENTS. Following the Effective Time, First American shall
provide generally to officers and employees of Pioneer and its subsidiaries
(collectively, the "PIONEER ENTITIES") employee benefits under employee benefit
and welfare plans (other than stock option or other plans involving the
potential issuance of First American Common Stock), on terms and conditions
which when taken as a whole are substantially similar to those currently
provided by First American and its subsidiaries (collectively, the "FIRST
AMERICAN ENTITIES") to their similarly situated officers and employees;
provided, that, for a period of 12 months after the Effective Time, First
American shall provide generally to officers and employees of the Pioneer
Entities severance benefits in accordance with the policies of either (i)
Pioneer, as disclosed by Pioneer to First American in connection with the
Agreement, or (ii) First American, whichever of (i) or (ii) will provide the
greater benefit to the officer or employee. For purposes of participation,
vesting and (except in the case of First American retirement plans) benefit
accrual under First American's employee benefit plans, the service of the
employees of the Pioneer Entities prior to the Effective Time shall be treated
as service with a First American Entity participating in such employee benefit
plans. First American and its subsidiaries also shall honor in accordance with
their terms all employment, severance, consulting and other compensation
contracts (as disclosed by Pioneer to First American in connection with the
Agreement) between any Pioneer Entity and any current or former director,
officer, or employee thereof, and all provisions for vested benefits or other
vested amounts earned or accrued through the Effective Time under the Pioneer
Benefit Plans.
INDEMNIFICATION; INSURANCE. The Agreement provides that, for a period of six
years after the Effective Time, First American shall indemnify, defend and hold
harmless the present and former directors, officers, employees and agents of the
Pioneer Entities (each, an "INDEMNIFIED PARTY") against all liabilities arising
out of actions or omissions arising out of the Indemnified Party's service or
services as directors, officers, employees or agents of Pioneer or, at Pioneer's
request, of another corporation, partnership, joint venture, trust or
40
50
other enterprise occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under Delaware Law and by Pioneer's Certificate of Incorporation and Bylaws as
in effect on the date of the Agreement, including provisions relating to
advances of expenses incurred in the defense of any litigation and whether or
not any First American Entity is insured against any such matter. Without
limiting the foregoing, in any case in which approval by First American or any
of its subsidiaries is required to effectuate any indemnification, such entity
shall direct, at the election of the Indemnified Party, that the determination
of any such approval shall be made by independent counsel mutually agreed upon
between First American and the Indemnified Party.
First American shall use its reasonable efforts (and Pioneer shall cooperate
prior to the Effective Time in these efforts) to maintain, in effect for a
period of three years after the Effective Time, Pioneer's existing directors'
and officers' liability insurance policy (provided that First American may
substitute therefor (i) policies of at least the same coverage and amounts
containing terms and conditions which are substantially no less advantageous or
(ii) with the consent of Pioneer given prior to the Effective Time, any other
policy) with respect to claims arising from facts or events which occurred prior
to the Effective Time and covering persons who are currently covered by such
insurance; provided that First American shall not be obligated to make aggregate
premium payments for such three-year period in respect of such policy (or
coverage replacing such policy) which exceed, for the portion related to
Pioneer's directors and officers, 150% of the annual premium payments on
Pioneer's current policy in effect as of the date of the Agreement (the "MAXIMUM
AMOUNT"). If the amount of the premiums necessary to maintain or procure such
insurance coverage exceeds the Maximum Amount, First American shall use its
reasonable efforts to maintain the most advantageous policies of directors' and
officers' liability insurance obtainable for a premium equal to the Maximum
Amount.
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a pooling-of-interests
under generally accepted accounting principles ("GAAP"), and the receipt of a
letter from First American's independent certified public accountants to the
effect that the Merger will qualify for such accounting treatment is a condition
to the parties' obligations to consummate the Merger.
REGULATORY MATTERS
FEDERAL RESERVE BOARD. The Merger is subject to prior approval by the Federal
Reserve Board under the Bank Holding Company Act of 1956, as amended (the "BHC
ACT"). The Federal Reserve Board approved the Merger under the BHC Act on August
27, 1998. As of the date of this Prospectus/Proxy Statement, the period during
which the U.S. Department of Justice could challenge the Merger on antitrust
grounds has expired.
STATE AUTHORITIES. The Merger also requires the filing of notices or
applications with the Commissioner of Financial Institutions of the State of
Tennessee (the "COMMISSIONER") and the Georgia Department of Banking and
Finance. Such filings have been made and the required approvals or confirmations
have been received prior to the date of this Prospectus/Proxy Statement.
First American and Pioneer are not aware of any governmental approvals or
actions that may be required for consummation of the Merger other than as
described above. Should
41
51
any other approval or action be required, First American and Pioneer currently
contemplate that such approval or action would be sought.
See "-- The Effective Time," "-- Conditions to the Merger" and "-- Termination
of the Merger Agreement."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of First American Common Stock issuable to Pioneer 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 Pioneer, 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
Pioneer Shareholders who are deemed to be affiliates of Pioneer 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. Securities and Exchange Commission (the "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.
Pioneer 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 Pioneer 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.
42
52
INFORMATION ABOUT FIRST AMERICAN AND PIONEER
INFORMATION ABOUT FIRST AMERICAN
GENERAL
First American was incorporated in Tennessee in 1968 and is registered as a bank
holding company under the BHC Act. First American owns all of the capital stock
of FANB, a national banking association headquartered in Nashville, Tennessee,
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'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) ("IFC"), 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.
RECENT ACQUISITIONS
On October 1, 1998, First American completed its acquisitions of Peoples Bank,
Dickson, Tennessee ("PEOPLES"), The Middle Tennessee Bank, Columbia, Tennessee
("MTB"), and CSB Financial Corporation ("CSB"). As of June 30, 1998, (i) Peoples
operated six branches in Dickson and Houston Counties, Tennessee, and had
approximately $136 million in assets, $118 million in deposit liabilities and
$16.8 million in shareholders' equity, (ii) MTB operated seven branches in Maury
County, Tennessee, and had approximately $225 million in assets, $190 million in
deposit liabilities and $30 million in shareholders' equity, and (iii) CSB
operated four branches in Cheatham County, Tennessee, and had approximately $145
million in assets, $132 million in deposit liabilities and $11 million in
shareholders' equity. On October 19, 1998, First American and National Commerce
Bancorporation ("NCBC") announced a definitive agreement whereby FANB would
acquire 10 NCBC branches in Tennessee and NCBC would acquire five First American
Savings Bank branches in Virginia. NCBC also signed a definitive agreement with
IFC to use IFC's services to enable NCBC to offer certain insurance and
investment products to its customers through NCBC's branch system.
43
53
INFORMATION ABOUT PIONEER
Pioneer was incorporated in Delaware in 1991 and is registered as a bank holding
company under the BCHA. Pioneer owns all of the capital stock of Pioneer Bank, a
Tennessee state chartered commercial bank headquartered in Chattanooga,
Tennessee, Valley Bank, a Tennessee state chartered commercial bank
headquartered in Sweetwater, Tennessee and Pioneer Bank, f.s.b., a federal
chartered savings bank headquartered in East Ridge, Tennessee. Pioneer's
subsidiary banks engage in lending in the following areas: commercial, consumer
(residential mortgages and other consumer loans) and real estate (construction,
commercial mortgages and other real estate loans).
Pioneer coordinates the financial resources of the consolidated enterprise and
maintains systems of financial, data operations, loan review, audit, human
resources, legal and compliance and administrative controls allowing for the
coordination of selected policies and activities. Pioneer derives its income
from dividends and management fees received from its subsidiaries.
As of June 30, 1998, Pioneer had total assets of approximately $1.0 billion,
total deposits of approximately $804.2 million and shareholders' equity of
approximately $103.1 million. The mailing address of the principal executive
offices of Pioneer is 801 Broad Street, Chattanooga, Tennessee 37402, and the
telephone number is (423) 755-0000.
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, except that George M. Clark, III will become a new
member of the First American Board.
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 the Nasdaq
National Market ("NASDAQ") under the trading symbol "FATN." As of October 19,
1998, First American Common Stock was held of record by approximately 15,651
persons. The following table sets forth the high and low sale prices of the
First American Common
44
54
Stock as reported by the NYSE or Nasdaq. The following prices have been adjusted
to reflect a two-for-one stock split of First American Common Stock effective
May 9, 1997.
FIRST AMERICAN
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...................................... 50.75 35.69
Fourth Quarter (through October 26, 1998).......... 39.63 34.38
There is no established or active trading market for Pioneer Common Stock, and
it is not listed or traded on any securities exchange, Nasdaq or other
over-the-counter market. The following table sets forth, based primarily upon
the limited trading information available from a Southeast regional brokerage
company which makes a market in Pioneer Common Stock, the high and low stock
prices of shares of common stock during each quarter of the last two years. This
information may not reflect all trades or the actual or the market value of
shares of Pioneer Common Stock. The following data regarding Pioneer Common
Stock is provided for informational purposes only and, due to the absence of an
active market, should not be viewed as indicative of the actual or market value
of Pioneer Common
45
55
Stock. The prices in the following table have been adjusted to reflect a
two-for-one stock split effective May 21, 1996.
PIONEER SALES
PRICES
----------------
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1996:
First Quarter...................................... $35.00 $33.50
Second Quarter..................................... 35.00 35.00
Third Quarter...................................... 36.00 35.00
Fourth Quarter..................................... 37.00 36.00
YEAR ENDED DECEMBER 31, 1997:
First Quarter...................................... 39.00 37.00
Second Quarter..................................... 41.00 39.00
Third Quarter...................................... 44.00 41.00
Fourth Quarter..................................... 45.00 44.00
YEAR ENDED DECEMBER 31, 1998:
First Quarter...................................... 51.00 45.00
Second Quarter..................................... 54.00 51.00
Third Quarter...................................... 57.00 54.00
Fourth Quarter (through October 26, 1998).......... 57.00 57.00
DIVIDENDS
The following table sets forth dividends declared per share of First American
Common Stock and Pioneer Common Stock, respectively, for the periods indicated.
The ability of either First American or Pioneer to pay dividends to its
respective shareholders is subject to certain restrictions. See "-- Supervision
and Regulation of First American and Pioneer."
46
56
FIRST AMERICAN PIONEER
DIVIDENDS(A) DIVIDENDS
-------------- ---------
YEAR ENDED DECEMBER 31, 1996:
First Quarter................................ $.140 .2175
Second Quarter............................... .155 .2175
Third Quarter................................ .155 .2175
Fourth Quarter............................... .155 .2175
YEAR ENDED DECEMBER 31, 1997:
First Quarter................................ .155 .23
Second Quarter............................... .200 .23
Third Quarter................................ .200 .23
Fourth Quarter............................... .200 .23
YEAR ENDED DECEMBER 31, 1998:
First Quarter................................ .200 .25
Second Quarter............................... .250 .25
Third Quarter................................ .250 .25
Fourth Quarter (through October 26, 1998).... .250 --
- -------------------------
(a) Cash dividends declared represents the dividends declared by First American
without any effect given to the acquisition of Deposit Guaranty Corp.
RECENT DEVELOPMENTS
FIRST AMERICAN -- 1998 THIRD QUARTER RESULTS
Net income in the third quarter of 1998, exclusive of merger and integration
costs and a gain on the sale of the corporate trust business of Deposit
Guaranty, was $73 million, or $0.68 per share, up 21% from $60 million, or $0.56
per share, in the third quarter of 1997. Return on assets ("ROA") and return on
equity ("ROE"), excluding merger and integration costs and the corporate trust
business gain, were 1.59% and 18.57%, respectively, in the third quarter of
1998, compared with 1.41% and 15.72%, respectively, in the year-earlier quarter.
For the nine months ended September 30, 1998, operating earnings, exclusive of
merger and integration costs and the corporate trust gain, were $204.2 million,
or $1.90 per share, up 19% from $1.60 per share for the first nine months of
1997. For the first nine months of 1998, ROA and ROE, excluding merger and
integration costs and the corporate trust gain, were 1.52% and 17.61%,
respectively, compared to 1.38% and 15.72%, respectively, in 1997.
First American recognized a $7 million ($4.4 million after-tax) gain on the sale
of the Deposit Guaranty corporate trust business in the third quarter of 1998.
Including this gain and costs of integrating Deposit Guaranty operations of $37
million ($22.8 million after tax), First American recorded net income for the
third quarter of $54.9 million, or $0.51 per share For the nine months ended
September 30, 1998, reported net income was $136 million, or $1.26 per share.
First American experienced growth in average earning assets for the third
quarter of 1998 of 9% over the third quarter of 1997. Third quarter loan volume,
exclusive of consumer
47
57
mortgages, was 2% higher than in the third quarter of 1997. Average deposits for
the third quarter increased 2% compared to the third quarter of 1997.
First American's productivity ratio in the traditional banking business,
excluding merger and integration costs, was 52.83 percent for the third quarter,
compared to 56.45 for the second quarter. For the first nine months of 1998, the
productivity ratio was 55.91%, compared to 59.44% in the first nine months of
1997. The improvement in productivity was primarily the result of increased
expense control.
First American's nonperforming assets were $35.9 million at September 30, 1998,
or 0.34% of total loans and foreclosed properties. At September 30, 1997, First
American's nonperforming assets were $49.4 million, or 0.43% of total loans and
foreclosed properties. The company recorded net loss charge-offs of $7 million
in the third quarter or 0.26% of average loans (on an annualized basis) and
$19.2 million or 0.23% for the first nine months of 1998. First American's
allowance for loan losses of $180.1 million equaled 1.71% of net loans at
quarter end and 594.45% of nonperforming loans. On May 1, 1998, Deposit
Guaranty, based in Jackson, Mississippi, was merged into First American in a
transaction that was accounted for as a pooling-of-interests. All prior period
financial data have been restated to reflect the merger.
SUPERVISION AND REGULATION OF FIRST AMERICAN AND PIONEER
GENERAL
As registered bank holding companies, First American and Pioneer are subject to
the supervision of, and to regular inspection by, the Federal Reserve Board.
FANB, a bank subsidiary of First American, is organized as a national banking
association, which is 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"). Peoples Bank, another bank subsidiary
of First American, is a Tennessee state-chartered bank, which is subject to
regulation by the Tennessee Department of Financial Institutions ("TDFI"). The
bank subsidiaries of Pioneer are Tennessee state-chartered banks subject to
regulation, supervision and examination by the Commissioner. Pioneer owns a
federal savings bank subject to supervision, regulation and examination by the
OTS. Each of the insured depository institution subsidiaries of First American
and Pioneer is also insured by, and subject to the regulations of, the Federal
Deposit Insurance Corporation (the "FDIC"), and is also affected significantly
by the actions of the Federal Reserve Board by virtue of its role in regulating
money supply and credit availability, as well as by the U.S. economy in general.
Areas subject to regulation by federal authorities include loan loss reserves,
investments, loans, mergers, issuance of securities, capital, payment of
dividends, establishment and closing of branches, product offerings and other
aspects of operations. In addition to banking laws, regulations and regulatory
agencies, First American and Pioneer 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 Pioneer and their ability to
make distributions. The following discussion summarizes certain aspects of those
laws and regulations that affect First American and Pioneer. 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
48
58
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. The FDIA provides that amounts received from the
liquidation or other resolution of any insured depository institution by any
receiver must be distributed (after payment of secured claims) to pay the
deposit liabilities of the institution prior to payment of any other general or
unsecured senior liability, subordinated liability, general creditor or
shareholder. This provision would give depositors a preference over general and
subordinated creditors and shareholders in the event a receiver is appointed to
distribute the assets of any of the bank subsidiaries of First American or
Pioneer.
The activities of First American and Pioneer and those of companies which each
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 and Pioneer, are required to obtain
prior approval of the Federal Reserve Board to engage in any new activity or to
acquire more than 5% of any class of voting stock of any company. First
American's and Pioneer's non-banking subsidiaries are subject to the supervision
of the Federal Reserve Board, and other non-banking subsidiaries may be subject
to the supervision of other regulatory agencies including the Securities and
Exchange Commission ("SEC" or the "COMMISSION"), the NASD and state securities
and insurance regulators. Subsidiaries and permitted investments of FANB, such
as IFC and SSI, are also subject to regulation and conditions of acquisition by
the OCC.
Bank holding companies 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.
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, except that applicable
agency and aggregate market share limitations may apply. 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
49
59
subsidiaries are located passed such legislation. Furthermore, pursuant to the
Interstate Banking and Branching Act, a bank is now able to open new branches in
a state in which it does not already have banking operations if such state has
enacted a law permitting such de novo branching.
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, Pioneer 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 Pioneer's were 12.31% and 13.47%, 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% and
Pioneer's was 9.92%. First American Federal Savings Bank and Pioneer Bank,
f.s.b. are 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, each of the subsidiaries of First American
and Pioneer were 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
50
60
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 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, each of the banking subsidiaries of First American and Pioneer 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.
"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 ("FDIA"), any FDIC-insured
subsidiary of First American or Pioneer can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC in connection with (i)
the default of a commonly controlled FDIC-insured subsidiary or (ii) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
subsidiary "in danger of default." "Default" is defined generally as the
appointment of a conservator or receiver and "in danger of default" is defined
generally as the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance. The FDIC may decline to
enforce the cross-guarantee provisions if it
51
61
determines that a waiver is in the best interest of the Bank Insurance Fund
("BIF") or the Savings Association Insurance Fund ("SAIF"), or both. The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
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, Pioneer or
their subsidiaries to these enforcement provisions.
BANK REGULATION
PAYMENT OF DIVIDENDS. 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, FANB, a national banking
subsidiary 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. In the case of Peoples Bank and
Pioneer's Tennessee bank subsidiaries, their ability to pay dividends is subject
to the rules and regulations of the TDFI governing the amount of dividends which
may be paid to shareholders, the manner in which dividends are paid, and the
methods, if any, by which capital stock and surplus may be retired and reduced.
Each of the banking subsidiaries is prohibited from paying a dividend if
thereafter the subsidiary 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 First American, Pioneer and their
respective 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,
Pioneer, 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
52
62
subsidiaries. For more information on "Payment of Dividends" by First American,
please see Note 15 ("Legal and Regulatory Matters") to First American's
Supplemental Consolidated Financial Statements on pages F-55 to F-58 herein. For
a discussion on the impact of First American's long-term debt on its ability to
pay dividends to shareholders, please see Note 9 ("Long-term Debt") to First
American's Supplemental Consolidated Financial Statements on pages F-40 to F-41
herein.
In addition to the foregoing, under the FDIA, insured depository institutions
are prohibited from making capital distributions, including the payment of
dividends, if, after making such distribution, the institutions would become
"undercapitalized" (as such term is used in the statute). Based on the current
financial condition of these institutions, First American and Pioneer do not
expect that this provision will have any impact on their ability to obtain
dividends from their bank subsidiaries.
FDIC INSURANCE. First American's and Pioneer's subsidiary depository
institutions are subject to FDIC deposit insurance assessments. The FDIC has
promulgated risk-based deposit insurance assessment regulations which became
effective in 1993. Under these regulations, insured institutions (whether
members of BIF or SAIF) are assigned assessment risk classifications based upon
capital levels and supervisory evaluations.
With the exception of deposits attributable to thrift acquisitions, FANB,
Peoples Bank, Pioneer Bank and Valley Bank pay premiums at the BIF rate. As
federal savings banks, FAFSB and Pioneer Savings Bank, f.s.b, pay premiums at
the SAIF rate. Thus, First American's and Pioneer's overall deposit insurance
premium expenses are affected by changes in both the BIF and the SAIF assessment
rate.
The Deposit Insurance Funds Act of 1996 ("DIFA") requires BIF members to pay
one-fifth of the assessment rate imposed upon thrifts to cover the annual
Financing Corporation ("FICO") bond payments from January 1, 1997 until December
31, 1999. From January 1, 2000 until the FICO bonds are retired, the law will
require banks and thrifts to pay the assessment on a pro rata basis. DIFA also
stipulates that the BIF and SAIF will be merged on January 1, 1999 into the new
Deposit Insurance Fund, contingent upon there being no federally insured savings
associations or thrifts in existence on that date and subject to further
legislative action. For more information regarding FDIC assessment rates, please
see Note 15 ("Legal and Regulatory Matters") of First American's Supplemental
Consolidated Financial Statements on pages F-55 to F-58 herein.
COMMUNITY REINVESTMENT ACT. First American's and Pioneer's subsidiary
depository institutions also are subject to the requirements of the Community
Reinvestment Act of 1976 ("CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process, as well as when an institution applies to undertake a
merger, acquisition or to open a branch facility. CRA regulations incorporate an
evaluation system that rates institutions based on their performance in meeting
community credit needs. Under these regulations, each institution is evaluated
based on the degree to which it is providing loans (the lending test), branches
and other services (the service test), and investments (the investment test) to
low and moderate income areas in the communities it serves, based on the
communities' demographics, characteristics and needs, the institution's
capacity, product offerings and business strategy. Under this evaluation system,
institutions receive one of four composite ratings: Outstanding, Satisfactory,
Needs to Improve or Substantial Noncompliance. As of June 30, 1998, each
53
63
of First American's and Pioneer's subsidiary depository institutions had at
least a satisfactory rating.
CERTAIN TRANSACTIONS WITH AFFILIATES. Provisions of the Federal Reserve Act
impose restrictions on the type, quantity and quality of transactions between
affiliates of an insured bank (including First American, Pioneer and their
respective nonbank subsidiaries) and the insured bank (or savings institution)
itself. Under these restrictions, an insured bank (or savings institution) and
its subsidiaries are, among other things, limited in engaging in "covered
transactions" with any one affiliate to no more than 10% of the capital stock
and surplus of the insured bank (or savings institution); and with all
affiliates in the aggregate, to no more than 20% of the capital stock and
surplus of the bank (or savings institution). "Covered transactions" are defined
by statute to include a loan or extension of credit, as well as a purchase of
securities issued by an affiliate, a purchase of assets (unless otherwise
exempted by the Federal Reserve Board), the acceptance of securities issued by
the affiliate as collateral for a loan and the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. In addition, any
transaction with an affiliate, including loans, contractual arrangements and
purchases, must be on terms and conditions that are substantially the same or at
least as favorable to the bank (or savings institution) as those prevailing at
the time for comparable transactions with non-affiliated companies. The purpose
of these restrictions is to prevent the misuse of the resources of the bank by
its uninsured affiliates. An exception to the quantitative restrictions is
provided for transactions between two insured banks or savings institutions that
are within the same holding company structure where the holding company owns 80%
or more of each institution. A proposed rule by the Federal Reserve Board,
published on July 15, 1997, if promulgated, potentially affects "covered
transactions" between banks, such as FANB and FAFSB, and their operating
subsidiaries. The proposed rule, among other things, would potentially limit
credit transactions between banks and their subsidiaries and affect the size of
companies that could be acquired by banks.
TRANSACTIONS WITH INSIDERS. Any loans made by First American's and Pioneer's
depository institution subsidiaries to their respective executive officers,
directors or 10% shareholders, as well as entities such persons control, are
required to be made on terms substantially the same as those offered to
unaffiliated individuals and to involve not more than the normal risk of
repayment, and are subject to individual and aggregate limits depending on the
person involved. Further, provisions of the BHCA prohibit a bank holding company
and its subsidiaries from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
OTHER SAFETY AND SOUNDNESS REGULATIONS. FDIC regulations require that
management report on its institution's responsibility for preparing financial
statements, and establishing and maintaining an internal control structure and
procedures for financial reporting and compliance with designated laws and
regulations concerning safety and soundness. Under these rules, independent
auditors must attest to and report separately on assertions in management's
report concerning the effectiveness of the internal control structure over
financial reporting, using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal banking
agencies has issued regulations and interagency guidelines implementing these
standards. The regulations and guidelines set forth general operational
54
64
and managerial standards in the areas of internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth and compensation, fees and benefits. Recently
proposed rules would add asset quality and earnings standards to the guidelines.
The current rules contemplate that each federal agency would determine
compliance with these standards through the examination process, and if
necessary to correct weaknesses, require an institution to file a written safety
and soundness compliance plan.
INTEREST RATE LIMITATIONS
The maximum permissible interest rates on most consumer and commercial loans
made by First American's and Pioneer's insured depository institution
subsidiaries are governed by state usury laws in states where these subsidiaries
operate and by applicable federal statutes and regulations that in each case set
limits on interest rates and impose penalties in the event such limits are
exceeded. In certain circumstances, these federal statutes and regulations
preempt state usury laws that otherwise would apply. In addition, under the
Interstate Banking and Branching Act, the usury or interest laws of a bank's
home state may be applied to that bank's operations in other states. In the case
of FANB, for example, this would result in the application of Tennessee's laws
to FANB's operations in Arkansas, Kentucky, Louisiana, Mississippi and Virginia.
ENVIRONMENTAL REGULATION
As real estate lenders and as owners of real property, financial institutions
such as First American, Pioneer and their subsidiary depository institutions may
become subject to liability under various statutes and regulations applicable to
property owners, specifically including those which impose liability with
respect to the environmental condition of real property. First American's and
Pioneer's primary exposure under these statutes and regulations stems from the
lending activities of their subsidiary depository institutions, FANB and FAFSB,
which have adopted policies and procedures to identify and monitor their
exposure to avoid any material loss or liability related to the environmental
condition of mortgaged property. Environmental liability can also result from
mergers and acquisitions, and First American and Pioneer have implemented
procedures to identify and avoid any material loss or liability related to the
acquisition of real property through mergers and acquisitions.
YEAR 2000
On May 5, 1997, the Federal Financial Institutions Examination Council
("FFIEC"), which consists of the Federal Reserve Board, the OCC, the FDIC, and
the OTS, and the National Credit Union Administration, issued a statement (the
"Interagency Statement") encouraging financial institutions, such as the
Corporation and its subsidiaries, to undertake initiatives to address and
resolve the Year 2000 issue by December 31, 1998. During 1997 and throughout
1998, the FFIEC has expanded on its Interagency Statement to provide further
guidance to management of financial institutions in addressing the Year 2000
issue. For a discussion of First American's and Pioneer's initiatives undertaken
response to the Interagency Statement, as updated, please see pages 107-08 of
this Prospectus/Proxy Statement.
RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT
The Riegle Community Development and Regulatory Improvement Act ("RCDRIA") is an
effort to alleviate certain regulatory burdens imposed on the banking industry
by
55
65
amending sections of FDICIA and other statutes pertaining to the regulation of
financial institutions and financial institution holding companies. For example,
as amended by the RCDRIA, FDICIA empowers each agency to adopt its own standards
for safety and soundness relating to quality, earnings, and stock valuation as
the agency deems appropriate.
The RCDRIA also contains various community development initiatives; measures to
promote the securitization of small business loans; changes to the National
Flood Insurance Program and changes to the Bank Secrecy Act in terms of money
laundering; protection against bank insolvency of the security interests of
public entities in bank assets pledged to secure the entities' deposits;
restrictions on certain high-rate, high-fee mortgages; and disclosure
requirements for reverse mortgages.
BROKER/DEALER REGULATION
The United States securities industry generally is subject to extensive
regulation under federal and state laws. The SEC is the federal agency charged
with administration of the federal securities laws. Much of the regulation of
broker/dealers, however, has been delegated to self-regulatory organizations,
principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (which are subject to approval by the
SEC) which govern the industry and conduct periodic examinations of member
broker/dealers. Securities firms are also subject to regulation by state
securities commissions in the states in which they are registered. IFC is a
registered broker-dealer in securities under the Securities Exchange Act of
1934, as amended, and is a member of the NASD. IFC is also an investment adviser
pursuant to the Investment Advisers Act of 1940, as amended, and is a member of
the Securities Investor Protection Corporation. IFC is registered as a
broker-dealer in 50 states, the District of Columbia, and Puerto Rico. As a
third-party marketer of investment products, IFC may, in certain instances, be
subject to regulation by those agencies having supervisory authority over IFC's
financial institution clients, including, for example, the Federal Reserve
Board, the OCC, the OTS, the FDIC, and various state banking agencies.
The regulations to which broker/dealers are subject cover all aspects of the
securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, uses and safekeeping of
customers' funds and securities, recordkeeping, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations, or changes in interpretation or
enforcement of existing laws and rules, often affect directly the method of
operation and profitability of broker/dealers. The SEC and the self-regulatory
organizations may conduct administrative proceedings which can result in
censure, fines, suspension or expulsion of a broker/dealer, its directors,
officers or employees. The principal purpose of regulation and discipline of
broker/dealers is the protection of customer and the securities market rather
than the protection of creditors and stockholders of broker/dealers.
COMPETITION
The activities in which First American engages are very competitive. Generally,
the lines of activity and markets served by First American involve competition
with money market mutual funds, national and state banks, mutual savings banks,
savings and loan associations, finance companies, brokerage firms, credit unions
and other financial institutions located primarily in the southeastern region of
the United States. The principal methods of competition center around such
aspects as interest rates on loans and deposits,
56
66
lending limits, customer services, location of offices, provision of financial
services, and other service delivery systems. Some of First American's
competitors are major corporations with substantially more assets and personnel
than First American and its subsidiaries. Additionally, First American's
competitive environment is subject to future changes in federal and state
legislation.
COMPARATIVE RIGHTS OF SHAREHOLDERS OF FIRST AMERICAN AND PIONEER
First American is a Tennessee corporation subject to the provisions of the TBCA
and the Tennessee Greenmail Act (the "TGA"). Pioneer is a Delaware corporation
subject to the provisions of the DGCL.
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.
Pioneer's Certificate of Incorporation provides that the size of the Pioneer
Board shall consist of 18 directors (exclusive of directors to be elected by the
holders of any one or more series of Preferred Stock voting separately as a
class or classes). This number may be amended from time to time by resolution
adopted by the affirmative vote of at least (i) 80% of the total number of
directors (without regard to whether there are current vacancies) and a (ii)
majority of the Continuing Directors (as this term is defined in Pioneer's
Certificate of Incorporation). However, in no event shall the whole board of
directors consist of less than nine persons.
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.
The DGCL, which governs Pioneer, provides that shareholders do not have the
right to cumulate their votes unless the corporation's Certificate of
Incorporation provides otherwise. Pioneer's Certificate of Incorporation does
not provide for cumulative voting.
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 Pioneer By-Laws provide that no person may be elected or continue to serve
as a director upon reaching 70 years of age except for those directors in office
as of April 11, 1995.
VACANCIES. The TBCA provides that vacancies on a board of directors may be
filled by shareholders or the board of directors unless the articles of
incorporation provide otherwise. 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.
57
67
The Pioneer By-Laws provide that any vacancy on the Board of Directors for any
reason may be filled only by the Board of Directors, acting by vote of (i) 80%
of the directors then in office and (ii) a majority of the Continuing Directors
(as this term is defined in Pioneer's By-Laws), although less than a quorum, or
by the affirmative vote of not less than (i) 80% of all shares of Pioneer
entitled to vote in the election of directors and (ii) a majority of the
shareholders (excluding generally those shareholders that own 5% or more of the
voting shares) if no directors remain.
REMOVAL. The TBCA provides that a corporation's charter can provide for removal
of directors with cause by a majority of the entire board of directors. The
First American Charter does not so provide. 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 Pioneer Certificate of Incorporation and the Pioneer By-Laws provide for
removal of directors only for cause upon the affirmative vote of (a) 80% of all
shares of Pioneer entitled to vote in the election of directors and (b) a
majority of the shareholders (excluding generally those shareholders that own 5%
or more of the voting shares) at a meeting duly called and held upon not less
than 30 days' prior written notice.
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.
Pursuant to Pioneer's Certificate of Incorporation, Pioneer's Directors may
nominate persons for the office of director. Also, Pioneer Shareholders may make
nominations for the elections of directors if: (i) advance notice of the
proposed nomination is received by the Secretary of Pioneer not less than 90
days prior to the anniversary of the last annual meeting of Pioneer
Shareholders; (ii) the advance notice set forth above meets certain disclosure
requirements set forth in Pioneer's Certificate of Incorporation; and (iii) the
shareholder's nomination occurs at a meeting of Pioneer Shareholders called for
the election of directors.
BUSINESS COMBINATION PROVISIONS
FIRST AMERICAN. 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, unless 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 TBCA 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 TBCA also exempts
transactions with Interested
58
68
Shareholders if the corporation enacts a charter or bylaw amendment 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 not adopted a charter or by-law amendment removing First American
from the coverage of the TBCA.
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 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.
PIONEER. Pioneer has opted out of the DGCL's business combination provision.
Generally, Pioneer's Certificate of Incorporation only requires the shareholder
vote set forth in the DGCL (majority of all votes entitled to be cast) to effect
the Merger. However, supermajority voting provisions are required if less than
(i) 80% of the total number of directors (without regard to whether there are
current vacancies) or less than (ii) a majority of the Continuing Directors (as
this term is defined in Pioneer's Certificate of Incorporation) vote to approve
the business combination. Supermajority voting provisions are also required if
the consideration received by Pioneer's shareholders in the business combination
is deemed unfair pursuant to five conditions set forth in Pioneer's Certificate
of Incorporation.
In this Merger, only the shareholder vote set forth in the DGCL will be required
as the conditions discussed above have been fulfilled.
SHAREHOLDER RIGHTS PLAN
Pioneer does not have a shareholder rights plan.
First American has a 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
59
69
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.
60
70
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 shareholders 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 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 shareholders 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
shareholders, 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 shareholders 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 shareholders, 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.
61
71
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 action of the Board
of Directors ordering redemption of the New Rights, the New Rights will
62
72
terminate and the only right of the holders of New Rights will be to receive the
$0.01 redemption price.
SHAREHOLDER MEETINGS
SHAREHOLDER ACTION WITHOUT A MEETING. Under the TBCA, shareholders may act by
written consent if all the shareholders entitled to vote on the action consent
to taking such action without a meeting. Under the TBCA, the affirmative vote of
the number of shares that would be necessary to authorize or take such action at
a meeting is the act of the shareholders.
Under Pioneer's By-Laws, no action required to be taken at any annual or special
meeting of shareholders of Pioneer, or any action which may be taken at any
annual or special meeting of such shareholders, may be taken without a meeting
and without prior notice and without a vote.
SPECIAL MEETINGS OF SHAREHOLDERS. The TBCA provides that a special meeting of
shareholders may be called by a corporation's board of directors or by the
persons authorized to call special meetings under the corporation's articles of
incorporation and bylaws or, unless the articles of incorporation provide
otherwise, by written demand of the shareholders having at least 10% of all the
votes entitled to be cast on an issue to be considered at the proposed special
meeting.
Under Pioneer's By-Laws, special meetings of shareholders may be called by a
majority of the total number of directors (without regard to whether there are
current vacancies) and a majority of the Continuing Board of Directors (as this
term is defined in Pioneer's By-Laws), or upon the written request of
shareholders owning not less than 35% of all shares of Pioneer issued and
outstanding and entitled to vote at such meeting.
NOTICE OF MEETING. The TBCA requires a corporation to notify its shareholders
with respect to each annual or special meeting no fewer than 10 and no more than
60 days before the meeting date (notice generally need be given only to
shareholders entitled to vote at such meeting). Such notice need not include a
description of the purpose of the annual meeting, but must include such a
description if the meeting is a special meeting.
Under Pioneer's By-Laws, Pioneer must notify its shareholders with respect to
each annual or special meeting no fewer than 10 and no more than 60 days before
the meeting date (notice generally need be given only to shareholders entitled
to vote at such meeting). Such notice need not include a description of the
purpose of the annual meeting, but must include such a description if the
meeting is a special meeting.
DISSENTERS' APPRAISAL RIGHTS
Under the DGCL, Pioneer shareholders have dissenter's rights as described in
"ADDITIONAL INFORMATION -- Dissenters' Appraisal Rights" and Appendix E 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
FIRST AMERICAN. 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
63
73
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.
PIONEER. Pioneer's Certificate of Incorporation requires the Pioneer Board to
consider all relevant factors when evaluating whether an actual or proposed
business combination, a tender or exchange offer, a solicitation of options or
offers to purchase or sell Pioneer's shares by another person, or a solicitation
of proxies to vote Pioneer shares by another person, or any similar transaction
is in the best interests of Pioneer and Pioneer Shareholders, including: the
adequacy and form of the consideration to be paid in connection with any such
transaction, the social and economic effects on Pioneer, its subsidiaries,
employees, depositors, loan and other customers, creditors and on the
communities in which Pioneer and its subsidiaries operate or are located; the
business and financial condition, and earnings prospects of the acquiring
person, persons, or entities; the competence, experience, and integrity of the
person or entity and their management proposing or effecting such actions; the
prospects for a successful conclusion of the business combination; and Pioneer's
prospects as an independent entity.
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.
INDEMNIFICATION
PIONEER. Pioneer's By-Laws provides for indemnification to any person who was
or is a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he, or the person of whom he is the
legal representative, is or was a director or officer of Pioneer or is or was
serving at the request of Pioneer as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, against
all expense, liability and loss reasonably incurred or suffered by such person
in connection therewith, so long as the director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Pioneer, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. At the indemnified
person's request, Pioneer must advance the expenses incurred by the indemnified
person in defending such proceeding, provided that, if the DGCL requires, the
64
74
payment of such expenses incurred by a director or officer in his capacity as a
director or officer of Pioneer in advance shall be made only upon delivery to
Pioneer of an undertaking by such director or officer to repay all amounts so
advanced if it shall ultimately be determined that such director or officer is
not entitled to be indemnified.
As to actions by or in the right of Pioneer, its By-Laws prohibit
indemnification of a person serving as a director, officer, employee or agent of
Pioneer, or serving at the request of Pioneer as a director, officer, trustee,
employee or agent of or in any other capacity with another corporation,
partnership, joint venture, trust or other enterprise, in respect of any claim,
issue or matter as to which such person has been adjudged liable to Pioneer
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought determines that, despite the adjudication of
liability but in view of all the circumstances, such person is entitled to
indemnity for such expenses which such court deems proper.
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 (as such terms are defined in the First American
By-Laws) (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 acted in good faith and in a manner he 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.
65
75
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 provisions 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
FIRST AMERICAN. 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.
PIONEER. The Pioneer Certificate of Incorporation provides that altering,
amending or repealing the provisions of the Pioneer Certificate of Incorporation
relating to (including changes to provisions that would have the effect of
permitting action inconsistent with or in circumvention of such provisions) the
Pioneer Board (including, with respect to directors, the number, term/length,
classification, removal and procedures for filling vacancies), business
combinations, shareholder actions, and shareholder proposals requires the
affirmative vote of at (i) least eighty percent (80%) of all shares entitled to
vote in the election of directors and (ii) a majority of the shareholders
(excluding generally those shareholders that own 5% or more of the voting
shares), unless such amendment, alteration or repeal is recommended to the
shareholders by a vote of not less than (x) 80% of the entire Board of Directors
and (y) a majority of the Continuing Directors (as this term is defined in
Pioneer's By-Laws), in which case the shareholder vote requirements set forth in
the DGCL shall be required.
Pioneer's By-Laws may be altered, amended, or repealed by the affirmative vote
of either (i) a majority of the total number of directors (without regard to
whether there are
66
76
current vacancies) and a majority of the Continuing Directors (as this term is
defined in Pioneer's By-Laws), or (ii) 80% of all shares of Pioneer entitled to
vote in the election of directors and a majority of the shareholders (excluding
generally those shareholders that own 5% or more of the voting shares).
ADDITIONAL INFORMATION ABOUT FIRST AMERICAN
BUSINESS AND PROPERTIES
GENERAL
First American Corporation ("FIRST AMERICAN" OR THE "CORPORATION"), a Tennessee
corporation, was incorporated in 1968 and is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and as
a savings and loan holding company under the Home Owner's Loan Act, as amended
("HOLA"). The Corporation owns all of the capital stock of First American
National Bank ("FANB"), a national banking association headquartered in
Nashville, Tennessee; First American Federal Savings Bank ("FAFSB"), a federal
savings bank headquartered in Roanoke, Virginia; and First American Enterprises,
Inc. ("FAE"), a Tennessee corporation headquartered in Nashville, Tennessee.
FANB owns 98.75% of the issued and outstanding capital stock of IFC Holdings,
Inc. ("IFC"), a Delaware corporation headquartered in Tampa, Florida, which is
engaged in the distribution of securities, other investment products, and
insurance. IFC offers these products under two brand names, INVEST Financial
Corporation ("INVEST") and Investment Centers of America, Inc. ("ICA"). The
INVEST brand markets investment products to financial institutions of various
asset sizes while the ICA brand markets investment products primarily to
community banks.
FANB also owns 49% of the capital stock of The SSI Group, Inc. ("SSI"), a
Florida corporation headquartered in Mobile, Alabama, which is engaged in health
care claims processing.
The Corporation 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. The
Corporation derives its income from interest, dividends and management fees
received from its subsidiaries. The mailing address of the principal executive
offices of the Corporation is First American Center, Nashville, Tennessee
37237-0700, and the telephone number is (615) 748-2000.
As of December 31, 1997, the Corporation had total assets of approximately $10.9
billion, total deposits of $8.0 billion, shareholders' equity of approximately
$908.7 million, and net income of $145.5 million. As of December 31, 1997, FANB
had total assets of approximately $10.59 billion, total deposits of $7.79
billion, shareholders' equity of approximately $947.1 million, and net income of
$146.0 million for 1997. As of December 31, 1997, the Corporation estimates that
it ranked, on the basis of aggregate deposits in Tennessee held by FANB, the
Corporation's principal subsidiary, as the second largest bank holding company
headquartered in Tennessee.
The Corporation's subsidiary banks engage in lending in the following areas:
commercial, consumer -- amortizing mortgages, consumer -- other, real
estate-- construction, and real estate -- commercial mortgages and other. The
risk involved to the Corporation and its subsidiary banks in making these loans
varies based on, among other things, the amount of the loan, the length of
amortization of the principal, the type of collateral, if any, used to
67
77
secure the loan, and characteristics of the borrower. For a further discussion
of the Corporation's and its subsidiary banks' lending activities, see
"-- Management's Discussion and Analysis of Financial Condition Results of
Operations" at pages to of this Prospectus/Proxy Statement.
For a discussion of the Corporation's and its subsidiary banks' investment
activities, see "-- Management's Discussion and Analysis of Financial Condition
and Results of Operations" at pages to of this Prospectus/Proxy Statement.
For a discussion of the Corporation's and its subsidiary banks' deposit and
other funding activities, see "-- Management's Discussion and Analysis of
Financial Condition and Results of Operations" at pages to of this
Prospectus/Proxy Statement.
COMMERCIAL BANKING
Founded in 1883, FANB, at December 31, 1997, had banking offices in 35 Tennessee
counties containing approximately 74% of Tennessee's population. FANB also has
banking offices in two Kentucky counties containing approximately 2.6% of
Kentucky's population and two Virginia counties (or cities) containing
approximately 1% of Virginia's population. On the basis of deposits at December
31, 1997, the Corporation estimates that FANB was the second largest bank in
Tennessee, and had the largest deposit base in the Nashville-Davidson County,
Tennessee market, the largest deposit base in the Tri-Cities (Sullivan, Carter,
Hawkins and Washington Counties, Tennessee and Washington County and Bristol
City, Virginia) market, the second largest deposit base in the Knoxville (Knox
County, Tennessee) market, the fifth largest deposit base in the Memphis (Shelby
County, Tennessee) market, the eighth largest deposit base in the Chattanooga
(Hamilton County, Tennessee) market, the second largest deposit base in the
Bowling Green, Kentucky, market, and the tenth largest deposit base in the
Southwest Virginia market.
At December 31, 1997, FANB had a total of 156 banking offices in Tennessee,
Kentucky, and Virginia. In its primary market of Tennessee, FANB had banking
offices in 20 of the 25 largest Tennessee counties (measured by aggregate bank
deposits of banks in the county at June 30, 1997) and in each of the 15 most
populous Tennessee cities.
As of October 26, 1998, which was subsequent to the Corporation's acquisition of
Deposit Guaranty, Deposit Guaranty National Bank's merger with and into FANB and
the Corporation's acquisition of Peoples Bank, The Middle Tennessee Bank and CSB
Financial Corporation, FANB had 312 banking offices in Tennessee, Mississippi,
Louisiana, Arkansas, Kentucky and Virginia.
FANB offers the services generally performed by commercial banks of like size
and character. FANB also provides individual trust services and investment
management services for customers of the Corporation's subsidiary banks. In
addition, FANB owns First Amtenn Life Insurance Company, which underwrites
credit life and accident and health insurance on extensions of credit made by
FANB. For a discussion of the securities brokerage services provided by FANB,
please see "Investment Product Distribution; Broker/Dealer Services" below.
FANB offers 24-hour banking service through a variety of means, including
automated teller machines located at a majority of its banking offices and at
other locations. As of October 26, 1998, FANB operated a total of 623 automated
teller machines. In 1997, FANB also introduced PC and telephone banking to its
customers.
FAFSB offers the services generally performed by savings banks of like size and
character. As of October 26, 1998, FAFSB had 10 branches in the southwestern
region of Virginia
68
78
and offered 24-hour banking service through 11 automated teller machines. On the
basis of deposits at December 31, 1997, the Corporation estimates that FAFSB had
the sixth largest deposit base in the Bristol City/Washington County, Virginia
market.
Peoples Bank, a Tennessee state-chartered bank, offers the services generally
performed by commercial banks of like size and character. As of October 26,
1998, Peoples Bank had six branches in Dickson and Houston Counties, Tennessee
and had eight automated teller machines.
FAE was incorporated in 1995 for the purpose of developing sources of
non-traditional financial services income. FAE has concentrated its efforts in
exploring the potential of fee income generation in the areas of health care
payment processing, insurance company relational database services, and
third-party marketing and securities distribution. A division of FANB manages
the Corporation's investments in these areas, including investments in IFC and
SSI.
INVESTMENT PRODUCT DISTRIBUTION; BROKER/DEALER SERVICES
IFC, which was formerly known as INVEST Financial Corporation, is a securities
broker-dealer registered with the National Association of Securities Dealers,
Inc. ("NASD"), and through its subsidiaries, is licensed to sell investment
products in all 50 states, the District of Columbia, and Puerto Rico.
Headquartered in Tampa, Florida, IFC's primary business is selling investment
products through financial institutions for which it functions as a third party
marketer. IFC offers investment products under the INVEST brand for its
financial institution clients. ICA, a North Dakota corporation headquartered in
Bismarck, North Dakota and a wholly owned subsidiary of IFC, is also a
broker-dealer registered with the NASD and a third-party marketer of its own
brand of investment products through financial institutions. ICA primarily
services community banks with assets of $500 million or less. As of December 31,
1997, IFC and ICA collectively service more than 400 banks through approximately
1900 licensed representatives in 1120 investment centers located throughout the
United States.
Effective February 1, 1997, AmeriStar Capital Markets, Inc., formerly a wholly
owned subsidiary of FANB and a broker-dealer registered with the NASD, was
merged with and into IFC. Through its AmeriStar Investment Products operating
division, IFC currently serves as the third-party marketer of investment
products for the Corporation's subsidiary banks.
HEALTH CARE CLAIMS PROCESSING
SSI, a health care claims processing company headquartered in Mobile, Alabama,
uses automated data processing to assist hospitals and physicians in
communicating billing and payment-related information to medical benefits
third-party payors, including government agencies, health maintenance
organizations, and insurance carriers. SSI's claims processing services include
transmission of bill payments by both patients and third-party payors to
hospitals or physicians. SSI provides these electronic financial data processing
services to more than 600 hospitals, clinics, and physicians in 38 states.
Effective January 1, 1997, SSI acquired CareWare Systems, Inc. ("CareWare"), a
Tampa, Florida-headquartered developer of medical management computer software
for managed care organizations, insurance carriers and health maintenance
organizations. CareWare's principal software product allows preapproval or
authorization of patient
69
79
treatment, consistent with recognized medical guidelines, and facilitates SSI's
health care claims processing function by helping control the selection,
delivery, and cost of medical services. Under the terms of the merger agreement,
CareWare's shareholders received 5.1% of SSI's common stock. Simultaneously,
FANB exercised its option to maintain its 49% ownership of SSI, for an
additional cost of approximately $667,000. The balance of SSI is owned, either
directly or indirectly, by Celia A. Wallace, who was appointed to the
Corporation's Board of Directors in June 1996.
COMPETITION
The activities in which the Corporation engages are very competitive. Generally,
the lines of activity and markets served by the Corporation involve competition
with money market mutual funds, national and state banks, mutual savings banks,
savings and loan associations, finance companies, brokerage firms, credit unions
and other financial institutions located primarily in the southeastern region of
the United States. The principal methods of competition center around such
aspects as interest rates on loans and deposits, lending limits, customer
services, location of offices, provision of financial services, and other
service delivery systems. Some of the Corporation's competitors are major
corporations with substantially more assets and personnel than the Corporation
and its subsidiaries. Additionally, the Corporation's competitive environment is
subject to future changes in federal and state legislation.
The Corporation's subsidiary banks actively compete for loans and deposits with
other commercial banks, savings and loan associations, and credit unions.
Consumer finance companies, department stores, factors, mortgage brokers and
insurance companies are also significant competitors for various types of loans.
FANB competes for various types of fiduciary and trust business from other
banks, trust and investment companies, investment advisory firms and others.
Through IFC, FANB competes with other third-party marketers of investment
products and other entities offering securities brokerage services.
EMPLOYEES
As of September 30, 1998, the Corporation and its subsidiaries employed 6,337
full-time equivalent officers and employees, compared with 4,066 at December 31,
1997 and 4,355 at December 31, 1996.
LEGAL PROCEEDINGS
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter Federal Savings Bank ("Charter" or
now "FAFSB"), brought an action against the OTS and the Federal Deposit
Insurance Corporation seeking injunctive and other relief, contending that
Congress' elimination of supervisory goodwill required rescission of certain
supervisory transactions. The Federal District Court found in Charter's favor,
but in 1992 the Fourth Circuit Court of Appeals reversed, and the U.S. Supreme
Court denied Charter's petition for certiorari. In 1995, the Federal Circuit
Court found in favor of another thrift institution in a similar case (Winstar
Corp. v. United States) in which the association sought damages for breach of
contract. Charter also filed suit against the United States Government
("Government") in the Court of Federal Claims based on breach of contract.
Pending the Supreme Court's review of the Winstar decision, FAFSB's action was
stayed. In July 1996, the Supreme Court affirmed the lower court's decision in
Winstar. The stay was automatically lifted and FAFSB's suit is now
70
80
proceeding. The Government, however, has filed a motion to dismiss the suit
based on the prior Fourth Circuit decision. This motion has not yet been decided
by the Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their ultimate
outcome, are contingent upon a number of factors, some of which are outside of
FAFSB's control, and are highly uncertain as to substance, timing and the dollar
amount of any damages which might be awarded should FAFSB finally prevail. Under
the Agreement and Plan of Reorganization as amended by and between FAFSB and the
Corporation, in the event that FAFSB is successful in this litigation, the FAFSB
shareholders as of December 1, 1995 will be entitled to receive additional
consideration equal in value to 50% of any recovery, net of all taxes and
certain other expenses, including the costs and expenses of such litigation,
received on or before December 1, 2000 subject to certain limitations in the
case of certain business combinations. Such additional consideration, if any, is
payable in the common stock of the Corporation, based on the average per share
closing price on the date of receipt by FAFSB of the last payment constituting a
recovery from the Government.
FANB (as successor to Deposit Guaranty National Bank ("DGNB")) is a defendant in
a case to which the plaintiffs are beneficiaries of a trust for which DGNB was
the trustee. In an amended complaint, the plaintiffs claim that DGNB was
negligent in its dealings with the trust property, breached its trust duties by
allegedly abusing its discretion and negligently handling trust assets, engaged
in self dealing, and was grossly negligent in its handling of the trusts. The
case seeks actual damages for waste of trust assets and loss of income and
punitive damages, both in an unspecified amount to be proven at trial, and
attorney fees and court costs. While the ultimate outcome of the lawsuit cannot
be predicted with certainty, management denies all liability and believes that
the ultimate resolution of this matter will not have a material effect on the
Corporation's consolidated financial statements.
FANB (as successor to DGNB) is also a defendant in an action brought in Pike
County, Mississippi by a land owner and a gaming corporation, alleging that DGNB
and the two defendant casinos entered into an agreement, expressed or implied,
to oppose an application to operate a casino on the Big Black River in
Mississippi. The plaintiffs contend that DGNB used its influence to cause the
Mississippi Gaming Commission to deny the casino's application. The plaintiffs
seek actual damages for injury to property and business in the total amount of
$38 million and punitive damages in the amount of $200 million. FANB denies all
liability. It is the opinion of management and counsel that ultimate disposition
of the case should not have a material effect on the Corporation's consolidated
financial statements.
There are from time to time other legal proceedings pending against the
Corporation and its subsidiaries. In the opinion of management and counsel,
liabilities, if any, arising from such proceedings presently pending would not
have a material adverse effect on the consolidated financial statements of the
Corporation.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS OF FIRST AMERICAN
The following is a list of First American's executive officers, their ages and
their positions and offices during the last five years (listed alphabetically).
71
81
OFFICER AGE BUSINESS EXPERIENCE -- PAST 5 YEARS
- ------- --- -----------------------------------
Dennis C. Bottorff................... 53 Mr. Bottorff serves as Chairman and Chief
Executive Officer of the Corporation and
FANB and also served as the Corporation's
President until August 1997. From November
1991 until January 1994, Mr. Bottorff also
served as President of FANB. Mr. Bottorff
also serves as a director of the
Corporation's affiliates SSI and IFC.
Melissa J. Buffington................ 40 Since August 1996, Ms. Buffington has served
as Executive Vice President and Director of
Human Resources of the Corporation and FANB.
From June 1992 though June 1993, she served
as Assistant Director of Strategic Planning
for FANB. From June 1993 through August
1996, she served as the Corporation's
Director of Quality Management.
R. Booth Chapman..................... 57 Since September 1991, Mr. Chapman has served
as Executive Vice President -- Independent
Loan Review of FANB.
Brian L. Cooper...................... 39 Mr. Cooper is Executive Vice President --
Marketing of FANB and has served in such
capacity since September 1995. From March
1992 through August 1995, he served as
Senior Vice President -- Marketing &
Electronic Banking of Banc One Corporation
(Western Region).
Emery F. Hill........................ 54 Mr. Hill is Executive Vice
President -- Operations and Technology of
the Corporation and FANB and has served in
this position since March 1992.
Rufus B. King........................ 52 Mr. King is Executive Vice President and
Chief Credit Officer of FANB and has served
in such position since July 1989.
Allan R. Landon...................... 50 Mr. Landon is Executive Vice President and
Chief Financial Officer of the Corporation
and has served in such position since
September 1998. From 1970 until September
1998, Mr. Landon was associated with with
Ernst & Young LLP, serving as a partner in
the firm since 1984.
Robert A. McCabe, Jr. ............... 47 Mr. McCabe is President -- FAE and Vice
Chairman of the Board of Directors of the
Corporation and FANB. From January 1992
until January 1994, he served as President,
General Bank of FANB. Mr. McCabe serves as a
director of the Corporation's affiliates SSI
and IFC.
72
82
OFFICER AGE BUSINESS EXPERIENCE -- PAST 5 YEARS
- ------- --- -----------------------------------
Dale W. Polley....................... 48 Mr. Polley serves as President of the
Corporation and Director of the Corporation
and FANB. From 1995 until May 1, 1998, he
also served as President of FANB. From
November 1992 through 1994, he served as the
Corporation's and FANB's Principal Financial
Officer. From December 1991 until January
1994, he served as Vice Chairman and Chief
Administrative Officer of the Corporation
and FANB.
Joe J. Powell, III................... 45 Mr. Powell is Executive Vice President, Bank
Investments and Investor Relations for the
Corporation and FANB. From 1997 until its
merger into the Corporation on May 1, 1998,
Mr. Powell served in various capacities at
Deposit Guaranty and DGNB, including as
Senior Vice President and Treasurer.
Mary Neil Price...................... 37 Ms. Price is Executive Vice President,
General Counsel, and Corporate Secretary of
the Corporation and FANB and has served in
such capacity since August 1997. From
November 1992 through October 1993, she was
Associate General Counsel and Vice President
of FANB. From October 1993 through February
1995, she served as Associate General
Counsel and Senior Vice President of FANB.
From February 1995 through July 1996, she
served as Senior Vice President and Senior
Counsel of FANB. From July 1996 through July
1997, she served as Deputy General Counsel
and Executive Vice President of the
Corporation and FANB. She is also the
corporate secretary and a director of IFC.
E.B. ("Bud") Robinson, Jr............ 57 Mr. Robinson has served as Director and
President of FANB since May 1998. From 1984
until its merger into the Corporation on May
1, 1998, Mr. Robinson served as Chairman and
CEO of Deposit Guaranty.
Terry S. Spencer..................... 42 Mr. Spencer serves as Executive Vice
President and Treasurer of the Corporation
and as Executive Vice President of FANB.
From September 1993 until March 1995, he
served as Executive Vice
President -- Development of FANB. From
December 1991 until September 1993, he
served as Senior Vice President -- Director
of Strategic Planning of FANB.
73
83
OFFICER AGE BUSINESS EXPERIENCE -- PAST 5 YEARS
- ------- --- -----------------------------------
Claire W. Tucker..................... 45 Ms. Tucker is President -- Corporate Bank of
FANB and has served in such capacity since
January 1997. From August 1991 through
January 1995, she served as Manager of
FANB's Health Care and Manufacturers
Divisions and Senior Vice President. From
January 1995 through January 1997, she
served as the Manager of FANB's Specialized
Lending Group and was appointed Executive
Vice President in April 1995.
M. Terry Turner...................... 43 Mr. Turner serves as President -- Retail
Bank of FANB and has served in this position
since January 1994. He served as Executive
Vice President -- Business and Professional
Banking of FANB from January 1991 until
January 1994.
Marvin J. Vannatta, Jr. ............. 54 Mr. Vannatta serves as Executive Vice
President and Principal Accounting Officer
of the Corporation and FANB and as Cashier
of FANB. From April 1994 until March 1995,
he served as Senior Vice President,
Principal Accounting Officer and Treasurer
of the Corporation. From January 1994 until
March 1995, Mr. Vannatta served as Senior
Vice President and as the Cashier of FANB.
From 1981 until January 1994, he served in
various capacities at FANB, including Senior
Vice President, Controller and Cashier.
Steven C. Walker..................... 49 Since May 1998, Mr. Walker has served as
President, Commercial and Private Banking
Group, for FANB. Until its merger into the
Corporation on May 1, 1998, Mr. Walker
served in various capacities for Deposit
Guaranty and DGNB, including Executive Vice
President of Corporate Banking and President
& CEO of Commercial National Bank.
74
84
DIRECTORS OF FIRST AMERICAN
DENNIS C. BOTTORFF Age -- 53
Director, Chairman and Chief Executive Officer of the
Company Director since 1991
and First American National Bank, Member of the Term to expire 2000
Executive and Development Committees
Since August 1997, Mr. Bottorff has served as Chairman and Chief Executive
Officer of First American and FANB. From January 1995 until August 1997, he also
served as President of First American. Throughout 1994, he served as President
and Chief Executive Officer of First American and as Chief Executive Officer of
FANB. From November 1991 through January 1994, Mr. Bottorff also served as
President of FANB. Mr. Bottorff also serves as a director of Ingram Industries,
Inc., and Dollar General Corporation, and as a member of the Vanderbilt
University Board of Trustees and as a director of IFC Holdings, Inc. and The SSI
Group, Inc., both of which are affiliates of First American.
EARNEST W. DEAVENPORT, JR. Age -- 59
Director, Chairman of the Human Resources Committee and
Member Director since 1989
of the Executive and Development Committees Term to expire 1999
Mr. Deavenport is Chairman of the Board and Chief Executive Officer of Eastman
Chemical Company. Mr. Deavenport also serves as a director for Milliken and
Company, as Chairman of the National Association of Manufacturers, as a director
of the Chemical Manufacturers Association, as a member of the Policy Committee
of the Business Roundtable, and as a trustee of the Malcolm Baldridge National
Quality Award Foundation.
REGINALD D. DICKSON Age -- 51
Director, Chairman of the Community Affairs Committee Director since 1981
and Member of the Executive and Human Resources Committees Term to expire 2001
Mr. Dickson is President Emeritus of INROADS, Inc., a non-profit minority career
development organization and Chairman of Buford, Dickson, Harper & Sparrow,
Inc., an investment, research and counseling firm in St. Louis, Missouri. From
1983 through 1992, Mr. Dickson served as President and Chief Executive Officer
of INROADS, Inc. Mr. Dickson also serves as a director of Dollar General
Corporation.
JAMES A. HASLAM, II Age -- 67
Director, Chairman of the Committee on Directors Director since 1983
and Member of the Executive and Asset Policy Committees Term to expire 2000
Since July 1995, Mr. Haslam has served as Chairman of Pilot Corporation, a
retail operator of travel centers and convenience stores/gasoline stations. Mr.
Haslam served as President and Chief Executive Officer of Pilot Corporation from
its founding in November 1958 to July 1995. He also serves as a member of the
University of Tennessee Board of Trustees.
Robert A. McCabe, Jr., a director and executive officer of the Company, is
married to the daughter of Mrs. Haslam.
75
85
WARREN A. HOOD, JR. Age -- 46
Member of the Audit Committee and Director since May 1998
Committee on Directors Term to expire 1999
Mr. Hood serves as Chairman of the Board of Hood Industries, Inc., a
manufacturer of building and forest products. Mr. Hood served as a Director of
Deposit Guaranty Corp. from 1990 until May 1, 1998
MARTHA R. INGRAM Age -- 62
Director and Member of the Executive, Human Resources and
Community Affairs Director since 1993
Committees and the Committee on Directors Term to expire 1999
Since June 1995, Mrs. Ingram has served as Chairman of Ingram Industries Inc., a
diversified transportation and energy company, a distributor of consumer
products, and a non-standard automobile insurance company. From 1981 to June
1995, Mrs. Ingram served as the Director of Public Affairs of Ingram Industries
Inc. and has served as a member of its Board of Directors since 1981. Mrs.
Ingram also serves as a member of the Board of Directors of Baxter
International, Inc., Weyerhaeuser Company, and Ingram Micro Inc.
WALTER G. KNESTRICK Age -- 60
Director, Chairman of the Asset Policy Committee Director since 1990
and Member of the Executive, Human Resources and Development
Committees Term to expire 2000
Mr. Knestrick founded Walter Knestrick Contractor, Inc., a commercial and
industrial building contractor, and has served as Chairman of its Board since
1969.
GENE C. KOONCE Age -- 66
Director and Member of the Audit Director since 1981
Committee and the Committee on Directors Term to expire 2001
Mr. Koonce is Vice Chairman of Atmos Energy Corporation, a natural and propane
gas distribution company. Until its acquisition on July 31, 1997, Mr. Koonce
served as Chairman, President, Chief Executive Officer and a member of the Board
of Directors of United Cities Gas Company, which now operates as a Division of
Atmos Energy Corporation. Mr. Koonce also serves as a director of Atmos Energy
Corporation.
JAMES R. MARTIN Age -- 54
Director and Member of the Community Affairs Director since 1989
and Audit Committees Term to expire 1999
Mr. Martin is the Chairman of the Board and Chief Executive Officer of
Plasti-Line, Inc., a Knoxville-based manufacturer of indoor and outdoor sign
products and point of purchase marketing products for corporate identification
programs.
ROBERT A. MCCABE, JR. Age -- 47
Director, Vice Chairman, and President Director since 1994
First American Enterprises Term to expire 2000
Member of the Executive and Development Committee
76
86
Since January 1994, Mr. McCabe has served as Vice Chairman of First American and
FANB and President -- First American Enterprises. Mr. McCabe served as
President, General Bank, FANB throughout 1992 and 1993. Mr. McCabe also serves
as a member of the Board of Directors of Sirrom Capital Corporation and as
director of IFC Holdings, Inc. and The SSI Group, Inc., both of which are
affiliates of First American.
HOWARD L. MCMILLAN, JR. Age -- 60
Member of the Community Affairs Committee Director since May 1998
Term to expire 1999
Until May 1, 1998, Mr. McMillan served as President and Chief Operating Officer
of Deposit Guaranty. He served as a Director of Deposit Guaranty from 1984 until
May 1, 1998
JOHN N. PALMER Age -- 64
Member of the Executive and Audit Committees Director since May 1998
Term to expire 1999
Mr. Palmer is the Chairman and Chief Executive Officer of Mobile
Telecommunications Technologies Corp., a telecommunications company. He also
serves as a director of Mobile Telecommunications Technologies Corp., Entergy
Corporation and East Group Properties. Mr. Palmer served as a Director of
Deposit Guaranty from 1987 until May 1, 1998.
DALE W. POLLEY Age -- 48
Director, President, Director since 1991
Member of the Executive and Community Affairs Committees Term to expire 2001
Since May 1, 1998, Mr. Polley has served as President of First American. From
August 1997 until May 1998, he served as President and Principal Financial
Officer of First American and FANB. From January 1994 until August 1997, Mr.
Polley served as Vice Chairman of First American and as President of FANB. From
December 1991 to January 1994, Mr. Polley served as Vice Chairman and Chief
Administrative Officer of First American and FANB. From November 1992 through
1994, he also served as Principal Financial Officer of First American and FANB.
Mr. Polley also serves as a Director of the Federal Reserve Bank of
Atlanta -- Nashville branch.
E. B. ROBINSON, JR. Age -- 57
Vice Chairman, Chief Operating Officer and Director since May 1998
President, First American National Bank Term to expire 1999
Member of the Asset Policy and Executive Committees
Until May 1, 1998, Mr. Robinson served as Chairman of the Board and Chief
Executive Officer of Deposit Guaranty. He was a member of the Board of Directors
of Deposit Guaranty from 1981 until May 1, 1998.
77
87
ROSCOE R. ROBINSON Age -- 67
Director and Member of the Development and Human Director since 1992
Resources Committees and the Committee on Directors Term to expire 1999
Dr. Robinson is a Professor of Medicine at Vanderbilt University Medical Center
in Nashville, Tennessee and the former Vice Chancellor for Health Affairs of
Vanderbilt University, a position he held from 1981 until his retirement in
1997. Dr. Robinson also serves as a director of ClinTrials Research, Inc. and as
a trustee of Duke University.
JAMES F. SMITH, JR. Age -- 68
Director, Chairman of the Development and Executive Director since 1983
Committees and Member of the Asset Policy Committee Term to expire 2001
From 1991 through December 1994, Mr. Smith served as Chairman of the Board of
First American and FANB. Mr. Smith also serves as a director of Pilot
Corporation and Plasti-Line, Inc.
CAL TURNER, JR. Age -- 58
Director and Member of the Audit Director since 1989
and Community Affairs Committees Term to expire 2001
Since 1988, Mr. Turner has held the position of Chairman and Chief Executive
Officer of Dollar General Corporation, a chain of discount retail stores. Mr.
Turner also serves as a director of Thomas Nelson Publishers, Inc.
CELIA A. WALLACE Age -- 53
Director, Member of the Development and Director since 1996
Audit Committees Term to expire 2000
Since 1986, Ms. Wallace has been Chairman of the Board and Chief Executive
Officer of Southern Medical Health Systems, Inc., a healthcare provider holding
company. Ms. Wallace also serves as Chairman of the Board of Chunchula Energy
Corporation and serves as a director of The SSI Group, Inc.
TED H. WELCH Age -- 64
Director and Member of the Asset Director since 1994
Policy and Audit Committees Term to expire 2001
Mr. Welch has been a self-employed real estate investor and operator since 1975.
Since 1993, he has served as President and Chief Executive Officer of Eagle
Communications, Inc., a publisher of periodicals. Mr. Welch also serves as a
director of National Health Investors, Inc., Southeast Service Corporation,
American Constructors, Inc., and Logan's Roadhouse Restaurant, Inc.
J. KELLY WILLIAMS Age -- 64
Member of the Development and Human Director since May 1998
Resources Committees Term to expire 1999
Mr. Williams serves as Chairman and Chief Executive Officer of ChemFirst, Inc.,
a company specializing in industrial and agricultural specialty chemicals and
chemical industry products and services. Mr. Williams served as a Director of
Deposit Guaranty from 1975 until May 1, 1998.
78
88
DAVID K. WILSON Age -- 78
Director, Member of the Executive and Human Resources Director since 1974
Committees and the Committee on Directors Term to expire 1999
Mr. Wilson is Chairman of Cherokee Equity Corporation, a holding company. He
also serves as a member of the Vanderbilt University Board of Trustees.
TOBY S. WILT Age -- 53
Director, Chairman of the Audit Committee, and Member Director since 1992
of the Executive and Asset Policy Committees Term to expire 2000
Mr. Wilt is the President of TSW Investment Company, a private investment
company in Nashville, Tennessee and Chairman of the Board of The Christie Cookie
Company, a gourmet baking company. Mr. Wilt also serves as a director of Outback
Steakhouse, Inc.
WILLIAM S. WIRE, II Age -- 66
Director, Member of the Community Affairs, Director since 1989
Human Resources and Asset Policy Committees Term to expire 1999
and the Committee on Directors
Mr. Wire is the former Chairman and Chief Executive Officer of Genesco, Inc., a
manufacturer and retailer of footwear and related products, and a manufacturer
of tailored clothing. He served as Chairman of Genesco, Inc. from 1986 until his
retirement in 1994. From 1986 to February 1993, he also served as Chief
Executive Officer of Genesco, Inc. Mr. Wire serves as a director of Genesco,
Inc., Dollar General Corporation, and American Endoscopy Services, Inc.
79
89
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or accrued by First
American to the First American Chief Executive Officer, First American's four
most highly compensated officers other than the Chief Executive Officer and the
Senior Counsel (the "NAMED EXECUTIVE OFFICERS") during the three fiscal years
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
LONGTERM
COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------- ---------- ----------------------
OTHER RESTRICTED SECURITIES ALL
ANNUAL STOCK UNDERLYING LTIP OTHER
COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) ($)(1) SARS(#) ($) ($)(2)
- --------------------------- ---- --------- -------- ------------ ---------- ---------- ------- ------------
Dennis C. Bottorff......... 1997 605,000 -- -- 1,954,985 72,400 -- 33,300
Chairman and Chief 1996 585,000 321,750 -- 926,751(3) 43,000 -- 32,450
Executive Officer 1995 550,000 275,000 -- -- -- -- 28,500
Dale W. Polley............. 1997 410,000 -- -- 1,318,429 35,000 -- 24,600
President 1996 395,000 217,250 -- 279,000 18,750 -- 23,700
1995 350,000 175,000 -- -- -- -- 20,400
Robert A. McCabe, Jr. ..... 1997 315,000 -- -- 907,874 26,800 -- 18,900
Vice Chairman 1996 290,000 159,500 -- 162,750 10,500 -- 17,400
1995 270,000 135,000 -- 93,678 -- -- 15,600
Martin E. Simmons.......... 1997 315,000 -- -- 546,104 26,800 -- 18,900
Senior Counsel 1996 290,000 159,500 -- 162,750 10,500 -- 17,400
1995 230,000 115,000 -- 29,000 -- -- 12,889
M. Terry Turner............ 1997 242,000 -- -- 608,153 11,800 -- 14,520
President -- General Bank 1996 235,000 129,250 -- 116,250 7,750 -- 14,100
1995 229,000 114,500 -- 29,000 -- -- 13,206
Brian L. Cooper............ 1997 215,000 22,570 -- 338,642 11,000 -- 7,979
Executive Vice
President -- 1996 165,000 66,000 -- 60,450 8,000 -- 8,460
Marketing; President, 1995 55,000 -- 25,000 170,500 18,000 -- --
AmeriStar Investments
and Trusts
- -------------------------
(1) As of December 31, 1997, the total number of restricted shares and their
aggregate market value were as follows: Mr. Bottorff held 121,862 restricted
shares valued at $6,062,635; Mr. Polley held 59,960 restricted shares valued
at $2,983,010; Mr. McCabe held 47,522 restricted shares valued at
$2,364,220; Mr. Simmons held 28,557 restricted shares valued at $1,420,711;
Mr. Turner held 27,634 restricted shares valued at $1,374,792; and Mr.
Cooper held 20,936 restricted shares valued at $1,041,566.
(2) Amounts in this column for 1997 include First American matching
contributions under First American's FIRST Plan (401(k)), and FIRST Plan
Supplemental Executive Retirement Plan (401(k) SERP) for the Named Executive
Officers as follows: Mr. Bottorff: 401(k) -- $9,500, 401(k) SERP -- $23,800;
Mr. Polley: 401(k) -- $9,500, 401(k) SERP -- $15,100; Mr. McCabe:
401(k) -- $9,500, 401(k) SERP -- $9,400; Mr. Simmons: 401(k) -- $9,500,
401(k) SERP -- $9,400;
80
90
Mr. Turner: 401(k) -- $9,500, 401(k) SERP -- $5,020; Mr. Cooper: 401(k) --
$7,979, 401(k) SERP -- $0.
(3) Of the 20,288 shares of restricted stock issued to Mr. Bottorff in 1996,
5,788 shares were issued pursuant to the First American executive stock
ownership guidelines established by the Human Resources Committee in 1994.
These shares will vest in three years if he maintains his ownership level.
OPTION GRANTS
Shown below is information concerning stock options granted to the Named
Executive Officers during 1997 pursuant to the 1991 Plan. Options were granted
on January 16, 1997 and vest 20% per year on the anniversary date of grant over
five years. First American granted no stock appreciation rights ("SARS") in
1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS/SARS RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN OR TERM
OPTIONS/SARS FISCAL YEAR BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) 1996 ($/SH) DATE 5%($) 10%($)
- ---- ------------ ------------ ---------- ---------- ---------- ----------
Dennis C. Bottorff..... 72,400 9.2% $29.5625 01/16/07 $1,346,039 $3,411,127
Dale W. Polley......... 35,000 4.4% $29.5625 01/16/07 $ 650,709 $1,649,025
Robert A. McCabe,
Jr................... 26,800 3.4% $29.5625 01/16/07 $ 498,257 $1,262,682
Martin E. Simmons...... 26,800 3.4% $29.5625 01/16/07 $ 498,257 $1,262,682
M. Terry Turner........ 11,800 1.5% $29.5625 01/16/07 $ 219,382 $ 555,957
Brian L. Cooper........ 6,000 0.76% $29.5625 01/16/07 $ 111,550 $ 282,690
5,000 0.63% $47.7500 10/16/07 $ 150,149 $ 380,506
Actual realizable values, if any, on stock option exercises are dependent on the
future performance of First American Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected will be
achieved.
81
91
OPTION EXERCISES AND FISCAL YEAR-END VALUES
Shown below is information with respect to exercises by the Named Executive
Officers during 1997 of options to purchase shares pursuant to First American's
stock option plans and information with respect to unexercised options to
purchase shares held by the Named Executive Officers as of December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
SHARES OPTIONS/SARS AT THE-MONEY OPTIONS/SARS
ACQUIRED DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Dennis C. Bottorff.... 100,000 $4,262,500 197,200 181,200 $7,325,800 $4,474,775
Dale W. Polley........ 20,000 $ 460,000 129,100 79,400 $5,028,850 $1,929,962
Robert A. McCabe,
Jr.................. 29,823 $ 976,678 83,577 58,000 $2,971,369 $1,414,625
Martin E. Simmons..... 2,000 $ 43,875 37,840 54,560 $1,301,192 $1,337,870
M. Terry Turner....... 3,864 $ 125,500 34,900 38,400 $1,139,762 $1,009,387
Brian L. Cooper....... 3,100 $ 34,612 5,700 28,200 $ 158,737 $ 607,175
Based on the closing price of $49.75 per share of First American Common Stock as
of December 31, 1997. First American granted no SARs in 1997.
First American has entered into contracts with certain of its executive
officers, including the Named Executive Officers with the exception of Mr.
Simmons, that provide generally for a payment equal to a stated multiple of the
officer's annual base salary and annual cash bonus as well as the employee's
annual cash bonus for the full year in which a Change in Control or Potential
Change in Control (as such terms are defined herein) takes place in the event of
a termination of the officer's employment by the Company other than "for cause"
or as a result of death or disability. For Messrs. Bottorff, Polley, McCabe and
Turner, the multiple is three times their respective annual base salary and
annual cash bonus; for Mr. Cooper, the multiple is two times. Additionally, the
contracts provide that the officers shall be paid such amounts if the officer
voluntarily terminates his employment with First American if, after a Change in
Control or a Potential Change in Control, (i) there is a reduction in the
officer's annual base salary or annual bonus opportunity, (ii) the officer is
required by First American, involuntarily, to relocate to an office more than 35
miles from the office where the officer was located at the time of the Change in
Control or Potential Change in Control, (iii) there is a material reduction in
the officer's responsibilities, authority, or duties, (iv) the officer's
benefits are materially reduced, or (v) First American does not honor the terms
of the contracts. These contracts generally provide for an excise tax gross-up
with respect to any taxes incurred under Section 4999 of the Code after a Change
in Control or Potential Change in Control. Additionally, these contracts provide
for an extension of life insurance, medical insurance, and other employment
benefits upon the occurrence of a Change in Control or Potential Change in
Control. "Change in Control" and "Potential Change in Control" have the meanings
ascribed to them in the Company's 1991 Employee Stock Incentive Plan.
82
92
RETIREMENT PLANS
The following table shows the estimated annual retirement benefit payable to
participating employees, including officers, in the salary ranges and years of
service classifications indicated, under the combined terms of the First
American Master Retirement Plan (which covers most officers and other salaried
employees on a non-contributory basis) and Supplemental Executive Retirement
Program. Consequently, the benefit and compensation limits imposed under
Sections 415 and 401(a)(17) of the Code have not been applied. The table assumes
retirement at age 65 in 1998.
PENSION PLAN TABLE
YEARS OF SERVICE
--------------------------------------------------------------------------
REMUNERATION 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------ -------- -------- -------- -------- -------- -------- --------
$ 175,000 $ 12,013 $ 24,025 $ 36,038 $ 50,938 $ 65,838 $ 80,738 $ 95,638
200,000 13,825 27,650 41,475 58,600 75,725 92,850 109,975
250,000 17,450 34,900 52,350 73,925 95,500 117,075 138,650
300,000 21,075 42,150 63,225 89,250 115,275 141,300 167,325
350,000 24,700 49,400 74,100 104,575 135,050 165,525 196,000
400,000 28,325 56,650 84,975 119,900 154,825 189,750 224,675
450,000 31,950 63,900 95,850 135,225 174,600 213,975 253,350
500,000 35,575 71,150 106,725 150,550 194,375 238,200 282,025
550,000 39,200 78,400 117,600 165,875 214,150 262,425 310,700
600,000 42,825 85,650 128,475 181,200 233,925 286,650 339,375
650,000 46,450 92,900 139,350 196,525 253,700 310,875 368,050
700,000 50,075 100,150 150,225 211,850 273,475 335,100 396,725
750,000 53,700 107,400 161,100 227,175 293,250 359,325 425,400
800,000 57,325 114,650 171,975 242,500 313,025 383,550 454,075
850,000 60,950 121,900 182,850 257,825 332,800 407,775 482,750
900,000 64,575 129,150 193,725 273,150 352,575 432,000 511,425
950,000 68,200 136,400 204,600 288,475 372,350 456,225 540,100
1,000,000 71,825 143,650 215,475 303,800 392,125 480,450 568,775
1,100,000 79,075 158,150 237,225 334,450 431,675 528,900 626,125
1,200,000 86,325 172,650 258,975 365,100 471,225 577,350 683,475
1,300,000 93,575 187,150 280,725 395,750 510,775 625,800 740,825
1,400,000 100,825 201,650 302,475 426,400 550,325 674,250 798,175
1,500,000 108,075 216,150 324,225 457,050 589,875 722,700 855,525
Covered compensation includes salary and bonus. The calculation of retirement
benefits under the plans generally is based upon average earnings for the
highest five consecutive years of the fifteen years preceding retirement. The
credited years of service for Messrs. Bottorff, Polley, McCabe, Simmons, Turner
and Cooper are 6, 6, 21, 5, 18 and 2 respectively. Benefits are calculated on
the basis of straight life income payments and are not subject to any deduction
for Social Security or other offset amounts.
COMPENSATION OF DIRECTORS
Directors who are not officers of First American receive an annual retainer of
$18,000 plus $1,000 for attendance of each regular or special board meeting and
each committee meeting. For 1998, the retainer has been increased to $20,000.
The Chairmen of the Asset Policy, Community Affairs, Development, Human
Resources and Audit Committees
83
93
receive additional annual retainers of $6,000 each. Non-employee directors of
First American who also serve on FANB's Knoxville Community Board and AmeriStar
Advisory Board receive attendance fees for those advisory board meetings ranging
from $500 to $1,250 per meeting. During 1997, the total directors' fees paid by
the Company and its subsidiaries to each of the outside directors of First
American ranged from $22,000 to $53,000; the aggregate amount paid by First
American to all outside directors in 1997 was $684,000. In addition, under the
1993 Plan, each non-employee director is annually granted the option to purchase
1,000 shares (now 2,000 shares as a result of the May 9, 1997 stock split) of
First American's Common Stock at a purchase price equal to market price on the
day of the annual meeting of shareholders. In 1998, the purchase price was
$51.44 per share. These options vest 20% per year over five years. Under First
American's Director's Deferred Compensation Plan, each director may annually
elect to defer payment of all or a portion of his or her retainer and fees until
attaining the age of 65. Such deferred amounts become payable upon the
termination of the tenure of a director provided the director has attained the
age of 65.
84
94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of First American's executive officers and directors, or members of the
immediate families of any of the foregoing persons, are customers of First
American's subsidiary banks and some of the First American executive officers
and directors, or members of their immediate family, are directors or officers
of corporations, or members of partnerships, which are customers of First
American's subsidiary banks. As customers they had transactions in the ordinary
course of business, including borrowings, all of which were on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and do not involve more than
the normal risk of collectibility or present any other unfavorable features.
In 1993, First American solicited competitive proposals from three vendors for
the design, fabrication, installation and maintenance of a new retail
merchandising system which was implemented in 1994. Following review of the
proposals submitted, Design Performance Group, a division of American Sign and
Marketing Services, Inc., a wholly owned subsidiary of Plasti-Line, Inc. was
selected as the vendor. Mr. Martin, a member of the First American Board, is the
Chairman of the Board of Directors and Chief Executive Officer of Plasti-Line,
Inc. and has an equity interest of approximately 50% in Plasti-Line, Inc. Mr.
Smith, a member of the First American Board, also serves on the Board of
Directors of Plasti-Line, Inc. In accordance with First American's policy
relating to business transactions with directors and their related interests,
the First American Board approved the selection of Design Performance Group as
the vendor for this project with Messrs. Martin and Smith abstaining from the
vote. In 1997, the amount paid to Design Performance Group was $364,667.05.
In August 1996, FANB entered into an agreement with Pilot Corporation, a retail
operator of convenience stores/gasoline stations, so as to permit FANB to
install, operate and maintain automated cash dispensers ("ATMS") at 38 Pilot Oil
stores. Mr. Haslam, a member of the First American Board, is a director of Pilot
Corporation, of which he and his family own 100%. Mr. Smith, a member of the
First American Board, also serves on the Board of Directors of Pilot
Corporation. In 1997, FANB paid Pilot Corporation a total of $111,674.75 based
upon the number of cash withdrawal transactions effected through these ATMs.
FANB anticipates that in the future, payments to Pilot under this agreement will
be approximately $180,000 per year.
In April 1996, FANB acquired 49% of The SSI Group, Inc. ("SSI"), a healthcare
claims processing company headquartered in Mobile, Alabama. At that time, the
remaining shares of SSI were owned 49% by Southern Medical Health Systems, Inc.
("SMHS") and 2% by Ms. Wallace individually. Ms. Wallace owns 100% of SMHS. In
conjunction with that transaction, FANB acquired the option to purchase
additional shares of SSI to maintain its 49% ownership upon the occurrence of
certain events. SSI's January 1, 1997 acquisition of CareWare Systems, Inc., a
medical management computer software company for SSI stock, triggered FANB's
ability to exercise its option. FANB exercised this option and purchased 15,569
shares of SSI common stock from SMHS for $228,024 in conjunction with the
CareWare Systems, Inc. acquisition.
On August 1, 1997, First American entered into an employment agreement with
Martin E. Simmons. Under this agreement, Mr. Simmons became senior counsel to
First American and is responsible for providing legal and related services to
First American and its subsidiaries. The agreement extends from August 1, 1997
through July 31, 2002 (with a possible extension to December 31, 2002), and
provides for a base salary of $315,000 per year plus an annual incentive-based
bonus opportunity of up to $157,500 during calendar
85
95
years 1997-2000. Mr. Simmons will participate in Company benefit plans covering
management employees, but will not receive further grants under First American's
stock compensation plans. If Mr. Simmons terminates his employment with First
American without cause, or if First American terminates his employment (other
than for cause), Mr. Simmons will receive two years of salary continuation and
certain bonus opportunities if such a termination occurs prior to August 1,
1998. If such a termination occurs on or after August 1, 1998, Mr. Simmons will
receive salary continuation for the full term of the agreement. In either case,
Mr. Simmons will immediately vest in stock options, ownership restricted stock
and any performance-based restricted stock that has been fully earned and be
entitled to certain early retirement benefits. However, if Mr. Simmons'
employment is terminated within two years of a change in control of First
American that takes place prior to September 1, 2000, Mr. Simmons will be
entitled to receive a lump-sum payment of his salary and remaining bonus
opportunity for the remaining term of the agreement, and generally the same
stock compensation and early retirement benefits as otherwise provided in the
agreement upon termination.
In connection with the execution of the Merger Agreement between First American
and Deposit Guaranty, E.B. Robinson, Jr. entered into an employment agreement
with First American. Pursuant to the agreement, Mr. Robinson will be employed by
First American as Vice Chairman and Chief Operating Officer, President of FANB,
and as a member of First American's Policy Team. Mr. Robinson will also serve on
the First American Board and on the First American Board's executive committee
during the term of the agreement. The term of the agreement commenced on May 1,
1998 and continues until the last day of the calendar month in which Mr.
Robinson's 62nd birthday occurs. Mr. Robinson's salary will be no less than
$600,000 per year during the term of the agreement, or, if greater, 80% of the
base salary paid to the chief executive officer of First American Mr. Robinson
will also be eligible to receive an annual incentive bonus, targeted at 50% of
his base salary, with a maximum potential bonus award equal to 100% of base
salary. In no event will the base salary and bonus paid to Mr. Robinson be less
than 80% of the sum of the annual base salary and bonus paid to the chief
executive officer of First American with respect to the same year. Mr. Robinson
will receive an annual stock incentive grant during the term of the agreement
with a value equal to 166% of his base salary. The agreement also provides that
Mr. Robinson is entitled to participate in the employee benefit plans, practices
and policies which are applicable to peer executives of First American,
including change in control severance arrangements. Mr. Robinson will also be
paid an annual retirement benefit commencing at age 62, which benefit will be
equal to 60% of Mr. Robinson's final average pay (as defined in the agreement),
less benefits payable under certain other retirement plans and arrangements of
Deposit Guaranty. The agreement also provides for a retirement benefit to be
paid to Mr. Robinson's spouse, should she survive him.
The agreement further provides that, upon any termination of Mr. Robinson's
employment with First American other than for cause or by reason of death or
disability, or if Mr. Robinson terminates his employment for good reason (as
defined in the agreement) he is generally entitled to payment of any unpaid
salary, a pro rata bonus, immediate vesting of the option and restricted stock
granted pursuant to the agreement, continuation of medical and welfare benefits
through the date on which the term of the agreement otherwise would have ended,
and additional service credit for purposes of the calculation of retirement
benefits. In addition, Mr. Robinson will be entitled to a lump sum payment equal
to the product of (i) the number of months from the date of termination until
the end of the calendar month in which Mr. Robinson's 62nd birthday occurs
divided by 12,
86
96
and (ii) the sum of Mr. Robinson's existing base salary and highest bonus earned
in the three years prior to the Effective Time. If payments received by Mr.
Robinson are subject to an excise tax under Section 4999 of the Code, Mr.
Robinson will be entitled to receive an additional amount necessary to make him
whole with respect to such excise tax, unless such payments (excluding
additional amounts payable due to the excise tax) do not exceed 110% of the
greatest amount which could be paid without giving rise to the excise tax, in
which case no additional payments will be made with respect to the excise tax,
and the payments otherwise due Mr. Robinson will be reduced in an amount
necessary to prevent the application of the excise tax.
In connection with the execution of the Merger Agreement between First American
and Deposit Guaranty, Howard L. McMillan, Jr. also entered into an employment
agreement with First American. Pursuant to the agreement, Mr. McMillan was to be
employed by First American as Chairman of Deposit Guaranty's operations within
First American. The term of the agreement commenced on May 1, 1998 and was to
continue until May 1, 2001. Mr. McMillan's salary was to be no less than
$350,000 per year during the term of the agreement. Mr. McMillan was also
eligible to receive an annual incentive bonus, targeted at 50% of his base
salary, with a maximum potential bonus award equal to 100% of base salary. Mr.
McMillan was to receive an annual stock incentive grant during the term of the
agreement with a value equal to 100% of his base salary. The agreement also
provided that Mr. McMillan would be entitled to participate in the employee
benefit plans, practices and policies which are applicable to peer executives of
First American, including change in control severance arrangements. Mr. McMillan
would also be paid an annual retirement benefit commencing at age 62, which
benefit shall be equal to 50% of Mr. McMillan's final average pay (as defined in
the agreement), less benefits payable under certain other retirement plans and
arrangements of Deposit Guaranty Corp. The agreement also provided for a
retirement benefit to be paid to Mr. McMillan's spouse, should she survive him.
The agreement further provided that, upon any termination of Mr. McMillan's
employment with First American other than for cause or by reason of death or
disability, or if Mr. McMillan terminated his employment for good reason (as
defined in the agreement) he would generally be entitled to a lump sum payment
of any unpaid salary, a pro rata bonus, immediate vesting of the option and
restricted stock granted pursuant to the agreement, continuation of medical and
welfare benefits through the date on which the term of the agreement otherwise
would have ended, and additional service credits for purposes of the calculation
of retirement benefits. In addition, Mr. McMillan would be entitled to a payment
equal to the product of (i) the number of months from the date of termination
until the end of the term divided by 12, and (ii) the sum of Mr. McMillan's
existing base salary and highest bonus earned in the three years prior to the
Effective Time. If payments received by Mr. McMillan are subject to an excise
tax under Section 4999 of the Code, Mr. McMillan would be entitled to receive an
additional amount necessary to make him whole with respect to such excise tax,
unless such payments (excluding additional amounts payable due to the excise
tax) do not exceed 110% of the greatest amount which could be paid without
giving rise to the excise tax, in which case no additional payments will be made
with respect to the excise tax, and the payments otherwise due Mr. McMillan
would be reduced in an amount necessary to prevent the application of the excise
tax.
Mr. McMillan terminated his employment agreement with First American effective
October 14, 1998, for good reason (as defined in his employment agreement), and
87
97
thereafter received the payment due to him under the agreement as a result of
such termination. Mr. McMillan is currently still a director of First American.
During 1998, the Corporation's Human Resources Committee was composed of Messrs.
Deavenport (Chairman), Dickson, Knestrick, Dr. Robinson, Williams, Wilson, Wire
and Mrs. Ingram. None of these persons has at any time been an officer or
employee of First American or any of its subsidiaries. During 1998, no member of
the Human Resources Committee had any relationship requiring disclosure by First
American under Item 404 of SEC Regulation S-K, and there existed no
relationships involving the executive officers, directors or Human Resources
Committee members and the executive officers, directors or compensation
committee members of any other entity such as to constitute an interlock for
disclosure purposes under applicable Commission regulations, except that Mr.
Bottorff, the Chairman and Chief Executive Officer of the Corporation, is a
member of the Board of Directors of Ingram Industries, Inc., and Mrs. Ingram,
who serves as Chairman of Ingram Industries, Inc., is a member of the
Corporation's Human Resources Committee. The entire Board of Directors of Ingram
Industries, Inc. serves as that entity's compensation committee.
88
98
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares held beneficially, directly
or indirectly, as of the First American Record Date, by all directors and
nominees for director, the First American Chief Executive Officer, First
American's four most highly compensated officers other than the Chief Executive
Officer and the Senior Counsel (the "NAMED EXECUTIVE OFFICERS") and by all
directors and executive officers as a group, together with the percentage of the
outstanding shares of First American Common Stock which such ownership
represents.
SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED** OF CLASS
- ------------------------ -------------------- ----------
Dennis C. Bottorff............................... 713,975(1) .6%
Brian L. Cooper.................................. 53,304(2) *
Earnest W. Deavenport, Jr........................ 18,665(3) *
Reginald D. Dickson.............................. 8,323(4) *
James A. Haslam, II.............................. 155,676(5) .14%
Warren A. Hood, Jr............................... 49,490(6) *
Martha R. Ingram................................. 26,000(4) *
Walter G. Knestrick.............................. 487,586(7) .4%
Gene C. Koonce................................... 15,035(4) *
James R. Martin.................................. 16,000(8) *
Robert A. McCabe, Jr............................. 266,103(9) .2%
Howard L. McMillan, Jr........................... 235,520(10) .2%
John N. Palmer................................... 78,464 *
Dale W. Polley................................... 289,991(11) .2%
E. B. Robinson, Jr............................... 422,706(12) .3%
Roscoe R. Robinson............................... 8000(4) *
James F. Smith, Jr............................... 310,831(13) .2%
Cal Turner, Jr................................... 147,336(14) .13%
M. Terry Turner.................................. 104,446(15) *
Celia A. Wallace................................. 600(16) *
Ted H. Welch..................................... 11,052(17) *
James K. Williams................................ 14,348 *
David K. Wilson.................................. 725,736(18) .6%
Toby S. Wilt..................................... 206,000(4) .18%
William S. Wire, II.............................. 28,528(4) *
All Directors and Executive Officers as a
Group.......................................... 5,098,593(19) 4.6%(20)
- ---------------
* less than .1%
** Adjusted for May 9, 1997 2-for-1 stock split.
(1) Includes 16,451 shares held in Mr. Bottorff's the First American
Corporation Section 401(K) Plan and/or Section 401(k) SERP Plan (the "FIRST
Plans"), 150,975 shares (over which Mr. Bottorff has voting but not
investment authority) granted pursuant to a restricted stock award under
the First American Corporation 1991 Employee Stock Incentive Plan (the
"1991 Plan"), options for 265,480 shares issues pursuant to the 1991 Plan
which are currently exercisable and 1034 share equivalents (as of 9-30-98)
held in Mr. Bottorff's Stock Account maintained under his Salary Deferral
Agreement with First American.
(2) Includes 1,434 shares held in Mr. Cooper's FIRST Plan account(s), 27,268
shares (over which Mr. Cooper has voting but not investment authority)
granted pursuant
89
99
to a restricted stock award under the 1991 Plan, options for 4,600 shares
issued pursuant to the 1991 Plan which are currently exercisable and 1034
share equivalents (as of 9-30-98) held in Mr. Cooper's Stock Account
maintained under his Salary Deferral Agreement with First American.
(3) Includes options of 6,000 shares issued pursuant to the First American
Corporation 1993 Non-Employee Director Stock Option Plan (the "1993 Plan")
which are currently exercisable and 1,170 share equivalents (as of
12/31/97) held in Mr. Deavenport's Stock Account maintained under the First
American Corporation Director's Deferred Compensation Plan.
(4) Includes options for 6,000 shares issued pursuant to the 1993 Plan which
are currently exercisable.
(5) Includes options for 6,000 shares issued pursuant to the 1993 Plan
currently exercisable and 16,024 shares owned by Mrs. Haslam as to which
Mr. Haslam disclaims beneficial ownership.
(6) Includes 2,690 shares held by Mr. Hood's minor children whom reside in Mr.
Hood's household.
(7) Includes options for 6,000 shares issued pursuant to the 1993 Plan which
are currently exercisable and 117,040 shares (75% of the total shares held)
in a profit sharing plan for which Mr. Knestrick is the beneficiary.
(8) Includes options for 6,000 shares issued pursuant to the 1993 Plan which
are currently exercisable, 2,000 shares held by trusts for which Mr. Martin
acts as trustee and 2,000 shares owned by his spouse as to which he
disclaims beneficial ownership.
(9) Includes 22,830 shares held in Mr. McCabe's FIRST Plan account(s), 1,021
shares held by his children, 312 shares held by his spouse (as to which he
disclaims beneficial ownership), 59,702 shares (over which Mr. Mcabe has
voting but not investment authority) granted pursuant to a restricted stock
award under the 1991 Plan, options for 92,560 shares issued pursuant to the
1991 Plan which are currently exercisable.
(10) Includes 19,332 shares (as of 6-30-98) held in Mr. McMillan's 401(k) Plan
held on behalf of Deposit Guaranty employees (of which is funded by First
American stock), 44,399 shares held by Mr. McMillan's spouse for which he
disclaims beneficial , 1 share he holds as custodian for a minor child and
options for 75,162 shares issued pursuant to the 1991 Plan which are
currently exercisable.
(11) Includes 12,179 shares held in Mr. Polley's FIRST Plan account(s), 84,887
shares (over which Mr. Polley has voting but not investment authority)
granted pursuant to a restricted stock award under the 1991 Plan and
options for 150,800 shares issued pursuant to the 1991 Plan which are
currently exercisable.
(12) Includes 59,118 shares (as of 6-30-98) held in Mr. Robinson's 401(k) Plan
held on behalf of Deposit Guaranty employees (of which is funded by First
American stock), 2,340 shares held by Mr. Robinson's spouse for which he
disclaims beneficial ownership, 45,000 shares (over which Mr. Robinson has
voting but not investment authority) granted pursuant to a restricted stock
award under the 1991 Plan, options for 174,330 shares issued pursuant to
the 1991 Plan that are currently exercisable.
(13) Includes options for 6,000 shares issued pursuant to the 1993 Plan which
are currently exercisable and 40,118 shares owned by Mrs. Smith as to which
Mr. Smith disclaims beneficial ownership.
(14) Includes 6,000 shares issued pursuant to the 1993 Plan which are currently
exercisable and 2,314 shares held by a trust for which Mr. Turner acts as
trustee.
90
100
(15) Includes 4,450 shares held in Mr. Turner's FIRST Plan account(s), 41,652
shares (over which Mr. Turner has voting but not investment authority)
granted pursuant to a restricted stock award under the 1991 Plan and
options for 40,110 shares issued pursuant to the 1991 Plan which are
currently exercisable.
(16) Includes options for 400 shares issued pursuant to the 1993 Plan which are
currently exercisable.
(17) Includes options for 2,400 shares issued pursuant to the 1993 Plan which
are currently exercisable.
(18) Includes options for 6,000 shares issued pursuant to the 1993 Plan which
are currently exercisable, 600,000 shares owned by a corporation
beneficially owned by Mr. Wilson, and 19,736 shares held by Mrs. Wilson to
which Mr. Wilson disclaims beneficial ownership.
(19) Includes 857,708 shares of First American Common Stock owned by or for
spouses, other relatives, trusts and firms which a director or officer
controls, where such beneficial ownership may be attributed to the director
or officer. This amount also includes 591,373 shares granted pursuant to
restricted stock awards under the 1991 Plan to executive officers over
which the officers have voting but not investment authority, options for
19,484 which officers have the right to acquire under First American's STAR
Award Plan which are currently exercisable, options for 1,065,249 shares
issued pursuant to the 1991 Plan which are currently exercisable, 80,800
shares which non-employee directors have the right to acquire under the
1993 Plan which are currently exercisable and 206,861 shares held in FIRST
Plan accounts.
(20) For purposes of computing this percentage, shares which may be acquired by
directors and officers under stock options which were exercisable as of
10-19-98 or within 60 days thereof are deemed to be outstanding.
91
101
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 109,993,689 shares were outstanding as of
October 19, 1998. First American Common Stock is listed on the NYSE under the
symbol "FAM." As of October 19, 1998, 26,253,001 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,
the number of authorized shares of First American Common Stock available for
other corporate purposes as of October 19, 1998 was approximately 63,753,310.
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 dissenter's 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 Pioneer 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
92
102
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
on 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 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 FIRST AMERICAN AND
PIONEER -- Supervision and Regulation of First American and Pioneer."
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.
93
103
FIRST AMERICAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and accompanying notes of First American and the
consolidated financial statements and accompanying notes of First American
appearing on pages F-2 to F-64 of this Prospectus/Proxy Statement.
To the extent that statements in this discussion relate to the plans,
objectives, or future performance of First American, these statements may be
deemed to be forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
management's current expectations and the current economic environment. Actual
strategies and results in future periods may differ materially from those
currently expected due to various risks and uncertainties.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
Effective May 1, 1998, the Corporation completed the merger of Deposit Guaranty
with and into the Corporation by exchanging approximately 48.7 million shares of
First American common stock for all of the outstanding shares of Deposit
Guaranty. Deposit Guaranty was a $7.2 billion asset financial services holding
company headquartered in Jackson, Mississippi, with banking offices in
Mississippi, Louisiana, Arkansas, and Tennessee, and mortgage offices in
Oklahoma, Nebraska, Texas, Indiana, and Iowa. The transaction was accounted for
under the pooling-of-interests method of accounting for business combinations
and, accordingly, the consolidated financial statements have been restated to
include the results of Deposit Guaranty for all periods presented. In connection
with the merger, restructuring and merger-related costs, which are comprised of
investment banking, severance, and systems conversions costs, are expected to
total approximately $72 million, net of tax, and will be recognized throughout
1998.
Net income for the second quarter of 1998 was $19.1 million with both basic and
diluted earnings per share at $.18. Excluding restructuring and merger-related
costs of $49.8 million, net of tax, recognized in the second quarter of 1998,
net income for the second quarter of 1998 was $68.9 million, up 20 percent from
$57.3 million earned in the second quarter of 1997. Basic earnings per share,
exclusive of the restructuring and merger-related costs, increased 20 percent,
to $.65 from $.54 in the second quarter of 1997. Diluted earnings per share,
exclusive of the restructuring and merger-related costs, increased 21 percent to
$.64 from $.53 in the second quarter of 1997. Excluding the restructuring and
merger-related costs, return on average assets ("ROA") improved to 1.54 percent
in the second quarter of 1998 compared to 1.37 percent in the second quarter of
1997 and return on average equity ("ROE") improved to 17.80 percent in the
second quarter of 1998 compared to 15.82 percent in the second quarter of 1997.
Net income for the six months ended June 30, 1998, was $81.1 million with basic
earnings per share of $.77 and diluted earnings per share of $.75. Excluding
after-tax restructuring and merger-related costs of $49.8 million, net income
for the six months ended June 30, 1998, was $130.9 million, up 15 percent from
$113.9 million earned during the first six months of 1997. Basic earnings per
share, exclusive of the restructuring and merger-related costs, increased 17
percent to $1.24 during the first six months of 1998 compared to $1.06 during
the first six months of 1997. Diluted earnings per share, exclusive of the
restructuring and merger-related costs, rose 17 percent during the first six
months of 1998
94
104
to $1.22 from $1.04 during the same time period last year. Excluding the
restructuring and merger-related costs, ROA improved to 1.49 percent during the
first six months of 1998 versus 1.37 percent during the first six months of 1997
and ROE increased to 17.16 percent compared to 15.54 percent.
Effective March 23, 1998, First American acquired Victory Bancshares, Inc.
("Victory"), a bank holding company in West Tennessee with $131 million in
assets by exchanging approximately 871 thousand shares of the Corporation's
common stock for all of the outstanding shares of Victory. The acquisition was
accounted for as a pooling of interests. Results of operations of Victory were
included in the Corporation's financial statements from the date of acquisition,
as prior amounts were not material. NOTE 2 to the supplemental consolidated
financial statements presents details of acquisition activity during 1997.
On April 3, 1998, First American completed the sale of three branches in
Virginia with total deposits of approximately $37 million for a pretax gain of
$2.7 million. The sale of the three branches was a part of the implementation of
First American's Distribution Management System ("DMS"), which is designed to
reconfigure First American's distribution system to determine the best mix of
distribution alternatives for clients and to maximize return on capital
investment.
On October 1, 1998, First American acquired Peoples Bank of Dickson ("Peoples
Bank"), a $136 million asset bank headquartered in Dickson, Tennessee, with six
banking offices in Middle Tennessee, into First American.
On October 1, 1998, First American also acquired The Middle Tennessee Bank
("Middle Tennessee"), a $225 million asset bank headquartered in Columbia,
Tennessee, with seven banking offices.
On October 1, 1998, First American also acquired CSB Financial Corporation ("CSB
Financial"), a $145 million asset bank holding company headquartered in Kingston
Springs, Tennessee, with four banking offices in Cheatham County. In addition to
a community bank, CSB Financial subsidiaries include a lease financing
subsidiary; a financial planning and insurance, annuity, mutual fund, and
securities sales subsidiary; and a mobile home financing subsidiary.
Effective July 11, 1998, First American sold First Mortgage Corp., a mortgage
subsidiary operating in Nebraska, Iowa, and Oklahoma, and recognized a pretax
loss of approximately $2.4 million.
On July 28, 1998, First American announced the signing of a definitive agreement
to sell the corporate trust business of DGNB to The Bank of New York. This
transaction was consummated on August 17, 1998 and resulted in an estimated gain
of $7 million. The sale involved the transfer of approximately 900 bond trustee
and agency relationships representing $8 billion in outstanding securities for
municipalities and corporations located primarily in Mississippi and Louisiana.
Effective September 15, 1998, First American sold its partnership interest in
Roberts & Eastland, an insurance agency, and recognized a deferred gain of
$442,000.
95
105
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Second Quarter 1998 Versus Second Quarter 1997
Net interest income on a taxable equivalent basis represented 58 percent of
total revenues in the second quarter of 1998 versus 63 percent in the second
quarter of 1997. For purposes of this discussion, total revenues consist of the
sum of net interest income on a taxable equivalent basis and noninterest income.
Net interest income is the difference between total interest income earned on
earning assets such as loans and securities and total interest expense paid on
interest-bearing liabilities such as deposits. Net interest income on a taxable
equivalent basis was $174.5 million in the second quarter of 1998, up $9.7
million, or 6 percent, from $164.8 million in the second quarter of 1997. The
$9.7 million increase in net interest income resulted primarily from an increase
in the volume of earning assets ($11.6 million net interest income impact)
offset by a slight decrease in the net interest spread ($1.9 million net
interest income impact).
During the second quarter of 1998, average earning assets increased $1.07
billion, or 7 percent, to $16.24 billion from $15.17 billion in the second
quarter of 1997. The increase in average earning assets was essentially due to
increases in investment securities ($937.5 million, or 23 percent) and loans
($147.6 million, or 1 percent). Approximately half of the increase in investment
securities was due to the effect of the securitization and retention of a total
of $584 million of mortgage loans during the first six months of 1998. Excluding
the effect of these mortgage loan securitizations and transfers to investment
securities, average investment securities increased $456.1 million, or 11
percent. The change in average loans was impacted by mortgage loan
securitizations, loan purchases, loan sales, and business combinations except
Deposit Guaranty; excluding the effect of the above items, average loans
increased $319.9 million, or 3 percent, during the second quarter of 1998 over
the second quarter of 1997. Interest-bearing liabilities averaged $13.51 billion
during the second quarter of 1998, an increase of $879.1 million, or 7 percent,
from $12.63 billion in the second quarter of 1997. Contributing to the growth in
interest-bearing liabilities during the second quarter of 1998 compared to the
same period in 1997 were increases in federal funds purchased and securities
sold under agreements to repurchase ($468.7 million, or 34 percent);
interest-bearing deposits ($258.4 million, or 2.5 percent); and long-term debt
($107.3 million, or 25 percent).
The net interest spread decreased to 3.57 percent in the second quarter of 1998
from 3.61 percent in the second quarter of 1997 as the average yield on earning
assets decreased 6 basis points while the average rate paid on interest-bearing
liabilities decreased 2 basis points. The 6 basis point decrease in the yield on
earning assets to 7.98 percent from 8.04 percent was essentially due to a
decrease in the yield on investment securities from 6.84 percent to 6.75 percent
offset by an increase in the yield on loans from 8.51 percent to 8.55 percent.
The external interest rate environment significantly impacts the rates that
First American earns on investment securities, charges for loans, and pays on
interest-bearing liabilities. For example, yields on purchases of investment
securities are impacted by yields on U.S. treasuries. A major factor
contributing to the decreased yield on investment securities was the purchase of
investment securities during the second quarter of 1998 in a lower long-term
interest rate environment compared to the second quarter of 1997. Factors
contributing to the 2 basis point decrease in the average rate paid on
interest-bearing liabilities to 4.41 percent from 4.43 percent were deposit
pricing actions offset by deposit mix changes and increases in the rates paid on
certificates of deposit $100,000 and over and other interest-bearing nondeposit
funds.
96
106
As the net interest spread declined, the net interest margin decreased 5 basis
points to 4.31 percent in the second quarter of 1998 from 4.36 percent in the
second quarter of 1997. The decline in the net interest margin was attributable
to a change in the mix of earning assets and competitive pressures resulting in
more reliance on noncore interest-bearing liabilities to fund earning assets.
First Six Months of 1998 Versus First Six Months of 1997
Net interest income on a taxable equivalent basis represented 60 percent of
total revenues in the first six months of 1998 versus 64 percent in the first
six months of 1997. Net interest income on a taxable equivalent basis was $347.9
million in the first six months of 1998, up $17.3 million, or 5 percent, from
$330.6 million in the first six months of 1997. The $17.3 million increase in
net interest income resulted primarily from an increase in the volume of earning
assets ($17.9 million net interest income impact) offset by a slight decrease in
the net interest spread ($.6 million net interest income impact).
During the first six months of 1998, average earning assets increased $850.5
million, or 6 percent, to $16.08 billion from $15.23 billion in the first six
months of 1997. The increase in average earning assets was essentially due to
increases in investment securities ($485.8 million, or 12 percent) and loans
($395.3 million, or 4 percent). Approximately half of the increase in investment
securities was due to the effect of the securitization of a total of $584
million of mortgage loans during the first six months of 1998. Excluding the
effect of these mortgage loan securitizations, average investment securities
increased $238.5 million, or 6 percent. The change in average loans was impacted
by mortgage loan securitizations, loan purchases, loan sales, and business
combinations except Deposit Guaranty; excluding the effect of the above items,
average loans increased $398 million, or 4 percent, during the first six months
of 1998 over the first six months of 1997. Interest-bearing liabilities averaged
$13.39 billion during the first six months of 1998, an increase of $734.5
million, or 6 percent, from $12.66 billion in the first six months of 1997.
During the first six months of 1998 compared to the same period in 1997, federal
funds purchased and securities sold under agreements to repurchase increased
$349.3 million, or 25 percent, to $1.75 billion; interest-bearing deposits grew
$176.8 million, or 2 percent, to $10.76 billion; and long-term debt increased
$140.4 million, or 33 percent, to $561.9 million.
The net interest spread declined 1 basis point in the first six months of 1998
to 3.62 percent from 3.63 percent in the first six months of 1997 as the average
yield on earning assets remained at 8.05 percent for both the first six months
of 1998 and 1997 while the average rate paid on interest-bearing liabilities
increased 1 basis point.
As the net interest spread declined, the net interest margin decreased 2 basis
points to 4.36 percent in the first six months of 1998 from 4.38 percent in the
first six months of 1997. The slight decline in the net interest margin was
attributable, in part, to a change in the mix of earning assets and competitive
pressures which resulted in an increase in the percentage of certificates of
deposit $100,000 and over, federal funds purchased and repurchase agreements,
and long-term debt funding average earning assets during the first six months of
1998 than in the first six months of 1997.
PROVISION FOR LOAN LOSSES
This topic is addressed under the caption, "Allowance and Provision for Loan
Losses."
97
107
NONINTEREST INCOME
Second Quarter 1998 Versus Second Quarter 1997
Total noninterest income represented 42 percent of total revenues in the second
quarter of 1998 compared with 37 percent in the second quarter of 1997. Total
noninterest income increased $26.2 million, or 27 percent, to $121.8 million in
the second quarter of 1998 from $95.6 million in the second quarter of 1997.
Noninterest income, excluding net realized gains on sales of securities, totaled
$120.3 million, an increase of $25.8 million, or 27 percent, from $94.5 million
in the second quarter of 1997. Approximately half of the increase in noninterest
income was attributable to investment services income, which increased $12.8
million, or 43 percent. IFC Holdings, Inc. ("IFC") contributed to substantially
all of the increase in investment services income as the result of growth in
retail brokerage commissions related to mutual funds, equities, and annuities
sales.
Other categories of noninterest income with significant increases in the second
quarter of 1998 over the second quarter of 1997 included mortgage banking
income, service charges on deposit accounts, trading account revenue, and other
income. Explanations for the changes in the second quarter of 1998 versus the
second quarter of 1997 are outlined as follows:
- Mortgage banking income was up $5.8 million, or 66 percent, which was
attributable to an increased volume of mortgage loans processed and $2.9
million of additional net gains on the sale of mortgage warehouse loans.
- The $3.4 million, or 12 percent, increase in service charges on deposit
accounts reflected fee increases and product changes in conjunction with
the utilization of a customer information system called VISION.
- Trading account revenue increased $1.2 million, or 130 percent, due to
increased call writing activity.
- The increase of $1.9 million, or 11 percent, in other income from the
previous year's second quarter was primarily attributable to a $2.7
million gain on the sale of three branches in Virginia and a $1 million
increase in open-end nonloan fees (essentially due to interchange fees
generated by the "Check Card" product) offset by a $2.4 million loss on
the sale of First Mortgage's operations.
First Six Months of 1998 Versus First Six Months of 1997
Total noninterest income increased $39.7 million, or 21 percent, to $228.2
million during the first six months of 1998 compared to $188.5 million during
the first six months of 1997 and represented 40 percent of total revenues during
the first half of 1998 compared to 37 percent during the first half of 1997.
Noninterest income, excluding net realized gains on sales of securities, totaled
$225.1 million during the first six months of 1998, an increase of $38 million,
or 20 percent, from $187.1 million during the first half of 1997. Approximately
half of the increase in noninterest income was attributed to investment services
income, which increased $16.3 million, or 26 percent. IFC contributed 83 percent
of the increase in investment services income as the result of growth in retail
brokerage commissions related to mutual funds, equities, and annuities sales.
Other categories of noninterest income with significant increases in the first
six months of 1998 compared to the first six months of 1997 included mortgage
banking income, service charges on deposit accounts, commissions and fees on
fiduciary activities, trading account
98
108
revenue, and other income. Explanations for the changes in the first six months
of 1998 versus the first six months of 1997 are outlined as follows:
- The $7.2 million, or 41 percent, increase in mortgage banking income was
attributable to an increased volume of mortgage loans processed and an
additional net gain of $3.1 million on the sale of mortgage warehouse
loans.
- Service charges on deposit accounts were up $5.9 million, or 11 percent,
which reflected fee increases and product changes in conjunction with the
utilization of a customer information system called VISION.
- Commission and fees on fiduciary activities increased $1.7 million, or 9
percent, principally as a result of an increase in the value of assets
managed due to favorable market conditions.
- Trading account revenue was up $1.5 million, or 61 percent, due to
increased call writing activity.
- The increase of $5.4 million, or 18 percent, in other income from the
first half of 1997 was primarily attributable to a $2.7 million gain on
the sale of three branches in Virginia, a $1.6 million gain in open-end
nonloan fees (essentially due to interchange fees generated by the "Check
Card" product), a $1 million increase in other corporate service fees
(essentially due to automated teller ("ATM") surcharge fees resulting
from non-First American customer's use of ATMs), an additional $.9
million gain recognized on the sale of First American's corporate trust
assets to The Bank of New York in the fourth quarter of 1997 offset by a
$2.4 million loss on the sale of First Mortgage's operations.
NONINTEREST EXPENSE
Second Quarter 1998 Versus Second Quarter 1997
Total noninterest expense increased $88.1 million, or 53 percent, to $253.5
million for the second quarter of 1998 compared with $165.4 million for the same
period in 1997. Noninterest expense in the second quarter of 1998 included $72
million of restructuring and merger-related costs comprised of $19.5 million of
severance and retention costs, $19 million of investment banking fees, $15
million to establish a charitable foundation for the Deposit Guaranty markets,
and $18.5 million of other expenses. Excluding the restructuring and
merger-related costs, noninterest expense increased $16.1 million, or 10
percent.
Significant changes in the second quarter of 1998 compared to the second quarter
of 1997 in noninterest expense included increases in subscribers' commissions,
salaries and benefits, equipment expense, and other expenses. Explanations for
the changes between the second quarter of 1998 versus the second quarter of 1997
are outlined as follows:
- Subscribers' commissions increased $9.6 million, or 56 percent, due to
increases in IFC's brokerage activities.
- Salaries and benefits increased only $2.1 million, or 3 percent. The
change was attributable to increases in merit pay and incentive program
expenses offset by decreases due to a reduction in the number of
employees, which reflected synergies in connection with the merger with
Deposit Guaranty.
- Equipment expense increased $.9 million, or 9 percent, due to an increase
in equipment rental expense. The second quarter of 1998 reflected an
increase in the rental of personal computers compared to the same time
period last year.
99
109
- Other expenses were up $3.6 million, or 18 percent. Contributing to the
$3.6 million increase were increases in intangibles amortization,
consultant fees, and software expense. The increase in intangibles
amortization of $2 million, or 28 percent, from $7.1 million to $9.1
million was primarily attributable to an increased portfolio of mortgage
servicing rights and an increase in impairment reserves related to
accelerated payments on the underlying loan portfolio. Consultant fees
were up $.8 million, or 37 percent, from $2.1 million to $2.9 million due
to various special projects designed to enhance efficiency, reduce costs,
and provide better services. Software expense was up $.7 million, or 32
percent, from $2.2 million to $2.9 million reflecting an increase in
software maintenance expense and amortization.
First American's productivity ratio in the traditional banking business improved
to 56.45 percent for the second quarter of 1998 compared to 59.69 percent for
the second quarter of 1997. The improvement in the productivity ratio means that
the Corporation spent $3.24 less to generate $100 of bank revenue during the
second quarter of 1998 compared to the same time period last year.
First Six Months of 1998 Versus First Six Months of 1997
Total noninterest expense increased $96.9 million, or 29 percent, to $427.2
million for the first six months of 1998 compared with $330.3 million for the
same period in 1997. Noninterest expense in the first six months of 1998
included $72 million of restructuring and merger-related costs. Excluding the
restructuring and merger-related costs, noninterest expense increased $24.8
million, or 8 percent.
Significant changes in the first six months of 1998 compared to the first six
months of 1997 in noninterest expense included increases in subscribers'
commissions, salaries and employee benefits, equipment expense, net occupancy
expense, communication expense, and other expenses. Explanations for the changes
in the first six months of 1998 versus the first six months of 1997 are outlined
as follows:
- Subscribers' commissions increased $12 million, or 34 percent, due to
increases in IFC's brokerage activities.
- Salaries and benefits increased only $5.5 million, or 3 percent. The
change was attributable to increases in merit pay and incentive program
expenses offset by decreases due to a reduction in the number of
employees, which reflected synergies in connection with the merger with
Deposit Guaranty.
- Equipment expense increased $1.9 million, or 9 percent, due to an
increase in equipment rental expense. The first six months of 1998
reflected an increase in the rental of personal computers compared to the
same time period last year.
- The increase in net occupancy expense of $1.3 million, or 6 percent, was
attributable to increased rent and depreciation expenses. Rent expense
was up due to increased leased space and rental rates. The increase in
depreciation expense was attributable to branch improvements. In
connection with First American's DMS, the branch system is being
reconfigured to optimize distribution investment.
- Communication expense increased $1.2 million, or 10 percent, due to
higher expenditures for telecommunications.
- Other expenses were up $4.4 million, or 11 percent. Contributing to the
$4.4 million increase were increases in intangibles amortization,
consultant fees, software expense, net foreclosed properties expense, and
miscellaneous taxes. The increase in
100
110
intangibles amortization of $2.9 million, or 20 percent, from $14.3
million to $17.2 million was primarily attributable to an increased
portfolio of mortgage servicing rights and an increase in impairment
reserves related to accelerated payments on the underlying loan
portfolio. Consultant fees were up $1.5 million, or 46 percent, from $3.2
million to $4.7 million due to various special projects designed to
enhance efficiency, reduce costs, and provide better services. Software
expense was up $1.3 million, or 25 percent, from $5.1 million to $6.4
million, which reflected an increase in amortization expense. Net
foreclosed properties expense increased $1.3 million from $1.7 million of
foreclosed properties income to $.4 million of foreclosed properties
income. Miscellaneous tax expense increased $1.2 million, or 32 percent,
from $3.7 million to $4.9 million due to increased franchise taxes paid
to states with nonbank operations.
First American's productivity ratio in the traditional banking business improved
to 57.15 percent during the first six months of 1998 compared to 59.77 percent
during the first six months of 1997. The improvement in the productivity ratio
means that the Corporation spent $2.62 less to generate $100 of bank revenue
during the first six months of 1998 compared to the same time period last year.
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field, and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). To address the Year 2000 issue, First American
has adopted a broad-based approach designed to encompass First American's total
environment.
First American has appointed a project manager from its information technology
("IT") group and a project team comprised of managers from various areas of the
organization to address the Year 2000 issue. Overseeing the project is a
steering committee made up of senior management. The project team is responsible
for evaluating Year 2000 impact to each area's products and systems, developing
a plan for bringing those products and systems to compliant levels, and testing
or verifying that compliance. Areas being addressed by the project team include:
- Business Systems Applications -- This involves Year 2000 remediation of
application software that is used to perform specific business functions
such as deposits or mortgage systems.
- Technical Infrastructure -- This involves Year 2000 remediation of the
hardware and software environment used to run application software, and
includes PC networks, telecommunications, mainframe computers, operating
systems, and productivity software.
- Credit Administration -- In this area, the project team is reviewing the
risk associated with Year 2000 status of the Corporation's clients and
depositors.
- Facilities Systems -- This involves Year 2000 remediation of nonIT
systems such as elevators, HVAC systems, security systems, lighting
systems, and utilities.
- Vendor and Third Party Assessment -- In this area, the project team has
conducted an inventory of the systems and products provided by third
parties and has contacted the providers regarding the status of their
Year 2000 compliance. This has been a broad-based effort including IT
vendors, nonIT vendors, and public utilities.
101
111
First American's project team is using a 5-phase approach in its Year 2000
project made up of awareness, assessment, remediation, validation, and
implementation phases. For IT systems, all in-house programs were remediated as
of December, 1997 and are now being tested for Year 2000 compliance. For vendor
supplied systems, First American has contacted the suppliers and determined the
compliance of these systems. Necessary upgrades to these systems are in process,
but are not yet complete. The project team is in the process of testing the
Corporation's vendor supplied systems, and anticipates having substantially
completed the testing of all mission critical applications by the end of 1998.
For nonIT systems, the project team has contacted vendors to establish the Year
2000 compliance of these products, and anticipates having substantially
completed testing of these products by the end of 1998.
First American estimates that the cost of its Year 2000 project will not exceed
$5 million dollars in the aggregate and that the cost will not be material to
earnings. Actual expenditures to date and anticipated future expenditures are
within this estimate. First American management believes its approach to the
Year 2000 issue to be comprehensive, and does not expect the Year 2000 issue to
have a material impact on its results of operations, liquidity or financial
condition. However, given the widespread nature of the problem, and the number
of factors outside of the Corporation's direct control, management is
continuously evaluating the risks associated with Year 2000. In order to help
mitigate these risks, a Year 2000 element is being developed for the existing
corporate contingency plan which will focus on mission critical systems (both IT
and nonIT) that are believed to be at high risk for noncompliance.
INCOME TAXES
During the second quarters of 1998 and 1997, income tax expense was $15.9
million (effective tax rate of 45.4%) and $33.4 million (effective tax rate of
36.8%), respectively. During the six months ended June 30, 1998, and June 30,
1997, income tax expense was $51.4 million (effective tax rate of 38.8%) and
$65.8 million (effective tax rate of 36.6%), respectively. The major factor for
the increase in the effective tax rates was from nondeductible restructuring and
merger-related costs in connection with the business combination with Deposit
Guaranty.
BALANCE SHEET REVIEW
ASSETS
Total assets of First American rose $1.97 billion, or 12 percent, to $19.06
billion at June 30, 1998, compared to $17.09 billion at June 30, 1997. The
growth in total assets was primarily due to a $2.04 billion, or 53 percent,
increase in investment securities. Excluding the effect of the securitizations
and retention of mortgage loans, investment securities increased $1.45 billion,
or 38 percent, between June 30, 1998, and June 30, 1997. Loans net of unearned
discount decreased $219.1 million, or 2 percent, between June 30, 1998, and June
30, 1997; excluding the effect of securitizations, sales, and business
combinations except Deposit Guaranty, loans net of unearned discount increased
$255.5 million, or 2 percent. Excluding the effect of securitizations, sales,
and business combinations except Deposit Guaranty, average loans increased $398
million, or 4 percent, during the first six months of 1998 compared to the first
six months of 1997. Also contributing to asset growth were increases in trading
account securities ($50.6 million, or 86 percent) which reflected an increase in
call writing activity, other assets ($60 million, or 10 percent), and cash and
due from banks ($33.1 million, or 3 percent).
102
112
Total assets of First American increased $1.23 billion, or 7 percent, from
$17.83 billion at December 31, 1997, to $19.06 billion at June 30, 1998. The
increase in total assets from December 31, 1997, to June 30, 1998, was primarily
due to a $1.78 billion, or 43 percent, increase in investment securities offset
by a $542.7 million, or 5 percent, decrease in loans net of unearned discount.
Excluding the effect of securitizations and retention of mortgage loans during
the first six months of 1998, investment securities increased $1.20 billion, or
29 percent, from December 31, 1997, to June 30, 1998. Loans net of unearned
discount decreased $542.7 million, or 5 percent, during the first six months of
1998; excluding the effect of securitizations, sales, and business combinations
except Deposit Guaranty, loans net of unearned discount decreased $48.5 million,
or .4 percent. Trading account securities increased $45.1 million, or 70
percent, from December 31, 1997, to December 31, 1998, due to increased call
writing activity.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management's policy is to maintain the allowance for loan losses at a level
which is adequate to absorb estimated loan losses inherent in the loan
portfolio. The provision for loan losses is a charge to earnings necessary,
after loan charge-offs and recoveries, to maintain the allowance at an
appropriate level. Determining the appropriate level of the allowance and the
amount of the provision for loan losses involves uncertainties and matters of
judgment and therefore cannot be determined with precision.
The allowance for loan losses was $180.1 million at June 30, 1998, $188.2
million at June 30, 1997, and $180 million at December 31, 1997. The allowance
for loan losses was 1.62 percent and 1.66 percent of net loans at June 30, 1998,
and 1997, respectively, and 1.55 percent of net loans at December 31, 1997.
In the second quarter of 1998, the allowance was increased by a provision of $5
million and decreased by net charge-offs of $5.3 million compared to a provision
of $1.9 million and net charge-offs of $5.7 million in the second quarter of
1997. Net charge-offs as a percentage of average loans on an annualized basis
amounted to .19 percent and .21 percent, respectively, in the second quarters of
1998 and 1997.
During the first six months of 1998, the allowance was increased by a provision
of $11 million and reduced by net charge-offs of $12.2 million compared to a
provision of $3.8 million and net charge-offs of $8.6 million in the first six
months of 1997. For the six months ended June 30, 1998, and 1997, activity in
the allowance for loan losses also included increases of $1.3 million and $7.6
million, respectively, which consisted of the allowance of business combinations
except Deposit Guaranty. Net charge-offs as a percentage of average loans on an
annualized basis amounted to .22 percent and .16 percent, respectively, for the
six months ended June 30, 1998, and 1997.
ASSET QUALITY
First American's nonperforming assets (excluding loans 90 days or more past due
on accrual status) were $38.9 million at June 30, 1998, $45.7 million at June
30, 1997, and $43.3 million at December 31, 1997. Nonperforming assets
(excluding loans 90 days or more past due on accrual status) at June 30, 1998,
represented .35 percent of total loans and foreclosed properties, compared to
.40 percent at June 30, 1997, and .37 percent at December 31, 1997. At June 30,
1998, nonperforming assets consisted of $31.9 million of nonaccrual loans and $7
million of foreclosed properties.
Other potential problem loans consist of loans that are currently not considered
nonperforming but on which information about possible credit problems has caused
103
113
management to doubt the ability of the borrowers to comply fully with present
repayment terms. At June 30, 1998, such loans totaled approximately $98.4
million. Depending on the economy and other factors, these loans and others,
which may not be presently identified, could become nonperforming assets in the
future.
LIABILITIES
Total deposits increased $537.1 million, or 4 percent, to $13.64 billion at June
30, 1998, from $13.10 billion at June 30, 1997. Excluding the effect of business
combinations except Deposit Guaranty and dispositions, total deposits increased
$337.8 million, or 3 percent, between June 30, 1998, and June 30, 1997. Average
deposits for the first six months of 1998 compared to the first six months of
1997 increased 3 percent; excluding the effect of business combinations and
dispositions, average deposits increased 1 percent. Short-term borrowings
increased $965.6 million, or 53 percent, to $2.79 billion at June 30, 1998, from
$1.82 billion at June 30, 1997, which was primarily due to an increase in
federal funds purchased and securities sold under agreements to repurchase. The
level of federal funds purchased and repurchase agreements can fluctuate
significantly on a daily basis depending on funding need and availability of
sources of funds to meet those needs. Long-term debt increased $183 million, or
44 percent, to $600.1 million at June 30, 1998, from $417.1 million at June 30,
1997, with most of the increase due to the addition of $285 million variable
rate and $5.5 million fixed rate borrowings from the Federal Home Loan Bank
("FHLB") offset by $114 million of FHLB borrowings ($108.5 million of variable
rate and $5.5 million of fixed rate) that were reclassified from long-term debt
to short-term borrowings. Competitive pressures resulted in an increased
reliance on noncore sources of funds during the first half of 1998 compared to
the first half of 1997.
Total deposits increased $236.1 million, or 2 percent, from $13.41 billion at
December 31, 1997, to $13.64 billion at June 30, 1998. Short-term borrowings
increased $816.7 million, or 41 percent, from $1.97 billion at December 31,
1997, which was primarily attributable to increases in federal funds purchased.
DERIVATIVE INSTRUMENTS
First American has utilized off balance sheet derivative products for a number
of years in managing its interest rate sensitivity. Generally, a derivative
transaction is a payments exchange agreement whose value derives from an
underlying asset or underlying reference rate or index. The use of noncomplex,
nonleveraged derivative products has reduced the Company's exposure to changes
in the interest rate environment. By using derivative products such as interest
rate swaps and futures contracts to alter the nature of (hedge) specific assets
or liabilities on the balance sheet (for example to change a variable to a fixed
rate obligation), the derivative product offsets fluctuations in net interest
income from the otherwise unhedged position. In other words, if net interest
income from the otherwise unhedged position changes (increases or decreases) by
a given amount, the derivative product should produce close to the opposite
result, making the combined amount (otherwise unhedged position impact plus the
derivative product position impact) essentially unchanged. Derivative products
have enabled First American to improve its balance between interest-sensitive
assets and interest-sensitive liabilities by managing interest rate sensitivity,
while continuing to meet the lending and deposit needs of its customers.
In conjunction with managing interest rate sensitivity, at June 30, 1998, First
American had derivatives with notional values totaling $3.28 billion. These
derivatives had a net
104
114
positive fair value (unrealized net pretax gain) of $12.3 million. Notional
amounts are key elements of derivative financial instrument agreements. However,
notional amounts do not represent the amounts exchanged by the parties to
derivatives and do not measure First American's exposure to credit or market
risks. The amounts exchanged are based on the notional amounts and the other
terms of the underlying derivative agreements. At June 30, 1997, First American
had derivatives with notional values totaling $2.26 billion. These derivatives
had a net positive fair value (unrealized net pretax gain) of $8.2 million at
June 30, 1997. The instruments utilized are noted in the following table along
with their notional amounts and fair values at June 30, 1998 and 1997.
WEIGHTED
WEIGHTED AVERAGE AVERAGE
RATE MATURITY
RELATED VARIABLE RATE NOTIONAL ----------------- -------- FAIR
ASSET/LIABILITY AMOUNT PAID RECEIVED YEARS VALUE
-------------------------- ---------- ---- -------- -------- -------
(IN THOUSANDS)
JUNE 30, 1998
Interest rate swaps Money market deposits $ 150,000 5.97%(1) 5.69%(2) 1.6 $ (234)
Interest rate swaps Available for sale 100,000 5.54(1) 5.67(2) 4.6 234
securities
Interest rate swaps Available for sale 50,000 5.78(2) 5.46(8) 3.3 (613)
securities
Interest rate swaps Loans 825,000 5.69(2) 6.61(2) 3.9 20,577
Interest rate swaps FHLB borrowings 85,000 6.33(1) 5.70(2) 6.2 (2,282)
Interest rate swaps Mortgages 20,482 6.65(1) 5.70(9) 9.1 (683)
Forward interest rate swaps Money market deposits 500,000 6.11(3) 5.69(3) 2.1 (938)
Forward interest rate swaps Available for sale 1,300,000 6.10(4) N/A(4) 2.5 (4,888)
securities
Floors Loans 250,000 5.45(1) 6.00(2) 2.9 1,119
---------- -------
$3,280,482 $12,292
========== =======
JUNE 30, 1997
Interest rate swaps Money market deposits $ 250,000 5.80%(1) 5.79%(5) 1.7 $ 2,337
Interest rate swaps Loans 550,000 5.84(5) 6.76(1) 4.5 6,140
Interest rate swaps Long-term debt 100,000 6.94(1) 6.06(10) .3 494
Interest rate swaps Mortgages 21,938 6.65(1) 5.69(9) 10.1 10
Forward interest rate swaps Money market deposits 750,000 6.37(6) 5.81(6) .7 772
Forward interest rate swaps Available for sale 200,000 7.10(7) 5.84(7) 3.4 (2,487)
Floors Loans 285,000 5.34(1) 5.81(2) 3.3 969
Caps Certificates of deposit 100,000 6.88(1) 5.87(2) .5 --
---------- -------
$2,256,938 $ 8,235
========== =======
- -------------------------
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on 3-month LIBOR.
(3) Forward swap periods have become effective for $100 million and will begin
at various dates during 1998 and 1999 for $400 million. The rates to be
paid are fixed and were set at the inception of the contracts. Variable
rates to be received are based on 3-month LIBOR, repricing quarterly, but
were unknown for $400 million of forward swaps at June 30, 1998, since the
related forward swap periods had not yet begun.
105
115
(4) Forward swap periods begin at various dates during 1998 and 1999. The rates
paid are fixed and were set at the inception of the contracts. Variable
rates are based on 3-month LIBOR and reprice quarterly.
(5) Variable rate which reprices quarterly based on 3-month LIBOR, except for
$25 million which reprices every 6 months based on 6-month LIBOR.
(6) Forward swap periods have become effective for $100 million and will begin
in September 1997 for $100 million, November 1997 for $200 million and June
1998 for $350 million. The rates to be paid are fixed and were set at the
inception of the contracts. Variable rates to be received are based on
3-month LIBOR and reprice quarterly, but were unknown for $650 million of
forward swaps at June 30, 1997 since the related forward swap period had
not yet begun.
(7) Forward swap periods have become effective for $100 million and will begin
in April 1998 for $100 million. The rates to be paid are fixed and were set
at the inception of the contracts. Variable rates to be received are based
on 3-month LIBOR, repricing quarterly, but were unknown for $100 million of
forward swaps at June 30, 1997, since the related forward swap periods had
not yet begun.
(8) Variable rate which reprices quarterly based on constant maturity treasury
index less 16 basis points on $25 million, and less 12 basis points on $25
million.
(9) Variable rate which reprices quarterly based on 1-month LIBOR.
(10) Variable rate which reprices quarterly based on 6-month LIBOR.
As First American's individual derivative contracts approach maturity, they may
be terminated and replaced with derivatives with longer maturities which offer
more interest rate risk protection. At June 30, 1998, there were $1.7 million of
deferred net gains related to terminated derivatives contracts, and there were
$5.1 million of deferred net losses at March 31, 1997. Deferred gains and losses
on off balance sheet derivative activities are recognized as interest income or
interest expense over the original covered periods.
Net interest income for the quarter ended June 30, 1998, was increased by
derivative products income of $1.2 million. Net interest income for the quarter
ended June 30, 1997, was increased by $.8 million derivative products income.
The increase in derivative products net income in second quarter 1998 from
second quarter 1997 was primarily due to actions taken later in 1997 to create a
derivatives position more balanced between pay-fixed and receive-fixed interest
rate swaps.
Credit risk exposure due to off-balance-sheet hedging is closely monitored, and
counterparts to these contracts are selected on the basis of their credit
worthiness, as well as their market-making ability. As of June 30, 1998, all
outstanding derivative transactions were with counterparts with credit ratings
of A-2 or better. Enforceable bilateral netting contracts between First American
and its counterparts allow for the netting of gains and losses in determining
net credit exposure. First American's net credit exposure on outstanding
derivatives was $16.4 million on June 30, 1998. Given the credit standing of the
counterparts to the derivative contracts, Management believes that this credit
exposure is reasonable in light of its objectives.
CAPITAL POSITION
Total shareholders' equity was $1.56 billion, or 8.17 percent of total assets,
at June 30, 1998, $1.47 billion, or 8.62 percent of total assets, at June 30,
1997, and $1.54 billion, or 8.66 percent of total assets, at December 31, 1997.
Total shareholders' equity increased
106
116
$83.3 million, or 6 percent, from June 30, 1997, to June 30, 1998, resulting
principally from comprehensive income (unrealized gains on securities available
for sale) and issuance of shares for acquisitions and employee benefit plans
offset by common stock repurchases and dividends to shareholders. Total
shareholders' equity increased $13.1 million, or .8 percent, from December 31,
1997, to June 30, 1998, which was primarily due to comprehensive income and
issuance of shares in connection with employee benefit plans offset by common
stock repurchases and dividends to shareholders.
During the second quarter of 1998, First American declared cash dividends on its
common stock of $.25 per common share compared to $.20 per common share in the
second quarter of 1997, an increase of 25 percent. Cash dividends for the first
six months of 1998 were $.45 per share, an increase of 27 percent over the same
time period last year. The dividend payout ratio was 138.89 percent (38.46
percent, exclusive of restructuring and merger-related costs) in the second
quarter of 1998 compared to 37.04 percent in the second quarter of 1997. The
dividend payout ratio for the six months ended June 30, 1998, and 1997, was
58.44 percent (36.29 percent, exclusive of restructuring and merger-related
costs) and 33.49 percent, respectively.
The Federal Reserve Board and the OCC promulgate risk-based capital guidelines
and regulations which require bank holding companies and national banks to
maintain minimum capital ratios. As of June 30, 1998, the Corporation, FANB and
DGNB had ratios which exceeded the regulatory requirements to be classified as
"well capitalized," the highest regulatory rating. At June 30, 1998, the
Corporation, FANB and DGNB had total risk-based capital ratios of 11.49 percent,
11.01 percent, and 12.54 percent, respectively; Tier I risk-based capital ratios
of 9.52 percent, 9.76 percent, and 11.30 percent, respectively; and Tier I
leverage capital ratios of 7.49 percent, 8.30 percent, and 8.62 percent,
respectively. In order to be considered well capitalized, the total risk-based
capital ratio must be a minimum of 10 percent, the Tier I risk-based capital
ratio must equal or exceed 6 percent, and the Tier I leverage capital ratio must
equal or exceed 5 percent.
First American Federal Savings Bank ("FAFSB") is subject to capital requirements
adopted by the Office of Thrift Supervision, which are similar but not identical
to those issued by the Federal Reserve Board and the OCC. At June 30, 1998,
FAFSB had ratios which exceeded the regulatory requirements to be classified as
"well capitalized."
LIQUIDITY
Liquidity management consists of maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and creditors.
Liquid assets include cash and cash equivalents (which consist of cash and due
from banks, interest-bearing deposits in banks, and federal funds sold and
securities purchased under agreements to resell) less Federal Reserve Bank
reserve requirements in addition to trading account securities and securities
that are estimated to mature within one year. Liquid assets totaled $1.46
billion and $1.28 billion at June 30, 1998, and 1997, respectively, which was
approximately 8.5 percent and 8.4 percent of earning assets, respectively.
Available for sale securities maturing after one year, which can be sold to meet
liquidity needs, had a balance of $4.57 billion at June 30, 1998, compared to
$2.94 billion at June 30, 1997. The overall liquidity position of First American
is further enhanced by a high proportion of core deposits, which provide a
stable funding base. Core deposits comprised 88 percent of total deposits at
June 30, 1998, versus 90 percent at June 30, 1997.
An additional source of liquidity is First American's three-year $100 million
revolving credit agreement which became effective in July 1998 and replaced the
1994 $70 million
107
117
revolving credit agreement. First American had no borrowings under either
agreement during 1998 or 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
OVERVIEW
On May 9, 1997, First American completed a 2-for-1 split of its common stock. On
May 1, 1998, First American completed the merger of the $7.2 billion asset
Deposit Guaranty Corp. with and into the Corporation. The transaction was
accounted for as a pooling-of-interests. All financial data included herein has
been restated to reflect the impact of the stock split and the merger of Deposit
Guaranty Corp.
First American continued its earnings momentum during 1997 and earned a record
$237.8 million for the year ended December 31, 1997, up 16 percent from 1996 net
income of $205.2 million. Net income increased 17 percent in 1996 from $175.7
million in 1995. Effective December 31, 1997, the Corporation adopted Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share amounts. Prior
year amounts are presented in accordance with SFAS No. 128 for comparative
purposes. Basic earnings per share increased during 1997 to $2.23, up 14 percent
over $1.96 in 1996. Basic earnings per share increased 13 percent in 1996
compared to $1.73 in 1995. Diluted earnings per share rose 13 percent in 1997 to
$2.18 from $1.93 in 1996. Diluted earnings per share increased 14 percent in
1996 over $1.70 in 1995. Return on average assets ("ROA") improved 10 basis
points in 1997 to 1.40 percent for 1997 from 1.30 percent for 1996. ROA was 1.24
percent for 1995. Return on average equity ("ROE") also improved to 15.91
percent for 1997 compared to 14.84 percent for 1996 and 14.61 percent for 1995.
A nonrecurring item in 1996 that impacted the comparison of the results of
operations for 1997 versus 1996 and 1996 versus 1995 was the one-time assessment
on deposits insured by the Savings Association Insurance Fund ("SAIF"). First
American's one-time SAIF assessment was $5.0 million, net of tax, or $.05 per
share. Excluding the one-time SAIF assessment, net income increased 13 percent
in 1997, and ROA and ROE were 1.33 percent and 15.21 percent, respectively, in
1996. Net income for 1995 was reduced by $7.5 million (or $.07 per share) for
after-tax acquisition expenses related to the merger of Heritage Federal
Bancshares, Inc. ("Heritage"). Excluding the SAIF assessment and the Heritage
merger expenses, net income increased 15 percent in 1996 over 1995. Excluding
these expenses, ROA and ROE were 1.30 percent and 15.24 percent, respectively,
in 1995.
The components of First American's strategy for 1997 were (1) transforming from
a bank to a financial services company, (2) targeting profitable customer
segments with tailored client solutions, (3) continually lowering the costs of
distribution, (4) aggressively and effectively managing capital and the balance
sheet, and (5) building organizational competencies. The 1997 results reflect
implementation of First American's well-defined strategy with growth in net
interest income and noninterest income, improved operating efficiency, and
effective balance sheet and capital management.
Financial highlights illustrating the successful implementation of First
American's strategy include:
- - Net interest income on a taxable equivalent basis increased 11 percent in
1997. The net interest margin improved to 4.37 percent in 1997 from 4.21
percent in 1996. Improvements in the net interest margin in the current
interest rate environment reflect
108
118
asset and liability management actions such as pricing and earning asset mix
improvements.
- - Noninterest income in 1997 increased 30 percent over 1996 to $395.8 million
from $303.7 million. This compares to a 50 percent increase in noninterest
income in 1996 from $203.0 million in 1995. Noninterest income contributed 37
percent to total revenue in 1997 as compared to 34 percent in 1996 and 27
percent in 1995. The increases in noninterest income are primarily the result
of the acquisition of IFC Holdings, Inc. ("IFC"), formerly INVEST Financial
Corporation on July 1, 1996, which was accounted for as a purchase. The
increases are also indicative of First American's continuing transformation
from a bank holding company to a financial services company. Excluding IFC,
noninterest income increased 14 percent in 1997.
- - Noninterest expense was $669.7 million in 1997 compared to $571.7 million in
1996, an increase of 17 percent. The primary reason for the 17 percent
increase was the inclusion of a full year of IFC's expenses in 1997, whereas
in 1996 IFC's expenses were included for only six months. Excluding the
one-time SAIF assessment and IFC, noninterest expense increased 10 percent in
1997 from 1996. Expenses also increased as a result of several bank
acquisitions in 1996 and 1997.
- - The productivity (operating efficiency) ratio related to traditional banking
activities improved 83 basis points to 59.04 percent in 1997 from 59.87
percent in 1996. For purposes of calculating the productivity ratio, in 1997 a
$2.4 million gain on the sale of corporate trust services, a $2.0 million gain
on the sale of HONOR Technologies, Inc. stock, and nonbank subsidiaries were
excluded, and in 1996 the one-time SAIF assessment and nonbank subsidiaries
were excluded.
- - Asset quality remained strong as evidenced by the decline in the ratio of
nonperforming assets to total loans and foreclosed properties to .37 percent
at December 31, 1997, from .43 percent at December 31, 1996, and .57 percent
at December 31, 1995.
- - Capital adequacy remained strong in 1997. The ratio of average equity to
average assets was 8.79 percent in 1997 compared to 8.77 percent in 1996.
- - In addition to the 2-for-1 common stock split, the Board of Directors
increased the quarterly cash dividend by 29 percent to $.20 per share in April
1997. First American paid dividends at the rate of $0.755 per common share in
1997, up 25 percent from $0.605 in 1996. The dividend payout ratio increased
to 33.86 percent in 1997 from 30.87 percent in 1996.
- - During 1997, First American took steps to further align the goals of
management with the strategic and financial goals of the Corporation. The
Human Resources Committee of the Board of Directors approved a program under
the terms of the 1991 Employee Stock Incentive Plan to compensate management
based on the Corporation's overall achievement of its goals. Executive and
senior management were given the choice of receiving part, or all, of their
annual incentive compensation (ranging from 20-50 percent of total
compensation) in restricted common stock, rather than cash, with the
opportunity to have the portion taken in stock matched by the Corporation.
First American's matching contribution will vest if the Corporation achieves
performance objectives equal to the median of a defined high performing peer
group (referred to internally as the "Sweet 16") by the end of the year 2000.
109
119
ACQUISITION AND DIVESTITURE ACTIVITY
Strategic acquisitions in new markets and acquisitions designed to enhance the
Corporation's presence in existing markets have contributed to First American's
growth in earnings and assets over the last three years. Acquisitions of
nontraditional financial services businesses are an integral part of First
American's strategy of transforming from a bank to a financial services company.
Acquisitions of banking businesses are designed to enhance First American's
branch network, to lower distribution costs, and to offer opportunities to
leverage existing banking and technological capabilities.
On October 1, 1998, First American completed acquisitions of Peoples, MTB and
CSB. See "INFORMATION ABOUT FIRST AMERICAN AND PIONEER -- Information About
First American -- Recent Acquisitions." On May 1, 1998, First American acquired
Deposit Guaranty, a financial services holding company with assets totaling
approximately $7.2 billion headquartered in Jackson, Mississippi. Deposit
Guaranty had 170 banking offices in Mississippi, Louisiana, Arkansas, and
Tennessee operating under the DGNB name and mortgage offices in Oklahoma,
Nebraska, Texas, Indiana, and Iowa. First American exchanged approximately 48.7
million shares of common stock for all of the outstanding shares of Deposit
Guaranty common stock in a transaction accounted for as a pooling-of-interests.
Prior to being acquired by First American, Deposit Guaranty entered into a
series of mergers to enhance its presence in existing markets and to enter new
markets. First American and Deposit Guaranty also acquired several
nontraditional financial services companies as described below.
Effective July 1, 1996, FANB, a wholly-owned subsidiary of First American,
purchased 96.2 percent of the stock of IFC for $26.0 million in cash.
Simultaneously, IFC completed its acquisition of Investment Center Group, Inc.,
the parent company of Investment Centers of America, in a transaction valued at
$5.0 million, making IFC the nation's largest marketer of mutual funds,
annuities, and other investment products sold through financial institutions.
Both transactions were accounted for as purchases. During the third quarter of
1996, FANB purchased an additional 2.1 percent of the stock of IFC. Effective
February 1, 1997, AmeriStar Capital Markets, Inc., formerly a wholly-owned
subsidiary of FANB and a broker-dealer registered with the National Association
of Securities Dealers, was merged with and into IFC. As a result of the merger,
FANB's equity ownership in IFC increased to 98.5 percent.
Effective April 1, 1996, FANB purchased 49 percent of the stock of The SSI
Group, Inc., a healthcare payments processing company, for $8.6 million. The
transaction is being accounted for under the equity method of accounting.
On June 29, 1996, Deposit Guaranty purchased McAfee Mortgage and Investment
Company, a mortgage banking operation headquartered in Lubbock, Texas in a
transaction accounted for as a purchase business combination. McAfee Mortgage
and Investment Company has fifteen offices located throughout Texas and
originated approximately $240 million in mortgage loans in 1995. On August 8,
1995, Deposit Guaranty purchased First Mortgage Corp., a mortgage banking
operation headquartered in Omaha, Nebraska. This acquisition was accounted for
as a purchase business combination. First Mortgage Corp. had a $1.1 billion
mortgage servicing portfolio and 6 production offices in Nebraska and Oklahoma.
For those acquisitions accounted for as a purchase business combination, the
results of operations have been included in the financial statements from the
date of acquisition. The pro forma effect on prior earnings of such acquisitions
is not significant. Prior year financial
110
120
and other information has been restated to include the pooling of Deposit
Guaranty. For other pooling transactions, the results of operations have been
included in the financial statements from the beginning of the year acquired,
and prior year financial information has not been restated as the changes would
have been immaterial.
From time to time, divestitures may be necessary to support First American's
strategies of targeting profitable customer segments and of efficiently and
effectively managing capital. On July 17, 1997, First American completed the
sale of Tennessee Credit Corporation and First City Life Insurance Company, with
total assets of $13.6 million, to Norwest Financial Tennessee, Inc. The
transaction resulted in a net gain of $2.1 million. On December 22, 1997, First
American completed the sale of its corporate trust business to the Bank of New
York for a gain of $2.4 million. The sale consisted of the transfer of
approximately 250 bond trustee and agency relationships representing $4 billion
of assets under management. First American also recently sold the corporate
trust business of Deposit Guaranty Corp. See "INFORMATION ABOUT FIRST AMERICAN
AND PIONEER -- Recent Developments."
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income on a taxable equivalent basis increased $68.7 million, or 11
percent, to $673.2 million during 1997 from $604.5 million in 1996. Net interest
income is the difference between the income earned on earning assets and the
interest paid on interest-bearing liabilities. Net interest income represented
63 percent of total revenues in 1997 versus 66 percent in 1996 and 73 percent in
1995. The decline in the ratio of net interest income to total revenues is
reflective of management's focus on increasing fee income in conjunction with
First American's transformation to a financial services company.
Both net interest income and the net interest margin, which is net interest
income expressed as a percentage of average earning assets, are affected by the
volume and mix of earning assets and interest-bearing liabilities and the
corresponding yields and costs. Product pricing, the volume of
noninterest-bearing sources of funds, interest rate contracts, securitizations
and sales of loans, and asset quality also affect net interest income and the
net interest margin. The discussion of net interest income should be read with
reference to TABLE 2 and TABLE 3. In this discussion, interest income has been
adjusted to a fully taxable equivalent basis which means that any tax-exempt
income has been increased to a level that would yield the same after-tax income
had that income been subject to taxation.
As net interest income increased, the net interest margin improved by 16 basis
points to 4.37 percent in 1997 from 4.21 percent in 1996. The net interest
margin improvement in 1997 over 1996 was primarily due to a better earning asset
mix, pricing actions on loans and deposits, and a decrease in hedging expense.
The $68.7 million increase in net interest income during 1997 resulted primarily
from an increase in the volume of earning assets over interest-bearing
liabilities and an improvement in the net interest spread (the difference
between the yield on earning assets and the rate paid on interest-bearing
liabilities). Of the $68.7 million increase in net interest income, $42.2
million was attributable to volume changes and $26.5 million was attributable to
the effect of an improved spread. During 1997, average earning assets increased
$1.0 billion to $15.4 billion, or 7 percent, from $14.4 billion in 1996. The
increase in average earning assets was essentially due to increases in loans
($934 million) and investment securities ($295.6 million) offset by decreases in
federal funds sold and securities purchased under
111
121
agreements to resell ($220.5 million). Interest-bearing liabilities averaged
$12.8 billion, an increase of $869.4 million, or 7 percent, from $11.9 billion
in 1996. Approximately 44 percent of the increase in interest-bearing
liabilities was in money market and NOW deposit accounts, 31 percent was in time
deposit accounts and 25 percent was from other short-term nondeposit sources.
The net interest spread improved 19 basis points during 1997 to 3.62 percent
from 3.43 percent in 1996 as average yields on earning assets increased while
the average rates paid on interest-bearing liabilities decreased. The average
yield on earning assets increased 11 basis points to 8.07 percent in 1997 from
7.96 percent in 1996. In general, the 11 basis point increase in the yield on
earning assets reflected a slightly higher overall interest rate environment in
1997 over 1996. For example, the average prime rate for 1997 was 8.44 percent
compared to 8.27 percent for 1996. Also, 1-year and 5-year treasury securities
yielded 5.63 percent and 6.22 percent on average, respectively, during 1997
versus 5.52 percent and 6.18 percent on average, respectively, during 1996.
Also, the yield on earning assets benefited from a tightening of First
American's liquidity position. During 1997, the average balance of lower
yielding federal funds sold and securities purchased under agreements to resell
was less than 1% of total earning assets compared to over 2% for 1996. The
average yield on investment securities increased 19 basis points during 1997 as
the result of a realignment of the portfolio. Factors contributing to the
increase in the average yield on loans in 1997 over 1996 were increased yields
on consumer loans, the sale of approximately $123.7 million of lower yielding
consumer mortgages, and an increase in the contribution to interest income from
derivatives that hedged loan yields. The average rate paid on interest-bearing
liabilities decreased 8 basis points to 4.45 percent in 1997 from 4.53 percent
in 1996. Factors contributing to the 8 basis point decrease were deposit pricing
actions and a decrease in the expense involved in hedging the rates paid on
these liabilities.
Taxable equivalent net interest income increased $56.1 million, or 10 percent,
in 1996 from $548.4 million in 1995. The increase in net interest income during
1996 resulted primarily from an increased volume of earning assets (mainly
loans) with average earning assets increasing $232.2 million more than average
interest-bearing liabilities. The 6 basis point decline in the net interest
spread in 1996 from 3.49 percent in 1995 resulted from the average yield on
earning assets decreasing 4 basis points and the average rate paid on
interest-bearing liabilities increasing 2 basis points. As the volume of
interest-bearing liabilities increased in 1996, the mix of interest-bearing
liabilities consisted of a larger percentage of higher-costing balances which
caused an increase in both the rate paid on interest-bearing liabilities and
interest expense. The 6 basis point decrease in the net interest margin from
1995 to 1996 reflected competitive pricing pressures, balance sheet mix changes,
and the overall average interest rate environment.
Management currently anticipates that net interest income will increase in 1998
due to expected growth in earning assets and that the net interest margin could
decline due to lower levels of interest rates and a flatter yield curve
resulting in lower reinvestment rates and a higher level of prepayments on same
asset classes.
112
122
NONINTEREST INCOME
Noninterest income represented 37 percent of total revenues during 1997 compared
with 34 percent in 1996 and 27 percent in 1995. Noninterest income increased
$92.0 million, or 30 percent, to $395.8 million in 1997 from $303.7 million in
1996. Noninterest income for 1997 included a full year of IFC's noninterest
income, whereas 1996 included IFC's income from its date of acquisition of July
1, 1996. During 1997, income from nontraditional banking services continued to
grow for First American as evidenced by the increase in investment services
income, which comprised 31 percent of total noninterest income in 1997 compared
with 22 percent in 1996. Investment services income increased $55.0 million, or
81 percent, in 1997 to $123.4 million from $68.4 million in 1996. IFC
contributed to substantially all of the increase in investment services income.
Excluding IFC, total noninterest income increased $36.5 million, or 14 percent.
First American is ranked as a leader in sales of investment products. According
to the Bank Securities Journal (Nov. 1997), First American ranked tenth in the
U.S. in terms of total investment products sold (bank only), during the first
quarter of 1997. When investment assets sold are compared to the deposit base,
First American ranked second in the U.S. This ranking reflects the IFC
acquisition, as well as the emphasis placed on the continued development of
First American's investment management services.
In addition to investment services income, several other categories which
contributed significantly to the improvement in noninterest income in 1997 over
1996 included service charges on deposit accounts, commissions and fees on
fiduciary activities, and other income. Service charges on deposit accounts
increased $20.2 million, which is attributable to fee increases and product
changes in conjunction with the utilization of a customer information system
called VISION. VISION captures product utilization, transaction behavior,
profitability, and buying preferences for each customer. Commissions and fees on
fiduciary activities increased $4.5 million principally as a result of an
increase in the value of assets managed due to favorable market conditions and
increased trust activity from improved marketing efforts.
Other income increased $13.8 million in 1997. As First American took steps to
target profitable customer segments during 1997, decisions were made to sell
First American's corporate trust business and Tennessee Credit Corporation, a
consumer finance subsidiary acquired with the purchase of First City Bancorp,
Inc. The gains included in other noninterest income related to these sales
amounted to $2.4 million and $2.1 million, respectively.
Also included in the $13.8 million increase in other income was a $2.5 million
increase in automated teller machines ("ATM") surcharge and network transaction
fees resulting from non-First American customer's use of ATMs and from the
introduction of new ATM services such as stamps and mini-statements.
Additionally, approximately $2.0 million was recognized as a gain on the sale of
First American's equity ownership in HONOR Technologies, Inc., a bank-card
network company. Other income included a $1.3 million increase in open-end,
non-loan fees due to interchange fees generated by the "Check Card" product and
a $1.0 million increase in income from related bank fees such as factoring
commissions, agency fees, and fees from outgoing wire transfers.
Noninterest income increased $100.7 million, or 50 percent, in 1996 over 1995.
IFC contributed $49.6 million to noninterest income primarily as investment
services income. Excluding the effects of IFC from its effective date of
acquisition, July 1, 1996, through December 31, 1996, noninterest income in 1996
was $254.1 million, a $51.1 million, or 25 percent, increase from 1995.
Investment services income contributed 52 percent of the
113
123
growth in noninterest income between 1996 and 1995. Other increases in
noninterest income were primarily the result of First American's diverse income
and fee generating activities, including service charges on deposit accounts,
income and fees related to selling and servicing mortgage loans, "Check Card"
interchange fees, and ATM surcharges and network transaction fees.
Management expects noninterest income to increase in 1998 as the result of
initiatives in generating fee growth through the integration and expansion of
banking, investing, and financial planning services offered to clients and
through the continued utilization of technological enhancements such as the
VISION customer information system.
NONINTEREST EXPENSE
During 1997 First American continued efforts to control costs without
sacrificing service to clients. Steps taken during 1997 to control costs
included the implementation of lower-priced yet more convenient, distribution
alternatives such as expanded telephone banking, additional ATMs (the number of
ATMs increased by 200 to 638 at December 31, 1997, or 46 percent), and PC
banking. Other steps taken during 1997 to increase efficiency included the
development of a new financial system to streamline financial procedures, review
of pay administration to ensure that jobs are designed to support the
transformation to a financial services company, revision of incentive plans,
reconfiguration of branches, and initiation of the replacement of the proof
operation with a new imaging system. A key measure of a bank holding company's
efficiency is the productivity ratio (also known as the operating efficiency
ratio) which is the ratio of operating expenses to taxable equivalent net
interest income plus noninterest income. Excluding nonbank subsidiaries, $4.4
million of nonrecurring gains pertaining to the sale of corporate trust assets
and First American's investment in HONOR Technologies, Inc., in 1997, and the
$8.1 million one-time SAIF assessment in 1996, First American's productivity
ratio improved 83 basis points during 1997 to 59.04 percent from 59.87 percent
in 1996. The improvement in the productivity ratio from 1996 to 1997 means that
the Corporation spent $0.83 less in 1997 compared to 1996 to earn $100 of
revenues. The ratio was 60.67 percent in 1995 excluding the impact of $7.3
million of Heritage merger-related expenses.
Total noninterest expense was $669.7 million in 1997 compared to $571.7 million
in 1996. One significant reason for the $98 million, or 17 percent, increase in
noninterest expense in 1997 over 1996 was that in 1997 a full year of IFC's
expenses were included, whereas in 1996 IFC's expenses for six months from its
date of acquisition of July 1, 1996 were included. Of the $98 million increase
in noninterest expense, $52.4 million was attributed to IFC. Increases in
subscribers' commissions of $35.8 million, increases in salaries and employee
benefits of $7.6 million, and increases in general and administrative expenses
of $7.4 million comprised the major portion of the increase in noninterest
expense attributable to IFC. Excluding IFC, noninterest expenses increased $45.6
million, or 9 percent. Excluding IFC and the one-time SAIF assessment,
noninterest expense increased $53.8 million, or 10 percent. This increase is
primarily attributable to the effects of the bank acquisitions made in 1997 and
1996.
Significant changes from 1996 to 1997 in noninterest expense categories,
inclusive of IFC and the bank acquisitions are outlined as follows:
- - Salaries and benefits, the largest component of noninterest expense, increased
$32.8 million, or 11 percent, in 1997 primarily due to merit increases,
incentive programs, related payroll taxes and the increased cost of medical
benefits.
114
124
- - Equipment expenses increased $7.7 million, or 22 percent, in 1997. During 1997
First American improved operations and banking facilities to better serve
customers in a more cost effective manner. Specifically, depreciation expense
increased due to additions and renovations at various branches, the addition
of new image scanning equipment, and enhancements and housing for ATMs. A
greater usage of computer maintenance contracts also contributed to the
increase in equipment expenses.
- - Communication expenses increased $5.0 million, or 24 percent, in 1997 due to
higher expenditures for telecommunications.
- - Net occupancy expense was up $6.2 million, or 15 percent, in 1997 primarily as
the result of increased depreciation, rentals and maintenance for branch
banking facilities acquired through acquisitions and depreciation attributed
to remodeling of other banking facilities.
- - The $8.7 million decrease in FDIC insurance expense in 1997 was primarily
related to the $8.1 million one-time assessment on SAIF deposits held as of
March 31, 1995, which was accrued in the third quarter of 1996.
During 1996 noninterest expense increased $107.8 million, or 23 percent, to
$571.7 million from $463.9 million for 1995. IFC expenses, which consisted
primarily of subscribers' commissions, were $48.8 million from its date of
acquisition through December 31, 1996. Excluding the acquisition of IFC,
noninterest expense was $522.9 million, a $59.0 million, or 13 percent, increase
from 1995. In addition to the acquisition of IFC, a significant portion of the
increase in 1996 over 1995 was due to increased costs of salaries and employee
benefits; net occupancy expense; intangibles amortization associated with the
bank acquisitions made during 1996 and 1995; and the one-time $8.1 million SAIF
assessment. Excluding the one-time SAIF assessment and the effects of the 1995
and 1996 acquisitions, noninterest expense increased $15.8 million, or 3
percent.
Management intends to continue to emphasize cost control while developing the
capacity to absorb future growth in connection with the Deposit Guaranty merger
and the Corporation's transformation to a financial services company.
Management's long-term objective is to improve the productivity ratio to less
than or equal to 50 percent by the year 2000. It is anticipated that the Deposit
Guaranty merger and the resulting cost synergies will assist in improving the
productivity ratio.
The term "Year 2000 issue" refers to the necessity of converting computer
information systems so that such systems recognize more than two digits to
identify a year in any given date field, and are thereby able to differentiate
between years in the twentieth and twenty-first centuries ending with the same
two digits (e.g. 1900 and 2000). This issue affects not only First American, but
virtually all companies, organizations and governments worldwide that use
computer information systems. To address the Year 2000 issue, First American has
adopted a broad-based approach designed to encompass First American's total
systems and nonsystems environments, including Deposit Guaranty. This approach
includes the development of a conversion time line, costs budget, resource
allocation, and independent verification of each system's capacity to properly
recognize dates following such conversion. First American has formed an
enterprise-wide steering committee and implementation team to oversee and
complete the conversion project.
A principal Year 2000 issue for First American relates to its mainframe computer
operating system software and application software. The operating system
software is subject to a data processing outsourcing agreement with IBM Global
Services ("IBM"). First American management believes that IBM is well into the
process of modifying this
115
125
operating system code. In addition, First American contracted with PLATINUM
technology, inc., a leading software technology company, to assist First
American in its Year 2000 efforts by converting First American's proprietary
code to Year 2000 compliance, and this work was substantially complete as of
December 31, 1997. First American is also actively working with its other third
party software vendors to ensure Year 2000 readiness. An inventory of software
applications at First American has been conducted and third party vendors have
been contacted regarding the status of the Year 2000 compliance of their
products. First American plans to conduct extensive testing of application
systems used in its operations, including both internally-developed and third-
party-vendor application systems, beginning in early 1998. With respect to
credit decisions, First American is taking steps to insure that Year 2000
compliance is taken into account in its loan underwriting procedures. Year 2000
issues related to physical facilities and other electronic interactions are also
being addressed.
First American expects to be substantially Year 2000 compliant with respect to
its critical systems by the end of 1998. Management anticipates that
internally-developed and third-party provided applications will be tested for
compliance in 1998 and 1999. The costs of First American's overall Year 2000
initiative have not yet been finally determined, but are not expected to exceed
$5 million in the aggregate.
INCOME TAXES
Income tax expense in 1997 was $137.9 million, which resulted in an effective
tax rate of 36.7 percent of pretax income versus $114.8 million, or 35.9 percent
of pretax income, for 1996. The higher effective tax rate for 1997 was primarily
attributable to an increase in nondeductible goodwill expense. Income tax
expense in 1995 was $100.2 million, or 36.3 percent, of pretax income. The
decrease in the tax rate for 1996 versus 1995 was attributable in part to a more
favorable overall effective state income tax rate. First American expects the
effective tax rate to decrease in 1998 due to the realignment of certain
corporate entities. For additional information on income taxes of the
Corporation, see NOTE 11 to the consolidated financial statements.
116
126
BALANCE SHEET REVIEW
LOANS
Loans comprise the largest component of First American's earning assets and
continue to be the highest yielding category of earning assets. Loans provided
77 percent of interest income during 1997 and 1996. During 1997 average loans
increased $934.0 million, or 9 percent, to $11.21 billion from $10.28 billion.
Excluding the effects of the acquisitions during 1997, the purchase of $200.0
million of installment loans, and $123.7 million of mortgage loan sales (other
than through mortgage banking operations), 1997 average loans increased $555.4
million, or 5 percent. The 5 percent loan growth in 1997 was attributable to (1)
positive economic conditions in primary markets, (2) organized sales efforts in
conjunction with effective administrative support and responsive credit
decisions, and (3) marketing programs. Management anticipates loan growth in the
next year will be between 5 to 10 percent.
TABLE 11 presents end of period loan balances by category for the past five
years. TABLE 6 presents the maturities of loans, exclusive of consumer loans,
outstanding at December 31, 1997.
COMMERCIAL LOANS
Commercial loans averaged $4.34 billion during 1997, up $420.3 million, or 11
percent, from $3.92 billion in 1996 and accounted for 45 percent of loan growth
in 1997. During 1997 and 1996, commercial loans comprised 39 percent and 38
percent of average total loans, respectively. The increase in commercial loans
occurred over a broad range of industry categories, including the healthcare,
hotels/amusement/recreation, and printing/ publishing segments, and was
attributable to a continued focus on increasing First American's specialization
in these categories. First American also experienced strong growth in loans
generated through those business lending units which target companies with
revenues up to $2 million. During 1997, First American continued to maintain a
leadership position in the state of Tennessee in small business (revenues under
$10 million) and middle market lending (revenues of $10 million to $100
million).
First American is monitoring the present turbulence in the Asian economy,
limiting direct exposure and continually evaluating indirect exposure.
Substantially all exposure to Asian-related companies was in the form of credit
facilities extended to United States-based affiliates of Asian companies. First
American's exposure to such companies at December 31, 1997 was $59.1 million,
while funded loans amounted to $11.7 million.
To facilitate the foreign trade needs of our customers, First American maintains
relationships with a number of foreign banks. Total approved exposure to Asian
banks amounted to $11.9 million which is comprised of various commitments. As of
December 31, 1997, $2.0 million was funded under these limits.
CONSUMER LOANS
The consumer loan portfolio increased $330.6 million, or 7 percent, to average
$5.16 billion during 1997 from $4.83 billion during 1996. Total consumer loans
averaged 46 percent of the loan portfolio in 1997 and 47 percent in 1996.
Consumer loans consist of mortgage loans, installment loans, open-end loans, and
single payment loans.
Average installment loans increased primarily due to the purchase of $200
million loans, with recourse, from a wholly-owned corporate agency and
instrumentality of the U.S.
117
127
Government on June 30, 1997. First American also secured the right to finance
new loans with this federally sponsored enterprise, whereby First American
assumes underwriting, funding, and administrative responsibilities.
The largest category of consumer loans, amortizing mortgages, increased on
average $90.7 million to $2.75 billion during 1997, from $2.66 billion in 1996.
Consumer amortizing mortgages comprised 25 percent of First American's average
net loans during 1997 compared to 26 percent in 1996. Considering the effect of
$123.7 million mortgage loans that were sold during 1997, average consumer
amortizing mortgages increased $159.0 million, or 6 percent.
Average open-end loans consists primarily of credit card loans and home equity
lines of credit. Average credit card loans increased $42.9 million in 1997 due
to continued growth from the reintroduction of credit card loans in 1995.
Average home equity lines of credit increased in 1997 as the result of
activation of existing lines of credit and a number of targeted sales
initiatives to acquire new lines of credit.
COMMERCIAL REAL ESTATE LOANS
Commercial real estate loans, which include real estate construction and real
estate commercial mortgages, increased $182.9 million, or 12 percent, to average
$1.71 billion during 1997 compared with $1.52 billion during 1996. Average total
commercial real estate loans were 15 percent of total loans during 1997 and
1996. There have been and continue to be, selective opportunities for commercial
real estate lending in First American's markets; the Corporation's goal is to
provide construction, acquisition/development and intermediate term financing
for clients in First American's markets.
INVESTMENT SECURITIES
The investment securities portfolio is the second largest component of First
American's earning assets and interest earned on investment securities was 22
percent of total taxable equivalent interest income in 1997 and in 1996. Total
investment securities were $4.1 billion at December 31, 1997 and 1996, and
comprised 26 and 27 percent of total earning assets at year-end 1997 and 1996,
respectively. As an integral component of asset/liability strategy, First
American manages the investment securities portfolio to maintain liquidity,
balance interest rate risk, and augment interest income. The portfolio is also
used to meet pledging requirements for deposits and borrowings. Additional
information on investment securities is provided under the captions "Net
Interest Income" and "Liquidity."
Securities in the investment portfolio are classified as either available for
sale ("AFS") or held to maturity ("HTM"). AFS securities averaged $3.13 billion
in 1997 compared with $2.68 billion in 1996. During 1997 the AFS portfolio was
realigned by increasing the amount of fixed rate securities held and reducing
the amount of floating rate securities held. HTM securities averaged $872.6
million during 1997 compared with $1.03 billion in 1996.
The average estimated maturity of the total securities portfolio was 3.4 years
at December 31, 1997 (3.6 years for AFS securities and 2.7 years for HTM
securities) compared with 4.1 years at year-end 1996 (4.7 years for AFS
securities and 2.3 years for HTM securities). The expected maturity for
nonamortizing securities is the stated maturity and the expected maturity for
mortgage-backed securities is based on current estimates of average maturities
including prepayment assumptions. The average repricing life of the securities
portfolio was 3.0 years at December 31, 1997 (3.2 years for AFS securities and
1.8 years for HTM securities). The average yield of the securities portfolio was
6.94
118
128
percent in 1997 compared to 6.80 percent in 1996. TABLE 5 presents additional
detail on estimated average maturities, average repricings, and weighted-average
yields.
Mortgage-backed securities comprised 75 percent of total investment securities
at December 31, 1997, compared to 67 percent at December 31, 1996.
Mortgage-backed security holdings on December 31, 1997, included $46.6 million
floating rate mortgage-backed securities (of which $42.1 million were classified
as AFS and $4.5 million were classified as HTM). All mortgage-backed securities
classified as U.S. Government agencies and corporations were issued or
guaranteed by the Federal National Mortgage Association ("Fannie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), or the Government
National Mortgage Association ("Ginnie Mae"). Other mortgage-backed securities
of 1.1 billion consisted of AAA-rated collateralized mortgage obligations
("CMO's"), which were purchased because of their high credit quality and
relatively certain average lives. At year-end 1997, over 99.9 percent of First
American's debt securities were investment grade with the remaining .1 percent
unrated. Of the securities which are rated, none are below investment grade
(BBB).
DEPOSITS AND OTHER SOURCES OF FUNDS
Core deposits, which consist of total deposits less certificates of deposit
("CD's") $100,000 and over and foreign deposits, continue to be First American's
primary source of funding for supporting earning asset growth. In addition, core
deposits provide a customer base for cross selling other products and services
offered by First American. Average core deposits were 76 percent of average
earning assets in 1997 compared to 77 percent in 1996. The mix of average core
deposits remained fairly constant between 1997 and 1996 with money market
accounts, CD's under $100,000, and noninterest-bearing demand deposits
continuing to comprise the majority of core deposits in both 1997 and 1996.
Average core deposits increased $715.3 million, or 6 percent, to $11.7 billion
in 1997. Increases in core deposits are attributable, primarily to the effect of
acquisitions and to the continued popularity of the First American Investment
Reserve ("FAIR") account. Of the $715.3 million increase in average core
deposits, over 60% related to the effect of the acquisitions made during 1997
and 1996. The FAIR account, a money market deposit account combining many
features common among money market funds, accounted for another $194.4 million
of the increase. On December 31, 1997, FAIR account balances outstanding were
$2.45 billion and the stated interest rate paid was 4.25 percent compared to
$2.25 billion and 4.30 percent, respectively, at December 31, 1996.
Other core deposit accounts that had increases in the average balances during
1997 included NOW accounts ($190.9 million increase), noninterest bearing demand
deposits ($326.7 million increase), and CD's under $100,000 ($110.0 million
increase) which were offset by a slight decrease in the average balance of
regular savings ($24.2 million decrease). First American is taking steps to
strengthen customer relationships in order to maintain its core deposit funding
base. Steps towards this objective include the implementation of an extensive
Distribution Management System ("DMS") and the Select Rewards program. The DMS
allows First American to reconfigure its distribution system based on client
preference to specifically tailor distribution channels market by market and to
provide the best mix of branches, mini branches, ATMs, telephone, and PC banking
in each individual market. For example, First American has entered into
contracts to sell three branches in Virginia as part of the reconfiguration
process; these sales are expected to close in the second quarter of 1998. The
Select Rewards program is a relationship-oriented program which is similar to
the airline industry's frequent flyer
119
129
program and rewards customers for banking with First American with points based
on the number, size, and longevity of accounts.
In addition to core deposits, other sources of funding utilized by First
American include CD's $100,000 and over, foreign deposits, short-term
borrowings, and long-term debt. Total short-term borrowings include overnight
federal funds purchased primarily from correspondent banks, securities sold
under agreements to repurchase, and other short-term borrowings, principally
funds due to the U.S. Treasury Department tax and loan accounts and the Federal
Home Loan Bank. Total CD's $100,000 and over, foreign deposits, and short-term
borrowings averaged $3.07 billion for 1997, up 14 percent, or $369.3 million
from the previous year. The increase in average CD's $100,000 and over, foreign
deposits, and short-term borrowings during 1997 is primarily attributable to
increases in CD's $100,000 and over ($151.8 million), Federal funds purchased
and repurchase agreements ($73.0 million), and other short-term borrowings
($145.1 million). The increase in the period end balance of other short-term
borrowings to $354.7 million at December 31, 1997, from $225.1 million at
December 31, 1996, was essentially due to a reclassification from long- to
short-term of $108.5 million variable rate and $14.5 million fixed rate advances
from the FHLB. TABLE 9 details maturities of CD's $100,000 and over at December
31, 1997 and 1996.
Long-term debt, which consists primarily of borrowings from the FHLB, increased
$165.7 million to $596.2 million at December 31, 1997, from $430.6 million at
December 31, 1996. Most of the increase was due to the addition of $285.0
million variable rate borrowings from the FHLB offset by $123.0 million of FHLB
borrowings that were reclassified from long-term to short-term as discussed in
the preceding paragraph. At December 31, 1997, First American's variable rate
long-term borrowings totaled $385.0 million with a weighted-average interest
rate of 5.86 percent, and total fixed rate long-term borrowings were $211.2
million with a weighted-average interest rate of 6.94 percent.
CREDIT RISK MANAGEMENT AND ASSET QUALITY
First American seeks to exercise prudent credit risk management in lending,
including diversification of the loan portfolio by loan category and by industry
segment, as well as by identification of credit risks. Accordingly, First
American places importance on industry specialization and relationship
management so that relationship managers (loan officers) are better able to
understand the complexities of an industry's characteristics. Specialization by
relationship managers permits First American to provide expertise in structuring
the original credit facility and to provide continuous risk evaluation.
First American's loans are predominantly to borrowers from its primary market
territory, an area in which First American's relationship managers are
knowledgeable. First American's primary market territory includes Tennessee,
Mississippi, Louisiana and selected markets in Virginia, Kentucky, Arkansas and
other adjacent states. Based on Standard Industrial Classification codes, there
were no industry concentrations within the commercial loan category in excess of
10 percent of total loans at December 31, 1997, or at December 31, 1996. First
American's ten largest outstanding loan relationships at December 31, 1997,
amounted to $265.5 million, or 2.3 percent of total loans, compared to $215.5
million, or 2.0 percent of total loans, at year-end 1996. At December 31, 1997,
the largest loan relationship had $46.9 million outstanding. In 1997, FANB's
regulatory legal lending limit would have been $238.5 million based on capital
as restated to reflect the impact of the acquisition of Deposit Guaranty.
120
130
NONPERFORMING ASSETS
First American carefully monitors loans for possible credit problems through
relationship managers and a staff of seasoned credit officers. The Credit Policy
Committee and an Independent Loan Review Division assist in the monitoring of
loans for possible credit problems. The Credit Policy Committee gives broad
direction to the lending activities of the Corporation by reviewing and
recommending matters relating to corporate lending policy, loan allocations,
concentrations, and underwriting criteria. The Independent Loan Review Division
of the Corporation performs periodic independent reviews of identified problem
loans and the general overall quality of the loan portfolios in light of
economic and market conditions and conducts annual examinations of the loan
portfolios to verify the monitoring process. Problem loans are assigned to
specialized areas for resolution.
Nonperforming assets include nonaccrual and restructured loans and foreclosed
properties. The ratio of nonperforming assets to total loans and foreclosed
properties was .37 percent at December 31, 1997, down 6 basis points from .43
percent at December 31, 1996. Nonperforming assets totaled $43.3 million at
December 31, 1997, and consisted of $36.3 million of nonaccrual loans and $7.0
million of foreclosed properties. This compared to $45.2 million of
nonperforming assets at December 31, 1996, which was comprised of $32.7 million
of nonaccrual loans, $11.8 million of foreclosed properties and less than $1
million in restructured loans. There were no restructured loans during 1997.
Table 8 summarizes changes in nonperforming assets for each of the past five
years and presents the composition of the nonperforming assets balance at the
end of each year.
Loans 90 days or more past due, excluding nonaccrual loans, were .23 percent of
total loans at December 31, 1997, versus .20 percent of total loans at December
31, 1996. The increase in total past due loans was primarily attributable to
increases in the loan categories of consumer-other and commercial loans across
several industry types.
First American had $61.9 million of outstanding loans at December 31, 1997,
versus $52.1 million at December 31, 1996, which were not considered
nonperforming, but whose borrowers, in management's opinion, are experiencing
financial difficulties severe enough that serious doubt exists as to their
continued ability to comply fully with present repayment terms. Depending on the
economy and other factors, these loans and others, which may not be presently
identified, could become nonperforming assets in the future.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
In the normal course of business First American must manage the risk that
borrowers may default on their obligations to the Corporation. The allowance for
loan losses (the "allowance") is a reserve established and maintained to protect
the Corporation against estimated losses inherent in the loan portfolio. The
allowance is increased by the provision for loan losses (which is an expense on
the income statement) and through recoveries of previously written-off loans and
is decreased by charged-off loans. Management reviews the allowance at least
quarterly to ensure the level is adequate to absorb estimated losses.
The allowance consists of two portions: an allocated portion and an unallocated
portion. The allocated portion is established separately by risk group as
follows: commercial and commercial real estate loans, consumer loans, and
off-balance-sheet commitments (unfunded loan commitments and standby letters of
credit). The processes applied to each group are similar but have been tailored
as appropriate for the nature of risk in each group. The assessment of the
allocated portion of the allowance is based on a detailed statistical analysis
of historical loan balances, net charge-offs, and off-balance-sheet loan and
letter of
121
131
credit commitments. Specific reserves are allocated to individual loans as
considered necessary based upon periodic reviews of significant lending
relationships.
The unallocated portion of the allowance is for inherent losses which probably
exist as of the valuation date even though they may have not have been
identified by the more objective processes used for the allocated portion of the
allowance. This is due to the risk of error and/or inherent imprecision in the
process. This portion of the allowance is particularly subjective and requires
judgments based upon qualitative factors which do not lend themselves to exact
mathematical calculations. Some of the factors considered are changes in credit
concentrations, loan mix, historical loss experience, and the general economic
environment in First American's markets.
While the total allowance is described as consisting of an allocated and an
unallocated portion, these terms are primarily used to describe a process. Both
portions are available to support inherent losses in the loan portfolio. An
analysis of the changes in the allowance for loan losses for the past five
years, including the provision and charge-offs and recoveries by loan category,
is presented in Table 7. The table also contains the year-end allocation of the
allowance for loan losses among the various loan portfolios and the unallocated
portion of the allowance for each of the past five years.
At December 31, 1997, the allowance for loan losses was $180.0 million, or 1.55
percent of net loans, versus $185.5 million, or 1.74 percent of net loans, at
December 31, 1996. The allowance for loan losses was $191.1 million, or 1.91
percent of net loans, at December 31, 1995. The changes in the allowance during
1997 from year-end 1996 were primarily due to a $12.5 million provision for loan
losses and $25.9 million of net loan charge-offs. Activity in the allowance for
loan losses during 1997 also included a $8.2 million increase due to the
acquisitions made during 1997, offset slightly by a $.2 million decrease due to
the sale of Tennessee Credit Corporation. The allowance as a percentage of
nonperforming loans increased to 496 percent at December 31, 1997, compared to
555 percent at December 31, 1996, and 465 percent at December 31, 1995. First
American's coverage ratio is one of the highest in the industry.
Net loan charge-offs were $25.9 million, or .23 percent of average loans, in
1997; $15.2 million, or .15 percent of average loans, in 1996; and $7.7 million,
or .09 percent of average loans, in 1995. The low level of net loan charge-offs
is indicative of First American's loan quality and credit administration
standards and the generally good economic environment existing in the
Corporation's primary market territory. Total gross loan charge-offs were $54.3
million in 1997, $45.7 million in 1996 and $31.1 million in 1995. Total
recoveries were $28.4 million in 1997, $30.5 million in 1996, and $23.4 million
in 1995.
The $10.7 million increase in net loan charge-offs in 1997 over 1996 was
primarily due to an increase in commercial loan net charge-offs, which were
$12.6 million in 1997 compared to net recoveries of $2.6 million in 1996. The
ratio of commercial loan net charge-offs to average commercial loans increased
36 basis points to .29 percent from (.07) percent in 1996. (A negative
percentage of net charge-offs indicates that recoveries exceeded net
charge-offs.)
Of the major loan categories, consumer-other loans had the highest level of net
charge-offs in 1997, 1996, and 1995, but experienced a $2.5 million decrease in
net loan charge-offs between December 31, 1997, and December 31, 1996.
Consumer-other loan net charge-offs were $15.0 million and $17.6 million, or .62
and .81 percent of average consumer-other loans, in 1997 and 1996, respectively.
Consumer-other loan net charge-offs were
122
132
$11.1 million, or .59 percent of average consumer-other loans, in 1995.
Increases in credit card loan and other open-end loan net charge-offs were
offset by decreases in direct and indirect loan net charge-offs from year-end
1996 to year-end 1997. First American generally charges off consumer loans on
which principal or interest is past due more than 120 days. Management expects
that consumer-other loan net charge-offs in 1998 will be slightly higher than in
1997.
Future provisions for loan losses depend on such factors as asset quality, net
loan charge-offs, loan growth, and other criteria as discussed above. The
appropriate level of the allowance for loan losses and the corresponding
provision will continue to be determined quarterly based on the allowance
assessment methodology. Under its current methodology, management anticipates
that there will be a provision for loan losses in 1998; however, the specific
amount cannot be determined at this time. Changes in circumstances affecting the
various factors of the Corporation's methodology could determine whether a
provision is warranted in 1998 and, if so, the amount.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
The focus of Asset/Liability Management is to maximize net interest income
within prudent constraints. Net interest income is managed within a framework of
guidelines approved by the Board of Directors and administered by the
Asset/Liability Committee ("ALCO"). ALCO is comprised of Senior Executives at
First American.
The Corporation's guideline for earnings variance is that net income will not
vary by more than 5 percent for a 150 basis point change in rates from
management's most likely interest rate forecast over the next twelve months.
During 1997, the Corporation maintained a variance within these guidelines.
Factors affecting interest rate sensitivity are reviewed and updated at least
monthly. Periodically, earnings and interest rate risks are projected for longer
periods.
ALCO evaluates interest rate risk by assessing the Corporation's current
interest sensitivity position and estimating possible earnings and economic
value of equity at risk. TABLE 4 provides the Corporation's interest rate
sensitivity position.
First American had a net liability sensitive position for a cumulative one-year
period of 18.2 percent at December 31, 1997, which is within management's
objective of a cumulative net liability sensitivity of 4 percent to 24 percent.
In other words, the amount of net liabilities that reprice more quickly than
assets, adjusted for the effects of off-balance-sheet activities, is $2,913.6
million, or 18.2 percent of all earning assets. This compares to a cumulative
net liability sensitivity of 21.5 percent at December 31, 1996. A cumulative net
liability sensitivity indicates that First American's net interest income has a
tendency to increase if interest rates decline. An interest rate gap sensitivity
analysis is limited in its usefulness since the interest rate gap position
presents a snapshot of interest sensitivity for one point in time (interest gap
sensitivity can change on a daily basis), whereas management will make pricing
decisions whenever such actions are deemed necessary. First American classifies
NOW, money market, and regular savings accounts, totaling $5.6 billion at
December 31, 1997, as immediately rate sensitive. If NOW and regular savings
were not classified as immediately rate sensitive, then the one-year cumulative
gap would be a liability sensitive position of $174.5 million, or 1.1 percent,
of earning assets at December 31, 1997.
123
133
Management believes that interest rate sensitivity is best measured by its
simulation modeling. Forecasted levels of earning assets, interest-bearing
liabilities, and off-balance-sheet financial instruments are combined with
ALCO's forecasts of alternative interest rates for the next twelve months and
with other factors in order to produce various earnings simulations. By
forecasting earnings under multiple interest rate scenarios, ALCO can assess the
extent of its earnings at risk.
The economic value of equity calculation is a present value computation of all
future cash flows for assets, liabilities, and off-balance-sheet items based on
the current yield of each of these instruments. In this computation, First
American assumes a discount rate that is equal to current market rates of
balance sheet categories being simulated. The present values of assets less
liabilities, adjusted for the present values of off-balance-sheet items,
establish a base case economic value of equity. The impact to the base case
economic value arising from instantaneous changes in interest rates by equal
amounts to all categories provides a measure of the economic value of equity at
risk. The Corporation's guideline states that for an instantaneous change in
interest rates of 150 basis points, the economic value of equity will not change
by more than 20 percent. During 1997, the Corporation maintained a variance
which was well within this guideline.
The Corporation's most likely interest rate scenario at December 31, 1997, was
based on no change in the federal funds or prime rates through 1998.
DERIVATIVES
First American has utilized off-balance-sheet derivative products for a number
of years in managing its interest rate sensitivity. Generally, a derivative
transaction is a payments exchange agreement whose value derives from an
underlying asset or underlying reference rate or index. The use of noncomplex,
non-leveraged derivative products has reduced the Corporation's exposure to
changes in the interest rate environment. By using derivatives, such as interest
rate swaps, interest rate caps and floors and occasionally futures contracts, to
alter the nature of (hedge) specific assets or liabilities on the balance sheet
(for example, to change a variable rate obligation to a fixed rate obligation),
the derivative products offset fluctuations in net interest income from the
otherwise unhedged position. In other words, if net interest income from the
otherwise unhedged position changes (increases or decreases) by a given amount,
the derivative product should produce close to the opposite result, making the
combined amount (otherwise unhedged position impact plus the derivative product
position impact) essentially unchanged. Derivative products have enabled First
American to improve its balance between interest-sensitive assets and
interest-sensitive liabilities by managing its interest rate sensitivity while
continuing to meet the credit and deposit needs of customers.
In aggregate, many of First American's securities and loans with fixed rates may
be funded with variable rate money market deposits. Consequently, net interest
income can be negatively affected if short-term interest rates rise. To reduce
this exposure, the Corporation has entered into interest rate swaps on which the
Corporation pays a fixed rate and receives a variable rate tied to three-month
London Interbank Offering Rate ("LIBOR"). Thus, these swaps act to "fix" the
rates paid on a portion of the money market account balances for the period of
time covered by the swaps, which in turn reduces the potential negative impact
on net interest income of rising interest rates. NOTE 14 to the consolidated
financial statements presents the derivative financial instruments outstanding
at December 31, 1997 and 1996.
124
134
Notional amounts are key elements of derivative financial instruments
agreements. However, notional amounts do not represent the amounts exchanged by
the parties to derivatives and do not measure First American's exposure to
credit or market risks. The amounts of payments exchanged are based on the
notional amounts and the other terms of the underlying derivative agreements. At
December 31, 1997, First American had interest rate swaps with notional values
totaling $2.43 billion and interest rate floors with notional values totaling
$300 million. At December 31, 1997, these derivatives had net positive fair
values (unrealized net pretax gains) of $12.0 million. At December 31, 1996, the
Corporation had interest rate swaps, floors and caps with notional values
totaling $1.12 billion, $300 million and $100 million, respectively, for a total
of $7.7 million net positive fair values (unrealized net pretax gains). For
estimated fair value information related to all financial instruments, see NOTE
14 to the consolidated financial statements.
As First American's individual derivative contracts approach maturity, they may
be terminated and replaced with derivatives with longer maturities which offer
more interest rate risk protection. NOTE 14 to the consolidated financial
statements presents the net deferred gain related to terminated derivative
contracts. The net deferred gain totaled $5.4 million at December 31, 1997, and
$5.0 million at December 31, 1996. Deferred gains and losses on terminated
off-balance-sheet derivative contracts are recognized as interest income or
interest expense over the original covered periods. Of the $5.4 million of net
deferred gain at December 31, 1997, $1.1 million will increase net interest
income during 1998 and $4.3 million will be recognized in the years from 1999 to
2006.
Net interest income for the year ended December 31, 1997, included derivative
products pretax net income of $.8 million, consisting primarily of $6.4 million
additional interest income on loans, $1.5 million reduction in interest income
on securities, and $1.9 million in additional interest expense on money market
deposits and $1.9 million in additional interest on other deposits. This
compares to $13.6 million of derivatives products net pretax expense in 1996.
The change in derivative products net expense in 1996 to net pretax income in
1997 was primarily due to amortization of deferred gains/losses on terminated
derivatives contracts ($.7 million net deferred gains recognized in 1997
compared with $10 million net deferred losses recognized in 1996).
All derivatives activity is conducted under ALCO and Board of Director's
supervision and according to detailed policies and procedures governing these
activities. Policy prohibits the use of leveraged and complex derivatives. The
Board of Directors also sets interim limitations on the total notional amount of
derivatives contracts that may be outstanding at any time.
Off-balance-sheet derivative activities give rise to credit risk when interest
rate changes move in the Corporation's favor. In such cases, First American
relies on the ability of the contract counterparts to make contractual payments
over the remaining lives of the contracts. Credit risk exposure due to
off-balance-sheet derivative activities is closely monitored, and counterparts
to these contracts are selected on the basis of their creditworthiness as well
as their market-making ability. As of December 31, 1997, all outstanding
derivative transactions were with counterparts with credit ratings of A-2 or
better. Enforceable bilateral netting contracts between First American and its
counterparts allow for the netting of gains and losses in determining net credit
exposure to the counterpart. First American's net credit exposure on outstanding
interest rate swaps was $14.1 million on December 31, 1997.
125
135
LIQUIDITY
First American's goal in liquidity management is to ensure that sufficient funds
are available to meet the demands of depositors, borrowers, and creditors. ALCO
is responsible for structuring the balance sheet to meet these demands and
regularly reviews current and forecasted funding needs. Liquid assets, which
include cash and cash equivalents (less Federal Reserve Bank reserve
requirements), money market instruments, and securities that are estimated to
mature within one year, amounted to $1.36 billion, or 8 percent of earning
assets, at December 31, 1997, versus $1.61 billion, or 11 percent of earning
assets at December 31, 1996. The decrease in the ratio of liquid assets to
earning assets between year-end 1997 and 1996 was primarily attributable to
decreases in HTM securities estimated to mature within one year and in cash and
due from banks. In addition to assets included in liquid assets, AFS securities
maturing after one year, which can be sold to meet liquidity needs, had a
balance of $3.29 billion at December 31, 1997 compared to $3.07 billion at
December 31, 1996. Loans, exclusive of consumer loans, maturing within one year
amounted to $2.43 billion at December 31, 1997. NOTES 1 and 4 to the
consolidated financial statements discuss accounting for securities in further
detail. Maturity of securities is also discussed under the caption "Investment
Securities" and provided in TABLE 5. TABLE 6 presents the maturities of loans,
exclusive of consumer loans.
First American's primary sources of liquidity are core deposits, short-and
long-term borrowings, and cash flows from operations. First American's strategy
is to fund assets to the maximum extent possible with core deposits, which
provide a sizable source of relatively stable and low-cost funds. Management
monitors liquidity by reviewing trends in ratios such as core deposits as a
percentage of total deposits, core deposits as a percentage of earning assets,
and loans as a percentage of core deposits. Core deposits averaged $11.73
billion during 1997 and $11.02 billion during 1996 and comprised 90 percent and
91 percent of average deposits in 1997 and 1996, respectively. During 1995 core
deposits averaged $9.94 billion and comprised 90 percent of average deposits.
Core deposits funded 76 percent, 77 percent, and 77 percent of earning assets in
1997, 1996, and 1995, respectively. Average loans as a percentage of average
core deposits was 96 percent in 1997 compared to 93 percent in 1996 due to
growth in loans exceeding core deposit growth. Average loans as a percentage of
average core deposits was 89 percent in 1995.
Short-term funding needs can arise from declines in deposits or other funding
sources, drawdowns of loan commitments, and requests for new loans.
Relationships with a stable and growing customer base and a current network of
over 300 downstream correspondent banks routinely supply some of these funds.
Additional funds, if needed, can be raised from regional, national, and
international money markets. Short-term funding sources, comprised of non-core
deposits and short-term borrowings, totaled $3.46 billion, or 19 percent of
total assets, at December 31, 1997, compared with $3.04 billion, or 18 percent
of total assets, at December 31, 1996. An analysis of short-and long-term
borrowings can be found under the caption "Deposits and Other Borrowed Funds."
Shareholders' equity and long-term debt also contribute to liquidity by reducing
the need to continually rely on short-term purchased funds. At December 31,
1997, the ratio of equity to assets was 8.66 percent compared with 8.63 percent
at December 31, 1996, and 8.49 percent at December 31, 1995. Long-term debt
totaled 3 percent of total assets at December 31, 1997, 1996, and 1995.
An additional source of liquidity is First American's three-year $70 million
revolving credit agreement which will expire in May 31, 1998. First American had
no borrowings under
126
136
this agreement during 1997. Plans are underway to negotiate a revolving credit
agreement in 1998.
The SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS show net cash provided or
used by operating, investing, and financing activities and the net effect of
those activities on cash and cash equivalents. As such, it is a tool in
analyzing liquidity. During 1997 cash provided by operating activities was $243
million compared to $337 million in 1996 and $65 million in 1995. The largest
component of cash provided by operating activities in all years was net income.
Investing activities utilized $421 million of cash in 1997, $889 million in
1996, and $385 million in 1995. The largest component of cash used in investing
activities in 1997 and 1996 was purchases of securities available for sale,
which used $3.2 billion of cash in 1997 and $3.6 billion in 1996. Financing
activities provided $105 million in net cash in 1997, $191 million in 1996, and
$704 million in 1995. During 1997 financing activities included an increase in
FHLB advances of $301 million, an increase in deposits of $91 million, and a
decrease of $197 million from cash utilized to purchase First American common
stock.
First American had no material capital expenditure commitments at year-ends
1997, 1996, or 1995.
Management believes that First American has adequate liquidity to meet all known
commitments including common stock repurchases, loan commitments, dividend
payments, debt service, and reasonable borrower, depositor, and creditor
requirements over the next twelve months.
CAPITAL MANAGEMENT AND CAPITAL RESOURCES
Capital adequacy is important to the continued soundness, profitability, and
growth of First American. The principal objectives of First American's strategy
in managing capital are to (1) protect shareholders and depositors, (2) comply
with all regulatory requirements, (3) improve profitability, and (4) utilize
excess capital. Plans to utilize excess capital include investing in
nontraditional financial services businesses that yield returns in excess of 20
percent, focusing on bank acquisitions to further enhance the branch network and
lower distribution costs, and returning excess capital to shareholders through
buying back stock and increasing dividends.
On April 17, 1997, in addition to authorizing a 2-for-1 stock split, the Board
of Directors increased the quarterly cash dividend by 29 percent to $0.20 per
share. During 1997 First American paid dividends at the rate of $0.755 per
common share, up 25 percent from $0.605 per share during 1996. The rate of
dividends paid per common share was up 14 percent in 1996 over $0.53 per share
in 1995. The dividend payout ratio increased slightly in 1997 to 33.86 percent
from 30.87 percent in 1996 and met management's strategic goal of a dividend
payout ratio in the range of 30 to 40 percent. The dividend payout rate in 1995
was 30.64 percent.
Another strategic goal of First American's capital management policy is to
maintain the rate of internal capital generation at a level sufficient to ensure
growth in assets and earnings. Management's year 2000 strategic goal is to
maintain an internal capital generation ratio (calculated by dividing net income
less dividends by the average realized shareholders' equity) of 10 to 14
percent. During 1997 the internal capital generation ratio increased to 10.7
percent from 10.2 percent in 1996. The internal capital generation ratio was
10.3 percent in 1995.
127
137
Total shareholders' equity at December 31, 1997, was $1.54 billion, up 6
percent, from December 31, 1996. This followed an increase of $115.4 million, or
9 percent, from year-end 1995. The ratio of average equity to average assets
increased to 8.79 percent in 1997 compared to 8.77 percent in 1996 and 8.50
percent in 1995. The tangible equity ratio, which adjusts capital for the impact
of intangibles acquired through acquisitions, decreased to 7.17 percent at
December 31, 1997, from 7.32 percent at year-end 1996. The tangible equity ratio
was 7.50 percent at December 31, 1995.
During 1997 shareholders' equity was increased by $159.8 million of earnings
retention ($237.8 million of net income less $78.0 million of dividends), $94.6
million of common stock issued for bank acquisitions, $22.1 million of common
stock issued for employee benefit and dividend reinvestment plans, and $4.7
million change in net unrealized gains and losses on securities available for
sale, net of tax. Shareholders' equity was reduced by the repurchase of $196.5
million of common stock in 1997. During 1996 shareholders' equity was increased
by $141.5 million of earnings retention ($205.2 million of net income less $63.7
million of dividends), $17.9 million of common stock issued for employee benefit
and dividend reinvestment plans, and $83.7 million of common stock issued for
acquisitions. Shareholders' equity was reduced by the $25.6 million change in
net unrealized gains and losses on securities available for sale, net of tax,
and by the repurchase of $108.2 million of common stock in 1996.
The CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY detail the
changes in shareholders' equity during 1997, 1996, and 1995 and NOTES 1 and 4 to
the consolidated financial statements provide further information regarding
unrealized gains and losses on securities available for sale.
The Federal Reserve Board and the OCC promulgate risk-based capital guidelines
and regulations for bank holding companies and national banks which require
minimum levels of capital based upon calculations which apply various risk
ratings to defined categories of assets and to certain off-balance-sheet items.
Under the risk-based capital requirements, total capital consists of Tier I
capital (essentially realized common equity less disallowed intangible assets)
plus Tier II capital (essentially Tier I capital plus qualifying long-term debt
and a portion of the allowance for loan losses). Assets by type, or category,
are assigned risk-weights of 0 to 100 percent, depending on regulatory assigned
levels of credit risk associated with such assets. Off-balance-sheet items are
considered in the calculation of risk-adjusted assets through conversion factors
established by regulatory agencies. These regulations require bank holding
companies and national banks to maintain certain minimum capital ratios. As of
December 31, 1997, First American and its principal subsidiary, FANB, had ratios
which exceeded the regulatory requirements to be classified as "well
capitalized," the highest regulatory capital rating. NOTE 15 to the consolidated
financial statements summarizes the risk-based capital and related ratios for
First American and FANB.
FAFSB is subject to capital requirements adopted by the OTS which are similar
but not identical to those issued by the Federal Reserve Board and the OCC. As
of December 31, 1997, FAFSB had ratios which exceeded the regulatory
requirements to be classified as "well capitalized."
128
138
SUPPLEMENTAL TABLE 2: RATE-VOLUME RECAP
1997 FROM 1996 1996 FROM 1995
--------------------------- ----------------------------
INCREASE INCREASE
(DECREASE)(1) (DECREASE)(1)
TOTAL DUE TO TOTAL DUE TO
INCREASE -------------- INCREASE ---------------
(DECREASE) VOLUME RATE (DECREASE) VOLUME RATE
---------- ------ ----- ---------- ------- -----
(IN MILLIONS)
CHANGE IN INTEREST INCOME:
Securities:
Taxable
Held to maturity........ $ (8.9) $(10.6) $ 1.7 $(119.4) $(119.3) $ (.1)
Available for sale...... 37.7 30.8 6.9 109.9 106.5 3.4
Tax-exempt
Held to maturity........ .3 .3 -- (10.8) (9.9) (.9)
Available for sale...... (1.4) (1.8) .4 15.2 13.1 2.1
------ -------
Total securities..... 27.7 19.9 7.8 (5.1) (2.9) (2.2)
------ -------
Loans........................ 81.6 79.3 2.3 113.6 121.4 (7.8)
Federal funds sold and
securities purchased under
agreements to resell...... (11.7) (11.9) .2 6.4 8.1 (1.7)
Other........................ 1.1 1.0 .1 .4 -- .4
------ -------
Total change in
interest income.... 98.7 81.6 17.1 115.3 121.0 (5.7)
------ -------
CHANGE IN INTEREST EXPENSE:
NOW, money market, and
savings accounts.......... 4.5 12.4 (7.9) 22.3 15.3 7.0
Certificates of deposit...... 14.1 13.9 .2 25.3 25.9 (.6)
Other interest-bearing
deposits.................. (.7) .4 (1.1) 4.2 4.8 (.6)
Short-term borrowings........ 13.2 10.7 2.5 (1.8) 6.2 (8.0)
Long-term debt............... (1.1) 1.5 (2.6) 9.1 9.0 .1
------ -------
Total change in
interest expense... 30.0 39.4 (9.4) 59.1 57.8 1.3
------ -------
CHANGE IN NET INTEREST
INCOME....................... $ 68.7 42.2 26.5 $ 56.2 63.2 (7.0)
====== ====== ===== ======= ======= =====
- -------------------------
(1) Amounts are adjusted to a fully taxable basis, based on the statutory
federal income tax rates, adjusted for applicable state income taxes net of
the related federal tax benefit. The effect of volume change is computed by
multiplying the change in volume by the prior year rate. The effect of rate
change is computed by multiplying the change in rate by the prior year
volume. Rate/volume change is computed by multiplying the change in volume
by the change in rate and included in the rate change.
129
139
SUPPLEMENTAL TABLE 3: CONSOLIDATED AVERAGE BALANCE SHEETS AND
TAXABLE EQUIVALENT INCOME/EXPENSE AND YIELDS/RATES
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------- --------- --------- ------- --------- --------- -------
(DOLLARS IN MILLIONS)
INTEREST-EARNING
ASSETS:(1)
Taxable securities:
Held to maturity........ $ 836.2 $ 58.1 6.95% $ 992.9 $ 67.0 6.75% $ 2,759.7 $ 186.4 6.75%
Available for sale...... 2,958.4 201.5 6.81 2,490.0 163.8 6.58 836.9 53.9 6.44
Tax-exempt securities:
Held to maturity........ 36.4 2.7 7.42 32.2 2.4 7.46 129.2 13.2 10.22
Available for sale...... 166.6 15.2 9.12 186.9 16.6 8.88 18.1 1.4 7.73
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total securities... 3,997.6 277.5 6.94 3,702.0 249.8 6.75 3.743.9 254.9 6.81
--------- --------- ---- --------- --------- ---- --------- --------- -----
Federal funds sold and
repurchase agreements... 103.6 5.8 5.60 324.1 17.5 5.40 187.4 11.1 5.92
Loans, net of unearned
discount:
Commercial.............. 4,342.3 355.8 8.19 3,922.0 327.0 8.34 3,448.3 291.5 8.46
Consumer-amortizing
mortgages............. 2,751.7 223.7 8.13 2,661.0 209.2 7.86 2,225.7 178.7 8.03
Consumer-other.......... 2,410.4 222.9 9.25 2,170.5 197.1 9.08 1,873.5 168.0 8.97
Real
estate-construction... 391.0 32.4 8.29 348.3 28.4 8.15 276.2 24.7 8.94
Real estate-commercial
mortgages and other... 1,315.9 119.7 9.10 1,175.7 111.2 9.46 1,036.9 96.6 9.30
--------- --------- ---- --------- --------- ---- --------- --------- -----
Loans, net of unearned
discount.............. 11,211.3 954.5 8.51 10,277.5 872.9 8.49 8,860.6 759.3 8.57
--------- --------- ---- --------- --------- ---- --------- --------- -----
Other.................... 84.8 5.4 6.37 69.0 4.3 6.23 68.2 3.9 5.72
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total earning
assets(1)......... 15,397.3 $1,243.2 8.07% 14,372.6 $1,144.5 7.96% 12,860.1 $1,029.2 8.00%
--------- --------- ---- --------- --------- ---- --------- --------- -----
Allowance for loan
losses.................. (187.7) (191.4) (188.8)
Cash and due from
banks................... 841.0 757.8 793.1
Other assets............. 949.1 828.6 673.2
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total assets....... $16,999.7 $15,767.6 $14,137.6
========= ========= ==== ========= ========= ==== ========= ========= =====
DEPOSITS AND BORROWED
FUNDS:
Demand deposits......... $ 2,453.6 $ 2,216.9 $ 2,080.8
Interest-bearing
deposits:
NOW accounts.......... 1,843.5 $ 40.9 2.22% 1,652.6 $ 34.3 2.08% 1,582.3 $ 34.8 2.20%
Money market
accounts............. 2,825.8 120.3 4.26 2,631.5 121.5 4.62 2,180.6 95.5 4.38
1994 1993
----------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ------- ------- ---------- -------- -------
(DOLLARS IN MILLIONS)
INTEREST-EARNING
ASSETS:(1)
Taxable securities:
Held to maturity........ $ 2,059.4 $127.1 6.17% $ 1,623.0 $ 107.8 6.64%
Available for sale...... 1,415.2 79.4 5.61 2,205.4 136.5 6.19
Tax-exempt securities:
Held to maturity........ 129.1 13.3 10.30 125.5 13.7 10.92
Available for sale...... 1.8 .1 5.56 2.4 .3 12.50
--------- ------ ----- ---------- -------- -----
Total securities... 3,605.5 219.9 6.10 3,956.3 258.3 6.53
--------- ------ ----- ---------- -------- -----
Federal funds sold and
repurchase agreements... 348.0 14.2 4.08 429.2 13.5 3.15
Loans, net of unearned
discount:
Commercial.............. 2,875.2 212.6 7.39 2,455.9 168.4 6.86
Consumer-amortizing
mortgages............. 1,803.1 140.6 7.80 1,550.6 127.0 8.19
Consumer-other.......... 1,650.2 137.6 8.34 1,490.8 128.5 8.62
Real
estate-construction... 197.0 15.1 7.66 176.9 13.5 7.63
Real estate-commercial
mortgages and other... 904.2 74.5 8.24 831.6 67.0 8.06
--------- ------ ----- ---------- -------- -----
Loans, net of unearned
discount.............. 7,429.7 580.4 7.81 6,505.8 504.4 7.75
--------- ------ ----- ---------- -------- -----
Other.................... 163.1 6.8 4.17 112.7 3.8 3.37
--------- ------ ----- ---------- -------- -----
Total earning
assets(1)......... 11,546.3 $821.3 7.11% 11,004.0 $ 780.0 7.09%
--------- ------ ----- ---------- -------- -----
Allowance for loan
losses.................. (201.0) (245.9)
Cash and due from
banks................... 797.9 780.5
Other assets............. 588.7 614.3
--------- ------ ----- ---------- -------- -----
Total assets....... $12,731.9 $ 12,152.9
========= ====== ===== ========== ======== =====
DEPOSITS AND BORROWED
FUNDS:
Demand deposits......... $ 2,055.2 $ 1,942.2
Interest-bearing
deposits:
NOW accounts.......... 1,575.1 $ 31.5 2.00% 1,421.3 $ 29.8 2.10%
Money market
accounts............. 1,857.1 67.6 3.64 1,761.9 55.9 3.17
AVERAGE BALANCE INCOME/EXPENSE
------------------------- -------------------------
COMPOUND COMPOUND
% CHANGE GROWTH RATE % CHANGE GROWTH RATE
1997/1996 1997/1992 1997/1996 1997/1992
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
INTEREST-EARNING
ASSETS:(1)
Taxable securities:
Held to maturity........ (15.78)% (22.61)% (13.28)% (23.50)%
Available for sale...... 18.81 57.59 23.02 48.29
Tax-exempt securities:
Held to maturity........ 13.04 (28.93) 12.45 (32.02)
Available for sale...... (10.86) 156.52 (8.43) 173.13
------- ------- ------- -------
Total securities... 7.98 2.58 11.09 .66
------- ------- ------- -------
Federal funds sold and
repurchase agreements... (68.03) (28.58) (66.86) (22.62)
Loans, net of unearned
discount:
Commercial.............. 10.72 11.64 8.81 15.22
Consumer-amortizing
mortgages............. 3.41 16.11 6.93 13.08
Consumer-other.......... 11.05 11.19 13.09 10.57
Real
estate-construction... 12.26 10.46 14.08 12.10
Real estate-commercial
mortgages and other... 11.92 9.38 7.64 11.39
------- ------- ------- -------
Loans, net of unearned
discount.............. 9.09 12.20 9.35 12.95
------- ------- ------- -------
Other.................... 22.90 (21.23) 25.58 (14.33)
------- ------- ------- -------
Total earning
assets(1)......... 7.13 7.63 8.62% 8.67%
------- ------- ------- -------
Allowance for loan
losses.................. (1.93) (7.37)
Cash and due from
banks................... 10.98 2.46
Other assets............. 14.54 8.34
------- ------- ------- -------
Total assets....... 7.81% 7.63%
======= ======= ======= =======
DEPOSITS AND BORROWED
FUNDS:
Demand deposits......... 10.68% 6.61%
Interest-bearing
deposits:
NOW accounts.......... 11.55 8.62 19.24% 4.13%
Money market
accounts............. 7.38 8.65 (.99) 13.88
130
140
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------- --------- --------- ------- --------- --------- -------
(DOLLARS IN MILLIONS)
Regular savings....... 882.5 21.8 2.47 906.7 22.7 2.50 964.0 25.9 2.69
Certificates of
deposit under
$100,000............. 3,002.1 158.7 5.29 2,892.1 151.7 5.25 2,486.2 131.5 5.29
Certificates of
deposit $100,000 and
over................. 1,189.4 64.1 5.39 1,037.6 57.0 5.49 956.8 51.9 5.42
Other time............ 724.9 40.8 5.63 717.3 41.2 5.74 648.2 37.4 5.77
Foreign............... 105.2 5.4 5.13 105.8 5.7 5.39 91.4 5.3 5.80
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total interest-bearing
deposits............. 10,573.4 452.0 4.27 9,943.6 434.1 4.37 8,909.5 382.3 4.29
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total deposits........ 13,027.0 12,160.5 10,990.3
--------- --------- ---------
Federal funds purchased
and repurchase
agreements............ 1,467.3 72.5 4.94 1,394.3 67.8 4.86 1,331.4 71.6 5.38
Other short-term
borrowings............ 312.0 17.5 5.61 166.9 9.0 5.39 115.8 7.0 6.04
Long-term debt.......... 446.2 28.0 6.28 424.7 29.1 6.85 292.5 20.0 6.81
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total interest-bearing
deposits and borrowed
funds................ 12,798.9 $ 570.0 4.45% 11,929.5 $ 540.0 4.53% 10,649.2 $ 480.8 4.51%
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total deposits and
borrowed funds....... 15,252.5 14,146.4 12,730.0
--------- --------- ---- --------- --------- ---- --------- --------- -----
Other liabilities........ 253.0 239.0 205.3
Shareholders' equity..... 1,494.2 1,382.2 1,202.3
--------- --------- ---- --------- --------- ---- --------- --------- -----
Total liabilities
and shareholders'
equity............ $16,999.7 $15,767.6 $14,137.6
========= ========= ==== ========= ========= ==== ========= ========= =====
NET INTEREST INCOME(1)... $ 673.2 $ 604.5 $ 548.4
Provision for loan
losses.................. 12.5 5.3 2.2
Noninterest income....... 395.8 303.7 203.0
Noninterest expense...... 669.7 571.6 463.9
--------- --------- ---- --------- --------- ---- --------- --------- -----
Income before income tax
expense and cumulative
effect of changes in
accounting principles... 386.8 331.3 285.3
Income tax expense....... 149.0 126.1 109.6
--------- --------- ---- --------- --------- ---- --------- --------- -----
Income before cumulative
effect of changes in
accounting principles... 237.8 205.2 175.7
Cumulative effect of
changes in accounting
principles, net of
tax..................... -- -- --
--------- --------- ---- --------- --------- ---- --------- --------- -----
1994 1993
----------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ------- ------- ---------- -------- -------
(DOLLARS IN MILLIONS)
Regular savings....... 1,065.0 25.5 2.39 1,006.3 25.3 2.51
Certificates of
deposit under
$100,000............. 2,244.9 93.8 4.18 2,289.3 97.6 4.26
Certificates of
deposit $100,000 and
over................. 707.2 28.8 4.07 730.3 28.1 3.85
Other time............ 643.1 33.6 5.22 672.8 38.5 5.72
Foreign............... 41.0 1.7 4.15 25.8 .7 2.71
--------- ------ ----- ---------- -------- -----
Total interest-bearing
deposits............. 8,133.4 282.5 3.47 7,907.7 275.9 3.49
--------- ------ ----- ---------- -------- -----
Total deposits........ 10,188.6 9,849.9
--------- ----------
Federal funds purchased
and repurchase
agreements............ 1,105.3 41.0 3.71 1,107.6 29.9 2.70
Other short-term
borrowings............ 87.7 4.1 4.68 54.5 1.7 3.12
Long-term debt.......... 109.0 7.1 6.51 60.1 4.3 7.15
--------- ------ ----- ---------- -------- -----
Total interest-bearing
deposits and borrowed
funds................ 9,435.4 $334.7 3.55% 9,129.9 $ 311.8 3.42%
--------- ------ ----- ---------- -------- -----
Total deposits and
borrowed funds....... 11,490.6 11,072.1
--------- ------ ----- ---------- -------- -----
Other liabilities........ 167.1 162.4
Shareholders' equity..... 1,074.2 918.4
--------- ------ ----- ---------- -------- -----
Total liabilities
and shareholders'
equity............ $12,731.9 $ 12,152.9
========= ====== ===== ========== ======== =====
NET INTEREST INCOME(1)... $486.6 $ 468.2
Provision for loan
losses.................. (14.7) (57.4)
Noninterest income....... 181.2 166.6
Noninterest expense...... 419.3 419.8.4
--------- ------ ----- ---------- -------- -----
Income before income tax
expense and cumulative
effect of changes in
accounting principles... 263.2 272.4
Income tax expense....... 98.9 98.4
--------- ------ ----- ---------- -------- -----
Income before cumulative
effect of changes in
accounting principles... 164.3 174.0
Cumulative effect of
changes in accounting
principles, net of
tax..................... -- (.1)
--------- ------ ----- ---------- -------- -----
AVERAGE BALANCE INCOME/EXPENSE
------------------------- -------------------------
COMPOUND COMPOUND
% CHANGE GROWTH RATE % CHANGE GROWTH RATE
1997/1996 1997/1992 1997/1996 1997/1992
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
Regular savings....... (2.67) .24 (3.96) (5.29)
Certificates of
deposit under
$100,000............. 3.80 3.45 4.61 3.78
Certificates of
deposit $100,000 and
over................. 14.63 8.31 12.46 10.56
Other time............ 1.06 .83 (.97) (1.68)
Foreign............... (.57) 40.38 (5.26) 50.47
------- ------- ------- -------
Total interest-bearing
deposits............. 6.33 5.73 4.12 5.83
------- ------- ------- -------
Total deposits........ 7.13 5.89
Federal funds purchased
and repurchase
agreements............ 5.24 7.36 6.93 17.19
Other short-term
borrowings............ 86.94 65.67 94.44 85.35
Long-term debt.......... 5.06 79.12 (3.78) 69.52
------- ------- ------- -------
Total interest-bearing
deposits and borrowed
funds................ 7.29 7.10 5.56% 8.67%
------- ------- ------- -------
Total deposits and
borrowed funds....... 7.82 7.02
------- ------- ------- -------
Other liabilities........ 5.86 11.59
Shareholders' equity..... 8.10 14.54
------- ------- ------- -------
Total liabilities
and shareholders'
equity............ 7.81% 7.63%
======= ======= ======= =======
NET INTEREST INCOME(1)... 11.36% 8.67%
Provision for loan
losses.................. 135.85 (24.09)
Noninterest income....... 30.33 21.66
Noninterest expense...... 17.16 10.60
------- ------- ------- -------
Income before income tax
expense and cumulative
effect of changes in
accounting principles... 16.75 22.80
Income tax expense....... 18.16 26.06
------- ------- ------- -------
Income before cumulative
effect of changes in
accounting principles... 15.89 21.00
Cumulative effect of
changes in accounting
principles, net of
tax..................... -- --
------- ------- ------- -------
131
141
1997 1996 1995
------------------------------- ------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------- --------- --------- ------- --------- --------- -------
(DOLLARS IN MILLIONS)
NET INCOME............... $ 237.8 $ 205.2 $ 175.7
========= ========= ==== ========= ========= ==== ========= ========= =====
Net interest spread...... 3.62% 3.43% 3.49%
Benefit of interest-free
funding................. .75 .78 .77
--------- --------- ---- --------- --------- ---- --------- --------- -----
NET INTEREST MARGIN...... 4.37% 4.21% 4.26%
========= ========= ==== ========= ========= ==== ========= ========= =====
1994 1993
----------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- ------- ------- ---------- -------- -------
(DOLLARS IN MILLIONS)
NET INCOME............... $164.3 $ 173.9
========= ====== ===== ========== ======== =====
Net interest spread...... 3.56% 3.67%
Benefit of interest-free
funding................. .65 .58
--------- ------ ----- ---------- -------- -----
NET INTEREST MARGIN...... 4.21% 4.25%
========= ====== ===== ========== ======== =====
AVERAGE BALANCE INCOME/EXPENSE
------------------------- -------------------------
COMPOUND COMPOUND
% CHANGE GROWTH RATE % CHANGE GROWTH RATE
1997/1996 1997/1992 1997/1996 1997/1992
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
NET INCOME............... 15.89% 21.00%
======= ======= ======= =======
Net interest spread......
Benefit of interest-free
funding.................
------- ------- ------- -------
NET INTEREST MARGIN......
======= ======= ======= =======
- ---------------
(1) Loan fees and amortization of net deferred loan fees (costs), which are
considered an integral part of the lending function and are included in
yields and related interest categories, amounted to $6.6 million in 1997,
$9.4 million in 1996, $6.7 million in 1995, $4.8 million in 1994, and $1.7
million in 1993. Yields/rates and income/expense amounts are presented on a
fully taxable equivalent basis based on the statutory federal income tax
rates, adjusted for applicable state income taxes net of the related federal
tax benefit; related interest income includes taxable equivalent adjustments
of $11.1 million in 1997, $11.3 million in 1996, $9.4 million in 1995, $8.9
million in 1994, and $9.8 million in 1993. Nonaccrual and restructured loans
are included in average loans and average earning assets. Consequently,
yields on these items are lower than they would have been if these loans had
earned at their contractual rates of interest. Yields on all securities are
computed based on carrying value.
132
142
SUPPLEMENTAL TABLE 4: INTEREST RATE SENSITIVITY ANALYSIS
INTEREST-SENSITIVE PERIODS
--------------------------------------------------------------------------------
MONTHS
---------------------------------
OVER OVER
THREE SIX TOTAL
WITHIN THROUGH THROUGH ONE 1-5 OVER 5
THREE SIX TWELVE YEAR YEARS YEARS TOTAL
--------- --------- --------- --------- -------- -------- ----------
(DOLLARS IN MILLIONS)
DECEMBER 31, 1997
Earning Assets:
Securities:
Available for sale..... $ 313.0 $ 131.9 $ 244.3 $ 689.2 $1,939.5 $ 766.8 $ 3,395.5
Held to maturity....... 81.9 32.7 63.3 177.9 369.7 167.4 715.0
--------- --------- --------- --------- -------- -------- ----------
Total securities... 394.9 164.6 307.6 867.1 2,309.2 934.2 4,110.5
Loans.................... 4,815.2 912.8 1,300.2 7,028.2 3,978.9 634.6 11,641.7
Other earning assets..... 267.5 -- -- 267.5 -- -- 267.5
--------- --------- --------- --------- -------- -------- ----------
Total earning
assets........... $ 5,477.6 $ 1,077.4 $ 1,607.8 $ 8,162.8 $6,288.1 $1,568.8 $ 16,019.7
========= ========= ========= ========= ======== ======== ==========
Interest-Bearing
Liabilities:
Interest-bearing
deposits:
NOW, money market, and
savings accounts..... $ 5,615.2 $ -- $ -- $ 5,615.2 $ -- $ -- $ 5,615.2
Certificates of
deposit.............. 1,577.5 999.2 1,008.3 3,585.0 731.9 3.1 4,320.0
Other interest-bearing
deposits............. 347.7 90.7 113.1 551.5 260.7 10.3 822.5
--------- --------- --------- --------- -------- -------- ----------
Total
interest-bearing
deposits......... 7,540.4 1,089.9 1,121.4 9,751.7 992.6 13.4 10,757.7
Other borrowed funds..... 2,228.3 11.4 4.9 2,244.6 34.1 287.1 2,565.8
--------- --------- --------- --------- -------- -------- ----------
Total
interest-bearing
liabilities...... 9,768.7 1,101.3 1,126.3 11,996.3 1,026.7 300.5 13,323.5
Net effect of swaps...... 78.8 125.6 (1,124.3) (919.9) 834.0 85.9 --
--------- --------- --------- --------- -------- -------- ----------
Adjusted interest-bearing
liabilities............ $ 9,847.5 $ 1,226.9 $ 2.0 $11,076.4 $1,860.7 $ 386.4 $ 13,323.5
========= ========= ========= ========= ======== ======== ==========
Interest-Sensitivity Gap:
For the indicated
period................. $(4,369.9) $ (149.5) $ 1,605.8 $(2,913.6) $4,427.4 $1,182.4 $ 2,696.2
Cumulative............... (4,369.9) (4,519.4) (2,913.6) (2,913.6) 1,513.8 2,696.2 2,696.2
Cumulative, as a percent
of total earning
assets................. (27.3)% (28.2)% (18.2)% (18.2)% 9.4% 16.8% 16.8%
========= ========= ========= ========= ======== ======== ==========
DECEMBER 31, 1996
Earning Assets:
Securities:
Available for sale..... $ 423.1 $ 80.0 $ 156.9 $ 660.0 $1,504.2 $ 985.8 $ 3,150.0
Held to maturity....... 156.5 51.1 106.3 313.9 444.1 211.8 969.8
--------- --------- --------- --------- -------- -------- ----------
Total securities... 579.6 131.1 263.2 973.9 1,948.3 1,197.6 4,119.8
Loans.................... 3,515.0 876.7 1,125.5 5,517.2 4,090.5 1,025.0 10,632.7
Other earning assets..... 327.6 -- -- 327.6 -- -- 327.6
--------- --------- --------- --------- -------- -------- ----------
Total earning
assets........... $ 4,422.2 $ 1,007.8 $ 1,388.7 $ 6,818.7 $6,038.8 $2,222.6 $ 15,080.1
========= ========= ========= ========= ======== ======== ==========
Interest-Bearing
Liabilities:
Interest-bearing
deposits:
NOW, money market, and
savings accounts..... $ 5,334.7 $ -- $ -- $ 5,334.7 $ -- $ -- $ 5,334.7
Certificates of
deposit.............. 1,086.1 984.9 985.5 3,056.5 1,090.3 19.0 4,165.9
Other interest-bearing
deposits............. 585.5 34.0 46.2 665.7 116.9 .1 782.7
--------- --------- --------- --------- -------- -------- ----------
Total
interest-bearing
deposits......... 7,006.3 1,018.9 1,031.7 9,056.9 1,207.2 19.1 10,283.3
Other borrowed funds..... 1,793.2 19.6 65.8 1,878.6 42.0 207.4 2,128.0
--------- --------- --------- --------- -------- -------- ----------
Total
interest-bearing
liabilities...... 8,799.5 1,038.5 1,097.5 10,935.5 1,249.2 226.5 12,411.2
Net effect of swaps...... (577.0) 101.0 (400.0) (876.0) 806.8 69.2 --
--------- --------- --------- --------- -------- -------- ----------
Adjusted interest-bearing
liabilities............ $ 8,222.5 $ 1,139.5 $ 697.5 $10,059.5 $2,056.0 $ 295.7 $ 12,411.2
========= ========= ========= ========= ======== ======== ==========
Interest-Sensitivity Gap:
For the indicated
period................. $(3,800.3) $ (131.7) $ 691.2 $(3,240.8) $3,982.8 $1,926.9 $ 2,668.9
Cumulative............... (3,800.3) (3,932.0) (3,240.8) (3,240.8) 742.0 2,668.9 2,668.9
Cumulative, as a percent
of total earning
assets................. (25.2)% (26.1)% (21.5)% (21.5)% 4.9% 17.7% 17.7%
Each column includes earning assets and interest-bearing liabilities that are
estimated to mature or reprice within the respective time frame. All floating
rate balance sheet items
133
143
are included as "within three months" regardless of maturity. Non-earning assets
(cash and due from banks, premises and equipment, foreclosed properties, and
other assets), noninterest-bearing liabilities (demand deposits and other
liabilities) and shareholders' equity are considered to be noninterest-sensitive
for purposes of this presentation and thus are not included in the above table.
In the table, all NOW, money market, and savings accounts are reflected as
interest-sensitive within three months. NOW accounts, savings, and certain money
market accounts are not totally interest-sensitive in all interest rate
environments. If NOW and regular savings accounts were not considered
interest-sensitive, the one year cumulative net liability interest-sensitive gap
position and percent of earning assets would be $174.4 million and (1.1)%,
respectively, for 1997, as compared to a net liability interest-sensitive gap
position and percent of earning assets of $638.7 million and (4.2)%,
respectively, for 1996.
134
144
SUPPLEMENTAL TABLE 5: SECURITY PORTFOLIO ANALYSIS
ESTIMATED MATURITY AT DECEMBER 31, 1997
---------------------------------------------------------------------------------
WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS AFTER 10 YEARS
------------------ ------------------ ------------------ ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ----- ---------- ----- ---------- ----- ---------- -----
(DOLLARS IN MILLIONS)
Securities Held to Maturity:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed................ $ 173.2 6.80% $ 244.1 7.17% $ 3.4 8.01% $ 1.4 7.00%
Other.......................... 10.4 5.01 17.1 5.73 -- -- -- --
Obligations of states and
political subdivisions(2)...... 3.8 5.69 10.7 6.08 6.5 6.47 21.7 6.05
Other debt securities:
Mortgage-backed................ 30.3 6.80 74.6 6.93 -- -- -- --
Other.......................... 6.8 6.82 10.5 6.73 100.5 7.99 -- --
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total debt securities held
to maturity............... $ 224.5 6.70% $ 357.0 7.00% $ 110.4 7.90% $ 23.1 6.11%
========== ===== ========== ===== ========== ===== ========== =====
Securities Available for Sale:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed................ $ 75.5 7.13% $ 1,937.5 7.09% $ 208.9 7.11% $ 11.3 7.10%
Other.......................... 20.4 6.58 250.1 6.77 220.3 6.88 69.8 7.64
Obligations of states and
political subdivisions(2)...... 8.9 10.19 35.6 8.83 53.2 7.74 81.3 8.78
Other debt securities:
Mortgage-backed................ -- -- 334.8 6.92 -- -- -- --
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total debt securities
available for sale........ $ 104.8 7.28% $ 2,558.0 7.06% $ 482.4 7.07% $ 162.4 8.17%
========== ===== ========== ===== ========== ===== ========== =====
Total equity securities....
Total securities available
for sale
========== ===== ========== ===== ========== ===== ========== =====
Total Securities:
Total debt securities............ $ 329.3 6.88% $ 2,915.0 7.05% $ 592.8 7.22% $ 185.5 7.91%
========== ===== ========== ===== ========== ===== ========== =====
Total equity securities..........
Total securities.................
========== ===== ========== ===== ========== ===== ========== =====
ESTIMATED MATURITY AT DECEMBER 31, 1997
----------------------------------------------------------
TOTAL FAIR AVERAGE AVERAGE
AMORTIZED COST VALUE MATURITY REPRICING
-------------------- ---------- -------- ---------
AMOUNT YIELD AMOUNT YIELD YIELD
---------- ----- ---------- -------- ---------
(DOLLARS IN MILLIONS)
Securities Held to Maturity:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed................ $ 422.1 7.03% $ 424.3 1.8 1.8
Other.......................... 27.5 5.46 27.3 .8 .4
Obligations of states and
political subdivisions(2)...... 42.7 6.09 44.3 9.7 9.7
Other debt securities:
Mortgage-backed................ 104.9 6.89 104.6 1.7 1.6
Other.......................... 117.8 7.81 122.7 5.2 .1
---------- ----- ---------- ----- -----
Total debt securities held
to maturity............... $ 715.0(3) 7.02% $ 723.2 2.7 1.8
========== ===== ========== ===== =====
Securities Available for Sale:(1)
U.S. Gov. agencies and
corporations:
Mortgage-backed................ $ 2,233.2 7.09% $ 2,233.8 3.6 3.4
Other.......................... 560.6 6.91 560.0 1.7 1.7
Obligations of states and
political subdivisions(2)...... 179.0 8.55 182.7 8.5 8.5
Other debt securities:
Mortgage-backed................ 334.8 6.92 333.7 4.3 4.3
---------- ----- ---------- ----- -----
Total debt securities
available for sale........ 3,307.6 7.12% 3,310.2 3.6 3.2
========== ===== ========== ===== =====
Total equity securities.... 85.3 85.3
Total securities available
for sale $ 3,392.9 $ 3,395.5(3)
========== ===== ========== ===== =====
Total Securities:
Total debt securities............ $ 4,022.6 7.10% $ 4,033.4 3.4 3.0
========== ===== ========== ===== =====
Total equity securities.......... 85.3 85.3
Total securities................. $ 4,107.9 $ 4,118.7
========== ===== ========== ===== =====
- -------------------------
(1) Yields on all securities were computed based on carrying value.
(2) Yields presented on a taxable equivalent basis, based on the statutory
federal income tax rate, adjusted for applicable state income taxes net of
the related federal tax benefit.
(3) Securities held to maturity were reported on the consolidated balance sheet
at amortized cost and securities available for sale were reported on the
consolidated balance sheet at fair value for a combined carrying value of
$4,110.5 million.
135
145
SUPPLEMENTAL TABLE 6: MATURITIES OF LOANS,
EXCLUSIVE OF CONSUMER LOANS
MATURITIES AT DECEMBER 31, 1997
-----------------------------------------
WITHIN 1-5 AFTER
1 YEAR YEARS 5 YEARS TOTAL
-------- -------- -------- --------
(DOLLARS IN MILLIONS)
Commercial loans.......................... $1,830.4 $2,185.1 $ 555.4 $4,570.9
Real estate -- construction loans......... 183.9 140.0 76.6 400.5
Real estate -- commercial mortgages and
other................................... 411.9 499.4 463.4 1,374.7
-------- -------- -------- --------
Total........................... $2,426.2 $2,824.5 $1,095.4 $6,346.1
======== ======== ======== ========
For maturities over one year:
Loans with fixed interest rates......... $1,763.1 $ 729.3 $2,492.4
Loans with floating interest rates...... 1,061.4 366.1 1,427.5
-------- -------- --------
Total........................... $2,824.5 $1,095.4 $3,919.9
======== ======== ========
136
146
SUPPLEMENTAL TABLE 7: ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, January 1........ $185,470 $191,134 $185,309 $198,544 $258,302
Loans charged off:
Commercial.............................. 19,214 10,100 4,661 11,784 13,390
Consumer -- amortizing mortgages........ 2,242 1,995 1,679 1,700 2,660
Consumer -- other....................... 31,494 31,909 23,620 15,878 18,750
Real estate -- construction............. 625 119 732 132 634
Real estate -- commercial mortgages and
other................................. 725 1,616 380 1,331 1,883
-------- -------- -------- -------- --------
Total charge-offs.................. 54,300 45,739 31,072 30,825 37,317
-------- -------- -------- -------- --------
Recoveries of loans previously charged
off:
Commercial.............................. 6,626 12,655 7,607 12,939 15,596
Consumer -- amortizing mortgages........ 1,376 1,475 1,638 1,753 2,700
Consumer -- other....................... 16,476 14,316 12,498 12,709 12,290
Real estate -- construction............. 133 76 652 764 1,526
Real estate -- commercial mortgages and
other................................. 3,762 2,025 1,034 2,136 1,556
-------- -------- -------- -------- --------
Total recoveries................... 28,373 30,547 23,429 30,301 33,668
-------- -------- -------- -------- --------
Net charge-offs........................... 25,927 15,192 7,643 524 3,649
-------- -------- -------- -------- --------
Net change in allowance due to
subsidiaries purchased/sold............. 8,000 4,188 11,225 1,547 1,296
Provision charged (credited) to operating
expenses.................................. 12,500 5,340 2,243 (14,669) (57,405)
Adjustment for change in fiscal year of
pooled company............................ -- -- -- 411 --
-------- -------- -------- -------- --------
Balance, December 31........................ $180,043 $185,470 $191,134 $185,309 $198,544
======== ======== ======== ======== ========
Allocation of allowance for loan losses, end
of year:
Commercial................................ $ 59,810 $ 58,387 $ 55,428 $ 52,447 $ 51,049
Consumer loans............................ 40,702 42,278 36,603 35,914 46,221
Real estate............................... 15,899 15,316 17,311 19,872 24,225
Unallocated/general....................... 63,632 69,489 81,792 77,076 77,049
-------- -------- -------- -------- --------
Balance, December 31........................ $180,043 $185,470 $191,134 $185,309 $198,544
======== ======== ======== ======== ========
Net charge-offs as a percent of average
loans, net................................ .23% .15% .09% .01% .06%
Allowance to net loans (end of year)........ 1.55 1.74 1.91 2.31 2.80
======== ======== ======== ======== ========
Percent of total year-end loans:
Commercial................................ 39.2% 38.7% 38.3% 40.0% 37.7%
Consumer -- amortizing mortgages.......... 23.9 25.5 26.0 23.8 25.5
Consumer -- other......................... 21.7 21.0 21.1 21.7 22.1
Real estate -- construction............... 3.4 3.4 3.1 2.8 2.6
Real estate -- commercial mortgages and
other................................... 11.8 11.4 11.5 11.7 12.1
-------- -------- -------- -------- --------
Total percent of year-end loans.... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
137
147
SUPPLEMENTAL TABLE 8: NONPERFORMING ASSET ACTIVITY
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance, January 1............. $ 45,248 $ 57,365 $ 53,180 $ 85,404 $147,840
Transfers in and new
foreclosed properties..... 47,199 24,061 34,166 23,391 56,614
Change in nonperforming
assets due to subsidiaries
purchased................. 1,279 2,348 6,393 2,045 199
Payments received............ (18,881) (23,085) (28,196) (20,923) (69,649)
Proceeds from sales of
foreclosed properties..... (12,910) (10,872) (11,426) (24,174) (31,714)
Net gains on sales........... 5,127 5,113 5,963 7,557 4,528
Charge-offs and writedowns... (12,917) (7,871) (2,091) (10,740) (10,191)
Return to earning status..... (10,828) (1,811) (624) (8,232) (12,482)
Other........................ -- -- -- (969) 259
Adjustment for change in
fiscal year for pooled
company................... -- -- -- (179) --
-------- -------- -------- -------- --------
Balance, December 31........... $ 43,317 $ 45,248 $ 57,365 $ 53,180 $ 85,404
======== ======== ======== ======== ========
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans................ $36,294 $32,716 $41,122 $37,230 $53,369
Restructured loans.............. -- 694 -- -- 54
------- ------- ------- ------- -------
Total nonperforming
loans.............. 36,294 33,410 41,122 37,230 53,423
Foreclosed properties........... 7,023 11,838 16,243 15,950 31,981
------- ------- ------- ------- -------
Total nonperforming
assets............. $43,317 $45,248 $57,365 $53,180 $85,404
======= ======= ======= ======= =======
Nonperforming assets to total
loans plus foreclosed
properties(1)................. .37% .43% .57% .66% 1.20%
======= ======= ======= ======= =======
90 days or more past due on
accrual....................... $26,875 $21,422 $10,890 $ 7,585 $ 7,699
======= ======= ======= ======= =======
- -------------------------
(1) Excludes loans 90 days or more past due on accrual.
138
148
SUPPLEMENTAL TABLE 9: CERTIFICATES OF DEPOSIT $100,000 AND OVER
MATURITIES AT
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
3 months or less........................................ $ 718,777 $ 661,653
Over 3 through 6 months................................. 319,841 238,301
Over 6 through 12 months................................ 232,178 200,953
Over 12 months.......................................... 119,352 148,286
---------- ----------
Total......................................... $1,390,148 $1,249,193
========== ==========
139
149
SUPPLEMENTAL TABLE 10: QUARTERLY FINANCIAL DATA
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------- -------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1997
Net interest income................ $171,094 $165,747 $162,288 $162,994
Net interest income, taxable
equivalent basis(1).............. 174,067 168,501 164,845 165,775
Provision for loan losses.......... 6,875 1,875 1,875 1,875
Noninterest income................. 107,170 100,085 95,626 92,880
Noninterest expense................ 171,087 168,321 165,378 164,945
Net income......................... 63,343 60,496 57,270 56,643
-------- -------- -------- --------
Selected per Share Data:
Net income:
Basic......................... $ .60 $ .57 $ .54 $ .52
Diluted....................... .58 .56 .53 .51
Cash dividends paid.............. .20 .20 .20 .155
Common stock price
High.......................... 55.38 50.13 40.00 34.63
Low........................... 43.75 38.00 29.63 28.00
Last trade.................... 49.75 48.88 38.38 31.81
-------- -------- -------- --------
Selected Ratios:
Return on average assets
(annualized).................. 1.45% 1.41% 1.37% 1.36%
Return on average equity
(annualized).................. 16.46 16.08 15.82 15.26
Net interest margin.............. 4.39 4.34 4.36 4.40
======== ======== ======== ========
1996
Net interest income................ $155,273 $152,235 $143,843 $141,910
Net interest income, taxable
equivalent basis(1).............. 157,989 155,188 146,747 144,613
Provision for loan losses.......... 1,335 1,335 1,335 1,335
Noninterest income................. 91,389 88,869 60,745 62,746
Noninterest expense................ 162,651 162,444 122,476 124,092
Net income......................... 52,949 49,619 51,325 51,289
140
150
THREE MONTHS ENDED
---------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------- -------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------- -------- -------- --------
Selected Per Share Data:
Net income:
Basic......................... $ .51 $ .47 $ .49 $ .49
Diluted....................... .50 .46 .49 .48
Cash dividends paid.............. .155 .155 .155 .14
Common stock price
High.......................... 29.38 24.13 22.81 24.25
Low........................... 23.88 20.38 21.06 21.19
Last trade.................... 28.81 24.00 21.06 22.25
-------- -------- -------- --------
Selected Ratios:
Return on average assets
(annualized).................. 1.32% 1.24% 1.32% 1.33%
Return on average equity
(annualized).................. 14.61 14.07 15.32 15.44
Net interest margin.............. 4.32 4.26 4.14 4.10
======== ======== ======== ========
- -------------------------
(1) Adjusted to a taxable equivalent basis based on the statutory federal income
tax rates, adjusted for applicable state income taxes net of the related
federal tax benefit.
141
151
SUPPLEMENTAL TABLE 11: CONSOLIDATED YEAR-END BALANCE SHEETS
DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cash and due from banks.............. $ 987,520 $ 998,302 $ 865,550 $ 849,153 $ 832,451
Securities:
U.S. Treasury and other U.S.
Government agencies and
corporations..................... 3,243,447 3,499,549 2,956,035 3,309,827 3,708,044
Obligations of states and political
subdivisions..................... 225,410 220,241 177,275 128,492 131,268
Other.............................. 641,664 400,114 338,691 233,814 46,982
----------- ----------- ----------- ----------- -----------
Total securities............. 4,110,521 4,119,904 3,472,001 3,672,133 3,886,294
----------- ----------- ----------- ----------- -----------
Federal funds sold and securities
purchased under agreements to
resell............................. 189,542 209,317 732,057 252,243 362,000
Loans:
Commercial......................... 4,570,941 4,118,480 3,833,265 3,221,391 2,682,558
Consumer-amortizing mortgages...... 2,783,097 2,717,894 2,600,040 1,912,596 1,816,943
Consumer-other..................... 2,524,577 2,239,558 2,116,345 1,747,035 1,572,801
Real estate-construction........... 400,557 361,451 309,264 227,016 183,441
Real estate-commercial mortgages
and other........................ 1,374,661 1,209,748 1,152,795 938,952 861,398
----------- ----------- ----------- ----------- -----------
Total loans.................. 11,653,833 10,647,131 10,011,709 8,046,990 7,117,141
Unearned discount............ (12,101) (14,466) (12,072) (19,848) (31,757)
----------- ----------- ----------- ----------- -----------
Loans, net of unearned discount.... 11,641,732 10,632,665 9,999,637 8,027,142 7,085,384
Allowance for loan losses.......... (180,043) (185,470) (191,134) (185,309) (198,544)
----------- ----------- ----------- ----------- -----------
Total net loans.............. 11,461,689 10,447,195 9,808,503 7,841,833 6,886,840
----------- ----------- ----------- ----------- -----------
Premises and equipment, net.......... 362,047 310,584 273,759 242,696 234,826
Other assets......................... 723,117 720,708 576,020 558,630 410,533
----------- ----------- ----------- ----------- -----------
Total Assets................. $17,834,436 $16,806,010 $15,727,890 $13,416,688 $12,612,944
=========== =========== =========== =========== ===========
LIABILITIES
Deposits:
Demand (noninterest-bearing)....... $ 2,647,765 $ 2,565,084 $ 2,378,146 $ 2,207,757 $ 2,126,404
Interest-bearing................... 10,757,692 10,283,284 9,802,041 8,146,682 7,955,861
----------- ----------- ----------- ----------- -----------
Total deposits............... 13,405,457 12,848,368 12,180,187 10,354,439 10,082,265
----------- ----------- ----------- ----------- -----------
Federal funds purchased and
securities sold under agreements to
repurchase......................... 1,614,931 1,472,277 1,355,431 1,415,397 1,169,301
Other short-term borrowings.......... 354,708 225,124 182,338 79,232 96,958
Long-term debt....................... 596,218 430,562 421,791 271,473 77,053
Other liabilities.................... 319,145 379,706 253,558 184,925 167,917
----------- ----------- ----------- ----------- -----------
Total Liabilities............ 16,290,459 15,356,037 14,393,305 12,305,466 11,593,494
----------- ----------- ----------- ----------- -----------
Shareholders' Equity
Common stock....................... 265,080 262,775 261,070 246,457 242,930
Additional paid-in capital......... 163,902 239,661 241,213 200,169 199,621
Retained earnings.................. 1,126,803 953,062 811,606 679,146 557,754
Deferred compensation on restricted
stock............................ (13,341) (2,066) (1,263) (2,161) (1,851)
Employee Stock Ownership Plan...... (163) (443) (661) (781) (1,053)
Net unrealized gains (losses) on
securities available for sale,
net of tax....................... 1,696 (3,016) 22,620 (11,608) 22,049
----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity... 1,543,977 1,449,973 1,334,585 1,111,222 1,019,450
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Shareholders' Equity....... $17,834,436 $16,806,010 $15,727,890 $13,416,688 $12,612,944
=========== =========== =========== =========== ===========
142
152
ADDITIONAL INFORMATION ABOUT PIONEER
BUSINESS
GENERAL
Pioneer is a Delaware corporation that is a bank holding company registered with
the Federal Reserve Board under the BHC Act. Pioneer was incorporated July 8,
1991, by the management of its principal subsidiary, Pioneer Bank. The holding
company formation was consummated on September 30, 1992, at which time Pioneer
acquired all of the outstanding shares of the common stock of Pioneer Bank in
exchange for 1,400,000 shares of Pioneer Common Stock. Pioneer's principal
business is owning three subsidiary banks, Pioneer Bank, Valley Bank and Pioneer
Bank, f.s.b. (collectively, the "Banks"), and supervising and coordinating the
activities of Pioneer Bank's subsidiaries and affiliates. Pioneer coordinates
the financial resources of the consolidated enterprise and maintains financial,
operational and administrative systems allowing for the centralized evaluation
of subsidiary operations and coordination of selected policies and activities.
Pioneer derives substantially all of its income from the Banks through
management fees, dividends and undistributed earnings of the subsidiaries. The
management fee agreement is an arrangement between the Banks and Pioneer where
chargeable affiliate expenses incurred by Pioneer are paid directly by the
subsidiaries. The dividends paid to Pioneer are determined generally in relation
to the subsidiaries' earnings, growth and capital positions. As a bank holding
company, Pioneer is a legal entity separate and distinct from the subsidiaries,
each of which is managed as a separate entity.
DEMOGRAPHIC AND ECONOMIC CHARACTERISTICS OF THE MARKETS
PIONEER BANK'S MARKET
The following market analysis for Pioneer Bank was obtained from statistics
maintained by the Tennessee State Planning Office and the University of
Tennessee at Knoxville, Center for Business and Economic Research as well as the
Hamilton County Chamber of Commerce. Growth of employment within the Chattanooga
Metropolitan Statistical Area ("MSA"), which includes Hamilton and Marion
Counties, Tennessee, and Catoosa, Dade and Walker Counties, Georgia, decreased
slightly from 3.9% in 1996 to 3.4% in 1997. From year to year, the civilian
labor force and the total employed individuals remained unchanged and the
unemployment rate decreased from 4.7% to 4.1%. Average weekly earnings and
average hours worked (by production workers) increased by 2.5% and .7%,
respectively, from 1996 to 1997 continuing a trend that began in late 1995. The
general increase in economic statistics for 1997 indicates the economy is
growing at a moderate pace.
The population of Hamilton County for years 1980, 1990 and 1997 (estimated) was
287,740, 285,536 and 306,644, respectively. The population of Marion County for
such years was 24,416, 24,860, and 28,533 (estimate), respectively. The
Chattanooga MSA population has grown from 364,526 in 1970, to 417,935 in 1980,
to 424,347 in 1990, and was estimated to be approximately 448,000 in 1997.
Hamilton County commerce has been relatively strong from 1996 to 1997 with some
exceptions. The primary industries in the Chattanooga MSA are services,
manufacturing and retail trade. Taxable retail sales rose 6.2% from $3,225.4
million to $3,425.7 million (estimated), total new cars and trucks sold
decreased 8.8% from 18,141 to 16,548 (estimated) and hotel/motel tax collected
increased 3.9% from $2,796,131 to $2,906,288. Within the Chattanooga MSA, the
number of houses sold during 1997 increased by 5.4%
143
153
to 4,129 (estimated) from 3,916 in 1996. During 1996, stable rates contributed
to continued growth in housing sales. During 1997, housing sales were sluggish
in the first six months of the year, but increased during the third and fourth
quarters, because of a decrease in residential mortgage interest rates.
Hamilton County building permits on an aggregate basis decreased by 6.6% from
$397,306,543 in 1996 to $371,148,400 (estimated) in 1997. More specifically, the
number of residential single family dwelling permits decreased 6.2% from 1,540
to 1,444 (estimated) with values increasing 2.4% from $155,259,161 to
$158,980,452 (estimated), respectively. Residential duplex permits decreased
11.1% from 27 to 24 (estimated) with values increasing 4.2% from $2,880,292 to
$3,002,060 (estimated), respectively. Residential apartment permits decreased
from 15 to 12 (estimated) with the aggregate values of such complexes increasing
39.6% from $1,859,554 to $2,595,464 (estimated), respectively. Residential
alteration permits increased 11.8% from 1,388 to 1,552 (estimated) and the
values increased 12.9% from $25,858,333 to $29,217,452 (estimated) in 1996 and
1997, respectively. New nonresidential permits increased 8.1% from 259 to 280
(estimated) in 1996 and 1997, respectively, with values decreasing 24.7% from
$150,475,360 to $113,371,796 (estimated) in 1996 and 1997, respectively.
Nonresidential alterations increased 18.0% from 610 to 720 (estimated) with
values increasing 31.3% from $60,974,143 to $80,063,836 (estimated).
VALLEY BANK'S MARKET
Valley Bank conducts business in Monroe and McMinn Counties, Tennessee, which
are located approximately 60 miles northeast of Chattanooga on Interstate 75.
The current rate of population growth of these counties approximates 6% per
decade. The aggregate population of Monroe and McMinn Counties in 1997 was
78,995. Per capita income levels were $13,501 and $15,487 (in 1996) for Monroe
and McMinn Counties, respectively, and are below Tennessee and national averages
of $19,285 and $23,854, respectively for the same period. The annual
unemployment rate of 7.9% for 1997 is relatively stable from 1996, but remains
above the state and national unemployment levels of 5.1% and 4.6%, respectively.
Total employment increased by 1.8% from 1996 to 1997. The primary industry in
the region is manufacturing, which represents approximately 50% of the jobs in
the area.
Annual retail sales in this market continued to increase during 1997 continuing
a trend beginning in 1995. On an annualized basis, the total retail sales of
durable goods was up 6.5% from 1996 levels, as opposed to an increase of 11.7%
from 1995 to 1996. Furthermore, quarterly sales tax payments increased on
average 7.1% from 1996 to 1997.
PIONEER BANK, F.S.B.'S MARKET
Pioneer Bank, f.s.b. conducts business in the same market as Pioneer Bank and in
the Northwest Georgia area including Whitfield and Catoosa Counties, which are
located within a thirty mile radius south of Chattanooga on Interstate 75. The
estimated aggregate population of Whitfield and Catoosa Counties in 1996 was
128,837 with a projected population growth of 4.30% by the year 2000. The labor
force size in 1997 was 47,184 and 24,261 for each of the counties, respectively
and unemployment rates were 4.5% and 3.7%, respectively, in 1997, which is
consistent with the state unemployment rate of 3.7%. The primary industry in
Northwest Georgia is carpeting and industries related to carpeting; however,
there are also other significant service and manufacturing industries. There has
been steady industrial growth in Northwest Georgia during the 1970's and 1980's,
but the
144
154
industrial growth rate has been significantly higher during the 1990's and the
trend is expected to continue. Certain estimates project the aggregate
population in the north Georgia area may be large enough to be considered a
metropolitan area by the year 2000.
PIONEER BANK
GENERAL
Pioneer Bank commenced operations in 1916 pursuant to a charter granted by the
State of Tennessee. Pioneer Bank offers a wide array of deposit accounts and
retail services, engages in consumer and commercial lending, provides a variety
of trust and fiduciary services and offers securities brokerage services through
Pioneer Securities, Inc., a wholly-owned subsidiary commencing business in the
Fall 1995. At December 31, 1997 Pioneer Bank operated 22 branch locations in
Hamilton and Marion Counties, Tennessee. Pioneer Bank currently has one branch
under construction in Dunlap, Tennessee in Sequatchie County. Pioneer Bank had
$747,706,786 in assets, $577,802,304 in deposits and $72,596,431 of
stockholders' equity on December 31, 1997.
LOANS
Pioneer Bank utilizes the following categories to segregate its loan portfolio:
consumer loans, commercial loans and real estate loans. The consumer loan
category represents all types of consumer installment loans, including credit
cards, both secured and unsecured. Commercial loans contain both secured and
unsecured credits including, but not limited to, the following types of
collateral: equipment, fixtures, inventory and accounts receivable. Real estate
construction, residential real estate and commercial real estate loans are
primarily secured by first mortgages. Underwriting criteria are governed by
Pioneer Bank's loan policy as approved by its Board of Directors. Policy
exceptions are permitted with approval of either the Loan Committee or
authorized loan officers. Generally, loans secured by real estate with
improvements are limited to an 80% loan-to-value ratio. However, a more
stringent loan-to-value ratio of 75% is applied to loans secured by unimproved
land with plans for development. Loans collateralized by unimproved or raw land
with no development plans are limited to a loan-to-value ratio of 65%. First and
second lien positions are considered in the aggregate when determining
loan-to-value ratios. Direct automobile loans are limited to 85% of the NADA
valuation or the purchase price, whichever is less. Indirect automobile loans
are limited to 115% of sticker price of the automobile. Loans secured with used
and new specialized equipment and machinery are limited to 70% and 80% of the
estimated fair value of the collateral, respectively.
As of December 31, 1997, loans with fixed interest rates totaled $339.3 million
or 65.9% of total loans, with $32.6 million maturing in less than three months
and $32.2 million maturing in three months to one year. Those maturing in one to
five years totaled $245.7 million. Fixed rate loans with a maturity in excess of
five years were $28.8 million. As of December 31, 1997, floating rate loans
repricing quarterly or more frequently totaled $162.7 million. Floating rate
loans repricing annually or more frequently, but less frequently than quarterly
totaled $3.2 million. Floating rate loans repricing less frequently than five
years totaled $9.4 million. Management reviews the asset/liability gap monthly
and adjusts its interest rate sensitivity strategy accordingly.
Pioneer Bank participates as an intermediary for the secondary market
underwriting of residential loans. In such a secondary market transaction, the
secondary market lender underwrites and funds the loan and Pioneer Bank closes
the loan without recording the loan on Pioneer Bank's accounting records.
Pioneer Bank does not have a policy requiring
145
155
all real estate first mortgage loans be conforming to the secondary market's
underwriting standards.
Participation loans purchased are subject to Pioneer Bank's underwriting
criteria as described in the lending policy. Pioneer Bank has sold
participations in loans to other financial institutions for a total of $9.4
million as of December 31, 1997. Pioneer Bank also participates in the Small
Business Association's lending program and has $281,632 in participations sold
to other financial institutions as of December 31, 1997. Pioneer Bank has not
purchased any loan participations from other financial institutions as of
December 31, 1997.
As defined by Tennessee Code Annotated, Section 45-2-1102, Pioneer Bank's legal
lending limit, either secured or unsecured, with Board approval is any amount up
to, but no more than, 25% of common stock, surplus and undivided profits. As of
December 31, 1997, Pioneer Bank had a legal lending limit of $18,149,000.
VALLEY BANK
GENERAL
Valley Bank began operations in 1884 in Sweetwater, Tennessee as the thirteenth
bank to be granted a charter by the State of Tennessee. Valley Bank offers a
wide array of deposit accounts and retail services and engages in consumer,
commercial, and real estate lending. At year end 1997, Valley Bank had nine
branch locations in Monroe and McMinn Counties, Tennessee. Valley Bank had
$190,964,785 in assets, $162,921,743 in deposits and $16,471,229 of
stockholders' equity on December 31, 1997.
LOANS
Valley Bank categorizes its loans similar to Pioneer Bank with the following
segregation categories for its portfolio: consumer loans, commercial loans and
real estate loans. The consumer loan category represents all types of consumer
installment loans, including credit cards, both secured and unsecured.
Commercial loans contain both secured and unsecured credits including, but are
not limited to, the following types of collateral: equipment, fixtures,
inventory and accounts receivable. Real estate construction, residential real
estate and commercial real estate are primarily secured by first mortgages.
Underwriting criteria are governed by Valley Bank's loan policy as approved by
the Valley Bank Board of Directors. Policy exceptions are permitted with the
approval of either the Board, the bank president, the Loan Committee or a senior
officer. Generally, loans secured by real estate with improvements are limited
to an 80% loan-to-value ratio. However, a more stringent loan-to-value ratio of
75% is applied to loans secured by unimproved land with plans for development.
Loans collateralized by unimproved or raw land with no development plans are
limited to a loan-to-value ratio of 65%. First and second lien positions are
considered in the aggregate when determining loan-to-value ratios. Automobile
loans are limited to 85% of the NADA valuation or the purchase price, whichever
is less. Loans secured with used and new specialized equipment and machinery are
limited to 70% and 80% of the estimated fair value of the collateral,
respectively.
As of December 31, 1997 fixed rate loans totaled $75.8 million with $9.7 million
maturing in less than three months and $14.9 million maturing in three months to
one year. Those maturing in one to five years totaled $49.2 million. Fixed rate
loans with a maturity in excess of five years were $2.0 million. As of December
31, 1997 floating rate loans repricing quarterly or more frequently totaled
$27.8 million.
146
156
Floating rate loans repricing annually or more frequently but less frequently
than quarterly totaled $7.3 million. Floating rate loans repricing every five
years or more frequently, but less than annually totaled $15.0 million.
Management reviews the asset/liability gap monthly and adjusts the interest rate
sensitivity strategy accordingly.
Valley Bank participates as intermediary for the secondary market underwriting
of residential loans. Valley Bank does not have a policy that requires all real
estate first mortgage loans be conforming to the secondary market's underwriting
standards.
Participation loans purchased are subject to Valley Bank's underwriting criteria
as described in the lending policy. Valley Bank has purchased $7.7 million in
participation loans as of December 31, 1997. Valley Bank participates in the
Small Business Administration's lending program and had $205,385 in
participations sold to other institutions as of December 31, 1997.
Valley Bank's legal lending limit with Board approval is any amount up to, but
no more than, 25% of common stock, surplus and undivided profits. As of December
31, 1997 Valley Bank had a legal lending limit, either secured or unsecured, of
$4,118,000.
PIONEER BANK, F.S.B.
GENERAL
Pioneer Bank, f.s.b. commenced operations on September 9, 1997. Pioneer's
applications to the OTS and the FDIC to organize and subsequently purchase a
Tennessee based, de novo, federal savings bank was approved during the third
quarter of 1997. Pioneer Bank, f.s.b. offers a wide array of deposit accounts
and retail services and engages in consumer, commercial, and real estate
lending. At year end 1997, Pioneer Bank, f.s.b. had a total of two branch
locations in Whitfield County, Georgia and Hamilton County, Tennessee. Pioneer
Bank, f.s.b had $23,276,213 in assets, $15,284,311 deposits and $7,775,527 of
stockholders' equity on December 31, 1997.
LOANS
Pioneer Bank, f.s.b. categorizes its loans similar to Pioneer Bank with the
following segregation categories for its portfolio: consumer loans, commercial
loans and real estate loans. The consumer loan category represents all types of
consumer installment loans, both secured and unsecured. Commercial loans contain
both secured and unsecured credits including, but are not limited to, the
following types of collateral: equipment, fixtures, inventory and accounts
receivable. Real estate construction, residential real estate and commercial
real estate are primarily secured by first mortgages. Underwriting criteria are
governed by Pioneer Bank, f.s.b.'s loan policy as approved by the Pioneer Bank,
f.s.b.'s Board of Directors. Policy exceptions are permitted with the approval
of either the Board, the bank president, the Loan Committee or a senior officer.
Generally, loans secured by real estate with improvements are limited to an 80%
loan-to-value ratio. However, a more stringent loan-to-value ratio of 75% is
applied to loans secured by unimproved land with plans for development. Loans
collateralized by unimproved or raw land with no development plans are limited
to a loan-to-value ratio of 65%. First and second lien positions are considered
in the aggregate when determining loan-to-value ratios. Automobile loans are
limited to 85% of the NADA valuation or the purchase price, whichever is less.
Loans secured with used and new specialized equipment and machinery are limited
to 70% and 80% of the estimated fair value of the collateral, respectively.
147
157
As of December 31, 1997 fixed rate loans totaled $7.3 million with $1.5 million
maturing in less than three months and $517,608 maturing in three months to one
year. Those maturing in one to five years totaled $5.2 million. Fixed rate loans
with a maturity in excess of five years were $52,302. As of December 31, 1997
floating rate loans repricing quarterly or more frequently totaled $2.8 million.
Floating rate loans repricing annually or more frequently but less frequently
than quarterly totaled $400,879. Management reviews the asset/liability gap
monthly and adjusts the interest rate sensitivity strategy accordingly.
Pioneer Bank, f.s.b. participates as intermediary for the secondary market
underwriting of residential loans. Pioneer Bank, f.s.b. does not have a policy
that requires all real estate first mortgage loans be conforming to the
secondary market's underwriting standards.
Participation loans purchased are subject to Pioneer Bank, f.s.b.'s underwriting
criteria as described in the lending policy. Pioneer Bank, f.s.b. did not have
any purchased participation loans as of December 31, 1997. Pioneer Bank, f.s.b.
participates in the Small Business Administration's lending program and had
$281,632 in participations sold to other institutions as of December 31, 1997.
Pioneer Bank, f.s.b.'s legal lending limit with Board approval is any amount up
to, but no more than, 25% of common stock, surplus and undivided profits. As of
December 31, 1997 Pioneer Bank, f.s.b. had a legal lending limit, either secured
or unsecured, of $1,944,000.
NON-BANKING ACTIVITIES
PIONEER BANK
Pioneer Bank has two wholly owned subsidiaries, Pioneer Securities, Inc. ("PSI")
and Center Finance Corporation. PSI is a securities broker-dealer providing
securities and other nondeposit products and services to bank customers, as well
as non-bank customers. Pioneer Bank has two trusteed affiliates, Frontier
Corporation, a real estate management and development company, and Valley
Company, Inc., a trust company. These Tennessee corporations are affiliates
through a trust agreement for the benefit of Pioneer Bank shareholders. The
trust agreements were established for 99 years, and are to expire in the year
2055. Through the trusteed affiliates of Pioneer Bank, credit related insurance
products and real estate used for banking facilities are provided to Pioneer
Bank. Revenues from these activities do not presently constitute a significant
portion of Pioneer's total operating revenues. During 1996, Pioneer Bank
purchased the stock of a trusteed affiliate's wholly owned subsidiary, Center
Loan & Thrift ("Center"), and changed Center's name to Center Finance
Corporation. Center is now engaged in consumer finance and related activities in
Hamilton and Marion Counties. Pioneer may engage in other activities permissible
for bank and bank holding company subsidiaries, subject to approval by
appropriate regulatory authorities.
COMPETITION
Pioneer Bank and Pioneer Bank, f.s.b. operate in highly competitive market
areas, the Chattanooga MSA which includes Hamilton and Marion Counties,
Tennessee and nearby parts of Northwest Georgia. Competition in these markets is
not only from other banks who perform a very wide spectrum of banking
activities, but it also from other types of financial institutions who compete
for deposits, commercial, fiduciary and investment services and various types of
loans and certain other financial services. Pioneer Bank and Pioneer Bank,
f.s.b. together vie for interest-bearing funds with a number of other financial
intermediaries and investment alternatives, including mutual funds, brokerage
firms, governmental and corporate bonds, and other securities. Competitors
include not only
148
158
financial institutions headquartered in the State of Tennessee, but also a
number of large out-of-state bank holding companies and other financial
institutions who have an established market presence in the State of Tennessee
and the Chattanooga MSA. In addition, recent legislative and regulatory changes
and technological advances have enabled customers to conduct banking activities
without regard to geographical barriers through computer based banking and
similar services.
Valley Bank conducts business in a generally rural market area, Monroe and
McMinn Counties, Tennessee. Competition for traditional banking services, such
as loans and deposits, is less intense than in the Chattanooga MSA. In Valley
Bank's market, the principal financial institutions competing for loan products
include other community banks and credit unions. Competition for deposits comes
from these financial intermediaries, as well as brokerage firms in the form of
non-insured investment securities, such as mutual funds, stocks or bonds.
Management believes competition in this market will intensify.
Pioneer believes intense competition for banking business among bank holding
companies and other providers of financial services will continue and
competition may further intensify as interstate bank branching becomes more
prevalent. It is anticipated additional consolidation of smaller banks into
larger institutions will continue in the State of Tennessee for the foreseeable
future.
EMPLOYEES
As of December 31, 1997, Pioneer and its subsidiaries had approximately 498 full
time equivalent employees. Pioneer maintains training and educational
opportunities through its in-house training facility, Pioneer University.
Coordinating job required skills with educational and training opportunities is
the primary function of Pioneer University. Pioneer University offers tuition
reimbursement for college degrees, including master's programs, so long as the
course study is related to business. Pioneer maintains affirmative action
programs designed to prepare employees for positions of increasing
responsibility in both management and operations, and provides a variety of
benefit programs including group life, health, accident and other insurance and
retirement plans. None of Pioneer's employees are covered by a collective
bargaining agreement, and Pioneer believes its employee relations are generally
good.
PROPERTIES
Pioneer, through its subsidiaries and affiliates, owns or leases buildings used
in the normal course of its business. The main offices of Pioneer at 801 Broad
Street, Chattanooga, Tennessee, are located in a 125,000 square-foot office
building, owned by Pioneer. Pioneer also owns a 54,000 square foot, six story
office building adjacent to the main offices, as well as a five story parking
facility with approximately 22,500 square-feet of rental space located across
the street. The book value of these three facilities was $4.8 million as of
December 31, 1997. No property owned by Pioneer is subject to a mortgage.
As of December 31, 1997, the net book value of Pioneer Bank's branch facilities
was $5.1 million. Pioneer Bank's 22 branches are mostly stand-alone commercial
buildings. All of them are located within Hamilton County, Marion County and
Sequatchie County, Tennessee. The average size of each branch is approximately
3,000 square feet. Pioneer Bank leases two facilities located in two area
shopping malls and leases one facility located inside the Wal-Mart store in
Kimball, Tennessee. All of the leases have remaining terms of less than five
years and certain of these leases may have renewal options. Pioneer Bank has one
new branch awaiting regulatory approval. It will be located in the Wal-Mart/
149
159
Gunbarrel store in Chattanooga, Tennessee. As of December 31, 1997, Valley
Bank's nine branch facilities had a book value of $2.8 million whereas Valley's
18,000 square foot main office located at 401 North Main Street, Sweetwater,
Tennessee had a book value of $2.0 million. Valley Bank opened a tenth branch in
Decatur, Tennessee in Meigs County subsequent to year end, but has no immediate
construction plans for any additional branches in 1998. Valley Bank branches are
approximately 3,000 square feet in size. As of December 31, 1997, the book value
of Pioneer Bank, f.s.b.'s branch office was $724,415. Pioneer Bank, f.s.b.
leases the Dalton facility and owns the Ringgold Road branch which has a land
lease from the holding company. All leases have remaining terms of less than
five years and certain of these leases may have renewal options. Pioneer Bank,
f.s.b. is opening a new facility on Highway 2A in Ft. Oglethorpe, Georgia. See
Notes to Consolidated Financial Statements for further information with respect
to the amounts at which bank premises, equipment and other real estate are
carried.
LEGAL PROCEEDINGS
Various claims and lawsuits are pending against Pioneer and the Banks in the
normal course of their business. Although the amount of any ultimate liability
with respect to such matters cannot be determined, in the opinion of management,
after consultation with legal counsel, those claims and lawsuits, when resolved,
should not have a material adverse effect on the consolidated results of
operation or financial condition of Pioneer and its subsidiaries.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following is a listing of all "persons" (as defined by the Commission) who
are the "beneficial owners", as defined by Commission, of more than 5% of the
outstanding shares of Pioneer Common Stock as of October 16, 1998.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------- -------------------- ----------
George M. Clark, Jr 288,222(1) 7.66%
801 Broad Street
Chattanooga, TN 37402
REEP & Co 671,424(2) 17.86%
801 Broad Street
Chattanooga, TN 37402
SunTrust Bank, Inc 212,555(3) 5.70%
25 Park Place, N.E.
Atlanta, GA 30303
- -------------------------
(1) Mr. Clark owns 186,122 shares individually; 13,500 shares are held by the
Clark Foundation; 88,600 shares are held by Mr. Clark as co-trustee with
Pioneer Bank for the benefit of other family members, and as to which he may
be deemed to share voting and investment power; 48,720 shares are owned by
Mr. Clark's wife, Carole C. Clark, as to which shares Mr. Clark disclaims
beneficial ownership.
(2) REEP & Co. is the nominee of the Pioneer Bank Trust Department. The Pioneer
Bank Trust Department may be deemed to share voting power with its
customers.
(3) SunTrust Bank, Inc. ("SunTrust") is the parent company of STI Trust and
Investment Operations, Inc., the nominee name for the safekeeping of
SunTrust's
150
160
trust customers' stock certificates. According to its 13G filing with the
SEC, SunTrust may be deemed to share voting power with its customers.
Set forth below is certain information as of October 16, 1998 regarding those
shares of Pioneer Common Stock owned beneficially by each of the members of the
Board of Directors of Pioneer, and the directors and officers of Pioneer as a
group.
PERCENTAGE OF
AMOUNT AND COMMON
NAME AND ADDRESS OF NATURE OF STOCK
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING(L)
- ------------------- --------------------- --------------
Douglas Heuer III............................... 7,839(2) 0.21%
W. O. Hubbuch................................... 7,125 0.19%
Joe N. Little................................... 83,157(3) 2.22%
Sam E. Miles, Jr................................ 1,625 0.04%
Ralph M. West, Jr............................... 4,487(4) 0.12%
Clayton Causby.................................. 1,100 0.03%
George M. Clark, III............................ 108,725(5) 2.89%
Robert T. Farnsworth............................ 1,561 0.04%
Rodger B. Holley................................ 10,547(6) 0.28%
Carol Jackson................................... 92,941(7) 2.47%
Paul D. Kelly................................... 2,875(8) 0.08%
Ralph L. Kendall................................ 6,525(9) 0.17%
D. Ray Marler................................... 20,980 0.56%
Kenneth A. Royse................................ 2,125 0.06%
Joseph A Schmissrauter, Jr...................... 2,325 0.06%
S. M. Warren.................................... 41,043(10) 1.10%
Jimmy E. Wilson................................. 7,145(11) 0.19%
Gregory B. Jones................................ 3,532(12) 0.09%
Larry R. Belk................................... 13,612(13) 0.36%
Kenneth C. Dyer, III............................ 2,252(14) 0.06%
George M. Clark, Jr. ........................... 288,222(15) 7.66%
James D. Renegar................................ -- --
All Executive Officers, Directors and Nominees
for Director as a Group (22 persons).......... 709,743 18.88%
- -------------------------
(1) Information relating to beneficial ownership of Common Stock by directors
is based upon information furnished by each person using "beneficial
ownership" concepts set forth in rules of the Commission under the Exchange
Act. Under such rules, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power", which includes the
power to vote or direct the voting of such security, or "investment power",
which includes the power to dispose of or to direct the disposition of such
security. The person is also deemed to be a beneficial owner of any
security of which that person has a right to acquire beneficial ownership
within 60 days. Under such rules, more than one person may be deemed to be
a beneficial owner of the same securities, and a person maybe deemed to be
a beneficial owner of securities as to which he or she may disclaim any
beneficial
151
161
ownership. Accordingly, nominees are named as beneficial owners of shares
as to which they may disclaim any beneficial interest. Except as indicated
in other notes to this table describing special relationships with other
persons and specifying shared voting or investment power, directors possess
sole voting and investment power with respect to all shares of Common Stock
set forth opposite their names.
(2) Includes 5,166 shares held jointly with Mr. Heuer's wife and 1,212 shares
held by Mr. Heuer's wife, as to which shares Mr. Heuer may be deemed to
share voting and investment power.
(3) Includes 29,680 shares held by Mr. Little's wife, as to which shares Mr.
Little may be deemed to share voting and investment power.
(4) Includes 2,800 shares held jointly with Mr. West's wife, as to which shares
Mr. West may be deemed to share voting and investment power. Includes 1,080
shares under option to purchase which are exercisable within 60 days.
Excludes an additional 2,320 shares under option to purchase which are not
exercisable within 60 days. Includes 107 shares in Mr. West's Employee
Stock Ownership Plan ("ESOP") as to which shares Mr. West may be deemed to
share voting and investment power.
(5) Includes 3,337 shares held by Mr. Clark's wife and 18,316 shares held by
Mr. Clark as trustee for his children, where he may be deemed to share
voting and investment power. Includes 1,200 shares under option to purchase
which are exercisable within 60 days. Excludes an additional 3,500 shares
under option which are not exercisable within 60 days. Includes 75 shares
in Mr. Clark's ESOP, as to which shares Mr. Clark may be deemed to share
voting and investment power.
(6) Includes 7,200 shares under option to purchase by Mr. Holley which are
exercisable within 60 days. Excludes an additional 16,008 shares under
option which are not exercisable within 60 days. Includes 276 shares in Mr.
Holley's ESOP, as to which shares Mr. Holley may be deemed to share voting
and investment power.
(7) Includes 49,062 held by a trustee for the benefit of Ms. Carol Jackson, as
to which she may be deemed to share voting and investment power.
(8) Includes 2,400 shares held jointly with Mr. Kelly's wife and 350 shares
held by Mr. Kelly's wife, as to which shares Mr. Kelly may be deemed to
share voting and investment power.
(9) Includes 2,600 shares held by various members of the Kendall family, as to
which shares Mr. Kendall may be deemed to share voting and investment
power.
(10) Includes 6,000 shares held by Mr. Warren's wife, as to which shares Mr.
Warren may be deemed to share voting and investment power.
(11) Includes 4,962 shares held jointly with Mr. Wilson's wife, as to which
shares Mr. Wilson may be deemed to share voting and investment power.
(12) Includes 2,160 shares under option to purchase by Mr. Jones which are
exercisable within 60 days. Excludes an additional 5,640 shares under
option which are not exercisable within 60 days. Includes 144 shares in Mr.
Jones' ESOP, as to which shares Mr. Jones may be deemed to share voting and
investment power.
(13) Includes 3,600 shares under option to purchase which are exercisable within
60 days. Excludes an additional 6,400 shares under option which are not
exercisable within 60 days. Includes 5,350 shares in Mr. Belk's ESOP, as to
which shares Mr. Belk may be deemed to share voting and investment power.
152
162
(14) Includes 2,160 shares under option to purchase by Mr. Dyer which are
exercisable within 60 days. Excludes an additional 6,640 shares under
option which are not exercisable within 60 days. Includes 132 shares in Mr.
Dyer's ESOP, as to which shares Mr. Dyer may be deemed to share voting and
investment power.
(15) Mr. Clark owns 186,122 shares individually; 13,500 shares are held by the
Clark Foundation; 88,600 shares are held by Mr. Clark as co-trustee with
Pioneer Bank for the benefit of other family members, and as to which he
may be deemed to share voting and investment power; 48,720 shares are owned
by Mr. Clark's wife, Carole C. Clark, as to which shares Mr. Clark
disclaims beneficial ownership.
153
163
PIONEER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTERIM PERIODS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
Pioneer ended the second quarter of 1998 with total assets of $1 billion, a 5.0%
increase from December 31, 1997 and a 7.3% increase from June 30, 1997. Pioneer
reported net income for the three months ending June 30, 1998 of $2.57 million,
or $0.684 basic earnings per share, compared to $2.06 million, or $0.548 basic
earnings per share, for the same period in 1997. For the six months ended June
30, 1998, Pioneer reported $4.9 million, or $1.31 basic earnings per share,
compared to $4.5 million, or $1.18 basic earnings per share, for the same period
last year. The improvement in earnings represents a 24.8% increase from the
second quarter 1997 to the second quarter of 1998 and a 10.6% increase from the
first six months of 1997 to the first six months of 1998.
NET INTEREST INCOME
Net interest income, before the provision for possible loan losses, was $10.6
million for the three months ended June 30, 1998, compared to $9.0 million for
the same period in 1997. This level of net interest income resulted primarily
from, among other things, an increase in net interest spread of 13 basis points
to 4.04% from 3.91%. The net interest margin was 4.84% in the second quarter of
1998 compared to 4.64% in the second quarter of 1997. The net interest margin
increased because the yield on interest earning assets increased 22 basis
points, while the rate paid on interest bearing liabilities increased only 9
basis points. See "Net Interest Margin."
Net interest income, before the provision for possible loan losses, was $20.4
million for the six months ended June 30, 1998, compared to $17.4 million for
the same period in 1997. This level of net interest income resulted primarily
from, among other things, an increase in net interest spread of 9 basis points
to 3.94% from 3.85%. The net interest margin was 4.75% for the six months ended
June 30, 1998 compared to 4.61% for the same period last year. The net interest
margin increased because the yield on interest earning assets increased 24 basis
points, while the rate paid on interest bearing liabilities increased only 15
basis points. See "Net Interest Margin."
CASH AND DUE FROM BANKS
Cash and due from banks increased from $46.9 million as of December 31, 1997, to
$60.1 million as of June 30, 1998, representing a 28.2% increase. The increase
is indicative of normal business cycles in the industry. Cash and due from bank
balances will fluctuate depending on monthly cycles and the volume of
uncollected funds deposited by bank customers. It is management's desire to
maintain adequate cash reserves to meet our customers' cash needs.
INVESTMENTS
Investment securities increased from $205.1 million to $207.0 million, or 1.0%
from December 31, 1997 to June 30, 1998. Maturities, sales and prepayments
within the securities portfolio were primarily reinvested back into the
investment portfolio. Loan growth was funded primarily by reducing federal funds
sold and from deposit growth. From December 31, 1997 to June 30, 1998 the
"Held-to-Maturity" securities decreased $17.5
154
164
million, or 36.1% while the "Available-for-Sale" securities increased $19.4
million, or 12.4%. The average expected life of the total investment security
portfolio at June 30, 1998 was 2.9 years with an average tax equivalent yield of
6.41%. Taxable equivalent adjustments, using a 34 percent tax rate, have been
made in calculating yields on tax-exempt obligations.
Since December 31, 1997, interest rate volatility in the bond market has
decreased the after tax value of the investment portfolio by $180,482. Interest
rates increased as the fears of Asia's financial difficulties subsided and
interest rates returned to their normal trading levels. Continued strength of
the U.S. dollar and the lack of any sign of inflation kept interest rates from
rising even higher. Regarding the investment portfolio, management intends to
(i) buy securities only during those times when prices appear most favorable,
(ii) maintain maturities five years or less and (iii) avoid excessive call
exposure.
The Financial Accounting Standards Board ("FASB"), pursuant to FASB 115,
requires the "Available for Sale" portfolio be valued at market prices and any
difference be recorded as a change in asset value to the investment portfolio
and capital. As of June 30, 1998, the FASB 115 adjustment resulted in an
increase in the asset value of the investment portfolio of $1.4 million and an
adjustment to the capital account of $936,000, after reserving $464,000 for
deferred taxes.
As of June 30, 1998, Pioneer had $175,000 invested in federal funds sold
compared to $18.8 million at December 31, 1997. Management continually monitors
Pioneer's liquidity position to determine the necessary balances of short-term
investments and to consider alternative uses of such funds.
LOAN PORTFOLIO
Loans, net of unearned income, increased $50.7 million, or 7.8% from December
31, 1997 to June 30, 1998. The loan mix changed marginally from year-end 1997 to
six months ending, June 30, 1998. The largest dollar volume loan category
increase occurred in commercial loans by $31.8 million, or 18.9% from December
1997 to June 1998. Consumer credit card loans decreased $109,000, or 2.4%.
Residential real estate loans increased $15.8 million, or 9.2% from December 31,
1997 to June 30, 1998, due to a strong demand for home equity loans and home
refinancing. Real estate construction loans increased 4.6%, or $2.5 million, for
the same period. This increase in construction loans is one indication of a
moderately strong local economy.
Higher interest rate levels will reduce the growth rate of the loan portfolio.
Management continues to monitor the mix of loans and the introduction of new
loan products to ensure our customers are provided with the best borrowing
opportunities.
155
165
Pioneer had no foreign loans or loans to lesser developed countries as of June
30, 1998. Pioneer has not invested in loans to finance highly leveraged
transactions ("HLT"), such as leveraged buy-out transactions, as defined by the
Federal Reserve Board and other regulatory agencies. There has not been a
concentration in lending to any one industry segment. Pioneer's loan mix is
further described in the table below.
LOAN PORTFOLIO
(IN THOUSANDS)
PERCENT PERCENT
JUNE OF DECEMBER OF
1998 TOTAL 1997 TOTAL
-------- ------- -------- -------
Commercial, financial and agricultural.... $199,417 28.39% $167,655 25.74%
Real estate:
Construction and land development....... 57,152 8.14% 54,624 8.39%
Residential............................. 187,917 26.76% 172,124 26.43%
Commercial.............................. 170,876 24.33% 155,348 23.86%
Consumer:
Credit cards............................ 4,369 0.62% 4,478 0.69%
Installments............................ 82,468 11.74% 96,739 14.85%
Lease financing........................... 144 0.02% 266 0.04%
-------- ------ -------- ------
Total Gross Loans............... 702,343 100.00% 651,234 100.00%
====== ======
Less:
Unearned income......................... 1,908 1,476
Allowance for loan losses............... 9,141 7,837
-------- --------
Total Net Loans................. $691,294 $641,921
======== ========
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The economic outlook for the State of Tennessee, where Pioneer does business, is
cautious. However, the economy is generally performing similar to the nation as
a whole. In Pioneer's markets, real estate values have increased slightly as
interest rates have remained close to the 7% to 7.25% level for 30-year
mortgages. New housing starts remained relatively constant for the second
quarter of 1998.
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and existing and prospective economic conditions when
determining the adequacy of the loan loss reserve. The allowance for possible
loan losses increased $1.3 million, or 16.6% from December 31, 1997 to June 30,
1998. The provision charged to expense is based on a continuous analysis by
Pioneer's management of potential losses in the loan portfolio and management's
efforts to maintain a minimum percentage of the allowance for possible loan loss
reserve at 1.25% of gross outstanding loans.
156
166
Pioneer's allowance for possible loan losses as a percentage of average loans,
net of unearned income, was 1.33% at June 30, 1998 as compared to 1.23% at
December 31, 1997. The allowance for loan losses at June 30, 1998, and December
31, 1997 provided 104.78% and 164.97% coverage of nonperforming assets and loans
90 days or more past due, respectively. Net charge-offs (annualized as a
percentage of average quarter-to-date loans) were 0.36% during the second
quarter of 1998 as compared to 0.26% for the same period one year ago.
ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
QUARTER ENDING
-------------------------------------------------
1998 1997
------------------- ---------------------------
JUNE 30 MARCH 31 DEC 31 SEPT 30 JUNE 30
------- --------- ------- ------- -------
Balance at beginning of
period...................... $ 8,414 $ 7,836 $ 7,651 $ 6,940 $ 6,153
Loans charged-off............. 832 442 889 529 433
Loans recovered............... 221 82 209 117 64
------- ------- ------- ------- -------
Net charge-offs
(recoveries)............. 611 360 680 412 369
Provision for loan losses
charged to expense.......... 1,338 938 865 1,123 1,156
------- ------- ------- ------- -------
Balance at end of period...... $ 9,141 $ 8,414 $ 7,836 $ 7,651 $ 6,940
======= ======= ======= ======= =======
Allowance for loan losses as a
percentage of average loans
outstanding for the
period...................... 1.33% 1.27% 1.23% 1.27% 1.22%
Allowance for loan losses as a
percentage of nonperforming
assets and loans 90 days
past due outstanding at end
of the period............... 104.78% 157.30% 164.97% 267.52% 240.64%
Annualized QTD net charge-offs
as a percentage of average
loans outstanding for the
period...................... 0.36% 0.22% 0.43% 0.27% 0.26%
Annualized YTD net charge-offs
as a percentage of average
loans outstanding for the
period...................... 0.29% 0.22% 0.26% 0.19% 0.16%
NONPERFORMING ASSETS AND PAST DUE LOANS
Pioneer has policies, procedures and underwriting guidelines intended to assist
in maintaining the overall quality of its loan portfolio. Pioneer monitors its
delinquency levels for any adverse trends. During the past few years, the
Southeastern region of the country has experienced a general improvement in the
real estate loan market. In view of these market conditions, management has
closely monitored and will continue to monitor Pioneer's real estate and
commercial loan portfolio during 1998. Particular attention will be focused on
those credits targeted by the loan monitoring and review process. Management's
continued emphasis is to seek and maintain a relatively low level of
nonperforming assets and returning the current nonperforming assets to an
earning status.
157
167
Nonperforming assets include nonperforming loans, renegotiated loans, foreclosed
real estate held for sale and foreclosed other personal property held for sale.
As of June 30, 1998, nonperforming assets were $4.7 million as compared to $2.6
million at December 31, 1997. The ratio of nonperforming assets to average
loans, net of unearned income, other real estate and other nonperforming assets
was 0.68% at June 30, 1998, compared to 0.41% at December 31, 1997 and 0.41% at
June 30, 1997. The increase in nonperforming assets is primarily due to the
addition of one large secured loan. Management was unable to estimate the amount
of recovery on the loan during the second quarter of 1998.
Total nonperforming loans to total average loans increased from 0.29% at
December 31, 1997, to 0.57% at June 30, 1998. Loans past due 90 days or more as
a percentage of total average loans increased to 0.59% as of June 30, 1998,
compared to 0.33% as of December 31, 1997. Management believes asset quality
remained strong through June 30, 1998 despite the increase in 90-day past due
loans during the second quarter.
Net loans charged off during the second quarter of 1998 were $610,000 compared
to a $369,000 for the same period of 1997. Further detail of loan charge-offs
and recoveries is presented in the table "Allowance for Loan Losses."
NONPERFORMING ASSETS AND PAST DUE LOANS
(IN THOUSANDS)
QUARTER ENDING
----------------------------------------------------
1998 1997
------------------- ------------------------------
JUNE 30 MARCH 31 DEC 31 SEPT 30 JUNE 30
-------- -------- -------- -------- --------
Avg loans, net of unearned
income....................... $685,645 $660,896 $636,559 $603,579 $566,628
======== ======== ======== ======== ========
Nonaccrual loans............... $ 3,875 $ 4,179 $ 1,836 $ 1,856 $ 1,708
Renegotiated or restructured
loans........................ 0 0 0 0 0
-------- -------- -------- -------- --------
Total nonperforming
loans.............. 3,875 1,836 1,856 1,708 4,179
Other real estate owned, net... 752 753 687 352 571
Other non-performing assets.... 23 94 107 67 24
-------- -------- -------- -------- --------
Total nonperforming
assets............. $ 4,650 $ 5,026 $ 2,630 $ 2,275 $ 2,303
======== ======== ======== ======== ========
Loans 90 days or more past due
and still accruing........... $ 4,075 $ 323 $ 2,120 $ 585 $ 581
Total nonperforming loans as a
percentage of total average
loans........................ 0.57% 0.63% 0.29% 0.31% 0.30%
Total nonperforming assets as a
percentage of total average
loans, ORE and other
nonperforming assets......... 0.68% 0.76% 0.41% 0.38% 0.41%
Loans 90 days past due as a
percentage of total average
loans........................ 0.59% 0.05% 0.33% 0.10% 0.10%
158
168
DEPOSITS
Total deposits increased $55.8 million, or 7.5% from $748.4 million at December
31, 1997 to $804.2 million at June 30, 1998. The increase is due primarily to
customers investing in time deposits and increases in large CD's. Total interest
bearing deposits increased $42.5 million from December 31, 1997 to June 30,
1998. Noninterest bearing demand deposits increased $13.3 million, or 10.5% in
the first six months of 1998 from December 31, 1997. From December 31, 1997 to
June 30, 1998, interest bearing transaction accounts increased $1.9 million, or
1.5%, while money market accounts and savings accounts decreased $579,000, or
1.0%, and increased $5.5 million, or 4.9% respectively.
Federal funds purchased and securities sold under agreements to repurchase
increased $8.2 million, or 13.5% from December 31, 1997 to June 30, 1998.
Counterparties to the agreements to repurchase are commercial account customers,
where excess funds from noninterest bearing checking accounts are transferred
nightly to a collateralized interest bearing repurchase account. These accounts
are not FDIC insured, therefore Pioneer collateralizes the deposits with
securities from the investment portfolio. For the quarter ended June 30, 1998,
none of the repurchased agreements were brokered. As of June 30, 1998 Pioneer
had $1.0 million in federal funds purchased, and on December 31, 1997 Pioneer
did not have any federal funds purchased. Pioneer uses borrowings from the
Federal Home Loan Board ("FHLB") to supplement the management of interest rate
risk by matching maturities within the loan portfolio with FHLB borrowings. At
June 30, 1998 total FHLB borrowings were $20.0 million, or $18.0 million lower
than on December 31, 1997. Regarding Pioneer's deposit mix, savings deposits and
both interest bearing and noninterest bearing transaction deposits accounted for
48.7%, 49.5% and 50.3% of total deposits at June 30, 1998, December 31, 1997 and
June 30, 1997, respectively. Large certificates of deposits represents 12.7% of
total deposits at June 30, 1998, and is higher than 9.4% at December 31, 1997
and 9.7% at June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining Pioneer's ability to meet
the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs.
Net cash provided by operating activities for the six months ended June 30,
1998, totaled $5.3 million. For the same period, net cash used by investing
activities totaled $36.1 million consisting primarily of proceeds from
maturities and sales of investment securities of $38.2 million, cash outflows of
$41.7 million in investment securities purchases, and a $50.7 million increase
in loans outstanding. Net cash provided by financing activities of $44.0 million
consisted of an increase in demand deposits of $15.2 million, an increase in
savings deposits of $4.9 million, an increase in time deposits of $35.7 million
and a decrease in other borrowings of $18.0 million. The payment of $1.9 million
in common stock dividends and intercompany dividends was funded from earnings
and equity, respectively. Intercompany dividends are used to fund the ongoing
operations of the holding company in lieu of management fees. Management
generally staggers the purchases of investment securities within a four-year
maturity horizon to provide sufficient liquidity to the loan portfolio.
Management does not anticipate any unexpected funding needs in the near future
that could not be satisfied with current cash generated from investing
activities.
159
169
Total stockholders' equity, adjusted for the unrealized appreciation on
securities available for sale, to total assets at June 30, 1998 and December 31,
1997 was 10.17% and 10.33%, respectively. Pioneer's book value per share,
increased from $26.57 at December 31, 1997 to $27.43 at June 30, 1998. Pioneer's
Tier I risk based capital ratio, total risk based capital ratio and leverage
capital ratio at June 30, 1998 were 12.31%, 13.47% and 9.92%, respectively,
exceeding the fully phased-in required capital ratios of 4.00%, 8.00% and 3.00%,
respectively. These ratios as of December 31, 1997 were 12.91%, 13.99% and
10.29%, respectively.
ASSET/LIABILITY MANAGEMENT
INTEREST RATE SENSITIVITY
Interest rate sensitivity is a function of the repricing characteristics of
Pioneer's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on repricing relationships of assets and liabilities during periods of changes
in market interest rates. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities that are subject to
repricing at various time horizons. The following table illustrates Pioneer's
exposure to interest rate fluctuations as of June 30, 1998:
INTEREST RATE SENSITIVITY ANALYSIS
AS OF JUNE 30, 1998
(IN THOUSANDS)
OVER 3 OVER 1
MONTHS YEAR NON-
3 MONTHS THROUGH THROUGH OVER INTEREST
OR LESS 12 MONTHS 5 YEARS 5 YEARS SENSITIVE TOTAL
-------- --------- -------- -------- --------- ----------
ASSETS:
Interest Earning
Assets:
Loans, net of
unearned Income.... $272,117 $ 68,701 $329,378 $ 30,239 -- $ 700,435
Less: Allowance for
loan losses........ -- -- -- -- (9,141) (9,141)
-------- --------- -------- -------- -------- ----------
Net
loans... 272,117 68,701 329,378 30,239 (9,141) 691,294
Investment
securities......... 10,519 63,488 86,378 46,644 -- 207,029
Federal funds sold... 175 -- -- -- -- 175
-------- --------- -------- -------- -------- ----------
Total earning
assets.......... 282,811 132,189 415,756 76,883 (9,141) 898,498
Cash and other
assets............. -- -- -- -- 106,053 106,053
-------- --------- -------- -------- -------- ----------
Total
assets.. $282,811 $ 132,189 $415,756 $ 76,883 $ 96,912 $1,004,551
======== ========= ======== ======== ======== ==========
160
170
OVER 3 OVER 1
MONTHS YEAR NON-
3 MONTHS THROUGH THROUGH OVER INTEREST
OR LESS 12 MONTHS 5 YEARS 5 YEARS SENSITIVE TOTAL
-------- --------- -------- -------- --------- ----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest Bearing
Liabilities:
Interest bearing
demand deposits.... $ 20,128 $ 39,142 $ 68,865 $ 6,581 -- $ 134,716
Money market
accounts........... -- 28,647 28,647 -- -- 57,294
Savings deposits..... -- -- 93,286 23,321 -- 116,607
Other time deposits.. 74,350 126,133 52,812 10 -- 253,305
CD's of $100,000 or
more............... 29,113 51,661 21,571 5 -- 102,350
Federal funds
purchased and
securities sold
under agreements to
repurchase......... 68,592 -- -- -- -- 68,592
Other borrowings..... -- 10,000 10,000 -- -- 20,000
-------- --------- -------- -------- -------- ----------
Total interest
bearing
liabilities..... 192,183 255,583 275,181 29,917 -- 752,864
Non-interest bearing
demand deposits.... -- -- -- -- 139,941 139,941
Other liabilities.... -- -- -- -- 8,622 8,622
Stockholders'
equity............. -- -- -- -- 103,124 103,124
-------- --------- -------- -------- -------- ----------
Total liabilities
and
stockholders'
equity.......... $192,183 $ 255,583 $275,181 $ 29,917 $251,687 $1,004,551
======== ========= ======== ======== ======== ==========
Interest sensitivity
gap................ $ 90,628 $(123,394) $140,575 $ 46,966
Cumulative interest
sensitivity gap.... $ 90,628 $ (32,766) $107,809 $154,775
Cumulative interest
sensitivity gap as
a percentage of
total earning
assets............. 10.09% -3.65% 12.00% 17.23%
In analyzing the interest rate sensitivity at June 30, 1998, Pioneer is found to
be liability sensitive in the less than twelve-month categories in the amount of
$32.8 million. Not until the mid-point of the one-year to five-year category do
assets match up with liabilities. This
161
171
means Pioneer is in a slightly liability sensitive position. During periods of
increasing interest rates, liability sensitivity would narrow Pioneer's net
interest margins, because interest earning assets would reprice slower than
interest bearing liabilities. During periods of decreasing interest rates, being
liability sensitive would enable Pioneer to reprice interest bearing liabilities
quicker, thereby increasing the net interest. Management maintains several
interest rate risk models, regularly meets with the Board of Directors to
discuss asset/liability management issues and believes this level of exposure to
interest rate fluctuations to be acceptable.
NET INCOME
Net income for the six months ended June 30, 1998 increased $474,000, or 10.6%
over the same period in 1997. Basic earnings per share for the first six months
of 1998 increased $0.126, or 10.6% to $1.311 compared to $1.185 for the same
period one year ago. Changes in diluted net income per share were identical
during the same periods. For the first six months of 1998 compared to the same
period last year net income increased even though the loan loss provision
increased by $654,000. Net interest income increased by $3.0 million,
noninterest income increased by $1.3 million and noninterest expense increased
by $2.7 million for the first six months of 1998 compared to the same period
last year. Annualized return on average assets for the six months ending June
30, 1998 was 1.00% as compared to 1.00% for the same period last year. The
annualized return on average equity for the first six months of 1998 was 9.81%,
compared to 9.64% for the same period in 1997. All net income calculations are
before merger related expenses. The pre-tax merger related expenses incurred
through June 30, 1998 are $179,000.
NET INTEREST MARGIN
Net interest margin is the principal component of a financial institution's
income stream and represents the difference or spread between interest from
earning assets and the interest expense paid on deposits and other borrowed
funds. Fluctuations in interest rates as well as volume and mix changes in
earning assets and interest bearing liabilities can materially impact net
interest margin. The discussion of net interest margin is presented on a tax
equivalent basis, unless otherwise noted, to facilitate comparisons among
various taxable and tax-exempt assets.
162
172
The following table shows average balances, interest income and interest
expense, and yields/rates for the three months ending June 30, 1998 and 1997.
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND YIELD/RATES
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------
ASSETS:
Earning Assets:
Loans, net of unearned income.......... $685,645 $15,694 9.18% $566,701 $12,846 9.07%
Investment securities.................. 209,449 3,441 6.59% 252,589 4,203 6.66%
Other earning assets................... 16,522 236 5.73% 10,189 158 6.20%
-------- ------- -------- -------
Total earning assets................. 911,616 19,371 8.52% 829,479 17,207 8.30%
Allowance for loan losses.............. (8,833) (6,297)
Cash and other assets.................. 89,699 86,489
-------- --------
TOTAL ASSETS.................. $992,482 $909,671
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest Bearing Liabilities:
Interest bearing demand deposits....... $143,346 $1,112 3.11% $121,762 $ 819 2.69%
Savings deposits....................... 115,606 735 2.55% 104,615 819 3.13%
Time deposits.......................... 307,782 4,083 5.32% 298,926 3,876 5.19%
Time deposits of $100,000 or more...... 94,581 1,365 5.79% 74,206 1,032 5.56%
Federal funds purchased and securities
sold under agreement to repurchase... 65,430 747 4.58% 75,120 805 4.29%
Other borrowings....................... 22,527 328 5.84% 14,811 209 5.64%
-------- ------- -------- -------
Total interest bearing liabilities... 749,272 8,370 4.48% 689,440 7,560 4.39%
------- -------
Net interest spread.................... $11,001 4.04% $9,647 3.91%
======= =======
Noninterest bearing demand deposits.... 133,061 121,026
Accrued expenses and other
liabilities.......................... 8,842 7,403
Stockholders' equity................... 101,307 91,802
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $992,482 $909,671
======== ========
Net yield on earning assets............ 4.84% 4.64%
====== ======
Taxable equivalent adjustment:
Loans................................ $ 21 $ 56
Investment securities................ 378 563
------- -------
Total adjustment.............. $ 399 $ 619
======= =======
163
173
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND YIELD/RATES
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------
ASSETS:
Earnings Assets:
Loans, net of unearned income.......... $673,339 $30,604 9.17% $546,761 $24,390 9.00%
Investment securities.................. 206,508 6,616 6.46% 249,138 8,207 6.64%
Other earning assets................... 21,070 586 5.61% 12,290 349 5.73%
-------- ------- -------- -------
Total earning assets................. 900,917 37,806 8.46% 808,189 32,946 8.22%
Allowance for loan losses.............. (8,422) (6,121)
Cash and other assets.................. 89,827 88,321
-------- --------
TOTAL ASSETS.................. $982,322 $890,389
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest bearing demand deposits....... $138,389 $1,953 2.85% $122,244 $1,650 2.72%
Savings deposits....................... 114,536 1,662 2.93% 105,478 1,662 3.18%
Time deposits.......................... 307,936 8,158 5.34% 294,660 7,545 5.16%
Time deposits of $100,000 or more...... 87,585 2,525 5.84% 70,410 1,924 5.51%
Federal funds purchased and securities
sold under agreement to repurchase... 63,898 1,461 4.61% 63,880 1,365 4.31%
Other borrowings....................... 29,204 846 5.84% 12,419 341 5.54%
-------- ------- -------- -------
Total interest bearing liabilities... 741,548 16,605 4.52% 669,091 14,487 4.37%
------- -------
Net interest spread.................... $21,201 3.94% $18,459 3.85%
======= =======
Noninterest bearing demand deposits.... 130,416 120,967
Accrued expenses and other
liabilities.......................... 9,848 7,893
Stockholders' equity................... 100,510 92,438
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY........ $982,322 $890,389
======== ========
Net yield on earning assets............ 4.75% 4.61%
====== ======
Taxable equivalent adjustment:
Loans................................ $ 48 $ 65
Investment securities................ 744 1,028
------- -------
Total adjustment.............. $ 792 $1,093
======= =======
The net yield on earning assets increased 20 basis points from the second
quarter of 1997 to the second quarter of 1998, 4.64% to 4.84%, respectively. The
increase resulted from changes in rates, volumes and mix of interest earning
assets and interest bearing liabilities. In addition, the average balance of
noninterest bearing demand deposits increased $12.0 million, or 9.9%. On a tax
equivalent basis, interest income on earning assets increased $2.2 million, or
12.6% due to an increase of $82.1 million, or 9.9% in the average volume of
interest earning assets. The development of the mix of interest earning assets
is the primary factor of the improved yields of earning assets as a whole. The
average balances of
164
174
loans increased $118.9 million, or 21.0%, while the average balance of
securities decreased $43.1 million, or 17.1% and the average balance of other
earning assets, primarily federal funds sold, increased $6.3 million, or 62.2%.
As a percentage of total earning assets, loans increased from 68.3% to 75.2%,
investment securities decreased from 30.5% to 23.0%, and other earning assets
increased from 1.2% to 1.8%, for the second quarter of 1997 and the second
quarter of 1998, respectively. Rates earned on loans increased 11 basis points,
while rates earned on investment securities decreased 7 basis points. The rates
earned on other earning assets decreased 47 basis points. The rate on total
earning assets increased 22 basis points. Interest expense on interest bearing
liabilities increased $810,000, or 10.7% in the second quarter of 1998 compared
to the same period last year. Average balances on interest bearing liabilities
increased by $59.8 million, or 8.7%. The average balances of interest bearing
demand deposits increased from second quarter of 1997 to second quarter of 1998
by $21.6 million, or 17.7%. Savings accounts increased for the same time periods
by $11.0 million, or 10.5%. The rates paid on these types of accounts during the
three months ending June 30, 1998, and 1997, increased 42 and decreased 58 basis
points, respectively. The average balance of time deposits, including time
deposits over $100,000, increased $29.2 million, or 7.8% and the rate paid
increased 15 basis points. Net interest spread and net interest spread rate
increased from the second quarter 1997 to the second quarter 1998 by $1.4
million and 13 basis points, respectively.
The net yield on earning assets increased 14 basis points to 4.75% for the first
six months of 1998 from 4.61% for the same period in 1997. The increase resulted
from changes in rates, volumes and mix of interest earning assets and interest
bearing liabilities. In addition, the average balance of noninterest bearing
demand deposits increased $9.4 million, or 7.8%. On a tax equivalent basis,
interest income on earning assets increased $4.9 million, or 14.8% due to an
increase of $92.7 million, or 11.5% in the average volume of interest earning
assets. The development of the mix of interest earning assets is the primary
factor of the improved yields of earning assets as a whole. The average balances
of loans increased $126.5 million, or 23.1%, while the average balance of
securities decreased $42.6 million, or 17.1% and the average balance of other
earning assets, primarily federal funds sold, increased $8.8 million, or 71.4%.
As a percentage of total earning assets, loans increased from 67.7% to 74.7%,
investment securities decreased from 30.8% to 22.9%, and other earning assets
increased from 1.5% to 2.4%, for the first six months of 1997 and 1998,
respectively. Rates earned on loans increased 17 basis points, while rates
earned on investment securities decreased 18 basis points. The rates earned on
other earning assets decreased 12 basis points. The rate on total earning assets
increased 24 basis points. Interest expense on interest bearing liabilities
increased $2.1 million, or 14.6% in the first six months of 1998 compared to the
same period last year. Average balances on interest bearing liabilities
increased by $72.5 million, or 10.8%. The average balances of interest bearing
demand deposits increased from the first six months of 1997 to the first six
months of 1998 by $16.1 million, or 13.2%. Savings accounts increased for the
same time periods by $9.1 million, or 8.6%. The rates paid on these types of
accounts during the six months ending June 30, 1998, and 1997, increased 13 and
decreased 25 basis points, respectively. The average balance of time deposits,
including time deposits over $100,000, increased $30.5 million, or 8.3% and the
rate paid increased 22 basis points. Net interest spread and net interest spread
rate increased from the first six months of 1997 to the first six months of 1998
by $2.7 million and 9 basis points, respectively.
165
175
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and commissions.
NONINTEREST INCOME
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- PERCENT --------------- PERCENT
1998 1997 CHANGE 1998 1997 CHANGE
------ ------ ------- ------ ------ -------
Trust income................... $ 453 $ 404 12.13% $ 886 $ 787 12.58%
Service charge on deposit
accounts..................... 1,215 1,038 17.05% 2,334 2,046 14.08%
Net securities gains
(losses)..................... 4 70 (94.29)% 8 62 (87.09)%
Other income................... 999 657 52.05% 2,401 1,396 71.99%
------ ------ ------ ------
TOTAL................ $2,671 $2,169 23.14% $5,629 $4,291 31.18%
====== ====== ====== ======
Trust fees increased $49,000 or 12.1% for the three months ended June 30, 1998,
as compared to the quarter ended June 30, 1997. Service charges increased
$177,000, or 17.1% from the second quarter of 1997 compared to the second
quarter of 1998. The increase in service charges is attributable to a new fee
structure implemented during the third quarter of 1997. Net securities gains of
$4,000 were realized in the second quarter of 1998, compared to gains of $70,000
realized in the same period of 1997. Other noninterest income increased
$342,000, or 52.1% for the second quarter 1998 compared to the second quarter of
1997. The increase in other noninterest income is primarily attributable to the
sale of Company real estate properties, which in management's opinion, were no
longer needed for continuing operations.
Trust fees increased $99,000 or 12.6% for the six months ended June 30, 1998, as
compared to the quarter ended June 30, 1997. Service charges increased $288,000,
or 14.1% from the second quarter of 1997 compared to the second quarter of 1998.
The increase in service charges is attributable to a new fee structure
implemented during the third quarter of 1997. Net securities gains of $8,000
were realized in the first six months of 1998 compared to gains of $62,000
realized in the same period of 1997. Other noninterest income increased $1.0
million, or 72.0% for the six months ending June 30, 1998 compared to the same
period last year. The increase in other noninterest income is primarily
attributable to the fees collected from the long-term mortgage department, where
long-term mortgages are sold to the secondary loan market, and from Pioneer
Securities, Inc., a wholly owned subsidiary of Pioneer Bank.
NONINTEREST EXPENSE
Salaries and benefits increased $637,000, or 15.7% for the three months ending
June 30, 1998, as compared to June 30, 1997 due to Company growth including the
establishment of Pioneer Bank, f.s.b., and commissions paid on long-term
mortgage origination. Occupancy expenses increased $222,000, or 30.4% due to
increased repair and maintenance expense. Management anticipates the level of
spending for occupancy expense to be about 5% higher than last year. Other
expenses increased $268,000, or 12.3% for the second quarter ending June 30,
1998, compared to the same period last year.
166
176
Salaries and benefits increased $1.6 million, or 21.2% for the six months ending
June 30, 1998, as compared to June 30, 1997 due to Company growth including the
establishment of Pioneer Bank, f.s.b., and year-to-date commissions paid on
long-term mortgage origination. Occupancy expenses increased $57,000, or 3.0%.
Management anticipates the level of spending for occupancy expense to remain at
this level through year-end. Other expenses increased $988,000, or 19.6% for the
six months ending June 30, 1998, compared to the same period last year.
NONINTEREST EXPENSE
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- PERCENT ----------------- PERCENT
1998 1997 CHANGE 1998 1997 CHANGE
------ ------ ------- ------- ------- -------
Salaries and benefits.......... $4,689 $4,052 15.72% $ 9,388 $ 7,749 21.15%
Net occupancy expense.......... 952 730 30.41% 1,949 1,892 3.01%
Other expense.................. 2,447 2,179 12.30% 5,056 4,068 24.29%
------ ------ ------- -------
Total................ $8,088 $6,961 16.19% $16,393 $13,709 19.58%
====== ====== ======= =======
PROVISION FOR INCOME TAXES
Pioneer's provision for income taxes increased $257,000, or 25.2% to $1.3
million for the three months ended June 30, 1998, as compared to $1.0 million
for the same period in 1997. The effective tax rate was 33.2% for the three
months ended June 30, 1998 as compared to 33.1% for June 30, 1997. Pioneer's
provision for income taxes increased $569,000, or 30.4% to $2.4 million for the
six months ended June 30, 1998, as compared to $1.9 million for the same period
in 1997. The effective tax rate was 33.1% for the six months ended June 30, 1998
as compared to 29.8% for June 30, 1997. This increase is attributable to a large
decrease in tax-free investments in the company's securities portfolio and gains
on the sale of company property. The notes to the December 31, 1997, financial
statements provide additional information regarding Pioneer's taxes.
YEAR 2000 COMPUTER ISSUE
The Year 2000 problem manifests in computer software and, in certain cases,
hardware not equipped to recognize the year change from 1999 to 2000. Much of
the software used today was designed with only two digits available for
indicating the current year. Thus the year 1998 would be represented as "98".
The computer software assumes the first two digits are "19", therefore correctly
interpreting "98" as "1998". In the year 2000, the computer software will
continue to store the last two digits as "00" and use "19" as the first two
digits, however the date will be incorrectly interpreted as "1900". This
problem, at its most fundamental level, threatens the integrity of financial
information produced by an organization's computer systems, and could undermine
the organization's ability to accurately report financial information and
execute transactions.
The federal regulatory agencies have required all financial institutions to
resolve their Year 2000 computer software problems by December 31, 1998. In
1997, Pioneer formalized its "Year 2000 Conversion Action Plan" (the "Plan").
The Plan provides a systematic process to attain Year 2000 compliance in advance
of January 1, 2000. The Plan uses a six-step approach to attain Year 2000
compliance. The six steps are awareness, assessment, remediation, validation,
implementation and contingency planning. The Plan requires
167
177
evaluating the Year 2000 impact of each of Pioneer's areas, products and systems
for both information technology ("IT") based and non-IT based systems. Areas
being addressed by the Plan include:
BUSINESS SYSTEMS APPLICATIONS -- This involves Year 2000 remediation of
application software used to perform specific business functions such as deposit
and loan systems. All mission critical systems are Year 2000 ready and have been
tested by Pioneer's vendors, but have not been tested by Pioneer.
TECHNOLOGY INFRASTRUCTURE -- This involves Year 2000 remediation of the hardware
and software environment used to run application software, and would include PC
and ATM networks, telecommunications, mainframe computers, operating systems and
productivity software. Remediation of Pioneer's technology infrastructure was
approximately 95% complete at June 30, 1998. Validation and implementation were
being conducted prior to the announcement of the Merger, with completion
scheduled for year end 1998. As a result of the Merger, First American has
determined to use its infrastructure technology to replace Pioneer's
infrastructure technology, and further work on Pioneer's technology has been
discontinued.
CREDIT ADMINISTRATION -- In this area the Plan requires reviewing the risk
associated with Year 2000 status of Pioneer's borrowers, depositors and
customers. This is a continuous process of evaluating the individual impact of a
client not being Year 2000 compliant. No assurance can be given that potential
Year 2000 problems at those with whom Pioneer does business will not occur, and
if these occur, consequences to Pioneer will not be material.
FACILITIES SYSTEMS -- This involves Year 2000 remediation of non-IT systems such
as elevators, HVAC systems, security systems, lighting systems and utilities.
All areas where third party involvement is necessary have been validated and
implemented with regard to the physical property Pioneer either owns or leases.
However, for any area outside the direct control of Pioneer, such as utilities,
the validation process is currently continuing, and no assurance can be given
that such third parties will be Year 2000 compliant.
VENDOR AND THIRD PARTY ASSOCIATIONS -- In this area the Plan requires an
inventory of the systems and products provided by third parties, and requires
Pioneer to contact each vendor or third-party to gain knowledge of the status of
their Year 2000 compliance. This is broad-based to include IT and non-IT
systems. Most of the validation process has been completed and potential
problems identified.
Prior to the Merger, Pioneer estimated its Year 2000 project costs would exceed
$1.0 million in the aggregate and the cost would not be material to earnings.
Actual expenditures to date and anticipated future expenditures are within this
estimate. Pioneer's management believes its approach to the Year 2000 issue to
be comprehensive, and does not expect the Year 2000 issue to have a material
impact on its results of operations, liquidity or financial condition, provided
the Merger is completed. However, given the nature of the problem and the number
of factors outside Pioneer's direct control, management is continuously
evaluating the risks associated with Year 2000. To help mitigate the risks a
Year 2000 corporate contingency plan is being developed. Even though the Merger
has changed and/or delayed certain Year 2000 compliance efforts, in the event
the Merger is not consummated, Pioneer presently believes that it can still
complete its Year 2000 Plan successfully in all material respects.
168
178
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The purpose of this discussion is to focus on significant changes in the
financial condition and results of operations of Pioneer and its subsidiaries
during the past three years. The discussion and analysis is intended to
supplement and highlight information contained in the accompanying consolidated
financial statements and related notes to the consolidated financial statements
and the selected financial data presented elsewhere in this Report. The
financial data discussed herein reflects the merger of Sweetwater Valley Corp.
with and into Pioneer, in November 1995, that was accounted for as a
pooling-of-interests. All per share data have been adjusted from 1993 to 1996
for the 2-for-1 stock split, effected as a 100% stock dividend, that occurred in
1996.
SUMMARY
Net income for 1997 was $9.7 million, an 8.5% increase from Pioneer's net income
of $8.9 million in 1996. Net income for 1996 was $1.9 million or 27% above the
1995 net income of $7.1 million. Net income per common share for 1997 was 8.8%
higher than in 1996 and in 1996 was 26.5% higher compared to 1995. Pretax income
for 1997 increased $1.9 million or 15.6% from 1996.
The increase in net income from 1996 to 1997 occurred for the following two
principal reasons: (i) increased yields on earning assets and (ii) increased
interest rate margins. First, the yield on average earning assets rose 46 basis
points from 7.89% in 1996 to 8.35% in 1997, whereas the rate paid on average
interest bearing liabilities increased by only 13 basis points from 4.30% in
1996 to 4.43% in 1997. Net interest rate margins increased to 4.70% for the
twelve months ending December 31, 1997, compared to 4.38% for the same period in
1996.
FINANCIAL CONDITION
EARNING ASSETS
Average earning assets in 1997 increased $80.6 million or 10.8% over 1996
primarily due to an increase in average loans outstanding. The average earning
asset mix continued to change during 1997 with loans at 70.0%, investment
securities at 28.0% and other earning asset categories at 2.0%. In 1996, loans
were 63.0%, investment securities 36.0% and other earning assets 1.0%. The mix
of earning assets during 1997 contributed to the higher yield on earning assets
due to the fact that the loan portfolio earned approximately 254 basis points
more during 1997 than the investment security portfolio. The mix of earning
assets is monitored to anticipate and respond to favorable interest rate
movements in an effort to increase the return on earning assets.
LOAN PORTFOLIO
Pioneer's average loans, net of unearned income, for 1997 were $583.7 million,
an increase of $115.0 million or 24.5% over $468.7 million in average loans for
1996. Average loans in 1996 were 27.4% or $100.7 million higher than the average
loans were in 1995. From year end 1996 to year end 1997, actual loans
outstanding increased 24.2% or $126.5 million from $523.3 million to $649.8
million, respectively. From year end 1995 to year end 1996, actual loans
outstanding increased 24.1% or $101.7 million. Loan growth for 1997 was
primarily funded through increased deposit growth, prepayments and maturities
from the investment portfolio, increases in repurchase agreements and increases
in FHLB borrowings. Pioneer's commercial, financial and agricultural loan
category had the best dollar volume increase in 1997 from 1996, with a $62.0
million or 58.7% increase. This
169
179
group as a percentage of the loan portfolio also had the largest change from
20.0% to 25.7%. Real estate construction loans increased $17.3 million or 46.4%,
residential real estate mortgage loans increased $33.9 million or 24.6%,
commercial real estate mortgage loans decreased $2.9 million or 1.9%, consumer
credit cards increased $317,000 or 7.6%, and consumer installment loans
increased $15.8 million or 19.5% over the same period. Over the past three years
the loan portfolio has been shifting away from commercial real estate lending
toward more consumer and residential real estate lending, because the
competitive rate environment has reduced the risk/return reward to a minimum.
The majority of Pioneer's loan growth from 1996 to 1997 occurred at Pioneer
Bank. Outstanding loans, net of unearned income, at Pioneer Bank increased 23.8%
or $99.3 million from 1996 to 1997 and increased $81.5 million or 24.4% from
1995 to 1996. During 1997, loans totaling $6.9 million or 1.1% of total loans
were transferred to Pioneer Bank, f.s.b. This loan transfer included $1.1
million in commercial, financial and agricultural loans, $2.4 million in
residential real estate mortgage loans and $3.4 million in commercial real
estate mortgage loans. Loan growth in 1997, net of transfers to Pioneer Bank,
f.s.b was as follows: the commercial financial and agricultural loans increased
50.5%, real estate construction loans increased 42.8%, residential real estate
mortgage increased 17.3%, commercial real estate mortgages increased 1.2%,
consumer installment loans increased 25.7% and consumer credit card loans
increased 6.1%. Valley Bank's loan portfolio, net of unearned income, increased
$16.4 million or 15.2% from 1996 to 1997, and increased $20.0 million or 22.7%
from 1995 to 1996. From year end 1996 to year end 1997, the majority of the
increase in Valley Bank's loans occurred in real estate construction,
residential real estate mortgage, commercial real estate mortgage, and consumer
installment loans, resulting in increases of 55.2%, 23.2%, 7.9% and 1%,
respectively. Commercial, financial and agricultural loans decreased 4.2%, and
consumer credit card loans increased 29.3% from year end 1996 to year end 1997.
Pioneer f.s.b's loan portfolio, net of unearned income increased $3.6 million or
52.9% during 1997. In 1997, real estate mortgage loans increased $3.3 million or
36.6%, and consumer installment loans increased $1.4 million.
Management of Pioneer sought higher loan growth in 1997 over previous years,
while at the same time maintaining high credit quality. In 1995, the economy
began to slow and the Federal Reserve Board decreased interest rates, thus
spurring construction and, therefore, real estate construction loans. In 1996,
the Federal Reserve Board generally maintained interest rates at the same levels
as in late 1995 which encouraged further growth. In 1997, the national economy
continued to generate moderate growth with low inflation. Meanwhile, economic
growth for the State of Tennessee and the Chattanooga MSA have been moderate,
but Tennessee's home ownership rate is at an historic high. Firm housing
affordability and extensive efforts to extend financing to lower income buyers
have been principal factors in the rise in residential real estate loans. This
trend is reflected in the shift in loan mix, as well as in the growth of the
overall portfolio. At the end of the first quarter of 1997, the Federal Reserve
Board increased interest rates 25 basis points and rates remained relatively
stable before declining in the late third, and early fourth quarters. The
downward trend in rates encouraged refinancing of existing residential mortgage
loans and growth in new residential mortgage loans. Non-residential building in
Tennessee and the Chattanooga MSA have also been very strong. Spurred by ongoing
commercial and hotel projects, as well as single family residential home demand,
construction companies are the most active job creators in the state. Demand for
office and industrial space remains strong and several of the state's
metropolitan areas possess among the tightest office and industrial vacancy
rates nationwide. This strength is reflected in the growth in the loan
portfolio. Company management will seek additional loan and deposit growth in
170
180
1998, but the amount of such growth, if any, will depend upon general economic
conditions, including whether or not the Federal Reserve Board decreases or
maintains current interest rate levels. In addition to overall growth, emphasis
is placed on the loan portfolio mix among commercial, real estate and consumer
loans to enhance the yield of the loan portfolio. For example, Pioneer has put
increased emphasis on increasing consumer loans via consumer credit cards,
indirect automobile loans and, through small consumer loans offered by Center.
As Pioneer strives to increase consumer loans, the threat of increased personal
bankruptcies must be considered. Through its credit policies and procedures,
Pioneer management believes an increased dollar volume in consumer loans can be
achieved without materially increasing the risk of incurring additional loan
losses due to personal bankruptcies. In addition, management is committed to
providing new products for not only consumer loans, but also real estate and
commercial loans. There has not, however, been a concentration in lending to any
one industry or segment.
Pioneer has not invested in loans to finance HLT's, such as leveraged buy-out
transactions, as defined by the Federal Reserve Board and other regulatory
agencies. Loans made by a bank for recapitalization or acquisitions (including
acquisitions by management or employees) which result in a material change in
the borrower's financial structure to a highly leveraged condition are
considered HLT loans. Pioneer had no foreign loans or loans to lesser developed
countries as of December 31, 1997.
The Loan Portfolio table shows the classifications of loans by major category at
December 31, 1997, and for each of the preceding four years. The second table
shows maturities of certain loan classifications and an analysis of the rate
structure for such loans due in over one year.
LOAN PORTFOLIO
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial, financial
and agricultural... $167,655 25.74% $105,641 20.03% $ 79,691 18.83% $ 57,358 17.00% $ 58,303 20.22%
Real estate
construction....... 54,624 8.39% 37,324 7.11% 18,671 4.41% 14,843 4.40% 13,669 4.74%
Real estate mortgage
Residential........ 172,124 26.43% 138,194 26.33% 117,182 27.69% 97,274 28.83% 82,811 28.73%
Commercial......... 155,348 23.85% 158,333 30.17% 153,354 36.24% 120,893 35.84% 89,876 31.18%
Consumer
Credit cards....... 4,478 0.69% 4,161 0.79% 3,253 0.77% 2,091 0.62% 99 0.03%
Installment........ 97,005 14.90% 81,196 15.57% 51,040 12.06% 44,895 13.31% 43,522 15.10%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
651,234 100.00% 524,849 100.00% 423,191 100.00% 337,354 100.00% 288,280 100.00%
====== ====== ====== ====== ======
Less:
Unearned income.... 1,476 1,596 1,688 1,443 1,246
Allowance for loan
losses........... 7,837 5,758 5,872 5,355 5,371
-------- -------- -------- -------- --------
Total loans.......... $641,921 $517,495 $415,631 $330,556 $281,663
======== ======== ======== ======== ========
171
181
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
RATE STRUCTURE FOR LOANS
MATURING OVER ONE YEAR
---------------------------
ONE YEAR PREDETERMINED FLOATING OR
ONE YEAR TO OVER FIVE INTEREST ADJUSTABLE
OR LESS FIVE YEARS YEARS RATE RATE
-------- ---------- --------- ------------- -----------
Commercial, financial and
agricultural............. $ 56,581 $ 92,942 $18,132 $ 70,758 $40,316
Real estate................ 186,748 182,910 12,438 192,977 2,371
Consumer................... 55,195 45,115 1,173 46,288 --
-------- -------- ------- -------- -------
Total............ $298,524 $320,967 $31,743 $310,023 $42,687
======== ======== ======= ======== =======
INVESTMENT PORTFOLIO
Pioneer's investment securities portfolio decreased 18.5% or $46.5 million from
year end 1996 to year end 1997. The average balance of the investment securities
portfolio has decreased since 1995 in order to fund loan growth, with the
exception of 1995, when there was an increase in funds available for investment
resulting from the purchase of branches in Marion County. Pioneer maintains an
investment strategy of seeking portfolio yields within acceptable risk levels,
as well as providing liquidity. Pioneer maintains two classifications of
investment securities: "Held to Maturity" and "Available for Sale." Prior to
December 1995, management placed only bank-qualified, municipal securities
exempt from federal income taxation, as well as non-bank qualified taxable
municipal securities in the "Held to Maturity" classification. In December,
1995, management reclassified the municipal securities to "Available for Sale"
and various mortgage backed agency securities to "Held to Maturity." The FASB
provided all corporations a moratorium from November 15, 1995, to December 31,
1995, to reassess their securities classifications (FASB 115). This window of
opportunity allowed Pioneer to reclassify securities as "Held to Maturity" or
"Available for Sale" without "tainting" the investment portfolio. The "Available
for Sale" securities are carried at fair market value, whereas the "Held to
Maturity" securities are carried at book value (or at fair value, as of transfer
date, if transferred from "Available for Sale" to "Held to Maturity" via the
FASB moratorium). As a consequence, with a higher percentage of securities being
placed in the "Available for Sale" category, Pioneer's accounting capital is
more volatile than it would be should a larger percentage be placed in the "Held
to Maturity" category. Due to the inverse relationship between bond prices and
interest rates, as market rates increase, bond prices decrease as does
accounting capital on an after tax basis. In a decreasing rate environment, bond
prices increase as does capital. Although capital is more volatile, management
has discretion, with respect to the "Available for Sale" securities, to
proactively adjust to favorable market conditions in order to provide liquidity
and realize gains on the sales of securities. Pioneer intends to continue to
categorize all future investment security purchases as "Available for Sale." The
changes in values in the investment securities portfolio are not taken into
account in determining regulatory capital requirements.
During 1997, average investment securities decreased $39.8 million or 14.7%.
Average investment securities during 1996 decreased $9.0 million or 3.2% from
1995 average levels. The decrease in securities of $46.5 million as of year end
1996 to year end 1997, consisted
172
182
primarily of decreasing state and political subdivision obligations by $18.7
million or 23.1% from $80.9 million in 1996 to $62.2 million in 1997.
During 1997, gross proceeds from investment securities sales were $83.4 million,
representing 36.2% of the average portfolio for the year. Net gains associated
with the sales were $293,723, which accounted for 3.0% of noninterest income.
Gross proceeds from investment securities sold during 1996 totaled $52.3
million, resulting in a net realized gain of $297,003, representing 3.6% of
noninterest income. Although Pioneer intends to actively administer the
investment portfolio and take advantage of market rate fluctuations, management
does not believe a disproportionate share of noninterest income will be produced
by securities gains. Over the course of 1997, market interest rates on bonds
decreased, thus generally enhancing the market values of the investment
securities. At year end 1997, gross unrealized gains in the "Available for Sale"
portfolio amounted to $2.1 million and unrealized losses amounted to $58,410.
Whereas at the same point in time in 1996, the gross unrealized gains in the
"Available for Sale" portfolio were $2.3 million and the gross unrealized losses
totaled $567,000. At the end of 1997, gross unrealized gains in the "Held To
Maturity" portfolio were $211,000 and unrealized losses amounted to $20,763. At
the year end of 1996, the gross unrealized gains in the "Held To Maturity"
portfolio were $29,205 and unrealized losses amounted to $119,265. As of
December 31, 1997, the net unrealized security gain, net of tax effect,
contributes a $1.0 million increase in accounting capital or 27.8 cents per
share to Pioneer's common stock book value.
Prior to 1993, Pioneer invested in taxable securities due to the lack of
preferential treatment afforded tax-exempt securities under the alternative
minimum tax laws. In 1993, Pioneer moved from the "Alternative Minimum Tax"
method to the "Regular Corporate Tax" method and municipal securities became
more attractive on a tax equivalent basis, offering wider spreads than U. S.
Treasury securities and were purchased when available. Upon achieving a targeted
volume of municipal securities in mid-1994, the strategy shifted to focus on
improving the balance of the maturity distribution and enhancing total yield, as
well as providing for liquidity. The following table sets forth the carrying
amount of the investment securities portfolio at the end of each of the last
three years.
INVESTMENT PORTFOLIO
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Securities Available for Sale:
U.S. Treasury securities............................ $ 39,337 $ 41,574 $ 52,082
U.S. Agency obligations............................. 40,740 37,839 46,200
State and political subdivisions.................... 62,190 80,855 83,726
Other securities.................................... 14,424 31,922 26,961
-------- -------- --------
Total Available for Sale Securities......... $156,691 $192,190 $208,969
-------- -------- --------
173
183
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
Securities Held To Maturity:
U.S. Treasury securities............................ $ 0 $ 0 $ 99
U.S. Agency obligations............................. 48,396 59,409 77,940
State and political subdivisions.................... 0 0 0
Other securities.................................... 0 0 0
-------- -------- --------
Total Held to Maturity Securities........... 48,396 59,409 78,039
-------- -------- --------
Total Securities............................ $205,087 $251,599 $287,008
======== ======== ========
The maturities and weighted average yields of the investment securities
portfolio at the end of 1997 are presented in the following table using
primarily the stated maturities excluding the effects of prepayments. The total
mortgage backed securities for 1997 and 1996 were $32.2 million and $33.1
million, respectively. As of December 31, 1997, the average expected life was
1.9 years. The average expected life of the total investment security portfolio
at December 31, 1997, was 3.1 years with an average tax equivalent yield of
6.46%. Taxable equivalent adjustments, using a 34% tax rate, have been made in
calculating yields on tax-exempt obligations.
As of December 31, 1997, except for the U.S. Government and its agencies, there
was not any issuer who represented 10% or more of shareholders' equity within
the investment portfolio.
During 1997, average federal funds sold increased $5.3 million or 60.8% from
1996 levels. Whereas, from 1995 to 1996, average federal funds sold decreased
$14.4 million or 62.2%. These short-term investments constituted $14.1 million
or 1.7% of average earning assets in 1997 and $9.0 million or 1.2% in 1996. The
increase in 1997 is due primarily to an increase in deposits and other
borrowings to fund future loan growth rather than short-term investments.
Management expects the average balance in federal funds sold to decrease in 1998
from the average in 1997 subject to growth in the loan portfolio.
174
184
The balance of interest earning deposits held with other banks was $528,417 at
year-end 1997 and $495,617 at year end 1996. These assets account for less than
1.0% of total earning assets.
INVESTMENT PORTFOLIO MATURITY SCHEDULE
SECURITIES MATURING AS OF DECEMBER 31, 1997
(IN THOUSANDS)
AFTER FIVE
AFTER ONE YEAR YEARS
WITHIN ONE BUT WITHIN BUT WITHIN AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS
--------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- ------- ----- ------- ----- ------- -----
Securities Available for
Sale:
U.S. Treasury securities... $20,048 5.94% $19,289 6.10% -- -- -- --
U.S. Agency obligations.... 4,991 5.97% 16,074 6.03% $2,013 6.09% $17,662 6.05%
State and political
subdivisions............. 5,570 6.97% 25,107 6.66% 24,060 6.74% 7,453 6.57%
Other...................... 4,321 7.67% 5,894 7.97% 104 7.74% 4,105 7.81%
------- ------- ------- -------
Total AFS
Securities...... 34,930 6.37% 66,364 6.46% 26,177 6.69% 29,220 6.43%
------- ------- ------- -------
Securities Held To
Maturity:
U.S. Treasury securities... -- -- -- -- -- -- -- --
U.S. Agency obligations.... 24,941 7.16% 10,486 6.08% 8,447 6.04% 4,522 5.64%
State and political
subdivisions............. -- -- -- -- -- -- -- --
Other...................... -- -- -- -- -- -- -- --
------- ------- ------- -------
Total HTM
Securities...... 24,941 7.16% 10,486 6.08% 8,447 6.04% 4,522 5.64%
------- ------- ------- -------
Total
Securities...... $59,871 6.67% $76,850 6.41% $34,624 6.53% $33,742 6.32%
======= ======= ======= =======
DEPOSITS AND SHORT-TERM BORROWINGS
Pioneer's average deposits and short-term borrowings increased $74.0 million or
10.1% from 1996 to 1997. Within this growth, average interest bearing
liabilities increased $70.9 million or 11.6%, while average noninterest bearing
deposits increased $3.1 million or 2.6%. Average deposits and short-term
borrowings increased $82.2 million or 12.7% from 1995 to 1996. Within this
growth, average interest bearing liabilities increased $73.9 million or 13.8%,
while average noninterest bearing deposits increased $8.2 million or 7.3%. The
majority of the growth since 1995 reflects Pioneer's strategy of consistently
emphasizing deposit growth, as deposits are the primary source of funding for
balance sheet growth. Management has pursued various avenues to develop its
deposit base through product enhancements, improved customer service, employee
education regarding cross selling bank products and services, and deposit
acquisitions such as the purchase of branches in Marion County.
For Pioneer Bank, average interest bearing transaction deposits and average
savings deposits, increased 11.1% and 21.6%, respectively, from 1996 to 1997,
and increased 3.73% and 11.76%, respectively from 1995 to 1996. The largest
dollar growth in average deposits at Pioneer Bank during 1997 occurred in
savings deposits and certificates of deposit over $100,000. For 1997, average
savings deposits increased $15.3 million or 21.8% and certificates of deposit
over $100,000 increased $14.7 million or 33.3%. The growth during
175
185
1997 occurred due to ongoing promotional efforts and special rates introduced
for limited time periods.
Valley Bank experienced an increase in average interest bearing transaction
deposits of 10.6% and a slight decrease in average savings deposits of 3.9%,
respectively, from 1996 to 1997, and had slight increases of 2.5% and 2.7%,
respectively from 1995 to 1996. The largest growth in average deposits at Valley
Bank during 1997 occurred in investment certificates of deposit under $100,000
and interest demand accounts. For 1997, average certificates of deposit under
$100,000 increased $9.5 million or 15.2% and interest demand accounts increased
$2.2 million or 12.6%. The growth during 1997 occurred due to special rates with
ongoing promotions.
Since September 1997, when Pioneer Bank, f.s.b. began operations, there has been
an increase of $560,000 in interest demand balances, and an increase of $528,000
in savings balances. There were no balances in these accounts when Pioneer Bank,
f.s.b. began operations. Certificates of less than $100,000 increased $714,000
or 8.9% since beginning operations. Approximately $8.7 million of certificates
less than $100,000 were initially transferred to Pioneer Bank, f.s.b. from
Pioneer Bank in October 1997. Total deposits at Pioneer Bank, f.s.b. as of
December 31, 1997, was $15.3 million or $6.5 million more than were transferred
from Pioneer Bank in October 1997. This deposit growth represents an increase of
74% in three months.
From year end 1996 to year end 1997, total deposits and other borrowings of
Pioneer increased $80.9 million or 10.6%. The largest portion of the growth
during 1997 was in FHLB borrowings increasing $28 million or 280%. From year end
1996 to year end 1997, interest bearing transaction deposits and savings
accounts increased $12.0 million or 5.2%, certificates of deposit over $100,000
increased $14.5 million or 25.8% and other time deposits of less than $100,000
increased $28.2 million or 10.1%. From year end 1996 to year end 1997,
noninterest bearing transaction deposits increased $1.1 million or less than
1.0%.
From year end 1995 to year end 1996, total deposits and other borrowings of
Pioneer increased $61.9 million or 8.8%. The largest portion of the growth
during 1996 was in savings deposits increasing $23.1 million or 26.2%. From year
end 1995 to year end 1996, interest bearing transaction deposits increased $2.1
million or 1.8%, certificates of deposit over $100,000 increased $4.6 million or
9.0% and other time deposits of less than $100,000 increased $2.8 million or
1.0%. From year end 1995 to year end 1996, noninterest bearing transaction
deposits decreased $2.2 million or 1.8%.
Regarding Pioneer's deposit mix, savings deposits and both interest bearing and
noninterest bearing transaction deposits accounted for 49.1% of total average
deposits during 1997. For 1996, these relatively low cost deposits equaled 49.2%
of all deposits and for 1995 they represented 50.2%. The decrease of 1.0% from
1995 to 1996 reflects the change in customer preferences for higher earning
certificates of deposits. The large certificates of deposit, representing 9.8%
of the total average deposits in 1997, increased from 8.4% in 1996, and is also
higher than the 8.5% level in 1995. For the last three years time deposits under
$100,000 have remained stable at 41.1%, 42.4% and 41.3% of average deposits for
1997, 1996 and 1995, respectively. The maturities of the time deposits over and
under
176
186
$100,000 issued by Pioneer as of December 31, 1997, are summarized in the
following table:
MATURITIES OF TIME DEPOSITS
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
OVER THREE OVER 1 YEAR
THREE MONTHS MONTHS THROUGH OVER
OR LESS LESS THAN 1 YEAR 5 YEARS 5 YEARS
------------ ---------------- ----------- -------
Certificates of deposit
over $100,000............ $ 20,471 $ 42,334 $ 7,776 $ 4
Other time deposits under
$100,000................. 93,410 170,986 42,829 16
======== ======== ======= ===
Total............ $113,881 $213,320 $50,605 $20
======== ======== ======= ===
Borrowed funds consist of short-term borrowings, primarily federal funds
purchased, securities sold under agreements to repurchase with our commercial
customers and short-term borrowings from the Federal Home Loan Bank. Average
federal funds purchased and average securities sold under agreements to
repurchase increased $15.1 million or 31.8% in 1997, $11.1 million or 30.8% in
1996 and $19.6 million or 118.3% in 1995. Much of the 1996 and 1997 growth
occurred through an emphasis seeking new cash management accounts using
commercial repurchase agreements. Average borrowings from the Federal Home Loan
Bank increased by $10.1 million or 107.1% in 1997 and $9.4 million in 1996, the
initial year of borrowings. Pioneer has increased its borrowings from the
Federal Home Loan Bank to facilitate growth in the loan portfolio.
SHORT-TERM BORROWINGS
MAXIMUM AVERAGE
OUTSTANDING AVERAGE INTEREST
AT ANY AVERAGE INTEREST ENDING RATE AT
MONTH END BALANCE RATE BALANCE YEAR END
----------- ------- -------- ------- --------
Year Ended December 31, 1997
Federal funds purchased............. $ 9,200 $ 3,689 5.66% $ -- 5.31%
Securities sold under agreements to
repurchase........................ 72,308 58,670 4.30% 60,439 4.37%
Federal Home Loan Borrowings........ 38,000 19,533 5.59% 38,000 5.58%
-------- ------- -------
Total Short-Term
Borrowings.............. $119,508 $81,892 4.67% $98,439 4.84%
======== ======= =======
Year Ended December 31, 1996
Federal funds purchased............. $ 20,300 $ 3,444 5.63% $13,500 5.93%
Securities sold under agreements to
repurchase........................ 51,254 43,859 4.29% 49,839 4.21%
Federal Home Loan Borrowings........ 10,000 9,430 5.44% 10,000 5.44%
-------- ------- -------
Total Short-Term
Borrowings.............. $ 81,554 $56,733 4.56% $73,339 5.69%
======== ======= =======
177
187
CAPITAL RESOURCES
Pioneer's stockholders' equity increased $6.0 million or 6.4% to $99.9 million
as of December 31, 1997, compared with $93.9 million at the end of 1996, and
$87.6 million at year end 1995. Retention of earnings and unrealized
appreciation on securities "Available for Sale" accounted for all the increases
in stockholders' equity during 1997. The growth in stockholders' equity in 1997
was slowed somewhat by an increase in the payment of $3.5 million in dividends
on the Pioneer Common Stock and purchases of $1.2 million in treasury stock by
Pioneer.
Unrealized appreciation of investment securities "Available for Sale" accounted
for an increase of $238,014 in stockholders' equity as of December 31, 1997.
Excluding the securities "Available for Sale" adjustment, stockholders' equity
was $98.9 million as of year end 1997, compared to $93.1 million for 1996, an
increase of $5.8 million or 6.2%.
Dividends of $3.5 million were declared on the Pioneer Common Stock in 1997, an
increase of $187,995 or 5.8% from 1996. The 1997 annual dividend per common
share was $.92 as compared to $.87 in 1996 adjusted for the 2-for-1 stock split
in June, 1996. The dividend payout ratio for 1997, defined as common dividends
declared as a percentage of net income available to common stockholders, was
35.4% in 1997 compared to 36.4% and 40.2% for 1996 and 1995, respectively.
Pioneer presently intends to continue a dividend payout similar to the
historical levels, subject to declaration by the Board of Directors.
Pioneer owned 29,479 shares accounted for as treasury stock at $1.1 million as
of year end 1997 and 15,269 shares accounted for as treasury stock at $558,784
as of year end 1996. The shares are recorded on the balance sheet using the cost
method for both dates. The treasury stock generally has been available for
Pioneer's Employee Stock Ownership Plan ("ESOP"), exercises of options and other
corporate stock plan purposes.
No new common stock or preferred stock was issued by Pioneer during 1997.
A strong capital position promotes depositor and investor confidence and
provides a foundation for profitability and future growth of the organization.
Pioneer's five-year compound annual growth rate in stockholders' equity of 5.84%
was primarily achieved through reinvested earnings.
Average stockholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average shareholders'
equity to average assets for 1997 was 10.54% compared to 10.71% in 1996 and
11.33% in 1995.
RETURNS ON EQUITY AND ASSETS
YEAR ENDING DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
Return on average assets............................. 1.07% 1.09% 0.96%
Return on average equity............................. 10.16% 10.14% 8.45%
Common dividend payout ratio......................... 35.43% 36.40% 40.23%
Average equity to average assets ratio............... 10.54% 10.71% 11.33%
The various federal bank regulators, including the Federal Reserve Board and the
FDIC, have risk-based capital requirements for assessing bank holding company
and bank capital adequacy. These standards define capital and establish minimum
capital standards in relation to assets and off-balance sheet exposures, as
adjusted for credit risks. Capital is classified into two tiers. For bank
holding companies, Tier 1 or "core" capital consists of
178
188
common shareholders' equity, qualifying noncumulative perpetual preferred stock
and minority interests in the common equity accounts of consolidated
subsidiaries, reduced by goodwill, other intangible assets and certain
investments in other corporations ("Tier 1 Capital"). Tier 2 Capital consists of
Tier 1 Capital, as well as a limited amount of the allowance for possible loan
losses, certain hybrid capital instruments (such as mandatory convertible debt),
subordinated and perpetual debt and non-qualifying perpetual preferred stock
("Tier 2 Capital").
At December 31, 1994, a risk-based capital measure and a minimum ratio standard
was fully phased in, with a minimum total capital ratio of 8% and Tier 1 Capital
equal to at least 50% of total capital. The Federal Reserve Board also has a
minimum leverage ratio of Tier 1 Capital to total assets of 3%. The 3% Tier 1
Capital to total assets ratio constitutes the leverage standard for bank holding
companies and Bank Insurance Fund ("BIF")-insured state-chartered non-member
banks, and will be used in conjunction with the risk-based ratio in determining
the overall capital adequacy of banking organizations. The FDIC has similar
capital requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve Board and the FDIC have emphasized that the capital
standards are supervisory minimums and an institution would be permitted to
maintain such minimum levels of capital only if it were rated a composite "one"
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies are required to maintain a leverage ratio of 3%
plus at least 1% to 2% of additional capital. These rules further provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital, to total average assets less all intangibles. The
percentage ratios for Pioneer, as calculated under the guidelines, were 12.91%
and 13.99% for Tier 1 and Tier 2, respectively, at year-end 1997. The tangible
Tier 1 leverage ratio for Pioneer in 1997 was 10.29%. The regulatory capital
ratios of Pioneer currently exceed the minimum ratios of 5% leverage capital, 6%
Tier 1 and 10% Tier 2 required in 1997 for "well capitalized" banks as defined
by federal regulators. The Federal Reserve Board has not advised Pioneer of any
specific minimum leverage ratio applicable to it.
179
189
The following table sets forth the regulatory capital calculations of Pioneer
and its subsidiaries on a consolidated basis as of December 31, 1997, 1996 and
1995, calculated in accordance with the applicable requirement of the Federal
Reserve Board in effect on such date:
RISK BASED CAPITAL CALCULATION
(IN THOUSANDS)
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Stockholders' Equity.......... $ 99,916 10.44% $ 93,923 10.83% $ 87,625 10.96%
======== ===== ======== ===== ======== =====
Regulatory capital
Tier 1 risk based:
Actual...................... $ 93,156 12.91% $ 86,667 13.86% $ 80,042 14.77%
Minimum required............ 28,866 4.00 25,012 4.00 21,680 4.00
-------- ----- -------- ----- -------- -----
Excess above minimum........ $ 64,290 8.91% $ 61,665 9.86% $ 58,362 10.77%
======== ===== ======== ===== ======== =====
Total risk based:
Actual...................... $100,993 13.99% $ 92,425 14.78% $ 85,914 15.85%
Minimum required............ 57,732 8.00 50,023 8.00 43,360 8.00
-------- ----- -------- ----- -------- -----
Excess above minimum........ $ 43,261 5.99% $ 42,402 6.78% $ 42,402 7.85%
======== ===== ======== ===== ======== =====
Leverage:
Actual...................... $ 93,156 10.29% $ 86,667 10.55% $ 80,042 10.93%
Minimum required............ 27,167 3.00 24,651 3.00 21,972 3.00
-------- ----- -------- ----- -------- -----
Excess above minimum........ $ 65,989 7.29% $ 62,016 7.55% $ 58,070 7.93%
======== ===== ======== ===== ======== =====
Total risked based assets..... $721,655 $625,289 $541,998
Total average assets.......... 911,291 828,165 739,679
Total assets.................. 956,890 867,240 799,268
Total intangible assets....... 5,716 6,450 7,271
BALANCE SHEET MANAGEMENT
LIQUIDITY MANAGEMENT
Liquidity is the ability of a company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining Pioneer's ability to meet
the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for Pioneer to meet the needs of its customer base,
but to maintain an appropriate balance between interest-sensitive assets and
interest-sensitive liabilities so Pioneer can profitably deploy its assets. Both
assets and liabilities are considered sources of liquidity funding and both are,
therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan
principal repayments and maturities of investment securities. Real estate and
commercial, financial
180
190
and agricultural loan payments are becoming an increasingly important source of
liquidity for Pioneer as this portfolio continues to grow. Total loans, less
unearned income, maturing in one year or less amounted to $297.9 million or
45.8% of the total loan portfolio at December 31, 1997. Investment securities
maturing in the same time frame totaled $59.9 million or 29.2% of the investment
securities portfolio at year-end 1997. Additional sources of liquidity are the
investments in federal funds sold and prepayments from the mortgage backed
securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various
customers' interest bearing and noninterest bearing deposit accounts. Securities
sold under agreements to repurchase and other short-term borrowings, including
advances from the Federal Home Loan Bank of Cincinnati, are additional sources
of liquidity and basically represent Pioneer's incremental borrowing capacity.
These sources of liquidity are short-term in nature and are used as necessary to
fund asset growth and meet short-term liquidity needs. At year-end 1997, Pioneer
held $24.1 million of additional securities available for pledging as repurchase
agreements and had $70.0 million of federal funds lines available and unused.
INTEREST RATE SENSITIVITY MANAGEMENT
Interest rate sensitivity is a function of the repricing characteristics of
Pioneer's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on repricing relationships of assets and liabilities during periods of changes
in market interest rates. Interest rate sensitivity with a view to maintaining a
mix of assets and liabilities that respond to changes in interest rates within
an acceptable time frame, thereby managing the effect of interest rate movements
on net interest income. Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities that are subject to repricing at
various time horizons. The differences are interest sensitivity gaps: three
months or less, three to twelve months, one to five years, over five years and
on a cumulative basis. The following table shows interest sensitivity gaps for
these different intervals as of December 31, 1997 and 1996.
The allocations used for the interest rate sensitivity report below were based
on the maturity schedules for the loans and deposits and the duration schedules
for the investment securities. Federal funds sold and purchased and agreements
to repurchase were allocated to the three month category. The Federal Home Loan
Borrowings were allocated according to their respective maturity dates. All
other interest bearing deposits were allocated 15% to the three month category,
20% to the less than one year category, 45% to the less than five year category
and the remainder to the over 5 year category. As shown in the following table,
as of December 31, 1997, 67% of Pioneer's interest bearing liabilities will
reprice within a year compared to 43% of all interest earning assets for the
same period. Accordingly, if interest rates increase suddenly, rates on
liabilities will increase faster than interest bearing assets, in the less than
one year period, and the net interest margin will be adversely affected. Changes
in the mix of earning assets or supporting liabilities can either increase or
decrease the net interest margin without affecting interest rate sensitivity. In
addition, the interest rate spread between an asset and its supporting liability
can vary significantly while the timing of repricing for both the asset and the
liability remains the same, thus impacting net interest income. This is referred
to as basis risk and, generally, relates to the possibility that the repricing
characteristics of short-term assets tied to Pioneer's prime lending rate are
different from those of short-term funding sources such as certificates of
deposit.
181
191
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis report. Prepayments may have significant effects on
Pioneer's net interest margin. Because of these factors and in a static test,
interest sensitivity gap reports may not provide a complete assessment of
Pioneer's exposure to changes in interest rates. Management utilizes
computerized interest rate simulation analysis to determine Pioneer's interest
rate sensitivity. The table below indicates Pioneer is in a liability sensitive
gap position for the first year, then moves into an asset sensitive position.
Overall, due to the factors cited, current simulation results indicates a
relatively low sensitivity to parallel shifts in interest rates. A liability
sensitive company will generally benefit from a falling interest rate
environment as the cost of interest bearing liabilities falls faster than the
yields on interest bearing assets, thus creating a widening of the net interest
margin. Conversely, an asset sensitive company will benefit from a rising
interest rate environment as the yields on earning assets rise faster than costs
of interest bearing liabilities. Management also evaluates economic conditions,
the pattern of market interest rates and competition to determine the
appropriate mix and repricing characteristics of assets and liabilities required
to produce a targeted net interest margin.
182
192
INTEREST RATE SENSITIVITY ANALYSIS
AS OF DECEMBER 31,
(IN THOUSANDS)
OVER 3 OVER 1
MONTHS YEAR OVER NON-
3 MONTHS THROUGH THROUGH FIVE INTEREST
OR LESS 12 MONTHS 5 YEARS YEARS SENSITIVE TOTAL
--------- --------- -------- ---------- --------- --------
1997
Securities AFS....................... $ 16,978 $ 17,952 $66,364 $ 55,397 $ -- $156,691
Securities HTM....................... 793 24,148 10,486 12,969 -- 48,396
Other interest earning assets........ 19,358 -- -- -- -- 19,358
Loans................................ 240,096 57,764 320,244 31,654 -- 649,758
--------- --------- -------- -------- --------- --------
Total Earning Assets......... 277,225 99,864 397,094 100,020 -- 874,203
--------- --------- -------- -------- --------- --------
Time deposits under 100M............. 93,410 170,986 42,829 16 -- 307,241
CD's over 100M....................... 20,471 42,334 7,776 4 -- 70,585
Other interest bearing liabilities... 72,785 84,258 172,611 12,696 -- 342,350
--------- --------- -------- -------- --------- --------
Total Interest Bearing
Liabilities................ 186,666 297,578 223,216 12,716 -- 720,176
Noninterest bearing sources of
funds-net.......................... 154,027 154,027
--------- --------- -------- -------- --------- --------
Interest sensitivity gap............. $ 90,559 $(197,714) $173,878 $ 87,304 $(154,027) $ --
========= ========= ======== ======== ========= ========
Cumulative interest sensitivity
gap................................ $ 90,559 $(107,155) $66,723 $154,027 $ --
Interest sensitivity gap as a
percentage of total earning
assets............................. 10.36% -22.62% 19.89% 9.99%
Cumulative interest sensitivity gap
as a percentage of total earning
assets............................. 10.36% -12.26% 7.63% 17.62%
========= ========= ======== ========
1996
Securities AFS....................... $ 20,752 $ 14,822 $106,028 $ 50,588 $ -- $192,190
Securities HTM....................... 1,000 3,054 38,242 17,113 -- 59,409
Other interest earning assets........ 2,131 -- -- -- -- 2,131
Loans................................ 82,983 65,890 285,287 89,093 -- 523,253
--------- --------- -------- -------- --------- --------
Earning assets....................... 106,866 83,766 429,557 156,794 -- 776,983
--------- --------- -------- -------- --------- --------
Time deposits under 100M............. 103,836 131,617 43,603 -- -- 279,056
CD's over 100M....................... 24,316 25,704 6,066 -- -- 56,086
Other interest bearing liabilities... 96,529 23,189 151,132 34,385 -- 305,235
--------- --------- -------- -------- --------- --------
Interest bearing liabilities......... 224,681 180,510 200,801 34,385 -- 640,377
Noninterest bearing sources of
funds-net.......................... 136,606 136,606
========= ========= ======== ======== ========= ========
Interest sensitivity gap............. $(117,815) $(96,744) $228,756 $122,409 $(136,606) $ --
========= ========= ======== ======== ========= ========
Cumulative interest sensitivity
gap................................ $(117,815) $(214,559) $14,197 $136,606 $ --
Interest sensitivity gap as a
percentage of total earning
assets............................. -15.16% -12.45% 29.44% 15.75%
Cumulative interest sensitivity gap
as a percentage of total earning
assets............................. -15.16% -27.61% 1.83% 17.58%
========= ========= ======== ========
183
193
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the principal component of a financial institution's
income stream and represents the difference or spread between interest and fee
income generated from earning assets and the interest expense paid on deposits
and other borrowed funds. Fluctuations in interest rates as well as volume and
mix changes in earning assets and interest bearing liabilities can materially
impact net interest income. The discussion of net interest income is presented
on a taxable equivalent basis, unless otherwise noted, to facilitate comparisons
among various taxable and tax-exempt assets.
Net interest income for 1997 increased $6.2 million or 19.0% over 1996, $4.7
million or 16.7% in 1996 over 1995 and $705,000 or 2.6% in 1995 over 1994.
Increased volumes and rates of earning assets account for the increases since
1994. The schedule on page 117 provides the detail of changes in interest
income, interest expense and net interest income due to changes in volumes and
rates.
Interest income increased $10.2 million or 17.2% in 1997 from 1996, increased
$7.9 million or 15.6% in 1996 from 1995, and increased $8.8 million or 20.9% in
1995 from 1994. The 1997 increase in interest income resulted from a 10.8%
increase in the volume of average earning assets, as well as by a 46 basis point
increase in the average interest rate earned on assets. The largest percentage
of growth in average assets occurred in the loan portfolio, $115.0 million,
while the average rate earned on the loan portfolio increased 33 basis points.
Through these increases, the loan portfolio produced an additional $12.0 million
or 29.2% in interest income in 1997 over 1996. The yield on the investment
security portfolio increased 18 basis points from 6.40% in 1996 to 6.58% in
1997. Although the yield increased, the average volume decreased $39.8 million
or 14.7%, and interest income on investment securities decreased $2.1 million or
12.4% from 1996 to 1997. Federal funds sold and other earning assets increased
in average volume by $5.4 million or 57.8% from 1996 to 1997, and showed an
increase in average rates earned of nine basis points.
The 1996 increase in interest income resulted from an 11.4% increase in the
volume of average earning assets, as well as by a 29 basis point increase in the
average interest rate earned on assets. The greatest percentage of growth in
average assets occurred in the loan portfolio, $100.7 million, while the average
rate earned on the loan portfolio increased 21 basis points. Through these
increases, the loan portfolio produced an additional $9.6 million or 30.5% in
interest income in 1996 over 1995. The yield on the investment security
portfolio decreased five basis points from 6.45% in 1995 to 6.40% in 1996. With
the yield declining and the average volume decreasing $9.0 million or 3.2%,
interest income on investment securities decreased $714,000 or 3.9% from 1995 to
1996. Federal funds sold and other earning assets decreased in average volume by
$14.1 million or 60.4%, and showed a decrease in average rates earned of 74
basis points.
Total interest expense increased by $3.3 million or 14.2% in 1996 from 1995, due
to an increase in interest bearing liabilities of $74 million or 13.8% and a two
basis point increase in the average rate paid on interest bearing liabilities.
Interest expense on interest bearing deposits increased $2.4 million or 11.5% as
the result of a three basis point increase in rates and a $53.4 million or 10.7%
increase in the average volume. The $20.5 million increase in average borrowed
funds, (including interest bearing liabilities not classified as deposits),
coupled with a 27 basis point decrease in their rates resulted in an $837,000 or
47.9% increase in interest expense for this category.
184
194
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield returned on average earning
assets and the average rate paid for all funds used to support those earning
assets, including both interest bearing and noninterest bearing sources of
funds. The net interest margin increased 32 basis points in 1997 to 4.70%,
preceded by a 20 basis point increase in 1996 to 4.38% from 4.18% in 1995. The
net cost of funds, defined as interest expense divided by average earning
assets, increased 13 basis points to 3.64% in 1997 from 3.51% in 1996. The yield
on earning assets increased 46 basis points to 8.35% in 1997 from 7.89% in 1996.
Comparing 1996 to 1995, the yield on earning assets rose 29 basis points, while
the rate paid on interest bearing liabilities increased two basis points. From
1995 to 1996 the net cost of funds increased nine basis points and the net
interest margin increased 20 basis points.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of noninterest bearing funds and
gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interest rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws discouraging investment in tax-exempt instruments, intense competition for
funds with non-bank institutions and changing regulatory supervision for some
financial intermediaries. The pressure was not unique to Pioneer and was
experienced by the banking industry nationwide. As a result of changes in the
overall asset and liability mix during 1997 and of the general economic factors,
the interest rate spread increased from 1996 to 1997. The net interest rate
spread in 1997 increased 33 basis points to 3.92% from the 1996 spread of 3.59%,
as the yields earned on earning assets increased faster than the cost of
interest bearing liabilities. In 1996, the net interest spread increased from
1995 by 27 basis points.
See the accompanying schedules entitled "Rate Volume Variance Report" and
"Consolidated Average Balances, Interest Income/Expense and Yields/Rates" for
more information.
185
195
CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
ASSETS:
Earning Assets:
Loans, net of unearned income... $583,698 $53,237 9.12% $468,686 $41,218 8.79% $367,943 $31,580 8.58%
Investment securities:.......... 230,340 15,146 6.58% 270,133 17,295 6.40% 279,102 18,009 6.45%
Other earning assets............ 14,615 781 5.34% 9,259 486 5.25% 23,384 1,460 5.99%
-------- ------- -------- ------- -------- -------
Total Earning Assets...... 828,653 69,164 8.35% 748,078 59,000 7.89% 671,429 51,049 7.60%
Allowance for loan losses........ (6,806) (5,690) (5,550)
Cash and other assets............ 89,444 86,227 73,800
-------- -------- --------
Total Assets.............. $911,291 $828,615 $739,679
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest bearing demand
deposits...................... $124,477 3,362 2.70% $119,119 3,308 2.78% $111,477 3,077 2.76%
Savings deposits................ 106,584 3,426 3.21% 91,871 2,614 2.85% 83,638 2,395 2.86%
Time deposits less than
$100,000...................... 297,658 15,306 5.14% 286,062 14,583 5.10% 53,680 12,995 5.12%
CD's greater than $100,000...... 71,048 4,283 6.03% 57,010 3,163 5.55% 51,826 2,767 5.34%
Other Obligations............... 19,533 1,091 5.59% 9,430 513 5.44% -- -- --
Federal funds purchased and
securities sold under
agreements to repurchase...... 62,359 2,731 4.38% 47,303 2,073 4.38% 36,177 1,749 4.83%
-------- ------- -------- ------- -------- -------
Total Interest Bearing
Liabilities.............. 681,659 30,199 4.43% 610,795 26,254 4.30% 536,798 22,983 4.28%
------- ------- -------
Net interest spread.............. $38,965 3.92% $32,746 3.59% $28,066 3.32%
======= ======= =======
Noninterest bearing deposits..... 124,346 121,244 113,025
Accrued expenses and other
liabilities..................... 9,247 7,857 6,046
Stockholders' equity............. 96,039 88,719 83,810
-------- -------- --------
Total Liabilities and
Stockholders' Equity..... $911,291 $828,615 $739,679
======== ======== ========
Net yield on earning assets...... 4.70% 4.38% 4.18%
==== ==== ====
Taxable Equivalent Adjustment:
Loans........................... $ 130 $ 149 $ 129
Investment securities........... 1,798 1,887 1,947
------- ------- -------
Total Adjustment.......... $ 1,928 $2,036 $2,076
======= ======= =======
YEAR ENDING DECEMBER 31, GROWTH RATES
--------------------------------------------------------- AVERAGE BALANCES
1994 1993 ---------------------
--------------------------- --------------------------- FIVE YEAR
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ ONE YEAR COMPOUND
BALANCE EXPENSE RATE BALANCE EXPENSE RATE 1996-1997 1993-1997
-------- ------- ------ -------- ------- ------ --------- ---------
ASSETS:
Earning Assets:
Loans, net of unearned income... $316,904 $25,278 7.98% $263,650 $21,326 8.09% 24.54% 21.98%
Investment securities:.......... 267,660 16,296 6.09% 274,938 16,501 6.00% (14.73)% (4.33)%
Other earning assets............ 16,267 656 4.03% 29,238 933 3.19% 57.85% (15.92)%
-------- ------- -------- -------
Total Earning Assets...... 600,831 42,230 7.03% 567,826 38,760 6.83% 10.77% 9.91%
Allowance for loan losses........ (5,627) (5,711) 19.61% 4.48%
Cash and other assets............ 71,662 63,787 3.73% 8.82%
-------- --------
Total Assets.............. $666,866 $625,902 9.98% 9.85%
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest bearing demand
deposits...................... $110,052 2,368 2.15% $107,836 2,363 2.19% 4.50% 3.65%
Savings deposits................ 80,506 2,319 2.88% 84,855 2,274 2.68% 16.01% 5.87%
Time deposits less than
$100,000...................... 235,353 7,956 3.38% 216,459 7,204 3.33% 4.05% 8.29%
CD's greater than $100,000...... 37,211 1,583 4.25% 29,107 1,101 3.78% 24.62% 24.99%
Other Obligations............... -- -- -- -- -- -- 107.14% --
Federal funds purchased and
securities sold under
agreements to repurchase...... 16,574 643 3.88% 14,846 364 2.45% 31.83% 43.16%
-------- ------- -------- -------
Total Interest Bearing
Liabilities.............. 479,696 14,869 3.10% 453,103 13,307 2.94% 11.60% 10.75%
------- -------
Net interest spread.............. $27,361 3.93% $25,453 3.89%
======= =======
Noninterest bearing deposits..... 105,068 92,260 2.56% 7.75%
Accrued expenses and other
liabilities..................... 3,785 3,996 17.69% 23.34%
Stockholders' equity............. 78,317 76,543 8.25% 5.84%
-------- --------
Total Liabilities and
Stockholders' Equity..... $666,866 $625,902 9.98% 9.85%
======== ========
Net yield on earning assets...... 4.55% 4.48%
==== ====
Taxable Equivalent Adjustment:
Loans........................... $ 98 $ 178
Investment securities........... 1,969 951
------- -------
Total Adjustment.......... $ 2,066 $1,129
======= =======
186
196
RATE VOLUME VARIANCE REPORT
TAXABLE EQUIVALENT BASIS
(IN THOUSANDS)
AVERAGE VOLUME CHANGE IN VOLUME AVERAGE RATE
------------------------------ ------------------- ------------------
1997- 1996-
1997 1996 1995 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- ---- ---- ----
Earning Assets:
Loans, net of unearned income... $583,698 $468,686 $367,943 $115,012 $100,743 9.12% 8.79% 8.58%
Investment securities:.......... 230,340 270,133 279,102 (39,793) (8,969) 6.58% 6.40% 6.45%
Other earning assets............ 14,615 9,259 24,384 5,356 (15,125) 5.34% 5.25% 5.99%
-------- -------- -------- -------- --------
Total Earning Assets...... $828,653 $748,078 $671,429 $ 80,575 $ 76,649 8.35% 7.89% 7.60%
======== ======== ======== ======== ========
Interest Bearing Liabilities:
Interest bearing demand
deposits...................... $124,477 $119,119 $111,477 $ 5,358 $ 7,642 2.70% 2.78% 2.76%
Savings deposits................ 106,584 91,871 83,638 14,713 8,233 3.21% 2.85% 2.86%
Time deposits less than
$100,000...................... 297,658 286,062 253,680 11,596 32,382 5.14% 5.10% 5.12%
CD's greater than $100,000...... 71,048 57,010 51,826 14,038 5,184 6.03% 5.55% 5.34%
Other Borrowings................ 19,533 9,430 -- 10,103 9,430 5.59% 5.44% --
Federal funds purchased and
securities sold under
agreement to repurchase....... 62,359 47,303 36,177 15,056 11,126 4.38% 4.38% 4.83%
-------- -------- -------- -------- --------
Total Interest Bearing
Liabilities............. $681,659 $610,795 $536,798 $ 70,864 $ 73,997 4.43% 4.30% 4.28%
-------- -------- -------- -------- --------
Net interest income/net interest
spread.......................... 3.92% 3.59% 3.32%
==== ==== ====
Net yield on earning assets...... 4.70% 4.38% 4.18%
==== ==== ====
Net cost of funds................ 3.64% 3.51% 3.42%
==== ==== ====
INCOME/EXPENSE VARIANCE
--------------------------- ----------------
1997- 1996-
1997 1996 1995 1996 1995
------- ------- ------- ------- ------
Earning Assets:
Loans, net of unearned income... $53,237 $41,218 $31,580 $12,019 $9,638
Investment securities:.......... 15,146 17,295 18,009 (2,149) (714)
Other earning assets............ 781 486 1,460 295 (974)
------- ------- ------- ------- ------
Total Earning Assets...... 69,164 59,000 51,049 10,164 7,951
======= ======= ======= ======= ======
Interest Bearing Liabilities:
Interest bearing demand
deposits...................... 3,362 3,308 3,077 54 231
Savings deposits................ 3,426 2,614 2,395 812 219
Time deposits less than
$100,000...................... 15,306 14,583 12,995 723 1,588
CD's greater than $100,000...... 4,283 3,163 2,767 1,120 396
Other Borrowings................ 1,091 513 -- 578 513
Federal funds purchased and
securities sold under
agreement to repurchase....... 2,731 2,073 1,749 658 324
------- ------- ------- ------- ------
Total Interest Bearing
Liabilities............. 30,199 26,254 22,983 3,945 3,271
------- ------- ------- ------- ------
Net interest income/net interest
spread.......................... $38,965 $32,746 $28,066 $ 6,219 $4,680
======= ======= ======= ======= ======
Net yield on earning assets......
Net cost of funds................
VARIANCE ATTRIBUTED TO
-------------------------------------------------
1997 1996
------------------------ ----------------------
VOLUME RATE MIX VOLUME RATE MIX
------- ------ ----- ------ ----- -----
Earning Assets:
Loans, net of unearned income... $10,489 $1,926 $(396) $ 8,855 $ 984 $(201)
Investment securities:.......... (2,618) 415 54 (574) (135) (5)
Other earning assets............ 286 13 (4) (794) (69) (111)
------- ------ ----- ------ ----- -----
Total Earning Assets...... 8,157 2,354 (346) 7,487 780 (317)
======= ====== ===== ====== ===== =====
Interest Bearing Liabilities:
Interest bearing demand
deposits...................... 145 (100) 9 212 24 (5)
Savings deposits................ 472 384 (44) 235 (9) (7)
Time deposits less than
$100,000...................... 596 119 8 1,651 (57) (6)
CD's greater than $100,000...... 847 341 (68) 288 120 (12)
Other Borrowings................ 565 29 (16) 513 -- --
Federal funds purchased and
securities sold under
agreement to repurchase....... 659 -- (1) 487 (213) 50
------- ------ ----- ------ ----- -----
Total Interest Bearing
Liabilities............. 3,284 773 (112) 3,386 (135) 20
------- ------ ----- ------ ----- -----
Net interest income/net interest
spread.......................... $ 4,873 $1,581 $(234) $4,101 $ 915 $(337)
======= ====== ===== ====== ===== =====
Net yield on earning assets......
Net cost of funds................
187
197
PROVISION FOR LOAN LOSSES, NET CHARGE-OFFS AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is the expense of providing an allowance or
reserve for anticipated future losses on loans. The amount of the provisions for
each period is dependent upon many factors including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
management's assessment of loan portfolio quality, the value of collateral and
general economic factors.
Tennessee's economy slowed moderately during 1997 reflecting structural changes
in the manufacturing industry. The economy in Northwestern Georgia remained
generally strong, due to the large presence of carpet manufacturers supplying a
strong housing market with new carpet. In Pioneer's markets, real estate values
continued to rise through 1998 as interest rates eased and housing sales
increased. Stable levels of interest rates since early 1997 facilitated the
growth of real estate development and lending in 1997.
Should the economy continue to grow at a moderate pace, improved property values
and commercial developments will enhance the asset quality of the loan portfolio
and, therefore, lower the probability for further write-downs, charge-offs and
the transfer of currently performing loans to a nonaccrual status in the real
estate and commercial loan categories. The mix of loans in the commercial real
estate construction and development portfolios are balanced in areas such as
office buildings, retail stores, apartment buildings, health care facilities and
industrial warehouses. In addition, the Banks' lending review monitors large
real estate credits on a continuing basis.
During recent years, Pioneer has strengthened its review process of the larger
loans in its portfolio and has imposed stricter underwriting standards in order
to reduce the effect economic cycles might have on credit quality. Loan review
procedures, including such techniques as loan grading, are constantly used by
Pioneer's loan review department in order to ensure potential problem loans are
identified early in order to lessen any potentially negative impact problem
loans may have on Pioneer's earnings. Automated loan reports are prepared and
used in conjunction with the identification and monitoring of such loans on a
monthly basis. Management's involvement continues throughout the process and
includes participation in the work-out process and recovery activity. These
formalized procedures are monitored internally by the loan review area whose
work is supplemented by internal audit, Pioneer's external audit and regulatory
agencies who provide an additional level of review on an annual basis. Such
review procedures are quantified in monthly, quarterly and annual reports to
senior management and are used in determining whether such loans represent
potential losses to Pioneer. A determination of a potential loss will result in
a charge to the provision for loan losses, thereby increasing the allowance for
possible loan losses available for the potential risk. Management monitors the
entire loan portfolio in an attempt to identify problem loans so credit risks in
the portfolio can be timely identified and an appropriate allowance maintained.
188
198
The following table sets forth information with respect to Pioneer's loans, net
of unearned income, and the allowance for loan losses for the five years ended
December 31, 1997.
SUMMARY OF LOAN LOSS EXPERIENCE
(IN THOUSANDS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Loans, net of unearned income
Average outstanding
during the period..... $583,698 $468,686 $367,943 $316,904 $263,650
======== ======== ======== ======== ========
Allowance for loan losses:
Balance at beginning of
period................ $ 5,758 $ 5,872 $ 5,355 $ 5,371 $ 5,934
Charge-offs:
Commercial, financial and
agricultural.......... 638 1,010 133 1,872 960
Real estate
construction.......... -- -- -- -- --
Real estate mortgage
Residential........... 190 609 11 293 525
Commercial............ -- -- -- 353 179
Consumer credit cards.... 117 58 17 -- --
Consumer installment..... 1,147 932 369 386 447
-------- -------- -------- -------- --------
Total Charge-offs.......... 2,092 2,609 530 2,904 2,111
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and
agricultural.......... 167 660 160 898 253
Real estate
construction.......... -- -- -- -- --
Real estate mortgage
Residential........... 45 432 1 165 111
Commercial............ -- -- 62 142 --
Consumer credit cards.... 18 4 6 -- --
Consumer installment..... 332 302 199 226 243
-------- -------- -------- -------- --------
Total Recoveries........... 562 1,398 428 1,431 607
-------- -------- -------- -------- --------
Net charge-offs............ 1,530 1,211 102 1,473 1,504
Provision charged to
income................... 3,609 1,097 619 1,457 941
-------- -------- -------- -------- --------
Balance at end of period... $ 7,837 $ 5,758 $ 5,872 $ 5,355 $ 5,371
======== ======== ======== ======== ========
Net charge-offs to average
loans outstanding........ 0.26% 0.26% 0.03% 0.46% 0.57%
Allowance for loan losses
to average loans
outstanding.............. 1.34% 1.23% 1.60% 1.69% 2.04%
Allowance for loan losses
to net charge-offs....... 5.12X 4.75X 57.6X 3.6X 3.6X
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
the existing credit risk of individual loans, concentrations of loans to
specific borrowers or industries and existing and prospective economic
conditions when determining the adequacy of the loan loss reserve. The allowance
for possible loan losses increased $2.1 million or 36.1% in 1997, and at
year-end was 1.34% of average loans compared to 1.23% at December 31, 1996 and
1.60%
189
199
at December 31, 1995. The large increase in the provision charged to income was
because management wanted to increase the provision for possible loan losses as
a percentage of average loans back to its historical levels. As shown in the
table below, management determined that at December 31, 1997, approximately 26%
of the allowance for loan losses was related to commercial, financial and
agricultural loans, 59% was related to real estate loans and 15% was related to
consumer installment loans. The allowance allocations for 1997 and 1996 are
shown in the following table.
ALLOCATION OF LOAN LOSS RESERVE
AS OF DECEMBER 31,
-------------------------------------------
1997 % TOTAL 1996 % TOTAL
---------- ------- ---------- -------
Commercial, financial and agricultural... $2,014,002 25.7% $1,479,818 25.7%
Real estate.............................. 4,600,074 58.7% 3,385,732 58.8%
Consumer................................. 1,222,506 15.6% 811,885 14.1%
Unallocated.............................. -- --% 80,613 1.4%
---------- ----- ---------- -----
Total.......................... $7,836,582 100.0% $5,758,048 100.0%
========== ===== ========== =====
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS
Interest on loans is normally accrued from the date an advance is made. The
performance of loans is evaluated primarily on the basis of a review of each
customer relationship over a period of time and the judgment of lending officers
as to the ability of borrowers to meet the repayment terms of loans. If there is
reasonable doubt as to the repayment of a loan in accordance with the agreed
terms, the loan may be placed on a nonaccrual basis pending the sale of any
collateral or a determination as to whether sources of repayment exist. This
action may be taken even though the financial condition of the borrower or the
collateral may be sufficient ultimately to reduce or satisfy the obligation.
Generally, when a loan is placed on a nonaccrual basis, all payments are applied
to reduce principal to the extent necessary to eliminate doubt as to the
repayment of the loan. Any interest income on a nonaccrual loan is recognized
only on a cash basis. See "Nonperforming Assets."
Lending officers are responsible for the ongoing review and administration of
each particular loan. As such, they make the initial identification of loans
which present some difficulty in collection or where circumstances indicate the
probability of loss exists. The responsibilities of the lending officers include
the collection effort on a delinquent loan. Senior management and the Loan
Committee are informed of the status of delinquent and "watch" or problem loans
on a monthly basis.
Senior management reviews the allowance for possible loan losses and makes
recommendations to the Loan Committee as to loan charge-offs on a monthly basis.
The Banks' policies are generally to discontinue the accrual of interest on
loans when payment of principal and interest is 90 days or more in arrears and
the loans are otherwise considered non-collectible.
At December 31, 1997, 1996 and 1995 loans accounted for on a nonaccrual basis
were approximately $1.8 million, $1.7 million and $1.2 million respectively, or
0.28%, 0.33% and 0.27% of the total loans, net of unearned income. The balances
of accruing loans past due 90 days or more as to principal and interest payments
were $2.1 million, $1.1 million and $383,000 at December 31, 1997, 1996 and
1995, respectively.
190
200
The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provision required
to maintain a level considered adequate to absorb anticipated loan losses. In
assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
the Banks' loan loss experience, the amount of past due and nonperforming loans,
specific known risk, the status and amount of nonperforming assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors affecting the allowance for potential credit losses.
While it is the Banks' policy to charge off in the current period the loans in
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.
In assessing the adequacy of the allowance, management relies predominately on
its ongoing review of the loan portfolio, which is undertaken both to ascertain
whether there are probable losses which must be charged off and to assess the
risk characteristics of the portfolio in the aggregate. This review takes into
consideration the judgments of the responsible lending officers, senior
management and those of bank regulatory agencies who review the loan portfolio
as part of the Banks' examination process. A percentage is allocated by loan
types, with additional amounts being added for individual problem loans
considered to have specific loss potential. While all information available is
used by management to recognize losses in the loan portfolio, there can be no
assurances future additions to the allowance will not be necessary. Each Bank's
Loan Committee reviews the assessments of management in determining the adequacy
of the allowance for loan losses.
The Bank's allowances for possible loan losses is also subject to regulatory
examinations and determinations as to adequacy. Their review may take into
account such factors as the methodology used to calculate the allowance for
possible loan loss reserves and the size of the loan loss reserve in comparison
to a group of peer banks identified by the regulators. During its routine
examinations of banks, the FDIC has, from time to time, required additions to a
bank's provision for possible loan losses and allowances for possible loan
losses as the regulators' credit evaluations and allowance for possible loan
loss methodology have differed from those of the management of such banks.
During the last several years, several large bank holding companies, located in
various portions of the United States, have substantially increased their
provisions and reserves for loan losses following regulatory examinations. Such
regulatory examinations have focused on loan quality, particularly the real
estate loan section of the loan portfolio. These large bank holding companies
have attempted to reduce the credit risks of real estate lending through maximum
loan-to-value requirements as well as systematic cash flow and initial customer
credit history analyses.
Management believes the $7.8 million in the allowance for possible loan losses
at December 31, 1997 (1.21% of total outstanding loans, net of unearned income
at such date) was adequate to absorb known risks in the portfolio at such date.
No assurance can be given, however, that adverse economic circumstances will not
result in increased losses in the Banks' loan portfolios, and require greater
provisions for possible loan losses in the future.
191
201
FASB STATEMENTS NO. 114 AND 118
Pioneer adopted FASB Statements No. 114 and No. 118 in the first quarter of
1995. For purposes of these FASB Statements, management maintains the following
policy. Impaired loans are divided into two classifications: doubtful and loss.
"Doubtful" loans indicate probable loss and are reserved at 50% of outstanding
principal regardless of underlying collateral value. If collateral value is less
than 50% of principal, then additional specific reserves are allocated. "Loss"
loans are deemed uncollectible by management and are reserved at 100% of
outstanding principal value. Pioneer charges-off loans it deems to be
uncollectible. The Directors Loan Committee approves all loan charge-offs. The
following table details impaired loans:
IMPAIRED LOANS
DECEMBER 31,
--------------------
1997 1996
--------- --------
Principal balance..................................... $ 492,004 $ 59,236
Interest income recorded during loan impairment....... -- --
Reserve for potential credit losses................... (247,309) (29,877)
--------- --------
Unreserved portion of impaired loans.................. $ 244,695 $ 29,359
========= ========
Average principal balance year-to-date................ $ 82,658 $ 78,879
========= ========
Impaired loans are identified according to the two classification methods in the
following table:
DECEMBER 31,
------------------
1997 1996
-------- -------
Doubtful loans outstanding.............................. $475,513 $58,719
Loss loans outstanding.................................. 16,491 517
NONPERFORMING ASSETS
Pioneer has policies, procedures and underwriting guidelines intended to assist
in maintaining the overall quality of its loan portfolio. Pioneer monitors its
delinquency levels for any adverse trends. Nonperforming assets consist of loans
on nonaccrual status, loans renegotiated at more favorable terms than those for
similar credits, real estate and other assets acquired in partial or full
satisfaction of loan obligations and loans past due 90 days or more.
Nonperforming assets include nonperforming loans and foreclosed real estate held
for sale. Nonperforming loans include loans classified as nonaccrual or
renegotiated. Pioneer's policy generally is to place a loan on nonaccrual status
when it is contractually past due 90 days or more as to payment of principal or
interest. A loan may be placed on nonaccrual status at an earlier date when
concerns exist as to the ultimate collectability of principal or interest. At
the time a loan is placed on nonaccrual status, interest previously accrued but
not collected is reversed and charged against current earnings. Recognition of
any interest after a loan has been placed on nonaccrual is accounted for on a
cash basis. Loans contractually past due 90 days or more, well secured or
guaranteed by financially responsible third parties and in the process of
collection are generally not placed on nonaccrual status.
192
202
Nonperforming assets at December 31, 1997, were $2.6 million, an increase of
$243,000 or 10.2% from year-end 1996. At year end 1996 nonperforming assets were
$2.4 million an increase of $473,000 or 24.7% more than at year end 1995. The
increase in nonperforming assets during 1997 is attributable primarily to
consumer indirect auto loans at Pioneer Bank. Interest on nonaccrual loans is
stopped when the loan is so categorized. If interest on such loans had been
accrued, such income would have approximated $129,894 for 1997, $150,299 for
1996 and $87,311 for 1995.
During the past few years, the Southeastern region of the country has
experienced a general improvement in the real estate loan market. In view of
these market conditions, management has closely monitored and will continue to
monitor Pioneer's real estate and commercial loan portfolio during 1998.
Particular attention will be focused on those credits targeted by the loan
monitoring and review process. Management's continued emphasis is to seek and
maintain a relatively low level of nonperforming assets and returning the
current nonperforming assets to an earning status.
At December 31, 1997, nonperforming assets were 0.40% of loans outstanding plus
foreclosed real estate held for sale compared to 0.46% for year end 1996 and
0.45% for year end 1995. Loans ninety days past due and still accruing interest
as a percentage of total loans was 0.33%, 0.22% and 0.09% for year end 1997,
1996 and 1995, respectively. Although this is an increasing trend the level of
charge-offs are well within management's accepted range.
At December 31, 1997, $1.81 million of nonaccrual loans or 98.0% of total
nonaccrual loans were secured. There were no commitments to lend any additional
funds on nonaccrual loans at December 31, 1997. Other foreclosed or repossessed
assets taken in consideration of loan amounts due Pioneer, consisting primarily
of repossessed automobiles, are classified in other assets at year-end 1997 and
account for less than 1.0% of total assets. The following table summarizes
Pioneer's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS
(IN THOUSANDS)
YEAR ENDING DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Loans, net of unearned income............... $649,758 $523,253 $421,503 $335,911 $287,034
======== ======== ======== ======== ========
Loans on nonaccrual......................... $ 1,836 $ 1,745 $ 1,153 $ 921 $ 2,988
Renegotiated loans.......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans.......... 1,836 1,745 1,153 921 2,988
Other nonperforming assets......... 107 81 -- -- --
Other real estate........................... 687 561 761 1,444 777
======== ======== ======== ======== ========
Total Nonperforming Assets......... $ 2,630 $ 2,387 $ 1,914 $ 2,365 $ 3,765
======== ======== ======== ======== ========
Loans 90 days or more past due and still
accruing.................................. $ 2,120 $ 1,139 $ 383 $ 974 $ 219
Total nonperforming loans as
percentage of total loans........ 0.28% 0.33% 0.27% 0.27% 1.04%
Total nonperforming assets as a
percentage of total loans and
OREO............................. 0.40% 0.46% 0.45% 0.70% 1.31%
Loans 90 days past due as a percentage of
total loans............................... 0.33% 0.22% 0.09% 0.29% 0.08%
193
203
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and profits and
commissions earned through credit life insurance sales and other activities. In
addition, gains or losses realized from the sale of investment portfolio
securities are included in noninterest income. Total noninterest income for 1997
increased $1.7 million or 20.7% compared to 1996. Noninterest income for 1996
showed an increase of $1.2 million or 17.1% from 1995.
NONINTEREST INCOME
(IN THOUSANDS)
% CHANGE % CHANGE
1997 1996 1995 1997-1996 1996-1995
------ ------ ------ --------- ---------
Service charge on deposit
accounts....................... $4,652 $4,019 $3,428 15.75% 17.24%
Trust department................. 1,625 1,564 1,181 3.90% 32.43%
Net securities gains realized.... 294 297 211 (1.0)% 40.76%
Other............................ 3,301 2,298 2,162 43.65% 6.29%
------ ------ ------
Total.................. $9,872 $8,178 $6,982 20.71% 17.13%
====== ====== ======
Fee income from service charges on deposit accounts increased $633,000 or 15.75%
in 1997 following a $591,000 or 17.2% increase in 1996. Pioneer Bank increased
its deposit base, and revised its schedule of account charges, effective at the
beginning of the fourth quarter of 1996, resulting in increased service charges
for 1997 over 1996. Emphasis on checking account services, appropriate pricing
for transaction deposit accounts and fee collection practices for other deposit
services will continue to be important factors to increasing noninterest income
for future years.
Trust fees or income from fee-based fiduciary activities increased $61,000 or
3.9% in 1997 compared to the $383,000 or 32.4% increase in 1996. Assets
administered by the Trust Division at December 31, 1997 were $577 million
compared to $490 million at the end of 1996 and $415 million at year end 1995.
Nonrecurring items of noninterest income include sales of investment portfolio
securities. Due to the stable interest rate environment of 1997 and successful
investment strategies, Pioneer realized gains on the sale of investment
securities in 1997 of $294,000 compared to $297,000 in 1996. Included in other
noninterest income are the gains and losses recognized on the sales of assets
such as fixed assets and other real estate owned. These gains and losses
amounted to less than $100,000 in 1997, 1996 and 1995.
Various recurring noninterest income items include bank services such as
travelers check fees, safe deposit box fees, fees on letters of credit,
origination fees on long term mortgages and fees on sales of mutual funds and
annuities. PSI is a wholly owned subsidiary of Pioneer Bank and had its second
year of operation in 1997. Total income for PSI in 1997 was $623,876 and
expenses were $611,704, including taxes and inter-company transactions,
providing a net income for the year of $12,172. Total income for PSI in 1996 was
$471,000 and expenses were $461,000, including taxes and inter-company
transactions, providing a net income for the year of $10,000.
194
204
NONINTEREST EXPENSE
Noninterest expense for 1997 increased $3.6 million or 14.1% from 1996,
increased $2.9 million or 12.7% in 1996 from 1995. Total salaries and other
personnel expenses in 1997 increased $2.2 million or 15.7% from 1996 to a total
of $16.1 million at year-end 1997. Salaries in 1996 increased $1.8 million or
14.7% in 1996 from 1995. The increases since 1995 are primarily the result of
the addition of approximately 73 full time equivalent employees during 1997 and
25 full time equivalent employees during 1996 and through normal merit pay
increases.
Occupancy and equipment expenses increased by $168,000 or 7.9% to $2.3 million
in 1997 following a $579,000 or 37.3% increase in 1996. Occupancy and equipment
expense in 1997 increased due to the depreciation related to major computer
software and hardware upgrades purchased in 1997 and the expenses related to the
new Pioneer Bank branches in Kimball and Dunlap, Tennessee, the new Valley Bank
branch in Athens, Tennessee, and the new Pioneer, f.s.b. branches in East Ridge,
Tennessee and Dalton, Georgia.
NONINTEREST EXPENSES
(IN THOUSANDS)
% CHANGE % CHANGE
1997 1996 1995 1997-1996 1996-1995
------- ------- ------- --------- ---------
Salaries and benefits............. $16,142 $13,949 $12,160 15.72% 14.71%
Net occupancy expense............. 2,297 2,129 1,550 7.89% 37.35%
FDIC insurance.................... 44 3 679 1299.03% (99.56)%
Other............................. 10,890 9,659 8,459 12.74% 14.19%
------- ------- -------
Total................... $29,373 $25,740 $22,848 14.11% 12.66%
======= ======= =======
FDIC insurance in 1997 increased $41,309 or 12.99% from 1996. All other
noninterest expenses increased by $1.2 million or 12.7% in 1997, compared to a
$1.2 million or 14.2% increase in 1996. The other expenses include, among other
items, professional service expenses, bank travel and entertainment expenses,
telephone, supplies, postage expense and amortization of intangible assets.
The primary factor for the increase in noninterest expense was primarily related
to continued bank growth in 1996 and 1997. The increase in 1995 was primarily
related to the Merger and the Marion Purchase. In 1995, the Marion Purchase
created a core deposit intangible of $7.2 million to be amortized over 10 years.
The Merger was accounted for as a pooling of interests and, therefore, all
merger related costs (i.e. legal, accounting and consulting fees) were expensed
as incurred.
FDIC INSURANCE ASSESSMENTS
Pioneer Bank and Valley Bank, BIF members, are subject to FDIC deposit insurance
assessments. In May, 1997, the FDIC Board of Directors voted to retain the
existing BIF and Savings Association Insurance Fund (the "SAIF") assessment
schedules of 0 to 27 basis points (annual rates) for the second semiannual
period of 1997. On May 20, 1997, the Board voted to collect on behalf of the
Financing Corporation (the "FICO") assessments sufficient to meet the funding
requirements of the FICO for the remainder of 1997. The FICO rate on
BIF-assessable deposits is 1.26 basis points, on an annual basis, and the rate
on SAIF-assessable deposits is 6.30 basis points. The Deposit Insurance
195
205
Funds Act of 1996 authorized the FICO to levy assessments on BIF- and
SAIF-assessable deposits, and stipulated that the BIF rate must equal one-fifth
the SAIF rate through year-end 1999, or until the insurance funds are merged,
whichever occurs first. Under the BIF, each financial institution is assigned
into one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- and further assigned into one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state regulators and other information
relevant to the institution's financial condition and the risk posed to the
applicable insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. During the year ended
December 31, 1997, Pioneer Bank and Valley Bank paid $26,116 and $18,373,
respectively, in BIF deposit insurance premiums, compared to 1996 premiums of
$1,500 and $1,680, respectively. Because BIF and SAIF assessments are levied
semi-annually, no assessments had been received for Pioneer Bank, f.s.b. as of
year-end because Pioneer Bank, f.s.b. did not commence operations until the
fourth quarter of 1997. Pioneer's assessments increased $41,309 or 12.99% from
1996 because the higher rates on the current assessment schedules were not
effective until January, 1997.
INCOME TAXES
Income tax expense increased $1.1 million or 36.4%, in 1997 from 1996 and
increased $629,949 or 25.9% in 1996 from 1995. The effective tax rate as a
percentage of pretax income was 29.9% in 1997, 25.3% in 1996 and 25.5% in 1995.
These tax rates are lower than the statutory Federal tax rate of 34.0% primarily
due to investments in loans and securities earning interest income exempt from
Federal taxation.
Pioneer made marginal decreases in the effective tax rate in 1995 and 1996 by
increasing the average holdings in tax-free securities in the investment
portfolio, but tax-free municipal income decreased by $209,000 in 1997
increasing the effective tax rate. In 1997, the effective tax rate increased to
88.0% of the statutory Federal tax rate compared to 74.0% in 1996 and 75.0% in
1995.
EFFECTS OF ACCOUNTING CHANGES
FASB Statement Number 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," issued in 1996, establishes
financial accounting reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities occurring after December 31,
1996, with the exception of any provisions deferred for implementation by the
FASB. The new standard became effective January 1, 1997 and superseded FASB
Statement Number 122, "Accounting for Mortgage Service Rights." The standard
gives accounting recognition to mortgage servicing contracts similarly
prescribed in current accounting rules and extends this recognition to servicing
contracts for all types of financial assets. However, FASB 125 eliminates the
current distinction between "normal" and "excess" servicing fees and will
generally reclassify these cash flows into two new types of assets: (1)
"servicing assets" and (2) certain related interest-only financial assets known
as "interest-only strips receivable." Furthermore, the standard establishes a
new accounting approach for distinguishing transfers of financial assets
reported as sales from transfers from those reported as borrowings. The overall
effect of the new standard on the financial statements was not material. The
FASB subsequently issued Statement 127 "Deferral of The Effective Date of
Certain Provisions of FASB Statement No. 125." Statement 127 defers for one year
the application of Statement 125 as it relates to transfers of financial assets
treated as secured borrowings.
196
206
Statement of Financial Standards No. 128, "Earnings per Share," establishes
standards for computing and presenting earnings per share ("EPS"). This Standard
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
statement of income for entities with complex capital structures, and it
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution, and it is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
occurring if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock
sharing in the earnings of the entity. This Standard is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier application is not permitted. This Standard requires
restatement of all prior-period EPS data presented. Currently, the difference
between Pioneer's basic and fully diluted EPS is less than one percent.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for the reporting and the presentation of
comprehensive income. Other comprehensive income items are to be classified by
their nature and by their related accumulated balances in the appropriate
financial statements of a company. Generally, other comprehensive income
includes transactions not typically recorded as a component of net income such
as foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain debt and equity securities. This Standard requires
such items be presented with equal prominence on a comparative basis in the
appropriate financial statements for fiscal years beginning after December 15,
1997.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," establishes standards and disclosure
requirements for the way companies report information about operating segments,
including related product information, both in annual and interim reports issued
to stockholders. Operating segments are components of a company about which
separate financial information is available and which are used in determining
resource allocations and performance results. Information such as segment net
earnings, appropriate revenue and expense items and certain balance sheet items
are required to be presented, and such amounts are required to be reconciled to
the company's combined financial information. Pioneer will assess the
methodologies and reporting for compliance with the Standard. This Standard is
effective for financial statements issued for periods ending after December 31,
1997, including interim periods.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In March 1997, the Federal Reserve
Board increased interest rates 25 basis points in an effort to contain perceived
inflationary pressures through monetary policy. Subsequently, the prime rate
remained unchanged in 1997, but the long-term rates on the Treasury yield curve
decreased by approximately 125 basis points through year-end as inflation
increased only slightly. Inflation affects financial institutions' increased
cost of
197
207
goods and services purchased, the cost of salaries and benefits, occupancy
expense, and similar items. Inflation and related increases in interest rates
generally decrease the market value of investments and loans held and may
adversely effect liquidity, earnings, and stockholders' equity. Mortgage
originations and refinancings tend to slow as interest rates increase, and can
reduce the Bank's earnings from such activities and the income from the sale of
residential mortgage loans in the secondary market.
MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in
market prices and interest rates. This risk of loss can be reflected in either
diminished current market values or reduced potential net interest income in
future periods.
Pioneer's market risk arises primarily from interest rate risk inherent in its
lending and deposit taking activities. The structure of Pioneer's loan and
deposit portfolios is such that a significant decline in the prime rate may
adversely impact net market values and interest income. Management seeks to
manage this risk through the utilization of various tools, primarily investment
securities and FHLB borrowings. The composition and size of the investment
portfolio and FHLB borrowing is managed so as to reduce the interest rate risk
in the deposit and loan portfolios while at the same time optimizing the yield
generated from those portfolios.
198
208
The table below presents in tabular form the contractual balances and the
estimated fair value of Pioneer's on-balance sheet financial instruments at
their expected maturity dates as of December 31, 1997. The expected maturity
categories take into consideration historical prepayment experience as well as
management's expectations based on the interest rate environment as of December
31, 1997. For core deposits without contractual maturity (i.e., interest bearing
checking, savings and money market accounts), the table presents principal cash
flows based on management's judgment concerning their most likely runoff or
repricing behaviors. Weighted average variable rates are based on implied
forward rates in the yield curve as of December 31, 1997. See "Pioneer
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Balance Sheet Management."
MARKET RISK INFORMATION
(IN THOUSANDS)
PRINCIPAL AMOUNT MATURING IN FAIR
------------------------------------------------------------- VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
-------- ------- ------- ------- ------- ---------- -------- --------
Rate Sensitive
Assets:
Fixed interest rate
loans.............. $118,654 $85,086 $68,855 $99,471 $24,868 $31,743 $428,677 $426,267
Average interest
rate............... 9.10% 9.06% 9.01% 8.97% 9.04% 9.05% 9.04% --
Variable interest
rate loans......... 179,870 33,541 8,159 790 197 -- 222,557 222,557
Average interest
rate............... 9.04% 8.98% 8.91% 8.90% 8.75% -- 9.03% --
Fixed interest rate
securities......... 57,873 26,921 20,360 15,178 6,909 48,883 176,124 176,314
Average interest
rate............... 6.68% 6.51% 6.34% 6.48% 6.30% 6.33% 6.49% --
Variable interest
rate securities.... 1,998 2,990 4,492 -- -- 19,483 28,963 28,963
Average interest
rate............... 6.26% 6.16% 6.24% -- -- 6.26% 6.25% --
Other interest
bearing assets..... 19,358 -- -- -- -- -- 19,358 19,358
Average interest
rate............... 5.46% -- -- -- -- -- 5.46% --
199
209
FAIR
VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL 1997
-------- ------- ------- ------- ------- ---------- -------- --------
Rate Sensitive
Liabilities:
Savings and interest
bearing checking... $117,833 $23,342 $23,342 $19,610 $19,610 $40,174 $243,911 $243,911
Average interest
rate............... 3.19% 3.05% 3.06% 2.94% 2.75% 2.50% 3.00% --
Fixed interest rate
time deposits...... 296,612 23,300 3,321 8,680 2,170 20 334,103 322,215
Average interest
rate............... 5.66% 5.72% 5.58% 5.38% 5.10% 5.50% 5.65% --
Variable interest
rate time
deposits........... 30,589 12,566 568 -- -- -- 43,723 43,723
Average interest
rate............... 3.98% 3.69% 3.21% -- -- -- 3.89% --
Fixed rate
borrowings......... 10,000 28,000 -- -- -- -- 38,000 38,000
Average interest
rate............... 5.35% 5.66% -- -- -- -- 5.58% --
Variable rate
borrowings......... 60,439 -- -- -- -- -- 60,439 60,439
Average interest
rate............... 4.37% -- -- -- -- -- 4.37% --
200
210
ADDITIONAL INFORMATION
DISSENTERS' APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, any holder of Pioneer Common Stock who does
not wish to accept the Merger Consideration may dissent from the Merger and
elect to have the fair value of his or her shares of Pioneer Common Stock
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) judicially determined and paid in cash, provided that
such shareholder complies with the procedural requirements of Section 262.
The following is a brief summary of the statutory procedures to be followed by a
holder of Pioneer Common Stock in order to dissent from the Merger and perfect
appraisal rights under the DGCL. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262, THE TEXT OF WHICH IS
ATTACHED AS APPENDIX E TO THIS PROSPECTUS/PROXY STATEMENT.
Any holder of Pioneer Common Stock seeking to exercise his or her right to
dissent from the Merger and demand appraisal of his or her shares of Pioneer
Common Stock must comply with the procedural requirements of Section 262,
including the satisfaction of each of the following conditions:
(i) such shareholder must deliver a written demand for appraisal of his or
her shares to Pioneer before the taking of the vote with respect to the
Agreement at the Special Meeting (this written demand for appraisal
must be in addition to and separate from any proxy or vote against the
Agreement; neither voting against, nor abstaining from voting nor
failing to vote on the Agreement will constitute a demand for appraisal
within the meaning of Section 262);
(ii) such shareholder must not vote in favor of the Agreement (a failure to
vote will satisfy this requirement, but a vote in favor of the
Agreement, by proxy or in person, or the return of a signed proxy
which does not specify either a vote against approval and adoption of
the Agreement or a direction to abstain, will constitute a waiver of
such shareholder right of appraisal and will nullify any previously
filed written demand for appraisal); and
(iii) such shareholder must continuously hold such shares from the date of
the making of the demand through the Effective Time.
If any holder of Pioneer Common Stock fails to comply with any of these
conditions and the Merger becomes effective, such shareholder will be entitled
to receive the Merger Consideration as provided in the Agreement, and will have
no appraisal rights with respect to his or her shares on Pioneer Common Stock.
All written demands for appraisal should be addressed to: Pioneer Bancshares,
Inc., 801 Broad Street, Chattanooga, Tennessee 37402; Attention: Gregory B.
Jones, before the taking of the vote concerning the Agreement at the Special
Meeting, and should be executed by, or on behalf of, the holder of record. Such
demand must reasonably inform Pioneer of the identity of the shareholder and
that such shareholder is thereby demanding appraisal of his or her shares.
TO BE EFFECTIVE, A DEMAND FOR APPRAISAL MUST BE EXECUTED BY OR FOR THE
SHAREHOLDER OF RECORD WHO HELD SUCH SHARES OF PIONEER COMMON STOCK ON THE DATE
OF MAKING SUCH DEMAND, AND WHO CONTINUOUSLY HOLDS SUCH SHARES THROUGH THE
EFFECTIVE TIME, FULLY AND CORRECTLY, AS SUCH SHAREHOLDER'S NAME APPEARS ON HIS
OR HER STOCK CERTIFICATE(S) AND
201
211
CANNOT BE MADE BY THE BENEFICIAL OWNER IF HE OR SHE DOES NOT ALSO HOLD THE
SHARES OF RECORD. THE BENEFICIAL OWNER MUST, IN SUCH CASE, HAVE THE REGISTERED
HOLDER SUBMIT THE REQUIRED DEMAND IN RESPECT OF SUCH SHARES.
If Pioneer Common Stock is owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity. If Pioneer Common Stock is owned of record by more than
one person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including one of two
or more joint owners, may execute the demand for appraisal for a shareholder of
record; however, the agent must identify the record owner or owners and
expressly disclose the fact that, in executing the demand, he or she is acting
as agent for the record owner. A record owner, such as a broker, who holds
Pioneer Common Stock as a nominee for others may exercise his or her right of
appraisal with respect to the shares held for one or more beneficial owners,
while not exercising such right for other beneficial owners. In such case, the
written demand should set forth the number of shares as to which the record
owner dissents. Where no number of shares is expressly mentioned, the demand
will be presumed to cover all shares of Pioneer Common Stock in the name of such
record owner.
Within ten days after the Effective Time, First American (as the surviving
corporation in the Merger) must give written notice that the Merger has become
effective to each shareholder who has so filed a written demand for appraisal
and who did not vote in favor of approval and adoption of the Agreement. Any
shareholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from First American the appraisal of
such shareholder shares of Pioneer Common Stock. Within 120 days after the
Effective Time, but not thereafter, either First American or any holder of
shares of Pioneer Common Stock who has complied with the requirements of Section
262, may file a petition in the Delaware Court of Chancery (the "Court of
Chancery") demanding a determination of the value of the shares of Pioneer
Common Stock held by all shareholders entitled to appraisal. First American has
no obligation, and does not presently intend, to file such a petition.
Accordingly, the failure of a shareholder to file such a petition within the
time period specified could nullify such shareholder's previous written demand
for appraisal and result in such shareholder losing his or her dissenters'
rights under Section 262. In any event, at any time within 60 days after the
Effective Time (or at any time thereafter with the written consent of First
American), any shareholder who has demanded appraisal has the right to withdraw
the demand and to accept payment of the Merger Consideration as provided in the
Agreement.
Within 120 days after the Effective Date, any shareholder who has complied with
the provisions of Section 262 to that point in time will be entitled to receive
from First American, upon written request, a statement setting forth the
aggregate number of shares of Pioneer Common Stock not voted in favor of the
Agreement and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. First American must mail such
statement to the shareholder within 10 days of receipt of such request.
If a petition for appraisal is duly filed by a shareholder and a copy thereof is
delivered to First American, First American will then be obligated within 20
days to provide the Court of Chancery with a duly verified list containing the
names and addresses of all shareholders who have demanded an appraisal of their
shares and with whom agreement as to the value of such shares has not been
reached. After notice to such shareholders, the Court of Chancery is empowered
to conduct a hearing upon the petition to determine those
202
212
shareholders who have complied with Section 262 and who have become entitled to
appraisal rights thereunder. The Court of Chancery may require the shareholders
who demanded payment for their shares to submit their stock certificates to the
Register in Chancery for notation thereon of the pendency of the appraisal
proceedings and if any shareholder fails to comply with such direction, the
Court of Chancery may dismiss the proceedings as to such shareholder.
After determination of the shareholders entitled to an appraisal, the Court of
Chancery will appraise the shares of Pioneer Common Stock, determining their
fair value exclusive of any element of value arising from the accomplishment or
expectation of the Merger. When the value is so determined, the Court of
Chancery will direct the payment by First American of such value, with interest
thereon, simple or compound, if the Court of Chancery so determines, to the
shareholders entitled to receive the same upon surrender to First American by
such shareholders of the certificates representing such shares of Pioneer Common
Stock.
In determining fair value, the Court of Chancery will take into account all
relevant factors, and may consider proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court. Under Delaware law, the Court of Chancery must
consider market value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts which could be ascertained as of the date of
the Merger that throw any light on future prospects of the merged corporation.
Section 262 provides that fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger." The Delaware
Supreme Court has construed Section 262 to mean that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." Shareholders who are considering seeking an appraisal should bear
in mind that the fair value of their shares of Pioneer Common Stock determined
under Section 262 could be more than, the same as or less than the consideration
they might otherwise receive pursuant to the Agreement if they do not seek
appraisal of their shares of Pioneer Common Stock, and that the opinions of
Keefe Bruyette and Carson Medlin set forth as Appendices C and D hereto,
respectively are not opinions as to fair value under Section 262.
Costs of the appraisal proceeding may be assessed against the parties thereto
(i.e., First American and the shareholders participating in the appraisal
proceedings) by the Court of Chancery as the court deems equitable in the
circumstances. Upon the application of any shareholder, the Court of Chancery
may determine the amount of interest, if any, to be paid upon the value of the
stock of shareholders entitled thereto. Upon application of a shareholder, the
Court of Chancery may order all or a portion of the expenses incurred by any
shareholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal. Any
shareholder who has demanded appraisal rights will not, after the Effective
Time, be entitled to vote the stock subject to such demand for any purpose or to
receive payment of dividends or any other distribution with respect to such
shares (other than dividends or distributions, if any, payable to holders of
record as of a record date prior to the Effective Date) or to receive the
payment of the consideration provided for in the Agreement. However, if no
petition for an appraisal is filed within 120 days after the Effective Time or
if such shareholder delivers to First American a written withdrawal of his or
her demand for an appraisal and an
203
213
acceptance of the Merger, either within 60 days after the Effective Time or
thereafter with the written approval of First American, then the right of such
shareholder to an appraisal will terminate. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery will be dismissed as to any
shareholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
FAILURE TO COMPLY STRICTLY WITH THE FOREGOING PROCEDURES WILL CAUSE A PIONEER
SHAREHOLDER TO LOSE HIS OR HER APPRAISAL RIGHTS. CONSEQUENTLY, ANY SHAREHOLDER
WHO DESIRES TO EXERCISE HIS OR HER APPRAISAL RIGHTS IS URGED TO CONSULT A LEGAL
ADVISOR BEFORE ATTEMPTING TO EXERCISE SUCH RIGHTS.
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 October [ ], 1998, Ms. Price beneficially owned [ ]
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, are set forth herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended March 31 and June 30, 1998 and 1997, 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 report included in First American's quarterly reports on Form 10-Q for
the quarters ended March 31 and June 30, 1998 and 1997 states that they 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 report 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 report on the unaudited
interim financial information because that report is not a "report" 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 Pioneer as of December 31, 1997 and
December 31, 1996, and for each of the years in the three-year period ended
December 31, 1997, are set forth herein and in the Registration Statement in
reliance upon the report of Joseph Decosimo and Company, LLP, independent
certified public accountants, also included herein, and upon the authority of
said firm as experts in accounting and auditing.
OTHER MATTERS
As of the date of this Prospectus/Proxy Statement, the Pioneer 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
204
214
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 Pioneer.
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 Pioneer 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, 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 and Pioneer file reports and other information with
the Commission under the Exchange Act. You may read and copy this information at
the following locations of the Commission:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
New York Regional Office
7 World Trade Center
Suite 1300
New York, New York 10048
Chicago Regional Office
Citicorp Center
500 West Madison Street
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. You may obtain additional information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330.
The Commission also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like First
American and Pioneer, 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.
First American has supplied all information contained in this Prospectus/Proxy
Statement relating to First American. Pioneer has supplied all information
contained in this Prospectus/Proxy Statement relating to Pioneer.
You should rely only on the information contained in this Prospectus/Proxy
Statement in considering how to vote your shares at the Special Meeting. Neither
First American nor Pioneer has authorized anyone to provide you with information
that is different from the information in this document. This Prospectus/Proxy
Statement is dated October , 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.
205
215
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 contains certain forward-looking statements
about the financial condition, results of operations and business of First
American and Pioneer. The words "believes," "expects," "anticipates," "intends,"
"estimates," "plans," "predicts" 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 Pioneer 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 Pioneer 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; (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 Issue"; (vii)
expected cost savings from First American's acquisition of Deposit Guaranty, the
Merger and First American's other recently completed acquisitions may not be
fully realized or realized within the expected time frames; (viii) revenues
following First American's acquisition of Deposit Guaranty, the Merger and First
American's other recently completed acquisitions may be lower than expected, or
deposit attrition, operating costs or customer loss may be greater than
expected; and (ix) costs or difficulties related to the integration of the
businesses of First American, Deposit Guaranty, Pioneer and other recently
acquired companies may be greater than expected.
206
216
INDEX TO FINANCIAL INFORMATION
PAGE
----
FIRST AMERICAN CORPORATION (AND SUBSIDIARIES):
Consolidated Income Statements for the Three and Six Months
Ended June 30, 1998 and June 30, 1997..................... F-2
Consolidated Balance Sheets as of June 30, 1998 and 1997 and
December 31, 1997......................................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 1998 and June 30,
1997...................................................... F-4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and June 30, 1997..................... F-6
Notes to Consolidated Financial Statements.................. F-7
Independent Auditors' Report................................ F-13
Consolidated Income Statements for the Years Ended December
31, 1997, 1996 and 1995................................... F-14
Consolidated Balance Sheets for the Years Ended December 31,
1997 and 1996............................................. F-15
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-18
Notes to Consolidated Financial Statements.................. F-19
PIONEER BANCSHARES, INC. AND SUBSIDIARIES:
Consolidated Balance Sheets as of June 30, 1998 and 1997.... F-62
Consolidated Statements of Income for the Interim Periods
Ended June 30, 1998 and 1997 (Unaudited).................. F-63
Consolidated Statements of Stockholders' Equity for the
Three and Six Month Periods Ended June 30, 1998 and 1997
(Unaudited)............................................... F-64
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1998 and 1997 (Unaudited).................. F-65
Notes to Interim Consolidated Financial Statements.......... F-66
Report of Independent Accountants........................... F-69
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-70
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-71
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995.............. F-72
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-73
Notes to Consolidated Financial Statements.................. F-76
F-1
217
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Interest and fees on loans................................. $236,718 $232,508 $479,844 $460,485
Interest and dividends on securities....................... 81,277 66,757 151,601 136,565
Interest on federal funds sold and securities purchased
under agreements to resell............................... 1,208 1,183 2,594 2,985
Interest on time deposits with other banks and other
interest................................................. 1,229 1,296 2,435 2,468
-------- -------- -------- --------
Total interest income................................ 320,432 301,744 636,474 602,503
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits:
NOW accounts............................................. 10,391 10,203 19,653 20,437
Money market accounts.................................... 28,995 30,315 59,572 59,456
Regular savings.......................................... 4,713 5,510 9,617 10,993
Certificates of deposit under $100,000................... 36,701 39,387 74,284 79,593
Certificates of deposit $100,000 and over................ 19,360 15,416 37,033 30,133
Other time and foreign................................... 11,385 11,580 22,764 22,992
-------- -------- -------- --------
Total interest on deposits........................... 111,545 112,411 222,923 223,604
-------- -------- -------- --------
Interest on short-term borrowings.......................... 27,760 20,447 52,534 40,563
Interest on long-term debt................................. 9,312 6,598 18,530 13,054
-------- -------- -------- --------
Total interest expense............................... 148,617 139,456 293,987 277,221
-------- -------- -------- --------
Net Interest Income......................................... 171,815 162,288 342,487 325,282
Provision For Loan Losses................................... 5,000 1,875 11,000 3,750
-------- -------- -------- --------
Net interest income after provision for loan
losses.............................................. 166,815 160,413 331,487 321,532
-------- -------- -------- --------
NONINTEREST INCOME
Investment services income................................. 42,849 30,000 78,035 61,711
Service charges on deposit accounts........................ 31,285 27,899 59,629 53,776
Mortgage banking........................................... 14,537 8,764 24,849 17,682
Commissions and fees on fiduciary activities............... 10,113 9,423 20,484 18,813
Merchant discount fees..................................... 964 900 1,764 1,790
Net realized gain on sales of securities................... 1,462 1,160 3,143 1,392
Trading account revenue.................................... 2,102 914 4,059 2,520
Other income............................................... 18,458 16,566 36,248 30,822
-------- -------- -------- --------
Total noninterest income............................. 121,770 95,626 228,211 188,506
-------- -------- -------- --------
NONINTEREST EXPENSE
Salaries and employee benefits............................. 84,218 82,095 169,855 164,366
Subscribers' commissions................................... 26,787 17,159 46,977 34,961
Net occupancy expense...................................... 12,461 11,736 24,622 23,299
Equipment expense.......................................... 11,426 10,515 22,567 20,639
Systems and processing expense............................. 3,632 4,070 7,296 8,124
Communication expense...................................... 6,967 6,405 13,811 12,580
Marketing expense.......................................... 5,182 5,550 10,223 10,083
Supplies expense........................................... 2,838 3,600 5,971 7,481
Goodwill amortization...................................... 4,224 4,040 8,448 7,809
Restructuring and merger-related costs..................... 72,043 -- 72,043 --
Other expenses............................................. 23,762 20,208 45,373 40,981
-------- -------- -------- --------
Total noninterest expense............................ 253,540 165,378 427,186 330,323
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE............................ 35,045 90,661 132,512 179,715
Income tax expense.......................................... 15,927 33,391 51,408 65,802
-------- -------- -------- --------
NET INCOME.................................................. $ 19,118 $ 57,270 $ 81,104 $113,913
======== ======== ======== ========
PER COMMON SHARE:
Net income:
Basic.................................................... $ .18 $ .54 $ .77 $ 1.06
Diluted.................................................. .18 .53 .75 1.04
Dividends declared......................................... .25 .20 .45 .355
======== ======== ======== ========
Average common shares outstanding:
Basic...................................................... 105,634 106,234 105,275 107,330
Diluted.................................................... 107,896 108,790 107,645 109,642
======== ======== ======== ========
See notes to consolidated financial statements.
F-2
218
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30
----------------------------- DECEMBER 31
1998 1997 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Cash and due from banks..................................... $ 1,004,527 $ 971,418 $ 987,520
Time deposits with other banks.............................. 4,910 10,216 13,463
Securities:
Held to maturity (fair value $993,118, $901,600, and
$723,228, respectively)................................. 985,792 896,609 715,027
Available for sale (amortized cost $4,891,346, $2,974,319,
and $3,392,894, respectively)........................... 4,906,133 2,959,051 3,395,494
----------- ----------- -----------
Total securities.................................... 5,891,925 3,855,660 4,110,521
----------- ----------- -----------
Federal funds sold and securities purchased under agreements
to resell................................................. 104,250 98,066 189,542
Trading account securities.................................. 109,577 58,902 64,469
Loans:
Commercial................................................ 4,545,640 4,337,973 4,570,941
Consumer -- amortizing mortgages.......................... 2,185,333 2,767,501 2,783,097
Consumer -- other......................................... 2,589,318 2,538,446 2,524,577
Real estate -- construction............................... 444,363 373,754 400,557
Real estate -- commercial mortgages and other............. 1,346,455 1,314,167 1,374,661
----------- ----------- -----------
Total loans......................................... 11,111,109 11,331,841 11,653,833
Unearned discount......................................... (12,079) (13,730) (12,101)
----------- ----------- -----------
Loans, net of unearned discount........................... 11,099,030 11,318,111 11,641,732
Allowance for loan losses................................. (180,138) (188,179) (180,043)
----------- ----------- -----------
Total net loans..................................... 10,918,892 11,129,932 11,461,689
----------- ----------- -----------
Premises and equipment, net................................. 340,994 340,176 362,047
Other assets................................................ 684,526 624,541 645,185
----------- ----------- -----------
Total assets........................................ $19,059,601 $17,088,911 $17,834,436
=========== =========== ===========
LIABILITIES
Deposits:
Demand (noninterest-bearing).............................. $ 2,796,231 $ 2,625,471 $ 2,647,765
NOW accounts.............................................. 2,152,207 1,820,200 1,879,520
Money market accounts..................................... 2,713,875 2,794,487 2,875,958
Regular savings........................................... 824,742 896,528 859,690
Certificates of deposit under $100,000.................... 2,767,410 2,961,095 2,929,845
Certificates of deposit $100,000 and over................. 1,530,941 1,162,407 1,390,148
Other time................................................ 700,319 712,330 718,349
Foreign................................................... 155,810 131,938 104,182
----------- ----------- -----------
Total deposits...................................... 13,641,535 13,104,456 13,405,457
----------- ----------- -----------
Short-term borrowings....................................... 2,786,341 1,820,780 1,969,639
Long-term debt.............................................. 600,125 417,053 596,218
Other liabilities........................................... 474,557 272,851 319,145
----------- ----------- -----------
Total liabilities................................... 17,502,558 15,615,140 16,290,459
=========== =========== ===========
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; authorized 200,000,000
shares; issued: 106,731,706 shares at June 30, 1998;
106,434,503 shares at June 30, 1997; and 106,032,013
shares at December 31, 1997............................... 266,829 266,086 265,080
Additional paid-in capital.................................. 142,586 187,952 163,902
Retained earnings........................................... 1,171,319 1,044,176 1,126,803
Deferred compensation on restricted stock................... (33,543) (15,091) (13,341)
Employee stock ownership plan obligation.................... -- (291) (163)
----------- ----------- -----------
Realized shareholders' equity............................... 1,547,191 1,482,832 1,542,281
Accumulated other comprehensive income (loss), net of tax... 9,852 (9,061) 1,696
----------- ----------- -----------
Total shareholders' equity.......................... 1,557,043 1,473,771 1,543,977
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $19,059,601 $17,088,911 $17,834,436
=========== =========== ===========
See notes to consolidated financial statements.
F-3
219
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
--------------------------------------------------
COMMON
SHARES ISSUED ADDITIONAL
AND COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS
------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance, January 1,
1997................... 105,109,909 $262,775 $ 239,661 $ 953,062
Comprehensive income:
Net income............. -- -- -- 113,913
Other comprehensive
loss, net of tax..... -- -- -- --
Comprehensive income.....
Issuance of common shares
in connection with
Employee Benefit Plans,
net of discount on
Dividend Reinvestment
Plan................... 859,989 2,149 12,587 --
Issuance of shares of
restricted common
stock.................. 448,914 1,122 13,600 --
Repurchase of shares of
common stock........... (5,000,996) (12,502) (135,328) --
Issuance of common shares
for purchase of
Hartsville Bancshares,
Inc. .................. 350,522 876 9,223 --
Issuance of common shares
for acquisitions of
pooled company......... 4,666,077 11,665 45,855 13,938
Amortization of deferred
compensation on
restricted stock....... -- -- -- --
Reduction in employee
stock ownership plan
obligation............. -- -- -- --
Cash dividends declared
($.355 per common
share)................. -- -- -- (21,016)
Cash dividends declared
by pooled company...... -- -- -- (15,721)
Tax benefit from stock
option and award
plans.................. -- -- 2,351 --
Other.................... 88 1 3 --
------------ -------- --------- ----------
Balance, June 30, 1997... 106,434,503 $266,086 $ 187,952 $1,044,176
============ ======== ========= ==========
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
--------------------------------------------------------
ACCUMULATED
EMPLOYEE OTHER
DEFERRED STOCK COMPREHENSIVE
COMPENSATION OWNERSHIP INCOME
ON RESTRICTED PLAN (LOSS), NET OF
STOCK OBLIGATION TAX TOTAL
------------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance, January 1,
1997................... $ (2,066) $(443) $(3,016) $1,449,973
Comprehensive income:
Net income............. -- -- --
Other comprehensive
loss, net of tax..... -- -- (6,045) --
Comprehensive income..... 107,868
Issuance of common shares
in connection with
Employee Benefit Plans,
net of discount on
Dividend Reinvestment
Plan................... -- -- -- 14,736
Issuance of shares of
restricted common
stock.................. (14,722) -- -- --
Repurchase of shares of
common stock........... -- -- -- (147,830)
Issuance of common shares
for purchase of
Hartsville Bancshares,
Inc. .................. -- -- -- 10,099
Issuance of common shares
for acquisitions of
pooled company......... 71,458
Amortization of deferred
compensation on
restricted stock....... 1,697 -- -- 1,697
Reduction in employee
stock ownership plan
obligation............. -- 152 -- 152
Cash dividends declared
($.355 per common
share)................. -- -- -- (21,016)
Cash dividends declared
by pooled company...... -- -- -- (15,721)
Tax benefit from stock
option and award
plans.................. -- -- -- 2,351
Other.................... -- -- -- 4
-------- ----- ------- ----------
Balance, June 30, 1997... $(15,091) $(291) $(9,061) $1,473,771
======== ===== ======= ==========
F-4
220
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
--------------------------------------------------
COMMON
SHARES ISSUED ADDITIONAL
AND COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS
------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance, January 1,
1998................... 106,032,013 $265,080 $ 163,902 $1,126,803
Comprehensive income:
Net income............. -- -- -- 81,104
Other comprehensive
income, net of tax... -- -- -- --
Comprehensive income.....
Issuance of common shares
in connection with
Employee Benefit Plans,
net of discount on
Dividend Reinvestment
Plan................... 510,298 1,276 7,828 --
Issuance of shares of
restricted common
stock.................. 500,148 1,250 22,239 --
Repurchase of shares of
common stock........... (1,181,909) (2,955) (59,923) --
Issuance of common shares
for acquisition of
pooled company......... 871,156 2,178 5,524 (1,206)
Amortization of deferred
compensation on
restricted stock....... -- -- -- --
Reduction in employee
stock ownership plan
obligation............. -- -- -- --
Cash dividends declared
($.45 per common
share)................. -- -- -- (26,006)
Cash dividends declared
by pooled company...... -- -- -- (9,384)
Tax benefit from stock
option and award
plans.................. -- -- 3,018 --
Other.................... -- -- (2) 8
------------ -------- --------- ----------
Balance, June 30, 1998... 106,731,706 $266,829 $ 142,586 $1,171,319
============ ======== ========= ==========
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998
--------------------------------------------------------
ACCUMULATED
EMPLOYEE OTHER
DEFERRED STOCK COMPREHENSIVE
COMPENSATION OWNERSHIP INCOME
ON RESTRICTED PLAN (LOSS), NET OF
STOCK OBLIGATION TAX TOTAL
------------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance, January 1,
1998................... $(13,341) $(163) $ 1,696 $1,543,977
Comprehensive income:
Net income............. -- -- --
Other comprehensive
income, net of tax... -- -- 8,138
Comprehensive income..... 89,242
Issuance of common shares
in connection with
Employee Benefit Plans,
net of discount on
Dividend Reinvestment
Plan................... -- -- -- 9,104
Issuance of shares of
restricted common
stock.................. (23,489) -- -- --
Repurchase of shares of
common stock........... -- -- -- (62,878)
Issuance of common shares
for acquisition of
pooled company......... -- -- 18 6,514
Amortization of deferred
compensation on
restricted stock....... 3,287 -- -- 3,287
Reduction in employee
stock ownership plan
obligation............. -- 163 -- 163
Cash dividends declared
($.45 per common
share)................. -- -- -- (26,006)
Cash dividends declared
by pooled company...... -- -- -- (9,384)
Tax benefit from stock
option and award
plans.................. -- -- -- 3,018
Other.................... -- -- -- 6
-------- ----- ------- ----------
Balance, June 30, 1998... $(33,543) $ -- $ 9,852 $1,557,043
======== ===== ======= ==========
See notes to consolidated financial statements.
F-5
221
FIRST AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
-------------------------
1998 1997
----------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................ $ 81,104 $ 113,913
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 11,000 3,750
Depreciation and amortization of premises and
equipment............................................. 18,930 18,481
Amortization of intangible assets....................... 17,136 14,284
Other amortization, net................................. 3,038 910
Deferred income tax (benefit) expense................... (816) 8,111
Net loss (gain) on sales and writedowns of other real
estate owned.......................................... 469 (1,893)
Net realized gains on sales of securities............... (3,143) (1,392)
Net loss (gain) on sales and writedowns of premises and
equipment............................................. 589 (114)
Net gain on sales of branches and other assets.......... (1,222) --
Change in assets and liabilities, net of effects from
acquisitions:
(Increase) decrease in mortgage loans held for sale... (102,288) 15,097
Increase in accrued interest receivable............... (5,927) (6,274)
Increase (decrease) in accrued interest payable....... 5,410 (1,093)
(Increase) decrease in trading account securities..... (45,108) 3,698
(Increase) decrease in other assets................... (62,089) 17,964
Increase (decrease) in other liabilities.............. 147,044 (87,914)
----------- ----------
Net cash provided by operating activities........... 64,127 97,528
----------- ----------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale...... 723,864 983,537
Proceeds from maturities of securities available for
sale.................................................... 846,959 283,769
Purchases of securities available for sale................ (3,025,212) (977,622)
Proceeds from maturities of securities held to maturity... 288,087 157,981
Purchases of securities held to maturity.................. (868) (85,058)
Proceeds from sales of other real estate owned............ 3,540 8,032
Acquisitions, net of cash and cash equivalents acquired... 11,262 85,063
Sales of branches and other assets........................ (18,003) --
Net decrease (increase) in loans, net of repayments and
sales................................................... 138,793 (369,843)
Proceeds from sales of premises and equipment............. 5,003 228
Purchases of premises and equipment....................... (1,964) (33,399)
----------- ----------
Net cash (used in) provided by investing
activities........................................ (1,028,539) 52,688
----------- ----------
FINANCING ACTIVITIES
Net increase (decrease) in deposits....................... 158,293 (267,179)
Net increase (decrease) in other short-term borrowings.... 817,118 (58,423)
(Repayment to) advances from Federal Home Loan Bank....... (1,624) 159,776
Net repayment of other long-term debt..................... (67) (77)
Issuance of common shares under Employee Benefit and
Dividend Reinvestment Plans............................. 9,104 14,736
Repurchase of common stock................................ (62,878) (147,830)
Tax benefit related to stock options...................... 3,018 2,351
Cash dividends paid....................................... (35,390) (37,022)
----------- ----------
Net cash provided by (used in) financing
activities........................................ 887,574 (333,668)
----------- ----------
Decrease in cash and cash equivalents..................... (76,838) (183,452)
Cash and cash equivalents, January 1...................... 1,190,525 1,263,152
----------- ----------
Cash and cash equivalents, June 30.......................... $ 1,113,687 $1,079,700
=========== ==========
Cash paid during the year for:
Interest expense.......................................... $ 299,397 $ 278,314
Income taxes.............................................. 44,625 47,347
Non-cash transactions:
Foreclosures.............................................. 1,836 1,780
Stock issued for acquisitions............................. 6,514 81,557
Mortgage loans securitized and retained................... 583,629 --
=========== ==========
See notes to consolidated financial statements.
F-6
222
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and general practices within the
banking industry. The interim consolidated financial statements should be read
in conjunction with First American Corporation's (the "Corporation" or "First
American") supplemental consolidated financial statements and include the
accounts of Deposit Guaranty Corp. ("Deposit Guaranty") for all periods
presented in accordance with the pooling-of-interests method of accounting for
business combinations. The quarterly consolidated financial statements reflect
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for interim periods. All adjustments are of a normal
recurring nature. Certain prior year amounts have been reclassified to conform
with the current year presentation. The results for interim periods are not
necessarily indicative of results to be expected for the complete fiscal year.
(2) ACQUISITIONS
Effective May 1, 1998, the Corporation completed the merger of Deposit Guaranty
with and into the Corporation by exchanging approximately 48.7 million shares of
First American common stock for all of the outstanding shares of Deposit
Guaranty (based on an exchange ratio of 1.17 shares of First American common
stock for each share of Deposit Guaranty common stock). Deposit Guaranty was a
$7.2 billion asset financial services holding company headquartered in Jackson,
Mississippi, with banking offices in Mississippi, Louisiana, Arkansas, and
Tennessee, and mortgage offices in Oklahoma, Nebraska, Texas, Indiana, and Iowa.
The transaction was accounted for as a pooling of interests, and accordingly,
the consolidated financial statements have been restated to include the results
of Deposit Guaranty for all periods presented. Restructuring and merger-related
costs, comprised primarily of investment banking, severance, and systems
conversions costs, are expected to total approximately $72 million, net of tax,
and will be recognized throughout 1998.
In April 1998 and in conjunction with the Deposit Guaranty business combination,
the number of authorized shares was increased from 100 million to 200 million.
Net interest income, noninterest income and net income as originally reported by
First American and Deposit Guaranty for the three months and the six months
ended June 30, 1997 are presented in the table below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
FIRST DEPOSIT FIRST DEPOSIT
AMERICAN GUARANTY COMBINED AMERICAN GUARANTY COMBINED
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net interest income.... $93,549 $68,739 $162,288 $186,483 $138,799 $325,282
Noninterest income..... 62,839 32,787 95,626 124,590 63,916 188,506
Net income............. 35,341 21,929 57,270 69,371 44,542 113,913
F-7
223
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Bank mergers and acquisitions completed by First American since January 1, 1997,
are presented in the following table (in millions):
COMMON
SHARES CASH ACCOUNTING
FINANCIAL INSTITUTION STATE DATE ASSETS ISSUED PAID TREATMENT
- --------------------- ----- ----------- ------ ------ ---- ----------
Jefferson Guaranty Bancorp,
Inc.......................... LA Jan. 1997 $299 2.1 $10 Purchase
Hartsville Bancshares, Inc..... TN Jan. 1997 90 0.4 -- Purchase
First Capital Bancorp, Inc..... LA Mar. 1997 186 1.8 -- Pooling
NBC Financial Corporation...... LA July 1997 69 0.5 -- Purchase
CitiSave Financial
Corporation.................. LA Aug. 1997 75 -- 19 Purchase
Victory Bancshares, Inc........ TN Mar. 1998 131 0.9 -- Pooling
For the acquisitions accounted for as pooling-of-interests combinations, the
results of operations have been included in the consolidated financial
statements from the beginning of the year acquired or from the date of the
acquisition when preacquisition amounts were not material. Prior year financial
statements have not been restated since the changes would have been immaterial.
For acquisitions accounted for as purchase business combinations, the results of
operations have been included in the consolidated financial statements from the
respective dates of acquisition. The purchase price in excess of the net assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years. The proforma effect on prior earnings of such acquisitions
is not significant.
On June 1, 1997, the Corporation issued .8 million shares of its common stock in
exchange for the 2 percent interest in Deposit Guaranty National Bank ("DGNB")
owned by minority shareholders. With this acquisition the Corporation became the
sole shareholder of DGNB.
Pending business combinations announced during the first six months of 1998 are
presented in the following table (dollars in millions):
ASSETS EXCHANGE ANTICIPATED
FINANCIAL INSTITUTION STATE AT 6/30/98 RATIO (1) EFFECTIVE DATE
- --------------------- ----- ---------- --------- ----------------
Peoples Bank of Dickson............. TN $ 136 3.7:1 October 1, 1998
Middle Tennessee Bank............... TN 225 7.768:1 October 1, 1998
CSB Financial Corporation........... TN 145 9.7071:1 October 1, 1998
Pioneer Bancshares.................. TN 1,006 1.65:1 November 1, 1998
- -------------------------
(1) Ratio of the number of shares of First American common stock to be exchanged
for each share of common stock of the financial institution to be merged.
These ratios are subject to adjustment in certain circumstances as provided
in the respective merger agreements.
The business combinations noted in the table above will be accounted for as
pooling of interests and are subject to shareholder and regulatory approval.
F-8
224
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) NONPERFORMING ASSETS
Nonperforming assets were as follows:
JUNE 30
----------------- DECEMBER 31
1998 1997 1997
------- ------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans.................................. $31,853 $37,597 $36,294
Foreclosed properties............................. 7,021 8,074 7,023
------- ------- -------
Total nonperforming assets...................... $38,874 $45,671 $43,317
======= ======= =======
Loans on accrual past due 90 days or more......... $26,445 $29,625 $26,875
======= ======= =======
Nonperforming assets as a percent of loans and
foreclosed properties (excluding loans on
accrual past due 90 days or more)............... .35% .40% .37%
======= ======= =======
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Balance, January 1..................................... $180,043 $185,470
Provision charged to operating expenses................ 11,000 3,750
Allowance of business combinations, except Deposit
Guaranty............................................. 1,317 7,581
-------- --------
192,360 196,801
-------- --------
Loans charged off...................................... 27,296 22,368
Recoveries of loans previously charged off............. 15,074 13,746
-------- --------
Net charge-offs........................................ 12,222 8,622
-------- --------
Balance, June 30....................................... $180,138 $188,179
======== ========
Allowance ratios were as follows:
SIX MONTHS
ENDED JUNE 30
--------------
1998 1997
----- -----
Allowance end of period to net loans outstanding............ 1.62% 1.66%
Net charge-offs to average loans (annualized)............... .22 .16
==== ====
F-9
225
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) ACCOUNTING MATTERS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," was adopted by the Corporation on January 1, 1998. SFAS
No. 130 establishes standards for reporting comprehensive income. Comprehensive
income includes net income and other comprehensive income which is defined as
non-owner related transactions in equity. Prior periods have been reclassified
to reflect the application of the provisions of SFAS No. 130.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Corporation adopted SFAS No. 131
on January 1, 1998 and is currently evaluating its operations to determine the
appropriate disclosures with respect to SFAS No. 131.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," revises and standardizes the disclosure requirements for employers'
pensions and other postretirement benefits plans. This standard does not change
the measurement or recognition of such plans. SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997. Restatement of disclosures for
earlier periods presented is required unless the information is not readily
available, in which case, all available information and a description of the
information not available shall be included in the notes to the financial
statements. The disclosure requirements of SFAS No. 132 have been designed to
provide information that is more comparable, understandable, and concise for the
users of this information. The Corporation adopted SFAS 132 on January 1, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. Gains or losses
resulting from changes in the values of derivatives will be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting with the key criterion for hedge accounting being that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, and shall not be applied retroactively to financial statements of
prior periods. At this time, the Corporation is evaluating when and how it will
adopt SFAS No. 133 as well as the possible impact of the statement on the
Corporation's consolidated financial statements.
F-10
226
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator). Diluted EPS is computed by dividing income available
to common shareholders by the weighted average number of shares outstanding
adjusted to reflect the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
(7) LEGAL AND REGULATORY MATTERS
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, Charter Federal Savings Bank ("Charter" or now
"FAFSB"), brought an action against the Office of Thrift Supervision and the
Federal Deposit Insurance Corporation seeking injunctive and other relief,
contending that Congress' elimination of supervisory goodwill required
rescission of certain supervisory transactions. The Federal District Court found
in Charter's favor, but in 1992 the Fourth Circuit Court of Appeals reversed,
and the U.S. Supreme Court denied Charter's petition for certiorari. In 1995,
the Federal Circuit Court found in favor of another thrift institution in a
similar case (Winstar Corp. v. United States) in which the association sought
damages for breach of contract. Charter also filed suit against the United
States Government ("Government") in the Court of Federal Claims based on breach
of contract. Pending the Supreme Court's review of the Winstar decision, FAFSB's
action was stayed. In July 1996, the Supreme Court affirmed the lower court's
decision in Winstar. The stay was automatically lifted and FAFSB's suit is now
proceeding. The Government filed a motion to dismiss the suit based on the prior
Fourth Circuit decision, and FAFSB has filed a Motion for Partial Summary
Judgment. These motions have not yet been decided by the Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their ultimate
outcome, are contingent upon a number of factors, some of which are outside of
FAFSB's control, and are highly uncertain as to substance, timing and the dollar
amount of any damages which might be awarded should FAFSB finally prevail. Under
the Agreement and Plan of Reorganization as amended by and between FAFSB and the
Corporation, in the event that FAFSB is successful in this litigation, the FAFSB
shareholders as of December 1, 1995, will be entitled to receive additional
consideration equal in value to 50% of any recovery, net of all taxes and
certain other expenses, including the costs and expenses of such litigation,
received on or before December 1, 2000, subject to certain limitations in the
case of certain business combinations. Such additional consideration, if any, is
payable in the common stock of the Corporation, based on the average per share
closing price on the date of receipt by FAFSB of the last payment constituting a
recovery from the Government.
DGNB is a defendant in a case in which the plaintiffs are beneficiaries of a
trust for which DGNB is the trustee. In an amended complaint, the plaintiffs
claim that DGNB was negligent in its dealings with the trust property, breached
its trust duties by allegedly abusing its discretion and negligently handling
trust assets, engaged in self dealing, and was grossly negligent in its handling
of the trusts. The case seeks actual damages for waste of trust assets and loss
of income and punitive damages, both in an unspecified amount to be
F-11
227
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
proven at trial, and attorney fees and court costs. While the ultimate outcome
of the lawsuit cannot be predicted with certainty, management denies all
liability and believes that the ultimate resolution of this matter will not have
a material effect on the Corporation's consolidated financial statements.
DGNB is also a defendant in an action brought in Pike County, Mississippi by a
land owner and a gaming corporation, alleging that DGNB and the two defendant
casinos entered into an agreement, expressed or implied, to oppose an
application to operate a casino on the Big Black River in Mississippi. The
plaintiffs contend that DGNB used its influence to cause the Mississippi Gaming
Commission to deny the casino's application. The plaintiffs seek actual damages
for injury to property and business in the total amount of $38 million and
punitive damages in the amount of $200 million. DGNB denies all liability. It is
the opinion of management and counsel that ultimate disposition of the case
should not have a material effect on the Corporation's consolidated financial
statements.
Also, there are from time to time other legal proceedings pending against the
Corporation and its subsidiaries. In the opinion of management and counsel,
liabilities, if any, arising from such proceedings presently pending would not
have a material adverse effect on the consolidated financial statements of the
Corporation.
F-12
228
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
First American Corporation:
We have audited the accompanying consolidated balance sheets of First American
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated income statements, changes in shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First American
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Nashville, Tennessee
July 10, 1998
F-13
229
CONSOLIDATED INCOME STATEMENTS
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
Interest income
Interest and fees on loans................................ $ 949,676 $ 867,897 $ 754,662
Interest and dividends on securities...................... 271,441 243,853 250,437
Interest on federal funds sold and securities purchased
under agreements to resell.............................. 5,779 17,525 11,128
Interest on time deposits with other banks and other
interest................................................ 5,235 4,025 3,647
---------- ---------- ----------
Total interest income............................... 1,232,131 1,133,300 1,019,874
---------- ---------- ----------
Interest expense
Interest on deposits:
NOW accounts............................................ 40,882 34,255 34,800
Money market accounts................................... 120,253 121,545 95,448
Regular savings......................................... 21,808 22,719 25,959
Certificates of deposit under $100,000.................. 158,725 151,689 131,521
Certificates of deposit $100,000 and over............... 64,143 56,994 51,902
Other time and foreign.................................. 46,169 46,914 42,677
---------- ---------- ----------
Total interest on deposits.......................... 451,980 434,116 382,307
---------- ---------- ----------
Interest on short-term borrowings (note 8).................. 90,067 76,839 78,543
Interest on long-term debt (note 9)......................... 27,961 29,084 19,971
---------- ---------- ----------
Total interest expense.............................. 570,008 540,039 480,821
---------- ---------- ----------
Net interest income......................................... 662,123 593,261 539,053
Provision for loan losses (Note 5).......................... 12,500 5,340 2,243
---------- ---------- ----------
Net interest income after provision for loan
losses............................................ 649,623 587,921 536,810
---------- ---------- ----------
Noninterest income
Investment services income................................ 123,431 68,364 15,525
Service charges on deposit accounts....................... 113,461 93,170 80,629
Commissions and fees on fiduciary activities.............. 38,787 34,312 31,364
Mortgage banking.......................................... 25,071 20,169 12,700
Merchant discount fees.................................... 3,766 4,492 4,878
Net realized gain on sales of securities (note 4)......... 4,234 2,585 1,656
Trading account revenue................................... 4,414 6,939 4,899
Gain on sales of branches (note 2)........................ -- -- 3,000
Other..................................................... 82,597 73,718 48,354
---------- ---------- ----------
Total noninterest income............................ 395,761 303,749 203,005
Noninterest expense
Salaries and employee benefits (note 10).................. 329,882 297,036 255,465
Subscribers' commissions (note 1)......................... 70,785 35,075 --
Net occupancy (note 6).................................... 48,159 42,006 35,712
Equipment................................................. 42,785 35,070 31,882
Systems and processing (note 6)........................... 15,662 14,755 11,389
Communication............................................. 25,731 20,684 17,205
Marketing................................................. 21,737 21,102 16,403
Supplies.................................................. 14,678 12,710 10,329
FDIC insurance (note 15).................................. 1,754 10,483 12,880
Merger-related (note 2)................................... -- -- 7,269
Other..................................................... 98,558 82,742 65,366
---------- ---------- ----------
Total noninterest expense........................... 669,731 571,663 463,900
---------- ---------- ----------
Income before income tax expense............................ 375,653 320,007 275,915
Income tax expense (note 11)................................ 137,901 114,825 100,215
---------- ---------- ----------
Net income.................................................. $ 237,752 $ 205,182 $ 175,700
========== ========== ==========
Per common share (note 13):
Net income:
Basic................................................... $ 2.23 $ 1.96 $ 1.73
Diluted................................................. 2.18 1.93 1.70
Dividends declared........................................ .755 .605 .53
---------- ---------- ----------
Average common shares outstanding (note 13):
Basic..................................................... 106,745 104,533 101,593
Diluted................................................... 108,950 106,092 103,300
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-14
230
CONSOLIDATED BALANCE SHEETS
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
DECEMBER 31,
---------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
ASSETS
Cash and due from banks (note 3)............................ $ 987,520 $ 998,302
Time deposits with other banks.............................. 13,463 55,533
Securities (note 4):
Held to maturity (fair value $723,228 and $977,767,
respectively)........................................... 715,027 969,797
Available for sale (amortized cost $3,392,894 and
$3,156,024, respectively)............................... 3,395,494 3,150,107
----------- -----------
Total securities.................................... 4,110,521 4,119,904
----------- -----------
Federal funds sold and securities purchased under agreements
to resell................................................... 189,542 209,317
Trading account securities.................................. 64,469 62,715
Loans (note 5):
Commercial................................................ 4,570,941 4,118,480
Consumer -- amortizing mortgages.......................... 2,783,097 2,717,894
Consumer -- other......................................... 2,524,577 2,239,558
Real estate -- construction............................... 400,557 361,451
Real estate -- commercial mortgages and other............. 1,374,661 1,209,748
----------- -----------
Total loans......................................... 11,653,833 10,647,131
Unearned discount......................................... (12,101) (14,466)
----------- -----------
Loans, net of unearned discount..................... 11,641,732 10,632,665
Allowance for loan losses................................. (180,043) (185,470)
----------- -----------
Total net loans..................................... 11,461,689 10,447,195
----------- -----------
Premises and equipment, net (note 6)........................ 362,047 310,584
Other assets (notes 7, 10, and 11).......................... 645,185 602,460
----------- -----------
Total assets........................................ $17,834,436 $16,806,010
=========== ===========
LIABILITIES
Deposits:
Demand (noninterest-bearing).............................. $ 2,647,765 $ 2,565,084
NOW accounts.............................................. 1,879,520 1,739,668
Money market accounts..................................... 2,875,958 2,732,810
Regular savings........................................... 859,690 862,253
Certificates of deposit under $100,000.................... 2,929,845 2,916,709
Certificates of deposit $100,000 and over................. 1,390,148 1,249,193
Other time................................................ 718,349 685,394
Foreign................................................... 104,182 97,257
----------- -----------
Total deposits...................................... 13,405,457 12,848,368
----------- -----------
Short-term borrowings (note 8).............................. 1,969,639 1,697,401
Long-term debt (note 9)..................................... 596,218 430,562
Other liabilities (notes 10 and 11)......................... 319,145 379,706
----------- -----------
Total liabilities................................... 16,290,459 15,356,037
----------- -----------
Commitments and contingencies (notes 6, 10, 14, and 15)
Shareholders' equity (notes 2, 4, 9, 10, 12, and 15)
Preferred stock, without par value; authorized 2,500,000
shares.................................................. -- --
Common stock, $2.50 par value; authorized 200,000,000
shares; issued: 106,032,013 shares at December 31, 1997;
105,109,909 shares at December 31, 1996................. 265,080 262,775
Additional paid-in capital................................ 163,902 239,661
Retained earnings......................................... 1,126,803 953,062
Deferred compensation on restricted stock................. (13,341) (2,066)
Employee stock ownership plan obligation.................. (163) (443)
----------- -----------
Realized shareholders' equity........................... 1,542,281 1,452,989
Net unrealized losses on securities available for sale,
net of tax.............................................. 1,696 (3,016)
----------- -----------
Total shareholders' equity.......................... 1,543,977 1,449,973
----------- -----------
Total liabilities and shareholders' equity.......... $17,834,436 $16,806,010
=========== ===========
See accompanying notes to consolidated financial statements.
F-15
231
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
COMMON
SHARES
ISSUED ADDITIONAL
AND COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS
----------- -------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BALANCE, DECEMBER 31, 1994
Issuance of common shares in
connection with Employee
Benefit...................... 98,582,780 $246,457 $ 200,169 $ 679,146
Plans, net of discount on
Dividend Reinvestment Plan
(note 10).................. 1,514,404 3,786 11,010 --
Issuance of shares of
restricted common stock (note
12).......................... 32,190 81 498 --
Repurchase of shares of common
stock........................ (6,385,902) (15,965) (95,142) --
Issuance of common shares for
purchase of Charter Federal
Savings Bank (note 2)........ 3,530,470 8,826 71,547 --
Issuance of common shares for
acquisitions of pooled
company...................... 7,154,061 17,885 49,557 8,580
Amortization of deferred
compensation on restricted
stock (note 12).............. -- -- -- --
Reduction in employee stock
ownership plan obligation
(note 10).................... -- -- -- --
Net income.................... -- -- -- 175,700
Cash dividends declared ($.53
per common share)............ -- -- -- (27,883)
Cash dividends declared by
pooled companies............. -- -- -- (23,983)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4) -- -- -- --
Tax benefit from stock option
and award plans.............. -- -- 3,574 --
Other......................... -- -- -- 46
----------- -------- --------- ----------
BALANCE, DECEMBER 31, 1995.... 104,428,003 261,070 241,213 811,606
----------- -------- --------- ----------
Issuance of common shares in
connection with Employee
Benefit Plans, net of
discount on Dividend
Reinvestment Plan (note
10).......................... 1,390,074 3,475 14,472 --
Issuance of shares of
restricted common stock (note
12).......................... 92,976 232 1,958 --
Repurchase of shares of common
stock........................ (4,922,297) (12,306) (95,943) --
Issuance of common shares for
purchase of First City
Bancorp, Inc. (note 2)....... 2,147,518 5,369 40,937 --
Issuance of common shares for
acquisitions of pooled
company...................... 1,974,829 4,937 32,512 (32)
Amortization of deferred
compensation on restricted
stock (note 12).............. -- -- -- --
Reduction in employee stock
ownership plan obligation
(note 10).................... -- -- -- --
Net income.................... -- -- -- 205,182
Cash dividends declared ($.605
per common share)............ -- -- -- (35,694)
Cash dividends declared by
pooled company............... -- -- -- (28,000)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4)................. -- -- -- --
NET
UNREALIZED
EMPLOYEE GAINS
DEFERRED STOCK (LOSSES) ON
COMPENSATION OWNERSHIP SECURITIES
ON STOCK OBLIGATION FOR SALE TOTAL
------------ ---------- ----------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BALANCE, DECEMBER 31, 1994
Issuance of common shares in
connection with Employee
Benefit...................... $ (2,161) $(781) $(11,608) $1,111,222
Plans, net of discount on
Dividend Reinvestment Plan
(note 10).................. -- -- -- 14,796
Issuance of shares of
restricted common stock (note
12).......................... (492) -- -- 87
Repurchase of shares of common
stock........................ -- -- -- (111,107)
Issuance of common shares for
purchase of Charter Federal
Savings Bank (note 2)........ -- -- -- 80,373
Issuance of common shares for
acquisitions of pooled
company...................... -- -- -- 76,022
Amortization of deferred
compensation on restricted
stock (note 12).............. 1,390 -- -- 1,390
Reduction in employee stock
ownership plan obligation
(note 10).................... -- 120 -- 120
Net income.................... -- -- -- 175,700
Cash dividends declared ($.53
per common share)............ -- -- -- (27,883)
Cash dividends declared by
pooled companies............. -- -- -- (23,983)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4) -- -- 34,228 34,228
Tax benefit from stock option
and award plans.............. -- -- -- 3,574
Other......................... -- -- -- 46
-------- ----- -------- ----------
BALANCE, DECEMBER 31, 1995.... (1,263) (661) 22,620 1,334,585
-------- ----- -------- ----------
Issuance of common shares in
connection with Employee
Benefit Plans, net of
discount on Dividend
Reinvestment Plan (note
10).......................... -- -- -- 17,947
Issuance of shares of
restricted common stock (note
12).......................... (2,190) -- -- --
Repurchase of shares of common
stock........................ -- -- -- (108,249)
Issuance of common shares for
purchase of First City
Bancorp, Inc. (note 2)....... -- -- -- 46,306
Issuance of common shares for
acquisitions of pooled
company...................... -- -- -- 37,417
Amortization of deferred
compensation on restricted
stock (note 12).............. 1,387 -- -- 1,387
Reduction in employee stock
ownership plan obligation
(note 10).................... -- 218 -- 218
Net income.................... -- -- -- 205,182
Cash dividends declared ($.605
per common share)............ -- -- -- (35,694)
Cash dividends declared by
pooled company............... -- -- -- (28,000)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4)................. -- -- (25,636) (25,636)
F-16
232
COMMON
SHARES
ISSUED ADDITIONAL
AND COMMON PAID-IN RETAINED
OUTSTANDING STOCK CAPITAL EARNINGS
----------- -------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Tax benefit from stock option
and award plans.............. -- -- 4,530 --
Other......................... (1,194) (2) (18) --
----------- -------- --------- ----------
BALANCE, DECEMBER 31, 1996.... 105,109,909 262,775 239,661 953,062
----------- -------- --------- ----------
Issuance of common shares in
connection with Employee
Benefit Plans, net of
discount on Dividend
Reinvestment Plan (note
10).......................... 1,234,445 3,086 18,979 --
Issuance of shares of
restricted common stock (note
12).......................... 445,583 1,114 13,564 --
Repurchase of shares of common
stock........................ (6,268,784) (15,672) (180,828) --
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. (note 2).... 350,522 876 9,223 --
Issuance of common shares for
acquisitions of pooled
company...................... 5,160,250 12,900 57,698 13,940
Amortization of deferred
compensation on restricted
stock (note 12).............. -- -- -- --
Reduction in employee stock
ownership plan obligation
(note 10).................... -- -- -- --
Net income.................... -- -- -- 237,752
Cash dividends declared ($.755
per common share)............ -- -- -- (44,393)
Cash dividends declared by
pooled company............... -- -- -- (33,558)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4)................. -- -- -- --
Tax benefit from stock option
and award plans.............. -- -- 5,603 --
Other......................... 88 1 2 --
----------- -------- --------- ----------
BALANCE, DECEMBER 31, 1997.... 106,032,013 $265,080 $ 163,902 $1,126,803
----------- -------- --------- ----------
NET
UNREALIZED
EMPLOYEE GAINS
DEFERRED STOCK (LOSSES) ON
COMPENSATION OWNERSHIP SECURITIES
ON STOCK OBLIGATION FOR SALE TOTAL
------------ ---------- ----------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Tax benefit from stock option
and award plans.............. -- -- -- 4,530
Other......................... -- -- -- (20)
-------- ----- -------- ----------
BALANCE, DECEMBER 31, 1996.... (2,066) (443) (3,016) 1,449,973
-------- ----- -------- ----------
Issuance of common shares in
connection with Employee
Benefit Plans, net of
discount on Dividend
Reinvestment Plan (note
10).......................... -- -- -- 22,065
Issuance of shares of
restricted common stock (note
12).......................... (14,678) -- -- --
Repurchase of shares of common
stock........................ -- -- -- (196,500)
Issuance of common shares for
purchase of Hartsville
Bancshares, Inc. (note 2).... -- -- -- 10,099
Issuance of common shares for
acquisitions of pooled
company...................... -- -- -- 84,538
Amortization of deferred
compensation on restricted
stock (note 12).............. 3,403 -- -- 3,403
Reduction in employee stock
ownership plan obligation
(note 10).................... -- 280 -- 280
Net income.................... -- -- -- 237,752
Cash dividends declared ($.755
per common share)............ -- -- -- (44,393)
Cash dividends declared by
pooled company............... -- -- -- (33,558)
Change in net unrealized gains
(losses) on securities
available for sale, net of
tax (note 4)................. -- -- 4,712 4,712
Tax benefit from stock option
and award plans.............. -- -- -- 5,603
Other......................... -- -- -- 3
-------- ----- -------- ----------
BALANCE, DECEMBER 31, 1997.... $(13,341) $(163) $ 1,696 $1,543,977
-------- ----- -------- ----------
See accompanying notes to consolidated financial statements.
F-17
233
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST AMERICAN CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Operating activities
Net income................................................ $ 237,752 $ 205,182 $ 175,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses............................... 12,500 5,340 2,243
Depreciation and amortization of premises and
equipment............................................. 38,122 35,119 31,526
Amortization of intangible assets....................... 29,717 20,315 14,417
Other amortization (accretion), net..................... 1,929 (2,140) (28,223)
Deferred income tax expense............................. 19,357 25,061 14,746
Net gain on sales and writedowns of foreclosed
property.............................................. (4,164) (4,991) (5,586)
Net realized gains on sales and write-downs of
securities............................................ (4,234) (2,585) (1,656)
Net gain on sales and write-downs of premises and
equipment............................................. (799) (131) (399)
Gain on sales of branches and other assets.............. (4,347) -- (3,000)
Gain on sale of subsidiaries............................ (2,105) -- --
Change in assets and liabilities, net of effects from
acquisitions and sales of branches:
Decrease (increase) in mortgage loans held for sale... 3,372 9,821 (97,353)
(Increase) decrease in accrued interest receivable.... (10,506) 3,919 (31,851)
Increase (decrease) in accrued interest payable....... 10,049 (10,548) 25,277
Increase in trading account securities................ (7,077) (22,619) (18,398)
Increase in other assets.............................. (53,805) (8,461) (9,992)
(Decrease) increase in other liabilities.............. (22,528) 83,750 (1,919)
----------- ----------- -----------
Net cash provided by operating activities........... 243,233 337,032 65,532
----------- ----------- -----------
Investing activities
Proceeds from sales of securities available for sale...... 2,625,181 2,125,045 1,531,941
Proceeds from maturities of securities available for
sale.................................................... 532,884 918,793 361,820
Purchases of securities available for sale................ (3,226,092) (3,614,276) (1,332,543)
Proceeds from maturities of securities held to maturity... 452,650 261,450 1,089,987
Purchases of securities held to maturity.................. (212,131) (168,211) (846,778)
Proceeds from sales of foreclosed property................ 16,099 16,007 12,998
Acquisitions, net of cash acquired........................ 76,697 25,156 21,335
Proceeds from sale of subsidiary, net of cash disposed
of...................................................... 1,907 -- --
Sales of branches and other assets........................ 6,091 -- (24,451)
Net increase in loans, net of repayments and sales........ (623,037) (391,972) (1,153,574)
Proceeds from sales of premises and equipment............. 7,075 6,176 1,999
Purchases of premises and equipment....................... (78,249) (67,183) (48,118)
----------- ----------- -----------
Net cash used in investing activities............... (420,925) (889,015) (385,384)
----------- ----------- -----------
Financing activities
Net (decrease) increase in deposits....................... (90,620) 197,061 847,451
Net increase (decrease) in short-term borrowings.......... 138,794 106,618 (69,179)
Proceeds from issuance of long-term debt.................. -- 99,381 49,513
Repayment of line of credit to fund loans held for sale... -- -- (32,954)
Advances from (repayments to) Federal Home Loan Bank...... 300,753 (64,166) 52,724
Net repayment of other long-term debt..................... (350) (126) (1,116)
Proceeds from early termination of swap contract on
long-term debt.......................................... 2,038 -- --
Issuance of common shares under Employee Benefit and
Dividend Reinvestment Plans............................. 22,065 17,947 14,883
Repurchase of common stock................................ (196,500) (108,249) (111,107)
Tax benefit related to stock options...................... 5,603 4,530 3,574
Cash dividends paid....................................... (76,718) (62,201) (50,146)
----------- ----------- -----------
Net cash provided by financing activities........... 105,065 190,795 703,643
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents.......... (72,627) (361,188) 383,791
Cash and cash equivalents, beginning of year.............. 1,263,152 1,624,340 1,240,549
----------- ----------- -----------
Cash and cash equivalents, end of year...................... $ 1,190,525 $ 1,263,152 $ 1,624,340
=========== =========== ===========
Cash paid during the year for:
Interest expense.......................................... $ 559,959 $ 550,584 $ 455,544
Income taxes.............................................. 98,402 89,613 72,597
Non-cash investing activities:
Foreclosures.............................................. 5,357 3,614 4,770
Reclassification of investment securities (note 4)........ -- -- 1,822,027
Stock issued for acquisitions (note 2).................... 94,636 83,723 156,395
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-18
234
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
First American Corporation ("Corporation" or "First American") is the Nashville,
Tennessee based parent company of First American National Bank ("FANB"), First
American Federal Savings Bank ("FAFSB"), G&W Life Insurance Company, Central
South Financial Services LLC, and First American Enterprises, Inc. The
Corporation and its subsidiaries make commercial, consumer, and real estate
loans and provide various banking and mortgage-related services to its customers
located within the Corporation's market, which consists primarily of the Mid
South region of the United States and Oklahoma, Nebraska, Texas, Indiana, and
Iowa.
FANB owns 98.5% of the issued and outstanding capital stock of IFC Holdings,
Inc. ("IFC"), formerly INVEST Financial Corporation, headquartered in Tampa,
Florida, which is engaged in the distribution of securities, investment, and
insurance products to customers of subscribing financial institutions located
throughout the country. IFC is a broker-dealer registered with the National
Association of Securities Dealers.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Corporation have been prepared in
conformity with generally accepted accounting principles including general
practices of the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of certain assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of related revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The consolidated financial statements include the accounts of the Corporation
and its subsidiaries more than 50 percent owned. Subsidiaries not more than 50
percent owned are recorded under the equity method and included in other assets.
All significant intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements for prior periods also
reflect certain reclassifications to conform to the 1997 presentation.
On May 9, 1997, the Corporation completed a 2-for-1 split of its common stock.
Accordingly, the consolidated financial statements for all periods presented
have been restated to reflect the impact of the stock split.
CASH AND CASH EQUIVALENTS
Cash and highly liquid investments with maturities of three months or less when
purchased are considered cash and cash equivalents. Cash and cash equivalents
consist primarily of cash and due from banks, interest-bearing deposits in
banks, and federal funds sold.
SECURITIES
The Corporation classifies investments in equity securities that have a readily
determinable fair value and investments in debt securities into three
categories: held to maturity debt securities, securities available for sale, and
trading securities.
Classification of a debt security as held to maturity is based on the
Corporation's intent and ability to hold such security to maturity. Securities
held to maturity are stated at cost
F-19
235
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
adjusted for amortization of premiums and accretion of discounts, unless there
is a decline in value which is considered to be other than temporary, in which
case the cost basis of such security is written down to fair value and the
amount of the write-down is included in earnings.
Securities classified as available for sale, which are reported at fair value
with unrealized gains and losses excluded from earnings and reported, net of
tax, in a separate component of shareholders' equity, include all securities not
classified as trading account securities or securities held to maturity. These
include securities used as part of the Corporation's asset/liability strategy
which may be sold in response to changes in interest rates, prepayment risk, the
need or desire to increase capital, and other similar factors. Gains or losses
on the sale of securities available for sale are recognized at the time of sale
(trade date), based upon the specific identification of the security sold, and
are included in noninterest income in the consolidated income statements.
Declines in value that are considered other than temporary are recorded in
noninterest income as a loss on investment securities.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading account securities, which are valued
at fair value with unrealized gains and losses included in earnings. Gains or
losses on sales and adjustments to the fair value of trading account securities
are included in noninterest income in the consolidated income statements.
Purchased premiums and discounts are amortized and accreted into interest income
on a constant yield basis over the lives of the securities, taking into
consideration current prepayment projections.
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation enters into interest rate swap and forward interest rate swap
transactions (swaps), as well as interest rate caps, floors, and futures
contracts, in connection with its asset/liability management program in managing
interest rate exposure arising out of nontrading assets and liabilities. There
must be correlation of interest rate movements between these derivative
instruments and the underlying assets or liabilities to qualify for hedge
accounting. The impact of a derivative is accrued over the life of the agreement
based on expected settlement payments and is recorded as an adjustment to
interest income or expense in the period in which it accrues and in the category
appropriate to the related asset or liability. The related amount receivable
from or payable to the derivative counterpart is included in other assets or
liabilities in the consolidated balance sheets. Realized and unrealized gains
and losses on futures contracts which are designated as effective hedges of
interest rate exposure arising out of nontrading assets and liabilities are
deferred and recognized as interest income or interest expense, in the category
appropriate to the related asset or liability, over the covered periods or lives
of the hedged assets or liabilities. Gains or losses on early terminations of
derivative financial instruments that modify the underlying characteristics of
specified assets or liabilities are deferred and amortized as an adjustment to
the yield or rate of the related assets or liabilities over the remaining
covered period. At such time that there is no longer correlation of interest
rate movements between the derivative instrument and the underlying asset or
liability, or if all of the underlying assets or liabilities specifically
related to a derivative instrument matures,
F-20
236
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
is sold or terminated, then the related derivative instrument would be closed
out or marked to market as an element of noninterest income on an ongoing basis.
Interest rate contracts used in connection with the securities available for
sale portfolio are carried at fair value with gains and losses, net of
applicable deferred income taxes, reported in stockholders' equity, consistent
with the reporting of unrealized gains and losses on such securities. Premiums
paid for interest rate floors qualifying for hedge accounting are deferred and
classified with the assets and liabilities hedged and are amortized into
interest income or expense over the life of the instrument.
On a limited basis, the Corporation also enters into interest rate swap
agreements, as well as interest rate cap and floor agreements, with customers
desiring protection from possible adverse future fluctuations in interest rates.
As an intermediary, the Corporation generally maintains a portfolio of matched
offsetting interest rate contract agreements. At the inception of such
agreements, the portion of the compensation related to credit risk and ongoing
servicing, if any, is deferred and taken into income over the term of the
agreements.
LOANS
Loans are stated at the principal amount outstanding. Unearned discount,
deferred loan fees net of loan origination costs, and the allowance for loan
losses are shown as reductions of loans. Loan origination and commitment fees
and certain loan-related costs are being deferred and the net amount amortized
as an adjustment of the related loan's yield over the contractual life of the
loan. Unearned discount represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest income on loans is
primarily accrued based on the principal amount outstanding. Interest income on
installment loans which have unearned discounts is recognized primarily by the
sum-of-the-month's digits method.
The Corporation identifies a loan as impaired when it is probable that the
Corporation will be unable to collect the scheduled payments of principal and
interest due under the contractual terms of the loan agreement. Impaired loans
are measured at the present value of expected future cash flows discounted at
the loan's effective interest rate, at the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. If the
measure of the impaired loan is less than the recorded investment in the loan,
the Corporation shall recognize this impairment by creating a valuation
allowance with a corresponding charge to the provision for loan losses or by
adjusting an existing valuation allowance for the impaired loan with a
corresponding charge or credit to the provision for loan losses. The
Corporation's consumer loans are divided into various groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment.
The Corporation considers all loans on nonaccrual status to be impaired.
Commercial loans are placed on nonaccrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated along with
various other factors to determine if a loan is impaired. Generally,
delinquencies under 90 days are not considered impaired unless certain other
factors are present which indicate impairment is probable. The decision to place
a loan on nonaccrual
F-21
237
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
status is also based on an evaluation of the borrower's financial condition,
collateral, liquidation value, and other factors that affect the borrower's
ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest
accrued and uncollected on the loan in the current fiscal year is reversed from
income, and all interest accrued and uncollected from the prior year is charged
off against the allowance for loan losses. Thereafter, interest on nonaccrual
loans is recognized as interest income only to the extent that cash is received
and future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to an accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
Loans not on nonaccrual status are classified as impaired in certain cases when
there is inadequate protection by the current net worth and financial capacity
of the borrower or of the collateral pledged, if any. In those cases, such loans
have a well-defined weakness or weaknesses that jeopardize the liquidation of
the debt, and if such deficiencies are not corrected, there is a probability
that the Corporation will sustain some loss. In such cases, interest income
continues to accrue as long as the loan does not meet the Corporation's criteria
for nonaccrual status.
The Corporation's charge-off policy for impaired loans is similar to its
charge-off policy for all loans in that loans are charged off in the month when
they are considered uncollectible. Consumer loans on which interest or principal
is past due more than 120 days are charged off.
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.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses represents a charge to earnings necessary, after
loan charge-offs and recoveries, to maintain the allowance for loan losses at an
appropriate level which is adequate to absorb estimated losses inherent in the
loan portfolio. Such estimated losses arise primarily from the loan portfolio
but may also be derived from other sources, including commitments to extend
credit and standby letters of credit. The level of the allowance for loan losses
is determined on a quarterly basis using procedures which include: (1)
categorizing commercial and commercial real estate loans into risk categories to
estimate loss probabilities based primarily on the historical loss experience of
those risk categories; (2) analyzing significant commercial and commercial real
estate credits and calculating specific reserves as necessary; (3) assessing
various homogeneous consumer loan categories to estimate loss probabilities
based primarily on historical loss experience; (4) reviewing unfunded
commitments; and (5) considering various other factors, such as changes in
credit concentrations, loan mix, and economic conditions which may not be
specifically quantified in the loan analysis process. Determining the
appropriate level of the allowance and the amount of the provision for loan
losses involves uncertainties and matters of judgment and therefore cannot be
determined with precision.
F-22
238
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
OTHER REAL ESTATE OWNED
Other real estate owned is reported in other assets and consists primarily of
foreclosed properties. Foreclosed properties include property acquired in
situations in which the Corporation has physical possession of a debtor's assets
(collateral) regardless of whether formal foreclosure proceedings have taken
place. Other real estate owned also includes premises no longer used for
business operations.
Other real estate is valued at the lower of cost or fair value of the assets
minus estimated costs to sell. The fair value of the assets is the amount that
the Corporation could reasonably expect to receive for them in a current sale
between a willing buyer and a willing seller, that is, other than in a forced or
liquidation sale. Cost includes loan principal, foreclosure expense, and
expenditures for subsequent improvements. The excess of cost over fair value
minus estimated costs to sell at the time of foreclosure is charged to the
allowance for loan losses. Subsequent write-downs to fair value minus estimated
costs to sell are included in other real estate owned expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization, which is computed principally on the straight-line method based on
the estimated useful lives of the assets or the lease terms, whichever is
shorter.
On January 1, 1996, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." 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 cost to sell. The adoption of this
statement had no effect on the consolidated financial statements.
REPURCHASE AND RESALE AGREEMENTS; BONDS LOANED
The Corporation utilizes "repurchase agreements" (securities sold under
agreements to repurchase) to borrow funds from customers, security dealers, and
others. The Corporation uses "resale agreements" (securities purchased under
agreements to resell) to lend money to security dealers and banks. The
Corporation lends its own and its customers' securities to security dealers both
directly and through the intermediation of a major money center bank. All such
transactions are governed by policies approved by the Board of Directors. These
policies specify that repurchase, resale, and bonds loaned transactions be
subject to approved written agreements with the counterparts; that each
counterpart meet creditworthiness criteria; that each transaction be confirmed
in writing; that all transactions comply with applicable law and regulation; and
that the Corporation be fully secured throughout the duration of each
transaction. The Corporation perfects a security interest in the counterpart's
collateral either by taking direct delivery or through the use of independent
third party custodians. Collateral is valued regularly and margin calls are
F-23
239
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
issued to counterparts whenever deficiencies occur. The Corporation deems its
policies and procedures adequate to ensure that loss in case of counterpart
default would be minimal.
INTANGIBLES
For acquisitions accounted for as purchases, the net assets have been adjusted
to their estimated fair values as of the respective acquisition dates. The value
of core deposit rights and the excess of the purchase price of subsidiaries over
net assets acquired (goodwill) are being amortized on a straight-line basis over
periods ranging from ten to twenty years. Core deposit rights and the excess of
the purchase price of subsidiaries over net assets acquired, net of amounts
amortized, are included in other assets in the supplemental consolidated balance
sheets.
The carrying value of the excess of the purchase price of subsidiaries over net
assets acquired will be reviewed if the facts and circumstances suggest that it
may be impaired. If this review indicates that goodwill will not be recoverable,
as determined based on the undiscounted cash flows of an entity acquired over
the remaining amortization period, the Corporation's carrying value of the
goodwill will be reduced by the estimated shortfall of discounted cash flows.
Separate assets are recognized for the rights to service mortgage loans for
others regardless of how those servicing rights are acquired (as part of
purchased loans or through the sale of loans with servicing retained). Mortgage
servicing rights are determined based on the present value of the difference
between the yield on the loans sold less a normal servicing fee and the yield
paid to the investors over the estimated lives of the loans. The mortgage
servicing rights are amortized on a method which approximates a level yield over
the estimated lives of serviced loans considering assumed prepayment patterns.
The carrying values of mortgage servicing rights and the amortization thereon
are periodically evaluated in relation to estimated future net servicing
revenues. For purposes of impairment evaluation and measurement, the risk
characteristics used to stratify the mortgage servicing rights are loan type,
loan-to-value ratio, and interest rate stratum, which results in groups of loans
that have similar credit and prepayment risk characteristics. Impairment of
mortgage servicing rights is recorded through a valuation allowance.
EMPLOYEE BENEFIT PLANS
The Corporation provides a variety of benefit plans to eligible employees.
Retirement plan expense is accrued each year and plan funding represents at
least the minimum amount required by the Employee Retirement Income Security Act
of 1974, as amended. Differences between expense and funded amounts are carried
in other assets or other liabilities. The Corporation recognizes postretirement
benefits other than pensions on an accrual basis and other postemployment
benefits are also recognized on an accrual basis. The Corporation also makes
contributions to an employee thrift and profit-sharing plan based on employee
contributions and performance levels of the Corporation.
INCOME TAXES
The Corporation files a consolidated federal income tax return, with the
exception of its life insurance subsidiaries, which file separate returns. The
provision for income tax expense is determined under the asset and liability
method. Under this method, deferred
F-24
240
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities, and are measured
using enacted tax rates and laws expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
EARNINGS PER COMMON SHARE
First American adopted SFAS No. 128, "Earnings Per Share," at December 31, 1997.
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS") and applies to companies with publicly held common stock. The
statement simplifies the standards for computing EPS and provides a more
compatible computation with international EPS standards. It replaced the
presentation of primary EPS with a presentation of basic EPS and requires dual
presentation of basic and diluted EPS on the face of the income statement. Basic
EPS is computed by dividing income available to common shareholders (numerator)
by the weighted average number of common shares outstanding (denominator). The
denominator utilized in computing diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Prior period financial EPS
data has been restated to reflect the implementation of SFAS No. 128.
TREASURY STOCK
Under Tennessee law, when a corporation purchases its common stock in the open
market, such repurchased shares become authorized but unissued. Accordingly, the
Corporation reduces the par value and reflects the excess of the purchase price
over par of any such repurchased shares as a reduction from additional paid-in
capital.
REVENUE RECOGNITION
Commission revenues and subscribers' commissions for IFC are recorded as of the
trade date of the transactions. Certain revenues and subscribers' commissions,
such as trailer fee commissions earned from mutual funds, are estimated based
upon historical experience.
Subscribers' commissions are commissions on sales of products marketed by IFC
and are paid to subscribing institutions. These commissions are accrued monthly
based upon a percentage of gross commissions after deduction of certain
contractual charges, and paid to subscribing institutions in the month following
settlement of the transactions.
OTHER ACCOUNTING CHANGES
SFAS No. 123, "Accounting for Stock-Based Compensation," issued in 1995,
provides an optional method of accounting for stock-based compensation based on
calculations of fair value at grant date. The Corporation will continue to
account for all stock-based compensation plans under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation
cost for fixed and variable stock-based awards is measured by the excess, if
any, of the fair market price of the underlying stock over the amount the
individual is required to pay (the intrinsic value).
F-25
241
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Compensation cost for fixed awards is measured at the grant date, while
compensation cost for variable awards is estimated until both the number of
shares an individual is entitled to receive and the exercise or purchase price
are known (measurement date).
On January 1, 1997, the Corporation prospectively adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities
based on consistent application of a "financial-components approach" that
focuses on control. Under this approach, after transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, and derecognizes liabilities when extinguished.
SFAS No. 125 provides standards for consistently distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of this statement had no material impact on the consolidated financial
statements.
SFAS No. 129, "Disclosure of Information About Capital Structure," was adopted
in 1997 and requires disclosure of information about an entity's capital
structure that has issued securities. This statement requires no change in the
Corporation's previous disclosure requirements under APB Opinion No. 15 and, as
such, had no impact on the consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements and requires that all components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The presentation of
comprehensive income for earlier periods is required. Adoption of SFAS No. 130
does not affect recognition or measurement of comprehensive income and its
components and, as such, will only affect the reporting and display in the
consolidated financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Adoption of SFAS No. 131 will expand disclosures related
to the consolidated financial statements. The Corporation is currently
evaluating its operations to determine the appropriate disclosures with respect
to SFAS No. 131.
NOTE 2. ACQUISITIONS AND DIVESTITURES
Effective May 1, 1998, the Corporation completed the merger of the $7.2 billion
asset Deposit Guaranty Corp. ("Deposit Guaranty") with and into the Corporation
by exchanging approximately 48.7 million shares of First American common stock
for all of
F-26
242
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
the outstanding shares of Deposit Guaranty (based on an exchange ratio of 1.17
shares of First American common stock for each share of Deposit Guaranty common
stock). Deposit Guaranty was a financial services holding company headquartered
in Jackson, Mississippi, with banking offices in Mississippi, Louisiana,
Arkansas, and Tennessee, and mortgage offices in Oklahoma, Nebraska, Texas,
Indiana, and Iowa. The transaction was accounted for as a pooling-of-interests
and, accordingly, the accompanying consolidated financial statements have been
restated to include the results of Deposit Guaranty for all periods presented.
After-tax merger and integration costs, comprised primarily of investment
banking, severance, and systems conversions costs, are expected to total
approximately $71 million and will be recognized in 1998.
In April 1998 and in conjunction with the Deposit Guaranty business combination,
the Board of Directors increased the number of authorized shares from 100
million to 200 million.
Net interest income and net income as originally reported by First American and
Deposit Guaranty for the years ended December 31, 1997, 1996, and 1995 are
presented in the table below:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
FIRST DEPOSIT FIRST DEPOSIT FIRST DEPOSIT
AMERICAN GUARANTY COMBINED AMERICAN GUARANTY COMBINED AMERICAN GUARANTY COMBINED
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net interest income..... $383,410 $278,713 $662,123 $349,698 $243,563 $593,261 $312,310 $226,743 $539,053
Noninterest income...... 259,594 136,167 395,761 180,533 123,216 303,749 108,487 94,518 203,005
Net income.............. 145,472 92,280 237,752 121,572 83,610 205,182 103,080 72,620 175,700
======== ======== ======== ======== ======== ======== ======== ======== ========
Bank and thrift mergers and acquisitions completed by First American during the
three years ended December 31, 1997, are presented in the following table (in
millions):
COMMON
SHARES CASH ACCOUNTING
FINANCIAL INSTITUTION STATE DATE ASSETS ISSUED PAID TREATMENT
- --------------------- ----- ---------- ------ ------ ---- ----------
LBO Bancorp, Inc.......................... LA Jan. 1995 $ 96 1.6 $-- Purchase
Citizens National Bancshares, Inc......... LA May 1995 193 3.2 -- Pooling
First Merchants Financial Corporation..... AR Aug. 1995 280 2.3 4 Purchase
Heritage Federal Bancshares, Inc.......... TN Nov. 1995 526 5.8 -- Pooling
Charter Federal Savings Bank.............. VA Dec. 1995 725 3.6* -- Purchase
First City Bancorp, Inc................... TN Mar. 1996 366 2.1 -- Purchase
Bank of Gonzales Holding Company.......... LA June 1996 126 1.5 -- Purchase
Tuscaloosa Bancshares, Inc................ LA Nov. 1996 41 0.5 -- Purchase
Jefferson Guaranty Bancorp, Inc........... LA Jan. 1997 299 2.1 10 Purchase
Hartsville Bancshares, Inc................ TN Jan. 1997 90 0.4 -- Purchase
First Capital Bancorp, Inc................ LA Mar. 1997 186 1.8 -- Pooling
NBC Financial Corporation................. LA July 1997 69 0.5 -- Purchase
CitiSave Financial Corporation............ LA Aug. 1997 75 -- 19 Purchase
- -------------------------
* The purchase agreement also provides that shareholders of Charter Federal
Savings Bank ("Charter") may receive additional consideration consisting of
shares of the Corporation's common stock with a value equal to 50 percent of
any goodwill litigation recovery, net of certain related expenses. See Note
15.
F-27
243
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The merger of Heritage Federal Bancshares, Inc. ("Heritage") was accounted for
as prescribed by the pooling-of-interests method of accounting with all
historical financial information restated to reflect the effects of Heritage.
Approximately $7.5 million of after-tax merger-related expenses, comprised
primarily of payments for severance, system conversions, investment banking and
other professional fees, and the recapture of the tax bad debt reserve, were
recognized in 1995 in connection with the merger of Heritage. For other
acquisitions accounted for as pooling-of-interests combinations, the results of
operations have been included in the accompanying consolidated financial
statements from the beginning of the year acquired; prior year financial
statements have not been restated since the changes would have been immaterial.
For acquisitions accounted for as purchase business combinations, the results of
operations have been included in the accompanying consolidated financial
statements from the respective dates of acquisition. The purchase price in
excess of the net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 15 years. The proforma effect on prior
earnings of such acquisitions is not significant.
In addition to the bank and thrift mergers and acquisitions included in the
tables above, during the past three years the Corporation acquired investments
in a securities broker-dealer and a health care claims processing company, two
branch mortgage companies, and a branch operation. All of these acquisitions
were accounted for as purchase business combinations, and accordingly, results
of operations have been included from the respective dates of acquisition. The
purchase price of these acquisitions in excess of the fair value of net assets
acquired has been recorded as goodwill and is being amortized on a straight-line
basis over 15 years. Proforma results of operations for these acquisitions have
not been presented because the effect was not material.
A summary of these acquisitions is presented below:
- On July 1, 1996, FANB purchased 96.2% of the stock of INVEST for $26
million in cash. Simultaneously, INVEST completed its acquisition of
Investment Center Group, Inc., the parent company of Investment Centers
of America, in a transaction valued at approximately $5.0 million. INVEST
is a national marketer of mutual funds, annuities, insurance, and other
investment products sold through financial institutions. During the third
quarter of 1996, FANB purchased an additional 2.1% of the stock of
INVEST. On February 1, 1997, AmeriStar Capital Markets, Inc., formerly a
wholly-owned subsidiary of FANB and a broker-dealer registered with the
National Association of Securities Dealers, was merged with and into
INVEST. As a result of this merger, FANB's equity ownership in INVEST,
increased to 98.5%. Effective December 2, 1997, the name of INVEST was
changed to IFC Holdings, Inc.
- On June 29, 1996, the Corporation purchased McAfee Mortgage and
Investment Company ("McAfee") for $3.6 million. McAfee is headquartered
in Lubbock, Texas, and has 15 offices located throughout Texas.
- Effective April 1, 1996, FANB purchased 49% of the stock of the SSI
Group, Inc. ("SSI"), a healthcare payments processing company, for $8.6
million. The transaction is being accounted for under the equity method
of accounting.
F-28
244
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
- On August 8, 1995, the Corporation purchased First Mortgage Corp., a
mortgage company located in Omaha, Nebraska, with a $1.1 billion mortgage
servicing portfolio and six production offices in Nebraska and Oklahoma,
for $15.8 million.
- On March 10, 1995, the Corporation purchased the Coahoma County,
Mississippi, operations of a local Mississippi bank with assets of $82
million.
On June 1, 1997, the Corporation issued .8 million shares of its common stock in
exchange for the 2 percent interest in Deposit Guaranty National Bank ("DGNB")
owned by minority shareholders. With this acquisition the Corporation became the
sole shareholder of DGNB.
On September 24, 1997, the Corporation entered into a definitive agreement to
acquire Victory Bancshares, Inc. ("Victory") located in Memphis, Tennessee. The
acquisition of Victory, with approximately $132 million in assets at December
31, 1997, was consummated during the first quarter of 1998 and was accounted for
as a pooling-of-interests. Results of operations of Victory will be included in
the Corporation's financial statements from the date of acquisition, as prior
amounts are not material. The number of shares of the Corporation's common stock
exchanged for all of the outstanding shares of Victory was .9 million shares.
On July 17, 1997, the Corporation completed the sale of Tennessee Credit
Corporation and First City Life Insurance with total assets of $13.6 million to
Norwest Financial Tennessee, Inc. The transaction resulted in a net gain of $2.1
million. On December 22, 1997, the Corporation completed the sale of its
corporate trust business to The Bank of New York for a gain of $2.4 million. The
sale consisted of the transfer of approximately 250 bond trustee and agency
relationships representing $4 billion of assets under management.
During the year ended December 31, 1995, the Corporation consummated the sale of
two branches with deposits of approximately $39.6 million. The transaction
resulted in a $3 million gain.
NOTE 3. CASH AND DUE FROM BANKS
The Corporation's bank and thrift subsidiaries are required to maintain
reserves, in the form of cash and balances with the Federal Reserve Bank.
Approximately $214.7 and $182.7 million of the cash and due from banks balance
at December 31, 1997 and 1996, respectively, represented reserves maintained in
order to meet Federal Reserve requirements.
F-29
245
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. SECURITIES
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair values of securities held to maturity at December 31, 1997 and
1996, are presented in the following table:
UNREALIZED
-------------------
AMORTIZED GROSS GROSS FAIR
COST GAINS LOSSES VALUE
--------- -------- -------- --------
(IN THOUSANDS)
December 31, 1997
U.S. Treasury and other U.S.
Government agencies and
corporations....................... $449,633 $ 3,276 $ 1,208 $451,701
Obligations of states and political
subdivisions....................... 42,723 1,588 48 44,263
Other debt securities (primarily
mortgage-backed securities)........ 222,671 5,088 495 227,264
-------- -------- -------- --------
Total securities held to
maturity................... $715,027 $ 9,952 $ 1,751 $723,228
======== ======== ======== ========
December 31, 1996
U.S. Treasury and other U.S.
Government agencies and
corporations....................... $724,939 $ 7,986 $ 2,353 $730,572
Obligations of states and political
subdivisions....................... 39,408 262 261 39,409
Other debt securities (primarily
mortgage-backed securities)........ 205,450 2,964 628 207,786
-------- -------- -------- --------
Total securities held to
maturity................... $969,797 $ 11,212 $ 3,242 $977,767
======== ======== ======== ========
Included in U.S. Treasury and other U.S. Government agencies and corporations
securities held to maturity were agency-issued mortgage-backed securities
amounting to $422.1 million ($424.3 million fair value) at December 31, 1997,
and $616.3 million ($622 million fair value) at December 31, 1996.
Mortgage-backed securities included in other debt securities amounted to $104.9
million ($104.6 million fair value) and $139 million ($139 million fair value)
at December 31, 1997 and 1996, respectively.
F-30
246
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair values of securities available for sale at December 31, 1997
and 1996, are presented in the following table:
UNREALIZED
AMORTIZED -------------------------- FAIR
COST GROSS GAINS GROSS LOSSES VALUE
---------- ----------- ------------ ----------
(IN THOUSANDS)
December 31, 1997
U.S. Treasury and other U.S. Government agencies and
corporations.......................................... $2,793,823 $12,610 $12,619 $2,793,814
Obligations of states and political subdivisions........ 179,000 3,877 190 182,687
Other debt securities................................... 334,786 1,313 2,391 333,708
---------- ------- ------- ----------
Total debt securities............................. 3,307,609 17,800 15,200 3,310,209
Equity securities (primarily Federal Reserve Bank and
Federal Home Loan Bank stock)......................... 85,285 -- -- 85,285
---------- ------- ------- ----------
Total securities available for sale............... $3,392,894 $17,800 $15,200 $3,395,494
========== ======= ======= ==========
December 31, 1996
U.S. Treasury and other U.S. Government agencies and
corporations.......................................... $2,782,203 $10,491 $18,084 $2,774,610
Obligations of states and political subdivisions........ 175,977 6,092 1,236 180,833
Other debt securities................................... 137,379 503 3,683 134,199
---------- ------- ------- ----------
Total debt securities............................. 3,095,559 17,086 23,003 3,089,642
Equity securities (primarily Federal Reserve Bank and
Federal Home Loan Bank stock)......................... 60,465 -- -- 60,465
---------- ------- ------- ----------
Total securities available for sale............... $3,156,024 $17,086 $23,003 $3,150,107
========== ======= ======= ==========
Included in U.S. Treasury and other U.S. Government agencies and corporations
securities available for sale were agency-issued mortgage-backed securities
amounting to $2,233.8 million ($2,233.2 million amortized cost) at December 31,
1997 and $1,745.2 million ($1,746.8 million amortized cost) at December 31,
1996. Mortgage-backed securities included in other debt securities amounted to
$333.7 million ($334.8 million amortized cost) and $132.8 million ($135.9
million amortized cost) at December 31, 1997 and 1996, respectively.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The FASB permitted a
one-time opportunity to reassess the appropriateness of the designation of all
securities held upon the initial application of the Special Report. The
Corporation reviewed its current designation of all securities in conjunction
with liquidity needs and management of interest rate risk and transferred $1.64
billion of securities from held to maturity to available for sale. At the time
of transfer, such securities had an unrealized gain of $25.9 million ($16.1
million net of tax).
In conjunction with the 1995 Heritage merger, the Corporation transferred $161.6
million of securities previously classified as held to maturity by Heritage to
securities available for sale in order to maintain the Corporation's existing
interest rate risk position. At the time of transfer, such securities had an
unrealized loss of $.5 million ($.3 million net of tax).
F-31
247
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The sale of securities available for sale resulted in net realized gains of $4.2
million, $2.6 million, and $2.9 million in 1997, 1996, and 1995, respectively.
Gross realized gains and losses on such sales were as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
GROSS GROSS GROSS GROSS GROSS GROSS
REALIZED REALIZED REALIZED REALIZED REALIZED REALIZED
GAINS LOSSES GAINS LOSSES GAINS LOSSES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
U.S. Treasury and other U.S Government
agencies and corporations............. $ 9,820 $9,825 $14,047 $11,547 $7,135 $4,190
Obligations of states and political
subdivisions.......................... 4,043 172 409 375 -- 2
Other debt securities................... 368 -- 51 -- 9 75
------- ------ ------- ------- ------ ------
Total securities available for
sale......................... $14,231 $9,997 $14,507 $11,922 $7,144 $4,267
======= ====== ======= ======= ====== ======
TOTAL SECURITIES
The amortized cost and approximate fair values of debt securities at December
31, 1997, by average estimated maturity are shown below. The expected maturity
for governmental and corporate securities is the stated maturity, and the
expected maturity for mortgage-backed securities and other asset-backed
securities is based on current estimates of average maturities, which include
prepayment assumptions.
SECURITIES HELD SECURITIES AVAILABLE
TO MATURITY FOR SALE
-------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- ---------- ----------
(IN THOUSANDS)
Due in one year or less...................... $224,523 $224,393 $ 104,768 $ 105,522
Due after one year through five years........ 356,963 359,480 2,558,077 2,557,646
Due after five years through ten years....... 110,399 115,125 482,352 484,212
Due after ten years.......................... 23,142 24,230 162,412 162,829
-------- -------- ---------- ----------
Total debt securities............... 715,027 723,228 3,307,609 3,310,209
Equity securities............................ -- -- 85,285 85,285
-------- -------- ---------- ----------
Total securities.................... $715,027 $723,228 $3,392,894 $3,395,494
======== ======== ========== ==========
At December 31, 1997 and 1996, the Corporation held securities with amortized
cost amounting to $1,399.2 million and $1,102 million, respectively, which were
issued or guaranteed by the Federal National Mortgage Association and $1,096.6
million and $1,153.1 million, respectively, which were issued or guaranteed by
the Federal Home Loan Mortgage Corporation.
Securities carried in the consolidated balance sheets at approximately $3,069.8
million and $2,856.5 million at December 31, 1997 and 1996, respectively, were
pledged to secure public and trust deposits, repurchase transactions, and for
other purposes as required or permitted by law.
F-32
248
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Corporation's bank and thrift subsidiaries have a diversified loan portfolio
consisting of commercial, consumer, and real estate loans with customers located
within the Corporation's market, which consists primarily of the Mid South and
Oklahoma, Nebraska, Texas, Indiana, and Iowa. Mortgage loans held for sale at
December 31, 1997 and 1996, were $270.4 million and $306.9 million,
respectively. Total mortgage loans serviced, including mortgage loans serviced
on behalf of the Corporation's banking subsidiaries, approximated $6.4 billion
and $6.3 billion at December 31, 1997 and 1996, respectively.
Loans are either secured or unsecured based on the type of loan and the
financial condition of the borrower. The loans are generally expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrower; however, the Corporation is exposed to risk of loss on loans due to
the borrower's difficulties, which may arise from any number of factors
including problems within the respective industry or economic conditions,
including those within the Corporation's market.
Transactions in the allowance for loan losses were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Balance, January 1..................................... $185,470 $191,134 $185,309
Provision charged to operating expenses................ 12,500 5,340 2,243
Allowance of subsidiary sold (note 2).................. (252) -- --
Additions due to business combinations (note 2)........ 8,252 4,188 11,225
-------- -------- --------
Subtotal...................................... 205,970 200,662 198,777
-------- -------- --------
Loans charged off...................................... 54,300 45,739 31,072
Recoveries of loans previously charged off............. (28,373) (30,547) (23,429)
-------- -------- --------
Net charge-offs........................................ 25,927 15,192 7,643
-------- -------- --------
Balance, December 31................................... $180,043 $185,470 $191,134
======== ======== ========
Net charge-offs (recoveries) by major loan categories were as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Commercial................................................ $12,588 $(2,555) $(2,946)
Consumer -- amortizing mortgages.......................... 866 520 41
Consumer -- other......................................... 15,018 17,593 11,122
Real estate -- construction............................... 492 43 80
Real estate -- commercial mortgages and other............. (3,037) (409) (654)
------- ------- -------
Total net charge-offs............................ $25,927 $15,192 $ 7,643
======= ======= =======
At December 31, 1997 and 1996, loans on a nonaccrual status amounted to $36.3
million and $32.7 million, respectively. Interest income not recognized on
nonaccrual loans was approximately $2.4 million in 1997, $1.9 million in 1996,
and $3.8 million in 1995. Interest income recognized on a cash basis on
nonaccrual loans was immaterial for all years.
F-33
249
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Directors and executive officers (and their associates, including companies in
which they hold ten percent or more ownership) of the Corporation and its
significant subsidiary, FANB, had loans outstanding with the Corporation and its
subsidiaries of $91.8 million and $108.5 million at December 31, 1997 and 1996,
respectively. During 1997, $3,131.6 million of new loans or advances on existing
loans (including participations sold) were made to such related persons,
repayments from such persons were $3,111.2 million, and $37.1 million of
existing loans were to persons no longer considered related. The Corporation
believes that such loans were made on substantially the same terms, including
interest and collateral, as those prevailing at the time for comparable
transactions with other borrowers and did not involve more than the normal risk
of collectibility or present other unfavorable features at the time such loans
were made.
Impaired loans and related loan loss reserve amounts at December 31, 1997, 1996
and 1995 were as follows:
DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
RECORDED LOAN LOSS RECORDED LOAN LOSS RECORDED LOAN LOSS
INVESTMENT RESERVE INVESTMENT RESERVE INVESTMENT RESERVE
---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS)
Impaired loans with loan loss
reserves..................... $23,287 $7,086 $12,939 $3,157 $23,806 $6,557
Impaired loans with no loan
loss reserves................ 16,483 -- 23,766 -- 33,244 --
------- ------ ------- ------ ------- ------
Total................. $39,770 $7,086 $36,705 $3,157 $57,050 $6,557
======= ====== ======= ====== ======= ======
The average recorded investment in impaired loans for the twelve months ended
December 31, 1997, 1996, and 1995 was $33 million, $51 million, and $44 million,
respectively. The related total amount of interest income recognized on an
accrual basis for the period that such loans were impaired was $382 thousand,
$798 thousand, and $982 thousand for the twelve months ended December 31, 1997,
1996, and 1995, respectively. No interest income was recognized on a cash basis
for impaired loans during 1997. The amount of interest income recognized on a
cash basis during the period of impairment for the years ended December 31,
1996, and 1995, was $147 thousand and $188 thousand, respectively.
F-34
250
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. PREMISES AND EQUIPMENT AND LEASE COMMITMENTS
Premises and equipment are summarized as follows:
DECEMBER 31,
---------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Land............................................. $ 56,999 $ 50,266
Buildings........................................ 295,745 272,826
Furniture and equipment.......................... 290,527 257,486
Leasehold improvements........................... 49,891 48,064
Premises leased under capital leases............. 3,008 3,008
--------- ---------
Subtotal............................... 696,170 631,650
Accumulated depreciation and amortization........ (334,123) (321,066)
--------- ---------
Net book value................................... $ 362,047 $ 310,584
========= =========
Depreciation and amortization expense of premises and equipment for 1997, 1996,
and 1995 was $38.3 million, $35.1 million, and $31.5 million, respectively.
Rent expense, net of rental income, on bank premises for 1997, 1996, and 1995
was $5.4 million, $4.4 million, and $1.7 million, respectively. Rental income on
bank premises for 1997, 1996, and 1995 was $10.2 million, $9.8 million, and $9.1
million, respectively.
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows:
OPERATING CAPITAL
TOTAL LEASES LEASES
-------- --------- --------
(IN THOUSANDS)
1998...................................... $ 15,165 $ 14,889 276
1999...................................... 14,408 14,128 280
2000...................................... 12,705 12,435 270
2001...................................... 10,691 10,421 270
2002...................................... 10,074 9,803 271
Thereafter................................ 69,214 67,415 1,799
--------
Total........................... $132,257 $129,091 3,166
--------
Purchase option........................... 110
Amounts representing interest at 6.75%.... (1,860)
--------
Total capitalized lease obligations....... 1,416
Amounts included in short-term
borrowings.............................. (127)
--------
Capitalized lease obligations included in
long-term debt.......................... $ 1,289
========
The Corporation has a data processing outsourcing agreement expiring in 2001
that had an average annual base expense of $8.5 million in 1995 through 1997. As
amended in 1997,
F-35
251
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
the average annual base expense will be $7.5 million for future years. Total
annual fees vary with cost of living adjustments and changes in services
provided by the vendor, which services depend upon the Corporation's volume of
business and system needs. The related expense is included in systems and
processing expense in the supplemental consolidated income statements.
NOTE 7. INTANGIBLE ASSETS
Following is a summary of intangible assets included in other assets on the
consolidated balance sheets including related amortization.
MORTGAGE TOTAL
SERVICING OTHER INTANGIBLE
GOODWILL RIGHTS INTANGIBLES ASSETS
-------- --------- ----------- ----------
(IN THOUSANDS)
Balance, December 31, 1994............... $ 40,403 $ 6,766 $20,646 $ 67,815
Additions.............................. 69,775 25,611 18,076 113,462
Amortization........................... (5,754) (4,457) (4,206) (14,417)
-------- ------- ------- --------
Balance, December 31, 1995............... 104,424 27,920 34,516 166,860
Additions.............................. 71,973 13,203 7,042 92,218
Dispositions........................... -- (1,012) -- (1,012)
Amortization........................... (11,704) (3,753) (4,858) (20,315)
-------- ------- ------- --------
Balance, December 31, 1996............... 164,693 36,358 36,700 237,751
Additions.............................. 51,717 14,838 15,036 81,591
Dispositions........................... (319) (2,645) -- (2,964)
Amortization........................... (16,050) (7,131) (6,536) (29,717)
-------- ------- ------- --------
Balance, December 31, 1997............... $200,041 $41,420 $45,200 $286,661
======== ======= ======= ========
The estimated fair value of the capitalized mortgage servicing rights at
December 31, 1997 and 1996, was $46.2 million and $39.9 million, respectively.
The related valuation allowance for 1997 and 1996 was $310 thousand and $259
thousand, respectively.
NOTE 8. SHORT-TERM BORROWINGS
Short-term borrowings are issued on normal banking terms and consisted of the
following:
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Federal funds purchased and securities sold
under agreements to repurchase................ $1,614,931 $1,472,277
Other short-term borrowings..................... 354,708 225,124
---------- ----------
Total short-term borrowings........... $1,969,639 $1,697,401
Other short-term borrowings included U.S. Treasury tax and loan accounts of
$112.7 million and $116.9 million at December 31, 1997 and 1996, respectively.
In addition,
F-36
252
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997 included borrowings from the Federal Home Loan Bank ("FHLB")
of $10 million (due upon demand), $199.1 million (due within 3 months), $5.7
million (due within 6 months), and $9.6 million (due within 12 months).
The following table presents information regarding federal funds purchased and
securities sold under agreements to repurchase:
DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities
sold under agreements to repurchase:
Amount outstanding at December 31.... $1,614,931 $1,472,277 $1,355,431
Average rate at December 31.......... 4.70% 4.68% 4.97%
Average amount outstanding during the
year.............................. $1,467,281 $1,394,251 $1,331,359
Average rate paid for the year....... 4.94% 4.86% 5.38%
Maximum amount outstanding at any
month-end......................... $1,732,169 $1,513,294 $1,497,451
========== ========== ==========
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-------------------
1997 1996
-------- --------
(IN THOUSANDS)
FHLB advances.............................................. $394,090 $230,378
6 7/8% noncallable subordinated notes (effective rate of
6.965%) due 2003, interest payable semiannually (less
unamortized discount of $169 in 1997 and $201 in 1996)... 49,831 49,799
6 5/8% noncallable subordinated notes (effective rate of
6.761%) due 2005, interest payable semiannually (less
unamortized discount of $389 in 1997 and $427 in 1996)... 49,611 49,563
7.25% noncallable senior notes (effective rate of 7.375%)
due 2006, interest payable semiannually (less unamortized
discount of $550 in 1997 and $595 in 1996)............... 101,397 99,405
Capitalized lease obligations (note 6)..................... 1,289 1,417
-------- --------
Total long-term debt............................. $596,218 $430,562
======== ========
At December 31, 1997, the $394.1 million of advances from the FHLB consisted of
$300 million of advances with interest rates tied to one-month London Interbank
Offering Rate ("LIBOR"), $85 million of advances with interest rates tied to
three-month LIBOR, and $9.1 million of advances with fixed interest rates;
weighted-average interest rates were 5.86% and 5.51%, respectively. Included in
these amounts are advances maturing in 1999 of $11.4 thousand, in 2000 of $300
million, in 2002 of $3.1 million, in 2003 of $3.4 million,
F-37
253
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
and after 2003 of $87.6 million. The Corporation's FHLB advances are
collateralized by a blanket pledge of 1-4 family mortgage loans.
The Corporation entered into an unsecured revolving credit agreement in 1994. As
amended in 1995, the agreement provides for loans up to $70 million. Under the
terms of the agreement, which expires in March 1998, the Corporation pays a fee
for the availability of these funds computed at the rate of 3/16 of 1% per annum
on the commitment. Interest to be paid on the outstanding balances will be
computed based on the prime interest rate of the lending banks, Eurodollar
rates, or adjusted certificate of deposit rates, as selected by the Corporation.
The Corporation had no revolving credit borrowings outstanding at December 31,
1997 or 1996.
The Corporation also maintained a $50 million line of credit at a commercial
bank. The line of credit, which is for general corporate purposes bears an
adjustable rate based on LIBOR and expires in May 1998. There is no commitment
fee or compensating balance arrangement relating to this line of credit. The
Corporation had no line of credit borrowings outstanding at December 31, 1997,
or 1996.
The terms of the credit agreements provide for, among other things, restrictions
on payment of cash dividends and purchases, redemptions, and retirement of
capital shares. Under the Corporation's most restrictive debt covenant,
approximately $126.7 million of retained earnings was available to pay dividends
as of December 31, 1997.
NOTE 10. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Corporation and its subsidiaries participate in a noncontributory retirement
plan with death and disability benefits covering substantially all employees
(except the employees of IFC) with one or more years of service. The benefits
are based on years of service and average monthly earnings of a participant for
the 60 consecutive months which produce the highest average earnings.
F-38
254
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's consolidated balance sheets:
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Plan assets at fair value, primarily U.S. bonds and
listed stocks.......................................... $307,735 $251,726
-------- --------
Actuarial present value of benefits for service rendered
to date:
Accumulated benefit obligation, including vested
benefits of $198,300 and $178,704, respectively..... 205,293 184,336
Additional benefits based on projected future
compensation........................................ 32,765 28,122
-------- --------
Projected benefit obligation............................. 238,058 212,458
-------- --------
Plan assets in excess of accumulated benefit
obligation............................................. 102,442 67,390
-------- --------
Plan assets greater than projected benefit obligation.... 69,677 39,268
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions..... (46,046) (15,491)
Unrecognized net transition asset........................ (2,755) (3,395)
Unrecognized prior service cost.......................... 2,055 2,409
-------- --------
Prepaid pension cost..................................... $ 22,931 $ 22,791
======== ========
Net pension expense included the following components:
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- ------- --------
(IN THOUSANDS)
Service cost for benefits earned during the
period........................................... $ 7,947 $ 7,250 $ 5,565
Interest cost on projected benefit obligation...... 15,918 14,659 13,218
Actual return on plan assets....................... (60,811) (24,100) (29,279)
Net amortization and deferral...................... 36,984 3,060 12,552
-------- ------- --------
Net periodic pension expense....................... $ 38 $ 869 $ 2,056
======== ======= ========
The discount rate and the rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
7.25% and 4.5-8.5%, respectively, at December 31, 1997; 7.25-7.75% and 4.5-8.5%,
respectively, at December 31, 1996; and 7.25% and 4.5-8.5%, respectively, at
December 31, 1995. The expected long-term rate of return on plan assets was 9 to
9.3% in all years.
SUPPLEMENTAL RETIREMENT PLAN
The Corporation has a supplemental retirement plan which provides supplemental
retirement benefits to certain executives of the Corporation. The expense was $.
3 million in 1997, $.3 million in 1996, and $.2 million in 1995. Benefit
payments from the plan are made from general assets of the Corporation. The
weighted average discount rate and rate
F-39
255
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
of increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation at December 31, 1997 were
7.25% and 4.5%, respectively, and at December 31, 1996 were 7.75% and 4.5%,
respectively.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, the Corporation and its subsidiaries have
postretirement benefit plans that provide medical insurance and death benefits
for retirees and eligible dependents (except the retirees of IFC). Because the
death benefit plan is not significant, it is combined with the healthcare plan
for disclosure purposes.
The status of the plans was as follows:
DECEMBER 31,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees........................................... $13,818 $13,843
Fully eligible, active plan participants........... 1,462 1,219
Other active plan participants..................... 4,705 3,350
------- -------
Total accumulated postretirement benefit
obligation.............................. 19,985 18,412
Plan assets at market value.......................... -- --
------- -------
Accumulated postretirement benefit obligation in
excess of plan assets.............................. 19,985 18,412
Unrecognized net gain from past experience different
from that assumed and effects of changes in
assumptions........................................ 674 1,717
------- -------
Accrued postretirement benefit cost.................. $20,659 $20,129
======= =======
The components of net periodic expense for postretirement benefits were as
follows:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------ ------- ------
(IN THOUSANDS)
Service cost for benefits earned during the
year......................................... $ 434 $ 330 $ 311
Interest cost on accumulated postretirement
benefit obligation........................... 1,395 1,317 1,366
Amortization of net gain....................... (14) (1,434) (29)
------ ------- ------
Net periodic postretirement benefit expense.... $1,815 $ 213 $1,648
====== ======= ======
The Corporation continues to fund medical and death benefit costs principally on
a pay-as-you-go basis.
For measurement purposes, a 9.0% annual rate of increase in the per capita cost
of covered healthcare benefits was assumed for 1997, declining gradually to 5.5%
per year by 2011 and remaining at that level thereafter. The discount rate used
to determine the
F-40
256
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
accumulated postretirement benefit obligation was 7.25% in 1997, 7.25-7.75% in
1996, and 7.25% in 1995.
The healthcare cost trend rate assumption has a significant effect on the
accumulated postretirement benefit obligation and net periodic benefit costs. A
1% increase in the trend rate for healthcare costs would have increased the
accumulated postretirement benefit obligation by $1 million as of December 31,
1997, and the net periodic expense (service cost and interest cost) would have
increased by $.1 million for 1997.
IFC provides medical and life insurance benefits to its retired employees. The
medical plan provides for medical insurance benefits at retirement, with
eligibility based upon age and the participant's number of years of
participation attained at retirement. Postretirement life insurance benefits are
limited to $10,000 per participant. The discount rate used in determining the
postretirement benefit obligation was 7.25% during 1997 and 7.5% in 1996. The
status of the plan was as follows:
DECEMBER 31,
---------------
1997 1996
------ -----
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees and beneficiaries........................... $ 43 $ 39
Fully eligible plan participants..................... 143 101
Other active plan participants....................... 722 583
----- ----
Total accumulated postretirement benefit
obligation................................ 908 723
Plan assets at market value............................ -- --
----- ----
Accumulated postretirement benefit obligation in excess
of plan assets....................................... 908 723
Unrecognized loss from actuarial experience............ (129) (22)
----- ----
Accrued postretirement benefit cost.................... $ 779 $701
===== ====
A 1% increase in the trend rate for healthcare cost would increase IFC's
accumulated postretirement benefit obligation as of December 31, 1997 by $.2
million.
OTHER EMPLOYEE BENEFITS
The Corporation has a combination savings thrift and profit-sharing plan ("FIRST
Plan") available to all employees (except the employees of IFC and hourly paid
and special exempt-salaried employees). The plan is funded by employee and
employer contributions. The Corporation's annual contribution to the plan is
based upon the amount of basic contributions of participants, participants'
compensation, and the achievement of certain corporate performance standards and
may be made in the form of cash or the Corporation's common stock with a market
value equal to the cash contribution amount. Total plan expense in 1997 was $5
million, $4.3 million in 1996 and $3.5 million in 1995. During 1997, 1996 and
1995 the Corporation matched employees' qualifying contributions at 100%.
F-41
257
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
In 1983, IFC formed the Salary Savings Retirement Plan. IFC has also established
a profit sharing plan covering certain employees. Contributions to both plans
totaled $.5 million in 1997 and $.2 million in 1996.
Deposit Guaranty, which merged with the Corporation effective May 1, 1998,
maintained a retirement savings plan. This plan, which remains in existence,
covers substantially all former Deposit Guaranty employees. Deposit Guaranty
automatically contributed an amount equal to 2% of each participant's base
salary to the plan. A participant, in addition, may elect to contribute up to
15% of base salary to the plan. The Corporation contributes an additional amount
to the plan equal to 50% of the participant's contribution up to 5% of base
salary.
Heritage, which merged with the Corporation effective November 1, 1995,
maintained an Employee Stock Ownership Plan ("ESOP"). The ESOP, which remains in
existence, covers substantially all former Heritage employees who qualified as
to age and length of service.
Annual contributions to the ESOP are equal to the required principal and
interest payments related to the ESOP loan. Dividends paid on shares held by the
ESOP are used to reduce the outstanding debt. The consolidated financial
statements for the year ended December 31, 1995, includes related compensation
expense of approximately $.1 million.
During 1995, the ESOP refinanced its notes payable with borrowings from the
Corporation. The new loan, which has essentially the same terms as the prior
borrowings, is payable in quarterly principal payments of approximately $30
thousand plus interest at the Corporation's base rate through March 30, 2002. At
December 31, 1997, the note payable bore interest at 8.5% and had a balance of
$.2 million.
F-42
258
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. INCOME TAXES
The components of the income tax provision are presented below:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income tax expense from operations:
Current federal income taxes.................... $105,604 $ 80,472 $ 75,834
Current state income taxes...................... 12,940 9,292 9,635
Deferred federal income tax expense............. 16,997 21,291 12,553
Deferred state income tax expense............... 2,360 3,770 2,193
-------- -------- --------
Total income tax expense from
operations........................... 137,901 114,825 100,215
-------- -------- --------
Prior business combinations....................... -- -- (181)
Valuation allowance............................... -- -- (2,949)
Income tax expense (benefit) reported in
shareholders' equity related to:
Securities available for sale................... 2,857 (15,818) 21,354
Employee stock option and award plans........... (5,603) (4,530) (3,574)
-------- -------- --------
Total income tax expense (benefit)
reported in shareholders' equity..... (2,746) (20,348) 14,650
-------- -------- --------
Total income taxes...................... $135,155 $ 94,477 $114,865
======== ======== ========
The following table presents a reconciliation of the provision for income taxes
as shown in the consolidated income statements with that which would be computed
by applying the statutory federal income tax rate of 35% to income before income
tax expense.
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Tax expense at statutory rates.................... $131,478 $112,003 $ 96,570
Increase (decrease) in taxes resulting from:
Tax-exempt interest............................. (6,525) (7,284) (6,227)
Cash surrender value of life insurance.......... (1,680) (1,461) (1,834)
Amortization of intangibles..................... 5,618 4,096 2,014
State income taxes, net of federal income tax
benefit...................................... 9,945 8,490 7,688
Other, net...................................... (935) (1,019) 2,004
-------- -------- --------
Total income tax expense from
operations........................... $137,901 $114,825 $100,215
======== ======== ========
F-43
259
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The 1997 net deferred tax liability is included in other liabilities and the
1996 net deferred tax asset is included in other assets on the consolidated
balance sheets. Management believes that it is more likely than not that the
deferred tax asset will be realized. Significant components of the deferred tax
assets and liabilities are, as follows:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets
Allowance for loan losses...................... $ 66,107 $ 67,387
Deferred compensation.......................... 14,829 13,725
Postretirement benefit obligation.............. 8,728 7,697
Unrealized loss on securities available for
sale........................................ -- 1,937
Other.......................................... 18,712 19,035
-------- --------
Total deferred tax asset............... 108,376 109,781
-------- --------
Deferred tax liabilities Property, plant, and
equipment...................................... 12,392 9,485
Direct lease financing......................... 54,000 43,209
Unrealized gain on securities available for
sale........................................ 920 --
Purchase accounting............................ 15,081 13,917
Pension........................................ 8,568 8,132
Mortgage servicing rights...................... 10,234 7,989
Other.......................................... 10,708 7,995
-------- --------
Total deferred tax liability........... 111,903 90,727
-------- --------
Net deferred tax (liability) asset..... $ (3,527) $ 19,054
======== ========
At December 31, 1997, IFC had approximately $1.9 million in pretax net operating
losses for federal income tax purposes which are available to offset future
taxable income of IFC. The net operating loss was generated in the fiscal year
ended June 30, 1986 and will expire on December 31, 2000. All of the net
operating loss carryforward resulted from operations prior to the date of the
Corporation's acquisition of IFC, and as such, its utilization is dependent upon
future income of IFC. In addition, the carryforward is further limited by
Section 382 of the Internal Revenue Code which applies to changes in ownership.
Based upon a projection of anticipated future taxable income, the Corporation
believes that it is more likely than not that sufficient levels of taxable
income will be generated by IFC in appropriate taxable periods prior to December
31, 2000, and as such, has recorded a net deferred tax asset related to the net
operating loss in the accompanying consolidated balance sheets. Management's
assessment of anticipated future taxable income is based upon numerous factors
including, but not limited to, projected interest rates, economics in the
securities industry and certain other cost saving strategies.
Retained earnings at December 31, 1997 includes approximately $4 million of
income that has not been subject to tax because of deductions for bad debts
allowed for federal income tax purposes. Deferred income taxes have not been
provided on such bad debt deductions
F-44
260
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
since it is not intended to use the accumulated bad debt deductions for purposes
other than to absorb loan losses. The tax liability would have been $1.6 million
at December 31, 1997 if this portion of retained earnings were used for purposes
other than as described.
At December 31, 1997, Deposit Guaranty Louisiana Corp. had investment tax credit
carryforwards for federal income tax purposes of approximately $1.6 million
which are available to reduce future federal income taxes, if any, through 2001.
Based upon anticipated future taxable income over the periods which the deferred
tax assets are realizable, management believes it is more likely than not
Deposit Guaranty Louisiana Corp. will realize the benefits of these deferred tax
assets.
NOTE 12. CAPITAL STOCK
The Corporation has stock-based compensation plans covering certain officers and
other key employees of the Corporation. The plans provide for restricted stock
incentives based on the attainment of annual and long-term performance goals.
Stock-based compensation plans also include stock option programs, which provide
for the granting of statutory incentive stock options and nonstatutory options
to key employees. Additionally, the Corporation has a stock option plan for
nonemployee directors. As of December 31, 1997, the Corporation had 11.7 million
shares of common stock reserved for issuance under these plans.
Since 1991, the Corporation has issued restricted common stock to certain
executive officers. The restrictions lapse within primarily 10 years of
issuance; however, if certain performance criteria are met, restrictions will
lapse earlier. The amount recorded for the restricted stock issued is based on
the market value of the Corporation's common stock on the award dates and is
shown as deferred compensation in shareholders' equity. Such compensation
expense is recognized over a three- to ten-year period. The amount of
compensation expense recognized from awards of restricted stock in the
Corporation's consolidated financial statements for 1997, 1996, and 1995 was
$3.4 million, $1.4 million, and $1.4 million, respectively.
The following table summarizes the Corporation's restricted stock grants and the
weighted-average fair values at grant date:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------
Restricted stock granted during the year..... 445,583 92,976 32,190
Weighted-average fair value of restricted
stock granted during the year.............. $32.94 $23.55 $16.66
F-45
261
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
As discussed under Note 1, the Corporation has chosen to follow APB Opinion No.
25 and related interpretations in accounting for employee stock options, and
accordingly, no compensation expense has been recognized for options granted
during 1997, 1996, and 1995. Had the Corporation used the provisions under SFAS
No. 123, the fair value of each option grant would be estimated on the date of
grant using the Black-Scholes option-pricing model. Based on this fair value
calculation of compensation expense, net income and earnings per share on a
proforma basis has been computed and is compared with reported amounts in the
table below:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
Net income, as reported......................... $237.8 $205.2 $175.7
Net income, proforma............................ 235.9 204.1 175.4
------ ------ ------
Basic earnings per share, as reported........... 2.23 1.96 1.73
Basic earnings per share, proforma.............. 2.21 1.95 1.73
------ ------ ------
Diluted earnings per share, as reported......... 2.18 1.93 1.70
Diluted earnings per share, proforma............ 2.17 1.93 1.70
====== ====== ======
The following weighted-average assumptions were used in the Black-Scholes
option-pricing model:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
Risk-free interest rate during the life of the
option....................................... 6.42% 5.74% 7.34%
Expected life of the option (in years)......... 6.1 6.1 6.1
Expected dividend yield over the expected life
of the option................................ 2.67% 2.75% 2.75%
Expected volatility of the stock over the
option's life................................ 22.47% 22.44% 23.97%
The effects of applying SFAS No. 123, for either recognizing or disclosing
compensation cost under such pronouncement, may not be representative of the
effects on reported net income in future years.
F-46
262
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Corporation's stock option plans as of December 31, 1997, 1996,
and 1995, and changes during the years ended on those dates is presented below:
1997 1996 1995
----------------------- ----------------------- -----------------------
TOTAL WEIGHTED- TOTAL WEIGHTED- TOTAL WEIGHTED-
OPTION AVERAGE OPTION AVERAGE OPTION AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
----------- --------- ----------- --------- ----------- ---------
Options outstanding at
beginning of year...... 4,424,363 $15.34 4,365,367 $12.11 4,991,679 $10.98
Options granted........ 845,100 29.41 1,117,700 22.69 807,946 15.22
Options exercised...... (829,966) 12.47 (997,654) 9.24 (1,342,252) 7.57
Options cancelled...... (144,780) 23.47 (61,050) 17.30 (92,006) 11.90
Options expired........ -- -- -- --
---------- ------ ---------- ------ ----------- ------
Options outstanding at
end of year............ 4,294,717 $18.40 4,424,363 $15.34 4,365,367 $12.11
Options exercisable at
year-end............... 2,364,168 $14.56 2,434,238 $12.41 2,649,407 $10.40
Weighted average fair
value of options
granted during the
year................... $ 8.66 $ 5.75 $ 4.67
========== ====== ========== ====== =========== ======
The following table summarizes information about stock options outstanding at
December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
OPTIONS WEIGHTED- OPTIONS
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL LIFE EXERCISE DECEMBER 31, EXERCISE
PRICES 1997 (YEARS) PRICE 1997 PRICE
- ----------------- ------------ ---------------- --------- ------------ ---------
$ 4.625 - $10.938 573,111 2.96 $ 8.29 573,111 $ 8.29
$11.438 - $14.750 1,091,304 5.47 12.99 789,544 12.48
$15.180 - $20.200 1,019,036 6.63 17.52 705,197 17.67
$21.375 - $26.500 967,796 8.27 23.66 295,396 24.80
$29.563 - $47.750 643,470 9.08 30.10 920 29.56
--------- ---- ------ --------- ------
$ 4.625 - $47.750 4,294,717 6.58 18.40 2,364,168 14.56
========= ==== ====== ========= ======
F-47
263
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. EARNINGS PER SHARE
The following reflects the reconciliation of the basic and diluted per share
computations for net income:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income available to common shareholders........... $237,752 $205,182 $175,700
======== ======== ========
Average shares
Average shares -- basic............................. 106,745 104,533 101,593
Effect of dilutive securities:
Forward purchase commitment...................... 21 -- --
Common stock options............................. 2,184 1,559 1,707
-------- -------- --------
Average shares -- diluted........................... 108,950 106,092 103,300
======== ======== ========
Basic earnings per share.............................. $ 2.23 $ 1.96 $ 1.73
Diluted earnings per share............................ 2.18 1.93 1.70
======== ======== ========
The effect from assumed exercise of .6 million and .3 million of stock options
was not included in the computation of diluted earnings per share for 1996 and
1995, respectively, because such shares would have had an antidilutive effect on
earnings.
NOTE 14. OFF-BALANCE-SHEET AND DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is a party to financial
transactions which have off-balance-sheet risk. Such transactions arise in
meeting customers' financing needs and from the Corporation's activities in
reducing its own exposure to fluctuations in interest rates. Off-balance-sheet
items involving customers consist primarily of commitments to extend credit and
letters of credit, which generally have fixed expiration dates. These
instruments may involve, to varying degrees, elements of credit and interest
rate risk. To evaluate credit risk, the Corporation uses the same credit
policies in making commitments and conditional obligations on these instruments
as it does for instruments reflected on the balance sheet. Collateral obtained,
if any, varies but may include deposits held in financial institutions; U.S.
Treasury securities or other marketable securities; income-producing commercial
properties; accounts receivable; property, plant, and equipment; and inventory.
The Corporation's exposure to credit risk under commitments to extend credit and
letters of credit is the contractual (notional) amount of the instruments.
Interest rate contract transactions may have credit and interest rate risk
significantly less than the contractual amount.
COMMITMENTS
Commitments to extend secured or unsecured credit are contractual agreements to
lend money provided there is no violation of any condition. Commitments 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 require-
F-48
264
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
ments. At December 31, 1997 and 1996, respectively, the Corporation had $5.1
billion and $4.1 billion of unfunded commitments to extend credit. Of these
amounts, unfunded commitments for borrowers with loans on nonaccrual status were
$.1 million at December 31, 1997, and $3 million at December 31, 1996.
Standby letters of credit are commitments issued by the Corporation to guarantee
the performance of a customer to a third party. As of December 31, 1997 and
1996, the Corporation had standby letters of credit issued amounting to
approximately $402.4 million and $343.3 million, respectively. The Corporation
also had commercial letters of credit of $40.9 million and $42.5 million at
December 31, 1997 and 1996, respectively. Commercial letters of credit are
conditional commitments issued by the Corporation to facilitate trade for
corporate customers. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Forward commitments are contracts for the delayed delivery of securities in
which the seller agrees to make delivery of a specified instrument at a
specified future date and at a specified price or yield. Credit risk may arise
from the possibility that counterparties may not have the ability to fulfill
their commitments, while market risk may arise from movements in interest rates
and security values. The majority of the forward commitments represent
agreements to sell mortgage loans. As of December 31, 1997, the contract amounts
for forward commitments totaled $139 million compared to $131 million at
December 31, 1996.
The Corporation contracts to buy and sell foreign exchange primarily to meet the
currency needs of its customers and to hedge any resulting exposure against
market risk. At December 31, 1997 and 1996, the Corporation had $30.6 million
and $23.2 million, respectively, of foreign exchange forward contracts, which is
the sum of customers' contracts with the Corporation and the Corporation's
offsetting contracts to minimize its exposure.
DERIVATIVES
The Corporation's principal objective in holding or issuing derivative financial
instruments is the management of interest rate exposure arising out of
nontrading assets and liabilities. The Corporation's earnings are subject to
risk of interest rate fluctuations to the extent that interest-earning assets
and interest-bearing liabilities mature or reprice at different times or in
differing amounts. Asset/liability management activities are aimed at maximizing
net interest income within liquidity, capital and interest rate risk constraints
established by management. The Corporation's objective is to manage the interest
sensitivity position so that net income will not be impacted more than 5% for
interest rates varying up to 150 basis points from the Corporation's most likely
interest rate forecast over the next 12 months.
F-49
265
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
To achieve its risk management objective, the Corporation uses a combination of
derivative financial instruments, particularly interest rate swaps. The
instruments utilized are noted in the following table along with their notional
amounts and fair values at year-end 1997 and 1996:
WEIGHTED-
WEIGHTED-AVERAGE AVERAGE
RATE MATURITY
RELATED VARIABLE RATE NOTIONAL ------------------ --------- FAIR
ASSET/LIABILITY AMOUNT PAID RECEIVED YEARS VALUE
---------------------------- ---------- ---- -------- --------- -------
(DOLLARS IN THOUSANDS)
December 31, 1997
Interest rate swaps........ Money market deposits $ 150,000 5.97%(1) 5.91%(2) 2.1 $ 164
Interest rate swaps........ Commercial loans 775,000 5.82(2) 6.61(1) 4.3 17,507
Interest rate swaps........ Mortgage loans 21,225 6.65(1) 6.00(2) 9.5 (545)
Interest rate swaps........ FHLB advances 85,000 6.33(1) 5.88(2) 6.7 (1,439)
Interest rate swaps........ Available for sale
Securities 50,000 5.75(3) 5.77(2) 4.8 (693)
Forward interest rate
swaps.................... Money market deposits 600,000 6.46(4) 5.89(4) 1.3 (1,821)
Forward interest rate
Available for sale
swaps.................... Securities 750,000 6.24(5) N/A(5) 2.5 (2,755)
---------- -------
Total interest rate
swaps.............. 2,431,225 10,418
Interest rate floors....... Commercial loans 300,000 5.37(6) N/A 2.9 1,604
---------- -------
Total interest rate
contracts.......... $2,731,225 $12,022
========== =======
December 31, 1996
Interest rate swaps........ Money market deposits $ 300,000 5.70%(1) 5.54%(2) 2.0 $ 1,717
Interest rate swaps........ Commercial loans 200,000 5.50(2) 6.75(1) 4.4 3,782
Interest rate swaps........ Mortgage loans 22,622 6.65(1) 5.56(2) 10.5 (182)
Interest rate swaps........ Long-term debt 100,000 5.56(2) 6.94(1) 9.3 1,789
Forward interest rate
swaps.................... Money market deposits 400,000 6.27(7) N/A(7) 1.8 (327)
Forward interest rate
Available for sale
swaps.................... Securities 100,000 7.02(7) N/A(7) 3.5 (1,853)
---------- -------
Total interest rate
swaps.............. 1,122,622 4,926
Interest rate caps......... Time deposits 100,000 6.88(6) N/A 1.0 7
Interest rate floors....... Commercial loans 300,000 5.37(6) N/A 3.9 2,814
---------- -------
Total interest rate
contracts.......... $1,522,622 $ 7,747
========== =======
- -------------------------
(1) Fixed rate.
(2) Variable rate which reprices quarterly based on LIBOR.
(3) Variable rate which reprices periodically based on the Constant Maturity
Treasury rate.
(4) Forward swap periods have become effective for $150 million and will begin
at various dates during 1998 for $450 million. The rates to be paid are
fixed and were set at the inception of the contracts. Variable rates to be
received are based on LIBOR, repricing quarterly, but were unknown for $450
million of forward swaps at December 31, 1997, since the related forward
swap periods had not yet begun.
(5) Forward swap periods begin at various dates during 1998. The rates paid are
fixed and were set at the inception of the contracts. Variable rates are
based on LIBOR and reprice quarterly.
(6) Fixed rate strike price, based on the 3-month LIBOR rate.
(7) Forward swap periods began at various dates during 1997. The rates paid are
fixed and were set at the inception of the contracts. Variable rates are
based on LIBOR and reprice quarterly.
F-50
266
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Notional amounts are key elements of derivative financial instrument agreements.
However, notional amounts do not represent the amounts exchanged by the parties
to derivatives and do not measure the Corporation's exposure to credit or market
risks. The amounts exchanged are based on the notional amounts and the other
terms of the underlying derivative agreements. The Corporation's credit exposure
at the reporting date from derivative financial instruments is represented by
the fair value of instruments with a positive fair value at that date offset by
any collateral held. Credit risk disclosures, however, relate to losses that
would be recognized if counterparts failed completely to perform their
obligations.
The risk that counterparts to derivative financial instruments might default on
their obligations is monitored on an ongoing basis. To manage the level of
credit risk, the Corporation reviews the credit standing of its counterparts and
enters into master netting agreements whenever possible, and when appropriate,
obtains collateral. Master netting agreements incorporate rights of setoff that
provide for the net settlement of subject contracts with the same counterparts
in the event of default.
Interest rate swap contracts are primarily used to convert certain deposits and
long-term debt to fixed interest rates or to convert certain groups of customer
loans to fixed rates. The Corporation's net credit exposure with interest rate
contract counterparts, considering master netting agreements and collateral
held, totaled $14.1 million at December 31, 1997, and $4.8 million at December
31, 1996.
Interest rate caps with three-year maturities were purchased during 1994 in
anticipation of further increases in interest rates and allowed the Corporation
to limit its exposure to unfavorable interest rate fluctuations over and above a
"capped" rate for certificates of deposit with maturities of three months or
less. A premium was paid for this protection. The risk assumed by the
Corporation was limited to the amount of the premium and not the notional amount
of the interest rate cap. At December 31, 1997, the Corporation did not have any
outstanding interest rate caps.
Interest rate floors with five-year maturities were purchased during 1995 in
anticipation of decreases in interest rates and allowed the Corporation to limit
its exposure to unfavorable interest rate fluctuations below a particular rate
for commercial loans. A premium is paid for this protection. The risk assumed by
the Corporation is limited to the amount of the premium and not the notional
amount of the interest rate floor. At December 31, 1997, the unamortized portion
of the interest rate floor was $1.9 million.
The table below summarizes, by notional amounts, the activity for each major
category of derivative financial instruments.
FORWARD
INTEREST RATE SWAPS SWAPS
---------------------- ----------
INTEREST INTERESTS BASIS PAY RECEIVE PAY FUTURES
RATE CAPS RATE FLOORS SWAP FIXED FIXED FIXED CONTRACTS
--------- ----------- ------- ---------- --------- ---------- ---------
(IN THOUSANDS)
Balance, December 31, 1995.... $ 100,000 $115,000 $ -- $1,213,910 $ 40,000 $ 300,000 $ 140,000
Additions................... -- 185,000 -- -- 400,000 700,000 --
Maturities/Terminations..... -- -- -- (891,288) (140,000) (500,000) (140,000)
--------- -------- ------- ---------- --------- ---------- ---------
Balance, December 31, 1996.... 100,000 300,000 -- 322,622 300,000 500,000 --
Additions................... -- -- 50,000 135,000 775,000 1,300,000 --
Maturities/Terminations..... (100,000) -- -- (201,397) (300,000) (450,000) --
--------- -------- ------- ---------- --------- ---------- ---------
Balance, December 31, 1997.... $ -- $300,000 $50,000 $ 256,225 $ 775,000 $1,350,000 $ --
========= ======== ======= ========== ========= ========== =========
F-51
267
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents the net deferred gains (losses) related to terminated
derivative financial instruments at December 31, 1997 and 1996. Deferred gains
of $11.2 million and deferred losses of $5.8 million are included in other
liabilities and other assets, respectively, on the consolidated balance sheet at
December 31, 1997. Deferred gains of $8.4 million and deferred losses of $3.4
million are included in other liabilities and other assets, respectively, on the
consolidated balance sheet at December 31, 1996.
DECEMBER 31,
----------------
1997 1996
------ ------
(IN THOUSANDS)
Interest rate swaps........................................ $5,402 $5,067
Futures contracts.......................................... -- (113)
------ ------
Total net deferred gains......................... $5,402(1) $4,954(2)
====== ======
- -------------------------
(1) $1.1 million of net deferred gains to be recognized during 1998 and $4.3
million of net deferred gains to be recognized during 1999 through 2006.
(2) $.8 million of net deferred gains recognized during 1997 and $4.2 million of
net deferred gains to be recognized during 1998 through 2001.
NOTE 15. LEGAL AND REGULATORY MATTERS
The Corporation 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 Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. 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 Corporation to maintain minimum ratios of Tier I and total capital
to risk-weighted assets, and of Tier I capital to average assets of 4%, 8%, and
4%, respectively. Management believes as of December 31, 1997, that the
Corporation met all capital adequacy requirements to which it was subject.
F-52
268
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the most recent notification from the Office of the
Comptroller of the Currency ("OCC") categorized FANB as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, FANB must maintain minimum Tier I risk-based capital, total
risk-based capital, and Tier I leverage ratios of 6%, 10%, and 5%, respectively.
There are no conditions or events since that notification that management
believes would change FANB's well capitalized status. The actual capital amounts
and ratios for the Corporation and FANB are presented in the table below:
FIRST AMERICAN NATIONAL
CORPORATION BANK
------------------------- -------------------------
DECEMBER 31, DECEMBER 31,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
CAPITAL COMPONENTS
Tier I capital:
Realized shareholders' common equity....... $ 1,542,281 $ 1,452,989 $ 1,638,492 $ 1,386,152
Less disallowed intangibles................ (242,257) (188,050) (223,802) (126,524)
----------- ----------- ----------- -----------
Total Tier I capital....................... 1,300,024 1,264,939 1,414,690 1,259,628
----------- ----------- ----------- -----------
Tier II capital:
Allowable allowance for loan losses........ 178,013 153,593 175,612 145,701
Unsecured holding company debt............. 99,442 99,361 -- --
----------- ----------- ----------- -----------
Total Tier II capital...................... 277,455 252,954 175,612 145,701
----------- ----------- ----------- -----------
Total capital.............................. $ 1,577,479 $ 1,517,893 $ 1,590,302 $ 1,405,329
=========== =========== =========== ===========
Risk-adjusted assets....................... $14,239,010 $12,255,593 $14,046,948 $11,624,579
Quarterly average assets................... 17,121,849 15,791,618 16,769,687 14,630,903
=========== =========== =========== ===========
CAPITAL RATIOS(1)
Total risk-based capital ratio............. 11.08% 12.39% 11.32% 12.09%
Tier I risk-based capital ratio............ 9.13 10.32 10.07 10.84
Tier I leverage ratio...................... 7.59 8.01 8.44 8.61
=========== =========== =========== ===========
- -------------------------
(1) Risk-based capital ratios were computed using realized equity (total
shareholders' equity exclusive of net unrealized gains (losses) on
securities available for sale, net of tax).
The extent to which dividends may be paid to the Corporation from its
subsidiaries is governed by applicable laws and regulations. For the
Corporation's national bank subsidiary, the approval of the OCC is required if
dividends declared in any year exceed net profits for that year (as defined
under the National Bank Act) combined with the retained net profits of the two
preceding years. In addition, a national bank may not pay a dividend, make any
other capital distribution, or pay management fees if such payment would cause
it to fail to satisfy certain minimum capital requirements. Under the
regulations of the Office of Thrift Supervision ("OTS"), a savings association
that exceeds its fully phased-in capital requirements both immediately prior to
and on a proforma basis
F-53
269
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
after giving effect to a proposed capital distribution is generally permitted
without prior approval of the OTS to make a capital distribution during a
calendar year equal to the greater of (i) 100% of net earnings to date during
the calendar year, plus the amount that would reduce by one-half its "surplus
capital ratio" (i.e., the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
income for the previous four quarters. In accordance with the most restrictive
regulations, at December 31, 1997, the above subsidiaries had $90.4 million
available for distribution as dividends to the Corporation.
On September 30, 1996, special legislation was enacted which required many
financial institutions to pay a one-time assessment on deposits insured by the
Savings Association Insurance Fund ("SAIF") at the rate of $.657 per $100 of
deposits held as of March 31, 1995. The Corporation's assessment was $8.1
million or $5 million, net of tax ($.05 per share). The purpose of the
legislation was to recapitalize the thrift fund up to the statutorily prescribed
1.25%. Effective January 1, 1997, the normal SAIF deposit insurance rate for
well-capitalized institutions dropped to 0 basis points per $100 of deposits.
Beginning January 1, 1997, a separate 1.3 basis point annual charge will be
assessed through 1999 on Bank Insurance Fund deposits and a 6.4 basis point
annual charge will be assessed on SAIF deposits in order to service debt
incurred by the Financing Corporation, a corporation established by the Federal
Housing Finance Board to issue stock and debt principally to assist in funding
the Federal Savings and Loan Insurance Corporation Resolution Fund. Starting in
the year 2000 until the Financial Corporation debt is retired, banks and thrifts
will pay such assessment on a pro rata basis, which is estimated to run
approximately 2.5 basis points.
Following the adoption of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), Charter Federal Savings Bank ("Charter" or
now "FAFSB"), brought an action against the OTS and the Federal Deposit
Insurance Corporation seeking injunctive and other relief, contending that
Congress' elimination of supervisory goodwill required rescission of certain
supervisory transactions. The Federal District Court found in Charter's favor,
but in 1992 the Fourth Circuit Court of Appeals reversed, and the U.S. Supreme
Court denied Charter's petition for certiorari. In 1995, the Federal Circuit
Court found in favor of another thrift institution in a similar case (Winstar
Corp. v. United States) in which the association sought damages for breach of
contract. Charter also filed suit against the United States Government
("Government") in the Court of Federal Claims based on breach of contract.
Pending the Supreme Court's review of the Winstar decision, FAFSB's action was
stayed. In July 1996, the Supreme Court affirmed the lower court's decision in
Winstar. The stay was automatically lifted and FAFSB's suit is now proceeding.
The Government, however, has filed a motion to dismiss the suit based on the
prior Fourth Circuit decision. This motion has not yet been decided by the
Federal Claims Court.
The value of FAFSB's claims against the Government, as well as their ultimate
outcome, are contingent upon a number of factors, some of which are outside of
FAFSB's control, and are highly uncertain as to substance, timing and the dollar
amount of any damages which might be awarded should FAFSB finally prevail. Under
the Agreement and Plan of Reorganization as amended by and between FAFSB and the
Corporation, in the event that FAFSB is successful in this litigation, the FAFSB
shareholders as of December 1, 1995 will be entitled to receive additional
consideration equal in value to 50% of any recovery,
F-54
270
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
net of all taxes and certain other expenses, including the costs and expenses of
such litigation, received on or before December 1, 2000 subject to certain
limitations in the case of certain business combinations. Such additional
consideration, if any, is payable in the common stock of the Corporation, based
on the average per share closing price on the date of receipt by FAFSB of the
last payment constituting a recovery from the Government.
DGNB is a defendant in a case in which the plaintiffs are beneficiaries of a
trust for which DGNB is the trustee. In an amended complaint, the plaintiffs
claim that DGNB was negligent in its dealings with the trust property, breached
its trust duties by allegedly abusing its discretion and negligently handling
trust assets, engaged in self dealing, and was grossly negligent in its handling
of the trusts. The case seeks actual damages for waste of trust assets and loss
of income and punitive damages, both in an unspecified amount to be proven at
trial, and attorney fees and court costs. While the ultimate outcome of the
lawsuit cannot be predicted with certainty, management denies all liability and
believes that the ultimate resolution of this matter will not have a material
effect on the Corporation's consolidated financial statements.
There are from time to time other legal proceedings pending against the
Corporation and its subsidiaries. In the opinion of management and counsel,
liabilities, if any, arising from such proceedings presently pending would not
have a material adverse effect on the consolidated financial statements of the
Corporation.
F-55
271
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments for both on-
and off-balance-sheet assets and liabilities for which it is practicable to
estimate fair value. The techniques used for this valuation are significantly
affected by the assumptions used, including the amount and timing of future cash
flows and the discount rate. Such estimates involve uncertainties and matters of
judgment and therefore cannot be determined with precision. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets. Accordingly, the aggregate fair value amounts presented are
not meant to represent the underlying value of the Corporation.
DECEMBER 31,
------------------------------------------------------
1997 1996
------------------------- -------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
Financial instruments (assets):
Cash and short-term investments........ $ 1,000,983 $ 1,000,983 $ 1,053,835 $ 1,053,835
Securities held to maturity............ 715,027 723,228 969,797 977,767
Securities available for sale.......... 3,395,494 3,395,494 3,150,107 3,150,107
Federal funds sold and securities
purchased under agreements to
resell............................... 189,542 189,542 209,317 209,317
Trading account securities............. 64,469 64,469 62,715 62,715
Loans, net of unearned discount and
allowance for loan losses............ 11,461,689 11,578,452 10,447,195 10,440,387
Financial instruments (liabilities):
Noninterest-bearing deposits........... 2,647,765 2,647,765 2,565,084 2,565,084
Interest-bearing deposits.............. 10,757,692 10,773,139 10,283,284 10,315,892
Short-term borrowings.................. 1,969,639 1,969,639 1,697,401 1,697,401
Long-term debt......................... 596,218 600,622 430,562 429,204
=========== =========== =========== ===========
F-56
272
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair values for the Corporation's off-balance-sheet financial
instruments are summarized as follows:
DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
CONTRACTUAL ESTIMATED CONTRACTUAL ESTIMATED
OR NOTIONAL FAIR OR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(IN THOUSANDS)
Commitments to extend credit.............. $5,136,991 $ 8,860 $4,065,635 $ 7,118
Standby letters of credit................. 402,400 1,270 343,342 2,326
Commercial letters of credit.............. 40,930 95 42,489 100
Interest rate swaps....................... 1,081,225 14,994 622,622 7,106
Forward interest rate swaps............... 1,350,000 (4,576) 500,000 (2,180)
Interest rate caps........................ -- -- 100,000 7
Interest rate floors...................... 300,000 1,604 300,000 2,814
========== ======= ========== =======
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
SHORT-TERM FINANCIAL INSTRUMENTS -- The carrying amounts of short-term financial
instruments, including cash, federal funds sold and purchased and resell and
repurchase agreements approximate fair value. These instruments expose the
Corporation to limited credit risk and have no stated maturity or mature within
one year or less and carry interest rates which approximate market.
SECURITIES HELD TO MATURITY, SECURITIES AVAILABLE FOR SALE, AND TRADING ACCOUNT
SECURITIES -- Fair values are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
LOANS -- For variable-rate loans that reprice frequently, fair values are based
on carrying values. The fair values for certain homogeneous categories of loans,
such as residential mortgages, are estimated using quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair values for other performing loans are estimated by
discounting estimated future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit risk and for similar
maturities. Included within financial assets are certain nonperforming assets,
consisting primarily of nonperforming loans, the fair values of which are based
principally on the lower of the amount due from customers or the fair value of
the loans' collateral, which is the amount the Corporation could reasonably
expect to receive in a current sale between a willing buyer and seller other
than in a forced or liquidation sale.
DEPOSITS -- The fair value of deposits with no stated maturity, such as demand
deposits, NOW accounts, money market accounts, and regular savings accounts, is
equal to the amount payable on demand at the reporting date. The fair value of
certificates of deposits and other fixed maturity time deposits is estimated
using the rates currently offered for deposits of similar remaining maturities.
Any foreign deposits are valued at the carrying value due to the frequency with
which rates for such deposits are adjusted to a market rate.
F-57
273
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
SHORT-TERM BORROWINGS -- Fair value is estimated to equal the carrying amount
since these instruments have a relatively short maturity.
LONG-TERM DEBT -- Rates for long-term debt with similar terms and remaining
maturities are used to estimate fair value of existing debt.
OFF-BALANCE-SHEET INSTRUMENTS -- The fair value of commitments to extend credit
is based on unamortized deferred loan fees and costs. For letters of credit,
fair value is estimated using fees currently charged to enter into similar
agreements with similar maturities. The fair value of the Corporation's
outstanding futures contracts, interest rate caps, and interest rate floors is
based on quoted market prices, and the estimated fair value of interest rate
swaps and forward interest rate swaps is based on estimated costs to settle the
obligations with the counterparts at the reporting date.
F-58
274
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for First American Corporation (Parent Company
only) was as follows:
CONDENSED INCOME STATEMENTS
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income
Dividends from subsidiaries:
Banks........................................ $249,594 $ 76,524 $ 52,170
Fees from subsidiaries.......................... 39,510 37,681 30,836
Interest from subsidiaries...................... 1,407 3,734 3,633
Interest on time deposits with other banks and
other income................................. 4,368 207 697
-------- -------- --------
Total income............................ 294,879 118,146 87,336
-------- -------- --------
Expenses
Salaries and employee benefits.................. 23,368 25,597 21,118
Interest expense................................ 14,701 11,627 4,076
Other expenses.................................. 21,620 22,467 19,699
-------- -------- --------
Total expenses.......................... 59,689 59,691 44,893
-------- -------- --------
Income before income taxes........................ 235,190 58,455 42,443
Reduction to consolidated income taxes arising
from parent company loss........................ 7,529 8,049 5,717
-------- -------- --------
Income before equity in undistributed earnings of
subsidiaries.................................... 242,719 66,504 48,160
-------- -------- --------
Equity in undistributed earnings (dividends in
excess of earnings) of subsidiaries
Banks........................................... (5,315) 138,152 126,714
Nonbanks........................................ 348 526 826
-------- -------- --------
Net income.............................. $237,752 $205,182 $175,700
======== ======== ========
F-59
275
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED BALANCE SHEETS
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Assets
Cash.................................................. $ 2,645 $ 47,279
Interest-bearing deposit with unaffiliated bank....... 7,600 --
Short-term investments with subsidiary................ 24,355 25,569
Employee stock ownership plan loan.................... 163 443
Investment in subsidiaries, at cost adjusted for
equity in earnings and net unrealized gains
(losses) on securities available for sale:
Bank............................................... 1,700,775 1,571,468
Nonbank............................................ 8,091 7,743
Other assets.......................................... 52,749 47,156
---------- ----------
Total assets.................................. $1,796,378 $1,699,658
========== ==========
Liabilities and shareholders' equity
Long-term debt........................................ $ 200,839 $ 198,767
Other liabilities..................................... 51,562 50,918
---------- ----------
Total liabilities............................. 252,401 249,685
========== ==========
Preferred stock, without par value.................... -- --
Common stock, $2.50 par value......................... 265,080 262,775
Additional paid-in capital............................ 163,902 239,661
Retained earnings..................................... 1,126,803 953,062
Deferred compensation on restricted stock............. (13,341) (2,066)
Employee stock ownership plan obligation.............. (163) (443)
---------- ----------
Realized shareholders' equity...................... 1,542,281 1,452,989
Net unrealized losses on securities available for
sale, net of tax................................... 1,696 (3,016)
---------- ----------
Total shareholders' equity.................... 1,543,977 1,449,973
---------- ----------
Total liabilities and shareholders' equity.... $1,796,378 $1,699,658
========== ==========
F-60
276
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income................................................ $237,752 $205,182 $175,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Dividends in excess of income (undistributed income) of
subsidiaries.......................................... 4,967 (138,678) (127,540)
Depreciation and amortization........................... 2,256 3,425 3,020
Deferred income tax expense............................. 540 1,614 1,295
Gain on sale of other assets............................ (2,258) -- --
Change in assets and liabilities, net of effect of
acquisitions:
Increase in interest receivable and other assets...... (8,740) (13,822) (10,094)
Increase in interest payable and other liabilities.... 1,029 7,420 9,233
-------- -------- --------
Net cash provided by operating activities.......... 235,546 65,141 51,614
-------- -------- --------
INVESTING ACTIVITIES
Net decrease (increase) in employee stock ownership plan
loan.................................................... 280 218 (661)
Acquisitions, net of cash acquired........................ (29,587) (1,477) (9,294)
Sale of other assets...................................... 2,830 -- --
Proceeds from sale of premises and equipment.............. 156 301 11
Purchases of premises and equipment....................... (3,961) (2,071) (1,086)
Net decrease in notes receivable from nonbank
subsidiary.............................................. -- 2,990 750
Net decrease in investment in subsidiary.................. -- -- 7,500
-------- -------- --------
Net cash used in investing activities..................... (30,282) (39) (2,780)
-------- -------- --------
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings.......... -- (27,600) 27,600
Proceeds from issuance of long-term debt.................. -- 99,381 49,513
Repayment of long-term debt............................... -- (2,734) (782)
Proceeds from early termination of swap contract on
long-term debt.......................................... 2,038 -- --
Issuance of common shares for Employee Benefit and
Dividend Reinvestment Plans............................. 22,065 17,947 14,883
Repurchase of common stock................................ (196,500) (108,249) (94,729)
Tax benefit-related to stock options...................... 5,603 4,530 3,574
Cash dividends paid....................................... (76,718) (62,201) (50,146)
-------- -------- --------
Net cash used in financing activities.............. (243,512) (78,926) (50,087)
-------- -------- --------
Decrease in cash and cash equivalents....................... (38,248) (13,824) (1,253)
Cash and cash equivalents, beginning of year................ 72,848 86,672 87,925
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 34,600 $ 72,848 $ 86,672
======== ======== ========
Cash paid during the year for:
Interest expense.......................................... $ 14,701 $ 10,419 $ 3,958
Income taxes.............................................. 58,971 48,255 30,894
Noncash investing activities:
Stock issued for acquisitions (note 2).................... 94,637 83,723 156,395
======== ======== ========
F-61
277
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
UNAUDITED UNAUDITED
JUNE 30, DECEMBER 31, JUNE 30,
1998 1997 1997
---------- ------------ ---------
ASSETS
- ---------
Cash and due from banks.......................... $ 60,085 $ 46,873 $ 62,988
Investment securities:
Held-to-maturity (fair value of $31,152 at June
30, 1998, $48,587 at December 31, 1997, and
$53,127 at June 30, 1997)................... 30,912 48,396 53,133
Available-for-sale............................. 176,117 156,691 189,784
Federal funds sold............................... 175 18,830 3,470
Loans............................................ 702,343 651,234 593,745
Less: Unearned income.......................... 1,908 1,476 1,872
Allowance for loan losses................ 9,141 7,837 6,939
---------- -------- --------
Net loans...................................... 691,294 641,921 584,934
Premises and equipment, net of accumulated
depreciation................................... 23,125 22,740 20,448
Intangible assets................................ 5,313 5,707 6,035
Other assets..................................... 17,530 15,732 15,324
========== ======== ========
Total Assets................................... $1,004,551 $956,890 $936,116
========== ======== ========
LIABILITIES
- ---------------
Deposits
Noninterest bearing demand deposits............ $ 139,941 $126,684 $142,597
Interest bearing demand deposits............... 134,716 132,755 128,563
Money market accounts.......................... 57,294 57,873 45,383
Savings deposits............................... 116,607 111,156 101,936
Time deposits of less than $100,000............ 253,305 249,368 251,865
Time deposits of $100,000 or more.............. 102,350 70,585 71,836
---------- -------- --------
Total deposits......................... 804,213 748,421 742,180
Federal funds purchased and securities sold under
agreements to repurchase....................... 68,592 60,439 61,508
Other borrowings................................. 20,000 38,000 28,000
Other liabilities................................ 8,622 10,114 8,223
---------- -------- --------
Total liabilities.............................. 901,427 856,974 839,911
---------- -------- --------
STOCKHOLDERS' EQUITY
- ---------------------------------
Common stock par value $.01 per share; 8,000,000
authorized; 3,759,912 issued................... 38 38 38
Surplus.......................................... 65,190 64,875 64,709
Retained earnings................................ 38,124 35,074 31,649
Unrealized appreciation/(depreciation) on
securities available for sale.................. 936 1,044 783
Less: treasury stock -- at cost.................. 1,164 1,115 974
---------- -------- --------
Total stockholders' equity..................... 103,124 99,916 96,205
---------- -------- --------
Total Liabilities and Stockholders' Equity..... $1,004,551 $956,890 $936,116
========== ======== ========
F-62
278
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED UNAUDITED
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
INTEREST INCOME
- ----------------------
Interest and fees on loans............................... $15,673 $12,790 $30,556 $24,325
Interest on investment securities
Taxable................................................ 2,374 2,620 4,475 5,195
Tax exempt............................................. 689 1,020 1,397 1,984
Interest on federal funds sold........................... 232 151 572 335
Interest on other earning assets......................... 4 7 14 14
------- ------- ------- -------
Total interest income.................................. 18,972 16,588 37,014 31,853
------- ------- ------- -------
INTEREST EXPENSE
- -----------------------
Interest bearing demand deposits......................... 1,112 819 1,953 1,650
Money market accounts.................................... 508 407 961 823
Savings deposits......................................... 735 819 1,662 1,662
Time deposits of less than $100,000...................... 3,575 3,469 7,197 6,722
Time deposits of $100,000 or more........................ 1,365 1,032 2,525 1,924
Federal funds purchased and securities sold under
agreements to repurchase............................... 747 805 1,461 1,365
Other borrowed money..................................... 328 209 846 341
------- ------- ------- -------
Total interest expense................................. 8,370 7,560 16,605 14,487
------- ------- ------- -------
Net interest income............................. 10,602 9,028 20,409 17,366
Provision for loan losses................................ 1,337 1,155 2,275 1,621
------- ------- ------- -------
Net interest income after the provision for loan
losses........................................ 9,265 7,873 18,134 15,745
------- ------- ------- -------
NONINTEREST INCOME
- ----------------------------
Trust income............................................. 453 404 886 787
Service charge on deposit accounts....................... 1,215 1,038 2,334 2,046
Net securities gains (losses)............................ 4 70 8 62
Other income............................................. 999 657 2,401 1,396
------- ------- ------- -------
Total noninterest income............................... 2,671 2,169 5,629 4,291
------- ------- ------- -------
NONINTEREST EXPENSE
- -----------------------------
Salaries and employee benefits........................... 4,689 4,052 9,388 7,749
Occupancy................................................ 952 730 1,949 1,892
Other.................................................... 2,447 2,179 5,056 4,068
------- ------- ------- -------
Total noninterest expense.............................. 8,088 6,961 16,393 13,709
------- ------- ------- -------
Income before provision for income taxes................. 3,848 3,081 7,370 6,327
Provision for income taxes............................... 1,278 1,021 2,440 1,871
======= ======= ======= =======
Net Income...................................... $ 2,570 $ 2,060 $ 4,930 $ 4,456
======= ======= ======= =======
Basic net income per common share........................ $ 0.684 $ 0.548 $ 1.311 $ 1.185
Diluted net income per common share...................... $ 0.683 $ 0.548 $ 1.311 $ 1.185
Dividends declared per common share...................... $ 0.25 $ 0.23 $ 0.50 $ 0.46
F-63
279
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE DATA)
COMMON STOCK ACCUMULATED
------------------ OTHER
# OF PAR CAPITAL RETAINED COMPREHENSIVE TREASURY
SHARES VALUE SURPLUS EARNINGS INCOME STOCK TOTAL
---------- ----- ------- -------- ------------- -------- --------
Balance -- December 31, 1996......... 3,759,912 $38 $64,866 $28,771 $ 807 $ (559) $ 93,923
Comprehensive Income:
Net income......................... 4,456
Other Comprehensive Income, net of
tax.............................. (24)
Comprehensive Income................. 4,432
Cash dividend........................ (1,730) (1,730)
Stock dividend.......................
Sales of Treasury Stock.............. 604 604
Purchases of Treasury Stock.......... (1,013) (1,013)
Employee Stock Ownership Plan
(ESOP)............................. (157) 152 (6) (11)
---------- --- ------- ------- ------ ------- --------
Balance -- June 30, 1997
(Unaudited)........................ 3,759,912 $38 $64,709 $31,649 $ 783 $ (974) $ 96,205
========== === ======= ======= ====== ======= ========
Balance -- December 31, 1997......... 3,759,912 $38 $64,875 $35,074 $1,044 $(1,115) $ 99,916
Comprehensive Income:
Net income......................... 4,930
Other Comprehensive Income, net of
tax.............................. (108)
Comprehensive Income................. 4,822
Cash dividend........................ (1,880) (1,880)
Sales of Treasury Stock.............. 858 858
Purchases of Treasury Stock.......... (907) (907)
Gains on Sales of Treasury Stock..... 315 315
---------- --- ------- ------- ------ ------- --------
Balance -- June 30, 1998
(Unaudited)........................ 3,759,912 $38 $65,190 $38,124 $ 936 $(1,164) $103,124
========== === ======= ======= ====== ======= ========
F-64
280
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
SIX MONTHS
ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 4,930 $ 4,456
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses................................. 2,275 1,621
Depreciation on premises and equipment.................... 1,317 1,285
Amortization and accretion of investment Securities....... 105 115
Increase in other assets.................................. (1,798) (349)
Net increase (decrease) in other liabilities.............. (1,492) 561
-------- --------
Net cash provided by operating activities................... 5,337 7,689
-------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of Available-for-sale
securities................................................ 20,751 64,233
Proceeds from maturities of Held-to-maturity securities..... 17,445 6,278
Purchases of investment securities.......................... (41,717) (62,500)
Net (increase) decrease in federal funds sold............... 18,655 (3,470)
Net increase in loans....................................... (50,677) (69,060)
Purchases of premises and equipment......................... (598) (1,389)
-------- --------
Net cash used in investing activities....................... (36,141) (65,908)
-------- --------
FINANCING ACTIVITIES
Net increase in demand deposits............................. 15,218 25,484
Net increase (decrease) in savings and MMDA................. 4,872 (8,373)
Net increase in time deposits............................... 35,702 32,501
Net increase (decrease) in repurchase Agreements and federal
funds purchased........................................... 8,153 (1,831)
Net increase (decrease) in other borrowings................. (18,000) 18,000
Cash dividends paid......................................... (1,880) (1,730)
Sales of treasury stock..................................... 858 604
Purchase of treasury stock.................................. (907) (1,013)
-------- --------
Net cash provided by financing activities................... 44,016 63,642
-------- --------
Increase in cash and cash equivalents............... 13,212 5,423
-------- --------
Cash and cash equivalents at the beginning of the period.... 46,873 57,565
-------- --------
Cash and cash equivalents at the end of the period.......... $ 60,085 $ 62,988
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized Appreciation (Depreciation) of Securities, net of
Deferred Taxes............................................ $ (108) $ (24)
Increase (Decrease) in Other Real Estate Owned.............. $ 65 $ 10
F-65
281
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
PIONEER BANCSHARES, INC.
A. PRESENTATION OF FINANCIAL INFORMATION
The financial statements in this report have not been audited. The information
included herein should be read in conjunction with the notes to consolidated
financial statements included in the 1997 Annual Report to Shareholders which
was furnished to each shareholder of the Company on March 25, 1998. The
consolidated financial statements presented herein conform to generally accepted
accounting principles and to general industry practices.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Pioneer Bancshares, Inc., its subsidiaries, Pioneer Bank, Pioneer Bank, f.s.b.,
Valley Bank, and Pioneer Bank's subsidiaries and trusteed affiliates. Pioneer
Bank's subsidiaries include Pioneer Securities, Inc. (PSI) and Center Finance
Company, Inc. (Center). The trusteed affiliates of Pioneer Bank include Frontier
Corporation and Valley Company with Valley's wholly-owned subsidiary, Oneida
Insurance Company, Inc. Collectively, Pioneer Bancshares and its subsidiaries
and trusteed affiliates are referred to as "Pioneer" or "the Company." Frontier
Corporation and Valley Company are held in trust for the benefit of Pioneer
Bank's shareholders for a period of one hundred years from 1956. At any time,
the trusts may be liquidated by a two-thirds vote of Pioneer Bank's
shareholders.
Substantially all intercompany transactions, profits and balances have been
eliminated.
ACCOUNTING POLICIES
During interim periods, the Company follows the accounting policies set forth in
its Form 10-K for the year ended December 31, 1997, as filed with the Securities
and Exchange Commission. Since December 1997, there have been no changes in any
accounting principles or practices, or in the method of applying any such
principles or practices, with the exception of the company's adoption of
Statement of Financial Standard No. 130, "Reporting Comprehensive Income".
INTERIM FINANCIAL DATA (UNAUDITED)
In the opinion of Company management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, the results of
operations, cash flows and stockholders' equity of the Company for the interim
periods. Results for interim periods are not necessarily indicative of the
results to be expected for a full year.
DEFERRED TAXES
Deferred income taxes arise from temporary differences between the income tax
basis and the financial reporting basis of assets and liabilities. If it is more
likely than not some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
F-66
282
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
PIONEER BANCSHARES, INC. -- (CONTINUED)
FASB STATEMENTS NO. 114 & 118
For purposes of these Statements, management maintains the following policy.
Impaired loans are divided into two classifications: doubtful and loss.
"Doubtful" loans indicate probable loss and are reserved at 50% of outstanding
principal regardless of underlying collateral value. If collateral value is less
than 50% of principal, then additional specific reserves are allocated. "Loss"
loans are deemed uncollectible by management and are reserved at 100% of
outstanding principal value. The Company charges-off loans it deems to be
substantially uncollectible. The Directors Loan Committee approves all loan
charge-offs. The following table details impaired loans:
JUNE 30,
---------------------
1998 1997
---------- --------
Principal balance................................. $1,483,813 $303,672
Interest income recorded during loan impairment... -- --
Reserve for potential credit losses............... 755,663 172,727
Unreserved portion of impaired loans.............. 728,150 130,945
Average principal balance quarter-to-date......... 640,936 169,571
Average principal balance year-to-date............ 525,014 159,632
Impaired loans are identified according to the two classification methods in the
following table:
JUNE 30,
---------------------
1998 1997
---------- --------
Doubtful loans outstanding........................ $1,456,301 $303,672
Loss loans outstanding............................ 27,512 --
The Company's method of valuing impaired loans approximates fair value as
defined in Statements No. 114 & 118.
EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator). Diluted EPS is computed by dividing income available
to common shareholders (numerator) by the adjusted weighted average number of
shares outstanding (denominator). The adjusted weighted average number of shares
outstanding reflects the potential dilution occurring if securities or other
contracts to issue common stock were exercised or converted into common stock
resulting in the issuance of common stock then shared in the earnings of the
entity.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by or with the approval of an
authorized executive officer of the Company may constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995. Words or phrases such as "should result, are expected to, we anticipate,
we estimate, we project" or similar
F-67
283
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
PIONEER BANCSHARES, INC. -- (CONTINUED)
expressions are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from the Company's historical experience and
its present expectations or projections. These risks and uncertainties include,
but are not limited to, unanticipated economic changes, interest rate movements
and the impact of competition. Caution should be taken not to place undue
reliance on any such forward-looking statements since such statements speak only
as of the date of the making of such statements.
B. ACCOUNTING AND REGULATORY MATTERS
PENDING ACQUISITION
On May 27, 1998, Pioneer Bancshares, Inc., a Delaware corporation, entered into
an Agreement and Plan of Merger with First American Corporation (First
American), a Tennessee corporation, providing for, among other things, the
merger of the Company with and into First American. The Merger is intended to
constitute a tax-free reorganization for federal tax purposes and is to be
accounted for as a pooling-of-interests transaction. Pursuant to the terms of
the Merger Agreement, each share of the Company's common stock, par value $.01
per share, outstanding immediately prior to the effective time of the Merger,
will be converted into the right to receive 1.65 shares of First American common
stock, par value $2.50 per share. The Company's banking operations will be
consolidated with First American and will operate under the First American name.
Management anticipates the Merger will be completed on November 1, 1998.
Bancshares' portion of merger-related costs is being recorded as a prepaid asset
and will be expensed during the fourth quarter of 1998. As of June 30, 1998,
merger related costs before taxes were approximately $179,661. First American
expects to incur restructuring and merger-related, pretax charges of about $16
million.
EFFECTS OF ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
disclosures about Pensions and Other Postretirement Benefits", changes the
disclosures about pensions and other benefits provided by employers. This
standard does not affect accounting measurements nor does it revise the
disclosures made in the financial statements of the plans. Rather, this standard
applies to financial statements of sponsors of such plans and harmonizes the
disclosures for various types of plans. The provisions of SFAS No. 132 are
effective for fiscal years beginning after December 15, 1997. Early application
is encouraged. Management intends to include appropriate disclosures in the
Company's financial reports as of December 31, 1998.
In 1998, the Financial Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 requires that derivatives be reported on the
balance sheet at fair value. Changes in fair value are recognized in net income
or, for derivatives which are hedging market risk related to future cash flows,
in the accumulated other comprehensive income section of the stockholder's
equity. Implementation is required by the first quarter of 2000, with cumulative
effect of adoption reflected in net income and accumulated other comprehensive
income, as appropriate. Pioneer Bancshares has not determined the effect or
timing of implementation of this pronouncement.
F-68
284
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Pioneer Bancshares, Inc.
Chattanooga, Tennessee
We have audited the accompanying consolidated balance sheets of Pioneer
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Bancshares,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ JOSEPH DECOSIMO AND COMPANY, LLP
Chattanooga, Tennessee
January 30, 1998
F-69
285
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
ASSETS
Cash........................................................ $ 46,344,884 $ 55,434,925
Federal Funds Sold.......................................... 18,830,000 1,635,000
------------ ------------
65,174,884 57,069,925
------------ ------------
Interest Bearing Deposits in Banks.......................... 528,417 495,617
------------ ------------
Investment Securities --
Securities Available-for-Sale............................. 156,690,716 192,189,989
Securities Held-to-Maturity............................... 48,396,477 59,409,004
------------ ------------
205,087,193 251,598,993
------------ ------------
Loans....................................................... 651,233,690 524,848,826
Less:
Unearned Interest and Loan Fees......................... 1,476,030 1,596,242
Allowance for Loan Losses............................... 7,836,582 5,758,048
------------ ------------
641,921,078 517,494,536
------------ ------------
Premises and Equipment, net................................. 22,740,334 20,241,720
------------ ------------
Other Assets................................................ 21,438,310 20,338,719
------------ ------------
Total Assets....................................... $956,890,216 $867,239,510
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities --
Deposits --
Noninterest-Bearing Demand.............................. $126,684,077 $125,529,309
Interest-Bearing Demand................................. 132,754,860 120,146,268
------------ ------------
259,438,937 245,675,577
------------ ------------
Savings................................................. 111,155,719 111,748,510
------------ ------------
Time Deposits --
Certificates of Deposit of $100,000 or more........... 70,584,736 56,086,477
Time Deposits of less than $100,000................... 307,241,495 279,056,446
------------ ------------
377,826,231 335,142,923
------------ ------------
Total Deposits..................................... 748,420,887 692,567,010
Federal Funds Purchased................................... -- 13,500,000
Securities Sold Under Agreements to Repurchase............ 60,439,198 49,838,840
Other Liabilities......................................... 10,114,173 7,410,193
Long-Term Debt............................................ 38,000,000 10,000,000
------------ ------------
Total Liabilities.................................. 856,974,258 773,316,043
------------ ------------
Commitments and Contingencies...............................
Stockholders' Equity --
Preferred Stock -- 1,000,000 shares authorized; 0 shares
issued.................................................. -- --
Common Stock -- $.01 par value -- 15,000,000 shares
authorized; 3,759,912 shares issued..................... 37,600 37,600
Surplus................................................... 64,875,396 64,866,732
Retained Earnings......................................... 35,074,447 28,771,470
Unrealized Appreciation on Securities, net of tax of
$663,647 for 1997 and $508,902 for 1996................. 1,044,463 806,449
Less: Treasury Stock -- 29,479 for 1997 and 15,269 for
1996, at cost........................................... (1,115,948) (558,784)
------------ ------------
Total Stockholders' Equity......................... 99,915,958 93,923,467
------------ ------------
Total Liabilities and Stockholders' Equity......... $956,890,216 $867,239,510
============ ============
The accompanying notes are an integral part of the financial statements
F-70
286
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
Interest Income
Loans................................. $53,107,207 $41,069,425 $31,572,245
Investment Securities --
U.S. Treasury...................... 2,775,826 2,832,786 2,936,475
U.S. Government Agencies........... 5,409,927 6,481,897 8,083,917
States and Political
Subdivisions..................... 3,516,996 3,998,347 4,049,060
Other.............................. 1,645,170 2,095,404 871,748
Federal Funds Sold.................... 781,231 485,909 1,459,781
----------- ----------- -----------
Total Interest Income......... 67,236,357 56,963,768 48,973,226
----------- ----------- -----------
Interest Expense
Interest-Bearing Demand Deposits...... 3,361,830 3,308,271 3,076,817
Savings Deposits...................... 3,425,914 2,613,680 2,395,598
Time Deposits of Less Than $100,000... 15,306,433 14,583,063 12,994,655
Certificates of Deposit of $100,000 or
more............................... 4,283,493 3,162,849 2,767,116
Other................................. 3,821,471 2,586,455 1,748,692
----------- ----------- -----------
Total Interest Expense........ 30,199,141 26,254,318 22,982,878
----------- ----------- -----------
Net Interest Income................... 37,037,216 30,709,450 25,990,348
Provision for Loan Losses............. 3,609,263 1,097,000 618,500
----------- ----------- -----------
Net Interest Income After
Provision for Loan
Losses..................... 33,427,953 29,612,450 25,371,848
----------- ----------- -----------
Noninterest Income
Trust Department...................... 1,625,036 1,563,925 1,181,175
Service Charges on Deposit Accounts... 4,651,648 4,018,786 3,428,139
Net Securities Gains.................. 293,723 297,003 211,065
Other................................. 3,301,574 2,298,675 2,161,689
----------- ----------- -----------
Total Noninterest Income...... 9,871,981 8,178,389 6,982,068
----------- ----------- -----------
Noninterest Expenses
Salaries and Employee Benefits........ 16,142,394 13,948,685 12,160,404
Net Occupancy......................... 2,297,421 2,129,070 1,550,486
Other................................. 10,933,057 9,662,055 9,136,980
----------- ----------- -----------
Total Noninterest Expenses.... 29,372,872 25,739,810 22,847,870
----------- ----------- -----------
Income Before Income Taxes.............. 13,927,062 12,051,029 9,506,046
Income Tax Provision.................. 4,164,966 3,054,182 2,424,233
----------- ----------- -----------
Net Income.............................. $ 9,762,096 $ 8,996,847 $ 7,081,813
=========== =========== ===========
Basic Net Income Per Share.............. $ 2.60 $ 2.39 $ 1.88
=========== =========== ===========
Diluted Net Income Per Share............ $ 2.60 $ 2.39 $ 1.88
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
F-71
287
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
UNREALIZED
APPRECIATION
COMMON STOCK RETAINED (DEPRECIATION) TREASURY
SHARES AMOUNT SURPLUS EARNINGS ON SECURITIES STOCK
--------- ------- ----------- ----------- -------------- -----------
Balance -- December 31, 1994......... 1,879,956 $18,800 $64,727,548 $18,812,602 $(5,591,295) $ (62,618)
Net Income........................... 7,081,813
Cash Dividends....................... (2,848,668)
Net Changes in Unrealized
Appreciation on Securities......... 5,903,139
Purchase of 15,956 Shares of Treasury
Stock, at cost..................... (416,162)
--------- ------- ----------- ----------- ----------- -----------
Balance -- December 31, 1995......... 1,879,956 18,800 64,727,548 23,045,747 311,844 (478,780)
Net Income........................... 8,996,847
100% Stock Dividend.................. 1,879,956 18,800 (18,800)
Cash Dividends....................... (3,271,124)
Net Changes in Unrealized
Appreciation on Securities......... 494,605
Purchase of 32,298 Shares of Treasury
Stock, at cost..................... (1,169,819)
Issuance of 35,943 Shares of Treasury
Stock.............................. 157,984 1,089,815
--------- ------- ----------- ----------- ----------- -----------
Balance -- December 31, 1996......... 3,759,912 37,600 64,866,732 28,771,470 806,449 (558,784)
Net Income........................... 9,762,096
Cash Dividends....................... (3,459,119)
Net Changes in Unrealized
Appreciation on Securities......... 238,014
Purchase of 31,563 Shares of Treasury
Stock, at cost..................... (1,193,053)
Issuance of 17,353 Shares of Treasury
Stock.............................. 8,664 635,889
--------- ------- ----------- ----------- ----------- -----------
Balance -- December 31, 1997......... 3,759,912 $37,600 $64,875,396 $35,074,447 $ 1,044,463 $(1,115,948)
========= ======= =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements
F-72
288
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
1997 1996 1995
------------- ------------- -------------
Cash Flows from Operating Activities
Interest Received..................... $ 66,509,478 $ 56,696,210 $ 47,744,035
Noninterest Income Received........... 9,144,385 7,800,624 6,784,656
Interest Paid......................... (28,922,101) (26,964,352) (19,975,569)
Cash Paid to Suppliers and
Employees.......................... (25,048,362) (21,104,588) (20,375,798)
Income Taxes Paid..................... (5,141,177) (4,232,414) (2,527,825)
------------- ------------- -------------
Net Cash Provided by Operating
Activities.................. 16,542,223 12,195,480 11,649,499
------------- ------------- -------------
Cash Flows from Investing Activities
Net Increase in Loans................. (128,491,162) (103,593,560) (85,748,513)
Purchase of Premises and Equipment.... (5,235,248) (6,088,571) (4,065,769)
Proceeds from Sale of Premises and
Equipment and Other Real Estate.... 479,153 628,765 1,042,803
Proceeds from Sales and Maturities of
Available-for-Sale Securities...... 116,288,681 87,956,332 62,823,196
Purchase of Available-for-Sale
Securities......................... (80,135,338) (69,142,425) (71,439,379)
Proceeds from Maturities of Held-to-
Maturity Securities................ 10,849,878 17,494,575 3,921,746
Purchase of Held-to-Maturity
Securities......................... -- -- (5,875,427)
Net Increase in Interest Bearing
Deposits in Banks.................. (32,800) (295,617) --
Marion County Acquisition............. -- -- (7,453,700)
Organization Costs.................... (103,260) -- --
Investment in Joint Venture........... (1,265,251) (1,461,286) --
Proceeds from Investment in Joint
Venture............................ 2,261,467 -- --
------------- ------------- -------------
Net Cash Used by Investing
Activities.................. (85,383,880) (74,501,787) (106,795,043)
------------- ------------- -------------
The accompanying notes are an integral part of the financial statements
F-73
289
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
1997 1996 1995
------------- ------------- -------------
Cash Flows from Financing Activities
Net Increase in Demand,
Interest-Bearing Demand and Savings
Deposits........................... $ 13,170,569 $ 23,007,894 $ 12,743,930
Net Increase in Time Deposits......... 42,683,308 7,463,861 74,101,848
Net Increase (Decrease) in Federal
Funds Purchased and Securities Sold
Under Agreements to Repurchase..... (2,899,642) 21,424,254 3,444,280
Proceeds from Issuance of Long-Term
Debt............................... 28,000,000 10,000,000 --
Dividends Paid........................ (3,459,119) (3,271,124) (2,848,668)
Purchase of Treasury Stock............ (1,193,053) (1,169,819) (416,162)
Proceeds from Reissuance of Treasury
Stock.............................. 644,553 1,247,799 --
------------- ------------- -------------
Net Cash Provided by Financing
Activities.................. 76,946,616 58,702,865 87,025,228
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents........................... 8,104,959 (3,603,442) (8,120,316)
Cash and Cash Equivalents -- beginning
of year............................... 57,069,925 60,673,367 68,793,683
------------- ------------- -------------
Cash and Cash Equivalents -- end of
year.................................. $ 65,174,884 $ 57,069,925 $ 60,673,367
============= ============= =============
Reconciliation of Net Income to Net Cash
Provided by Operating Activities
Net Income............................ $ 9,762,096 $ 8,996,847 $ 7,081,813
Other Gains and Losses, net........... (636,174) (162,367) 31,750
Amortization and Accretion............ 1,301,630 1,877,989 963,645
Depreciation.......................... 2,651,928 1,866,623 1,571,077
Write Down of Other Real Estate....... 5,461 158,200 14,818
Provision for Loan Losses............. 3,609,263 1,097,000 618,500
Gain on Sale of Securities............ (293,723) (297,003) (211,065)
Loss (Gain) on Sale of Premises and
Equipment.......................... 3,047 (238,962) (766)
Gain on Sale of Other Real Estate..... (67,118) -- (399)
Deferred Income Taxes................. (1,446,460) (829,409) (300,290)
The accompanying notes are an integral part of the financial statements
F-74
290
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
1997 1996 1995
------------- ------------- -------------
Changes in Operating Assets and
Liabilities --
Decrease (Increase) in --
Interest Receivable.............. $ (446,521) $ (84,658) $ (1,229,191)
Other Assets..................... 127,263 262,386 (424,556)
Increase (Decrease) in --
Interest Payable................. 1,277,040 (710,034) 3,007,309
Other Liabilities................ 224,242 607,691 330,156
Income Taxes Payable............. 470,249 (348,823) 196,698
------------- ------------- -------------
Net Cash Provided by Operating
Activities............................ $ 16,542,223 $ 12,195,480 $ 11,649,499
============= ============= =============
Supplemental Disclosures of Noncash
Investing and Financing Activities
Increase in Other Real Estate Owned... $ 455,357 $ 632,751 $ 55,000
Unrealized Appreciation (Depreciation)
of Securities, net of Deferred
Taxes.............................. $ 238,014 $ 494,605 $ 5,903,139
The accompanying notes are an integral part of the financial statements
F-75
291
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the company are as
follows:
DESCRIPTION OF BUSINESS -- Pioneer Bancshares, Inc. is a bank holding company
which owns 100% of the outstanding stock of Pioneer Bank, Valley Bank and
Pioneer Bank, f.s.b. Pioneer Bank has two wholly-owned subsidiaries, Center
Finance Company, Inc. (formerly Center Loan and Thrift, a wholly-owned
subsidiary of Valley Company) and Pioneer Securities, Inc. Marion Properties,
Inc. (formerly a wholly-owned subsidiary of Pioneer Bank) was dissolved during
1996. Pioneer Bank also has two trusteed affiliates, Frontier Corporation and
Valley Company. Valley Company has one wholly-owned subsidiary, Oneida Life
Insurance Company. The banks and Pioneer Bank's subsidiaries and affiliates
provide banking, trust, and investment services in southeast Tennessee and north
Georgia. Pioneer Bank's principal office is in Chattanooga, Tennessee, Valley
Bank's principal office is in Sweetwater, Tennessee, and Pioneer Bank, f.s.b.'s
principal office is in East Ridge, Tennessee.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Pioneer Bancshares, Inc., its wholly-owned
subsidiaries and the trusteed affiliates. Frontier Corporation and Valley
Company are held in trust for the benefit of Pioneer Bank's stockholder for a
period of one hundred years from 1956. At any time, the trusts may be liquidated
by a two-thirds vote of Pioneer Bank's stockholder.
Substantially all intercompany transactions, profits and balances have been
eliminated.
CASH AND DUE FROM BANKS -- The banks maintain at various financial institutions
cash accounts which may exceed federally insured amounts at times.
CASH AND CASH EQUIVALENTS -- For purposes of cash flows, the banks consider
Federal Funds Sold to be cash equivalents.
INVESTMENT SECURITIES -- Investment securities considered held-to-maturity are
stated at cost adjusted for amortization of premiums and accretion of discounts,
which are recognized as adjustments to interest income. Investment securities
considered available-for-sale are adjusted for unrealized holding gains and
losses and recorded at fair value. The difference in fair value and cost
adjusted for amortization and accretion for securities available-for-sale is
shown as a separate component of stockholders' equity net of income tax effects.
Gains or losses on disposition are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.
DERIVATIVE FINANCIAL INSTRUMENTS -- The banks enter into variable and fixed rate
loan commitments with off-balance-sheet risk. The contract amounts and nature
and terms of the commitments are disclosed separately in the notes to the
consolidated financial statements. The banks hold no other instruments meeting
the definition of derivative financial instruments as defined by Statement of
Accounting Standards No. 119.
INSTALLMENT LOANS -- Unearned interest, relating principally to installment
loans made on a discount basis, is stated at the amount refundable upon
prepayment. Interest income on these loans is recognized on scheduled payment
dates by use of the sum-of-the-months digits method.
F-76
292
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR LOAN LOSSES -- The banks provide for loan losses on a reserve
basis and include in operating expenses an estimated amount for credit losses
determined by management based on loan loss experience and evaluation of
potential loss in the current loan portfolio. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful. Certain loans on
which the accrual of interest is discontinued are considered impaired and are
carried at the fair value of their underlying collateral. Any difference between
the loan's fair value and carrying amount is recorded as a reserve for loan
losses.
INTEREST INCOME ON LOANS -- Interest on loans is accrued and credited to income
based on the principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed.
LOAN ORIGINATION FEES -- Loan origination fees and related direct incremental
loan costs are offset and the resulting net amount is deferred and taken into
income as a loan yield adjustment using a method which approximates the level
yield method.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation. Expenditures for repairs, maintenance and minor
improvements are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or
other retirement of depreciable property, the cost and related accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in operations.
Depreciation is provided using straight-line and accelerated methods over the
estimated useful lives of the depreciable assets. Deferred income taxes are
provided for differences in the computation of depreciation for book and tax
purposes.
INTANGIBLE ASSETS -- Intangible assets are amortized over the following lives:
LIFE
----
Organization Costs.................................. 5 years
Goodwill............................................ 18-40 years
Core Deposit Intangibles............................ 10 years
The company reviews recoverability of the carrying value of goodwill using
projections of future cash flows and future earnings. The company's basis for
write-offs of the carrying value of goodwill is based on management's best
estimate of the future performance of the affected entity.
FORECLOSED ASSETS -- Foreclosed assets are stated at the lower of their carrying
amount or current fair value less the cost to sell.
POSTRETIREMENT BENEFITS -- The expected cost of providing post-retirement
benefits to employees, employee beneficiaries and covered dependents is accrued
during the years that employees render services to the banks or related
companies.
F-77
293
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES -- Deferred income taxes arise from temporary differences between
the income tax basis and financial reporting basis of assets and liabilities. If
it is more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is recognized.
COMMON STOCK DATA -- During 1997, the Company adopted SFAS 128, "Earnings per
Share," which specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted net income
per share. Basic net income per share is computed by dividing the net income for
the period by the weighted average number of common shares outstanding during
the period. Diluted net income per share is computed by dividing the net income
for the period by the weighted average number of common shares outstanding
during the period plus the effect of dilutive common stock equivalents.
Previously reported earnings per share have been restated to conform with the
new presentation and disclosure requirements of SFAS 128. There was no change in
the computation of earnings per share for previously reported years under SFAS
128.
TRUST DEPARTMENT ASSETS -- Property (other than cash deposits) held by the banks
in a fiduciary or agency capacity for their customers is not included in the
consolidated balance sheets, since such items are not assets of the banks.
ADVERTISING COSTS -- Advertising costs are charged to expense when incurred.
Advertising costs totaled $391,961 for 1997, $387,932 for 1996 and $382,632 for
1995.
ESTIMATES AND UNCERTAINTIES -- 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.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior years'
financial statements to conform with the current year presentation.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The company's banking subsidiaries are required to maintain average reserve
balances based on a percentage of deposits. The average amounts of these
reserves required were approximately $14,721,000 for 1997 and $14,556,000 for
1996.
INVESTMENT SECURITIES
Investment securities are classified into three categories: held-to-maturity,
available-for-sale and trading. For securities to be classified as
held-to-maturity, the bank must demonstrate the positive intent and ability to
hold the securities to maturity. Trading securities, of which the banks have
none, are securities bought and held principally for the purpose of selling them
in the near future. Available-for-sale securities are those securities not
classified as held-to-maturity or trading.
F-78
294
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities as of December 31, 1997, are summarized as follows:
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------ ---------- ---------- ------------
AVAILABLE-FOR-SALE
U.S. Treasury --
Maturing within one
year.............. $ 19,984,858 $ 66,488 $ 3,410 $ 20,047,936
Maturing after one
but within five
years............. 19,147,397 143,418 1,557 19,289,258
------------ ---------- ------- ------------
39,132,255 209,906 4,967 39,337,194
------------ ---------- ------- ------------
U.S. Government
Agencies --
Maturing within one
year.............. 4,980,402 12,929 2,048 4,991,283
Maturing after one
but within five
years............. 16,019,186 79,895 24,602 16,074,479
Maturing after five
but within ten
years............. 2,014,534 37 1,989 2,012,582
Maturing after ten
years............. 17,360,336 301,816 60 17,662,092
------------ ---------- ------- ------------
40,374,458 394,677 28,699 40,740,436
------------ ---------- ------- ------------
State and Political
Subdivisions --
Maturing within one
year.............. 5,532,081 38,229 -- 5,570,310
Maturing after one
but within five
years............. 24,760,591 351,678 5,024 25,107,245
Maturing after five
but within ten
years............. 23,319,971 741,433 1,594 24,059,810
Maturing after ten
years............. 7,125,023 327,317 -- 7,452,340
------------ ---------- ------- ------------
60,737,666 1,458,657 6,618 62,189,705
------------ ---------- ------- ------------
Corporate Debt --
Maturing after one
but within five
years............. 5,802,959 22,409 18,126 5,807,242
Maturing after ten
years............. 2,600,000 20,313 -- 2,620,313
------------ ---------- ------- ------------
8,402,959 42,722 18,126 8,427,555
------------ ---------- ------- ------------
F-79
295
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------ ---------- ---------- ------------
Other --
Maturing within one
year.............. $ 4,320,222 $ -- $ -- $ 4,320,222
Maturing after one
but within five
years............. 87,000 -- -- 87,000
Maturing after five
but within ten
years............. 104,190 -- -- 104,190
Maturing after ten
years............. 1,484,414 -- -- 1,484,414
------------ ---------- ------- ------------
5,995,826 -- -- 5,995,826
------------ ---------- ------- ------------
Total
Investment
Securities
Available-
for-Sale.. $154,643,164 $2,105,962 $58,410 $156,690,716
============ ========== ======= ============
HELD-TO-MATURITY
U.S. Government
Agencies --
Maturing within one
year.............. $ 24,941,257 $ -- $20,763 $ 24,920,494
Maturing after one
but within five
years............. 10,485,897 53,716 -- 10,539,613
Maturing after five
but within ten
years............. 8,446,784 95,479 -- 8,542,263
Maturing after ten
years............. 4,522,539 61,906 -- 4,584,445
------------ ---------- ------- ------------
Total
Investment
Securities
Held-to-
Maturity.. $ 48,396,477 $ 211,101 $20,763 $ 48,586,815
============ ========== ======= ============
F-80
296
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment securities as of December 31, 1996, are summarized as follows:
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------ ---------- ---------- ------------
AVAILABLE-FOR-SALE
U.S. Treasury --
Maturing within one
year.............. $ 17,141,424 $ 46,790 $ 1,954 $ 17,186,260
Maturing after one
but within five
years............. 24,338,707 94,912 46,786 24,386,833
------------ ---------- -------- ------------
41,480,131 141,702 48,740 41,573,093
------------ ---------- -------- ------------
U.S. Government
Agencies --
Maturing within one
year.............. 6,026,699 34,702 2,760 6,058,641
Maturing after one
but within five
years............. 17,276,312 124,625 163,832 17,237,105
Maturing after five
but within ten
years............. 2,114,363 24,759 -- 2,139,122
Maturing after ten
years............. 12,195,041 209,715 -- 12,404,756
------------ ---------- -------- ------------
37,612,415 393,801 166,592 37,839,624
------------ ---------- -------- ------------
State and Political
Subdivisions --
Maturing within one
year.............. 3,068,831 30,385 995 3,098,221
Maturing after one
but within five
years............. 42,817,254 645,274 133,138 43,329,390
Maturing after five
but within ten
years............. 31,769,219 761,453 74,982 32,455,690
Maturing after ten
years............. 1,875,207 95,536 10 1,970,733
------------ ---------- -------- ------------
79,530,511 1,532,648 209,125 80,854,034
------------ ---------- -------- ------------
Corporate Debt --
Maturing within one
year.............. 6,055,142 2,988 44,930 6,013,200
Maturing after one
but within five
years............. 20,149,319 207,290 97,613 20,258,996
------------ ---------- -------- ------------
26,204,461 210,278 142,543 26,272,196
------------ ---------- -------- ------------
F-81
297
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES MARKET VALUE
------------ ---------- ---------- ------------
Other --
Maturing within one
year.............. $ 3,888,325 $ -- $ -- $ 3,888,325
Maturing after one
but within five
years............. 145,333 -- -- 145,333
Maturing after five
but within ten
years............. 169,165 -- -- 169,165
Maturing after ten
years............. 1,448,219 -- -- 1,448,219
------------ ---------- -------- ------------
5,651,042 -- -- 5,651,042
------------ ---------- -------- ------------
Total
Investment
Securities
Available-
for-Sale.. $190,478,560 $2,278,429 $567,000 $192,189,989
============ ========== ======== ============
HELD-TO-MATURITY
U.S. Government
Agencies --
Maturing within one
year.............. $ 4,053,597 $ -- $ 3,146 $ 4,050,451
Maturing after one
but within five
years............. 38,242,143 10,002 116,119 38,136,026
Maturing after five
but within ten
years............. 10,965,317 6,515 -- 10,971,832
Maturing after ten
years............. 6,147,947 12,688 -- 6,160,635
------------ ---------- -------- ------------
Total
Investment
Securities
Held-to-
Maturity.. $ 59,409,004 $ 29,205 $119,265 $ 59,318,944
============ ========== ======== ============
Included in U.S. Government Agencies are certain mortgage-backed securities
which may mature earlier because of principal prepayments. They are as follows:
1997 1996
----------- -----------
AVAILABLE-FOR-SALE
Carrying Value.............................. $15,911,907 $12,195,041
=========== ===========
Approximate Market Value.................... $16,213,723 $12,404,756
=========== ===========
HELD-TO-MATURITY
Carrying Value.............................. $16,253,116 $20,921,424
=========== ===========
Approximate Market Value.................... $16,122,974 $20,590,450
=========== ===========
F-82
298
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Securities pledged to secure various public deposits and other balances have an
amortized cost of $126,534,828 and a market value of $127,637,005 as of December
31, 1997, and an amortized cost of $137,940,623 and a market value of
$138,105,735 as of December 31, 1996.
Proceeds from sales of securities totaled $83,373,393 for 1997, $52,255,678 for
1996 and $35,589,478 for 1995. Gross gains realized on sales totaled $550,423
for 1997, $354,082 for 1996 and $345,433 for 1995. Gross losses realized on
those sales totaled $256,700 for 1997, $57,079 for 1996 and $134,368 for 1995.
As permitted by the Financial Accounting Standards Board, the banks made a
one-time reclassification of certain securities prior to December 31, 1995.
Securities transferred from the held-to-maturity to the available-for-sale
classification had amortized cost of $75,752,721 and unrealized gain of
$328,486, net of tax, as of the date of transfer. Securities transferred from
available-for-sale to held-to-maturity had a carrying value of $78,039,861 and
an unrealized loss, net of tax, of $432,649 as of the date of transfer.
LOANS
Loans by type are summarized as follows:
1997 1996
------------ ------------
Real Estate Loans........................... $388,245,000 $333,851,000
Commercial and Industrial Loans............. 161,902,710 106,426,000
Loans to Individuals for Household, Family
and Other Consumer Expenditures........... 92,321,200 75,840,000
Other Loans................................. 8,764,780 8,731,826
------------ ------------
Total Loans....................... 651,233,690 524,848,826
Unearned Interest and Loan Fees............. (1,476,030) (1,596,242)
Allowance for Loan Losses................... (7,836,582) (5,758,048)
------------ ------------
Net Loans......................... $641,921,078 $517,494,536
============ ============
Certain directors of Pioneer Bank, Valley Bank and Pioneer Bank, f.s.b. and
companies in which they are principal owners, officers and/or directors were
loan customers of the banks during 1997 and 1996. In the opinion of management,
such loans are made in the ordinary course of business at normal credit terms
including interest rate and collateralization. Loans to these persons and to
their related organizations totaled $6,476,194 as of December 31, 1997 and
$5,051,576 as of December 31, 1996. During 1997, $6,844,844 of these loans were
made and repayments totaled $5,420,226.
Loans, including impaired loans, on which the accrual of interest has been
discontinued or reduced totaled $1,835,555 as of December 31, 1997 and
$1,744,703 as of December 31, 1996. If interest on such loans had been accrued,
such income would have approximated $129,894 for 1997, $150,299 for 1996 and
$87,311 for 1995.
F-83
299
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
1997 1996 1995
----------- ----------- ----------
Allowance for Loan
Losses -- beginning of year...... $ 5,758,048 $ 5,871,790 $5,355,354
Provision for Loan Losses........ 3,609,263 1,097,000 618,500
Loans Charged Off................ (2,091,979) (2,608,561) (529,686)
Recoveries....................... 561,250 1,397,819 427,622
----------- ----------- ----------
Allowance for Loan Losses -- end of
year............................. $ 7,836,582 $ 5,758,048 $5,871,790
=========== =========== ==========
Because of uncertainties inherent in the estimation process, management's
estimate of credit losses in the loan portfolio and the related allowance may
change in the near term. However, the amount of the change that is reasonably
possible cannot be estimated.
Impaired loans and related information are as follows:
1997 1996
--------- --------
Principal Balance................................. $ 492,004 $ 59,236
Allowance for Loan Losses......................... (247,309) (29,877)
--------- --------
Unreserved Portion of Impaired Loans.............. $ 244,695 $ 29,359
========= ========
Average Principal Balance -- Year to Date......... $ 82,658 $ 78,879
========= ========
Interest income on impaired loans is recognized only after the principal balance
is deemed current. The allowance for loan losses above is a portion of the
banks' total allowance for loan losses.
No interest income was recognized on these loans for the three years ended
December 31, 1997.
PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
1997 1996
------------ ------------
Land........................................ $ 3,865,301 $ 3,122,924
Buildings and Improvements.................. 20,118,446 17,720,357
Equipment................................... 14,497,177 12,796,890
Livestock................................... 64,725 73,824
------------ ------------
38,545,649 33,713,995
Accumulated Depreciation.................... (15,805,315) (13,472,275)
------------ ------------
$ 22,740,334 $ 20,241,720
============ ============
F-84
300
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense is summarized as follows:
1997 1996 1995
---------- ---------- ----------
Net Occupancy Expense................ $1,010,790 $ 798,288 $ 599,583
Furniture and Equipment Expense...... 1,625,870 1,057,068 963,387
Other................................ 15,268 11,267 8,107
---------- ---------- ----------
$2,651,928 $1,866,623 $1,571,077
========== ========== ==========
DEPOSITS
The aggregate amounts of maturities for time deposits having a remaining term of
more than one year as of December 31, 1997, are as follows:
1999............................................ $31,126,511
2000............................................ 5,029,395
2001 and 2002................................... 8,656,989
Thereafter...................................... 29,829
BUSINESS COMBINATION
On June 15, 1995, Pioneer Bank acquired all of the deposits and certain
facilities, furnishings and equipment of three NationsBank branches in Marion
County in a combination accounted for as a purchase. The results of operations
for the three branches are included in the financial statements since the date
of acquisition. The total cost of the acquisition was $8,383,409. Deposits of
$70,700,471 were also assumed. The total cost of the acquisition exceeded the
fair value of the net assets acquired by $7,246,798. The excess is being
amortized as a core deposit intangible over ten years.
On November 30, 1995, the company acquired Sweetwater Valley Corp. in a business
combination accounted for as a pooling of interests. Sweetwater Valley Corp. was
a one bank holding company owning all of the outstanding common stock of Valley
Bank. As a part of the merger, Sweetwater Valley Corp. was dissolved. Valley
Bank became a wholly-owned subsidiary of the company through the exchange of
479,956 shares of the company's common stock for all of the outstanding stock of
Sweetwater Valley Corp. The financial statements for 1995 are based on the
assumption that the companies were combined for the full year, and financial
statements for prior years have been restated to give effect to the combination.
F-85
301
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate results of operations for the periods prior to the merger with
Sweetwater Valley Corp. are as follows:
UNAUDITED
11 MONTHS ENDED
NOVEMBER 30, 1995
-----------------
NET INTEREST INCOME, AFTER PROVISION FOR LOAN LOSSES
Pioneer Bancshares, Inc................................... $16,836,825
Sweetwater Valley Corp.................................... 6,247,748
-----------
Combined.................................................. $23,084,573
===========
NET INCOME
Pioneer Bancshares, Inc................................... $ 5,156,108
Sweetwater Valley Corp.................................... 1,717,660
-----------
Combined.................................................. $ 6,873,768
===========
OTHER CHANGES IN STOCKHOLDERS' EQUITY
Pioneer Bancshares, Inc................................... $ 2,158,218
Sweetwater Valley Corp.................................... 1,018,101
-----------
Combined.................................................. $ 3,176,319
===========
PIONEER BANK, F.S.B.
Pioneer Bank, f.s.b. commenced operations as a federal savings bank on September
9, 1997. Eight million dollars was contributed by the company for 100% of the
bank's stock. The company funded this contribution by a special dividend from
one of its banking subsidiaries.
F-86
302
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the bank's financial instruments are as follows:
1997 1996
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Financial Assets --
Cash and short-term
investments.......... $ 65,703,301 $ 65,703,301 $ 57,565,542 $ 57,565,542
Investment securities... 205,087,193 205,277,531 251,598,993 251,508,933
Loans................... 649,757,660 647,348,094 523,252,584 523,809,697
Allowance for loan
losses............... (7,836,582) (7,836,582) (5,758,048) (5,758,048)
------------ ------------ ------------ ------------
$912,711,572 $910,492,344 $826,659,071 $827,126,124
============ ============ ============ ============
Financial Liabilities --
Deposits --
Noninterest bearing
demand............. $126,684,077 $126,684,077 $125,529,309 $125,529,309
Interest bearing
demand............. 132,754,860 132,754,860 120,146,268 120,146,268
Savings.............. 111,155,719 111,155,719 111,748,510 111,748,510
Certificates of
deposit of $100,000
or more............ 70,584,736 68,420,272 56,086,477 56,412,475
Time deposits of less
than $100,000...... 307,241,495 297,518,124 279,056,446 275,556,255
Other borrowings..... 38,000,000 38,000,000 10,000,000 10,000,000
------------ ------------ ------------ ------------
$786,420,887 $774,533,052 $702,567,010 $699,392,817
============ ============ ============ ============
Unrecognized Financial
Instruments --
Commitments to extend
credit............... $114,348,440 $114,348,440 $ 93,557,932 $ 93,557,932
Standby letters of
credit............... 3,648,810 3,648,810 3,650,766 3,650,766
Credit card
arrangements......... 10,678,346 10,678,346 8,811,081 8,811,081
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS -- For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES -- For securities held as investments, fair value equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
F-87
303
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LOAN RECEIVABLES -- For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer loans, fair
value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES -- The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
OTHER BORROWINGS -- The fair value of the company's other borrowings is
estimated using discounted cash flow analysis based on the company's current
incremental borrowing rate for similar types of borrowing arrangements.
INCOME TAXES
The income tax provision consists of the following:
1997 1996 1995
----------- ----------- -----------
Current Provision......................... $ 5,611,426 $ 3,883,591 $ 2,724,523
Deferred Provision........................ (1,446,460) (829,409) (300,290)
----------- ----------- -----------
Income Tax Provision...................... $ 4,164,966 $ 3,054,182 $ 2,424,233
=========== =========== ===========
Reconciliation of the income tax provision to statutory rates is as follows:
1997 1996 1995
----------- ----------- -----------
Federal Income Tax at Statutory Rate...... $ 4,735,200 $ 4,097,350 $ 3,232,056
Tax-Exempt Interest....................... (1,142,803) (1,291,906) (1,281,994)
Other..................................... 49,723 (140,384) (22,367)
Nondeductible Acquisition Costs........... -- -- 131,598
State Income Taxes -- net of federal
income tax benefit...................... 522,846 389,122 364,940
----------- ----------- -----------
Income Tax Provision...................... $ 4,164,966 $ 3,054,182 $ 2,424,233
=========== =========== ===========
F-88
304
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of each type of significant item that gave rise to deferred
taxes are:
1997 1996
---------- ----------
Deferred Tax Assets
Loan Loss Reserve..................................... $2,626,119 $1,009,733
Unearned Loan Fees.................................... 88,644 204,555
Goodwill.............................................. 225,420 148,962
Other Real Estate..................................... 56,812 87,023
Post Retirement Benefits.............................. 396,599 362,463
Acquisition Costs..................................... 126,419 122,418
---------- ----------
3,520,013 1,935,154
---------- ----------
Deferred Tax Liabilities
Property and Equipment................................ 217,762 291,869
Investment Securities................................. 663,647 508,902
Federal Home Loan Bank Stock.......................... 246,610 80,000
Other................................................. 93,472 59,176
---------- ----------
1,221,491 939,947
---------- ----------
Net Deferred Tax Assets................................. $2,298,522 $ 995,207
========== ==========
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN
The company has a 401(k) and Employee Stock Ownership Plan (the plan) covering
employees meeting certain age and service requirements. The plan is structured
so that employees can contribute to the plan on a tax deductible basis and have
their contributions invested in various investment funds offered under the plan.
The company may use the plan as a leveraged ESOP to purchase stock in Pioneer
Bancshares, Inc. and allocate that stock to employees over a period of time as
the ESOP loan used to purchase the stock is paid down. As of December 31, 1997,
the plan was not leveraged. The plan permits, but does not require, the company
to make an employer matching contribution during any plan year. Employer
contributions which represent 50% of the first 6% of employees' contributions to
the plan totaled $192,954 for 1997, $167,426 for 1996 and $122,751 for 1995.
An employee stock ownership plan is available for all full-time employees at
Valley Bank. All persons employed on the last day of the plan year are eligible
to participate in the employee stock ownership plan. As of December 31, 1995,
the Valley Bank ESOP was merged into the company's plan. Contributions to the
plan were $531,764 for 1997, $294,429 for 1996 and $343,787 for 1995.
The number of allocated shares of the company's common stock held in the ESOP
was 90,484 shares as of December 31, 1997, 101,175 shares as of December 31,
1996, and none as of December 31, 1995. As of December 31, 1997, 1996 and 1995,
there were no unearned ESOP shares.
F-89
305
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The plan issues a put option to any participant who receives a distribution of
company stock. The put option permits the participant to sell distributed
company stock to the company during two option periods at the fair market value
at the date of exercise of the option. The first put option period is a period
of at least sixty days beginning on the date of distribution of company stock to
the participant. The second put option period is a period of at least sixty days
beginning after the next determination of fair market value of company stock by
independent appraisal in the plan year following the distribution. As of
December 31, 1996, 3,270 allocated shares with a fair value of $120,990 were
subject to the put options. No shares were subject to the put options as of
December 31, 1997 or 1995.
LONG-TERM INCENTIVE PLAN
The company established a long-term incentive plan (the plan) during 1994 for
eligible employees. The total number of shares that may be issued under the plan
may not exceed 200,000 shares.
Under the terms of the plan, incentive stock options to purchase shares of the
company's common stock are granted at a price not less than the fair market
value of the stock at the date of grant. Options may be exercised within ten
years after the date the incentive stock option is granted.
The plan includes nonqualified stock options which shall be exercisable only
during a term fixed by the Stock Option Committee. The company may elect to
grant nonqualified stock options at a price less than the fair market value of
the common stock at the time the option is granted.
The plan also allows for granting of stock appreciation rights in connection
with grant of an option. Upon exercise of a stock appreciation right, the holder
may receive no more than an amount payable in cash and/or in shares of common
stock equal to the difference between the fair market value of common stock and
the exercise price.
Also included in the plan are detached stock appreciation rights which the Stock
Option Committee may grant without granting options. The Committee also
determines whether these rights are fully vested upon grant or whether they vest
over a specific time period. Upon exercise of a detached stock appreciation
right, the holder shall be entitled to a payment equal to the fair market value
of one share of common stock on the date exercised, reduced by the fair market
value of one share of common stock on the grant date.
Exercise of both stock appreciation rights and detached stock appreciation
rights is subject to conditions specified by the plan.
F-90
306
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity relating to incentive stock options
during 1997, 1996 and 1995:
NUMBER OPTION PRICE
OF SHARES PER SHARE
--------- -------------
BALANCE AT DECEMBER 31, 1994.................. 0 N/A
Options Granted............................. 2,000 $36.85*
Options Granted............................. 40,000 $33.50**
-------
BALANCE AT DECEMBER 31, 1995.................. 42,000
Options Forfeited........................... (1,200) $33.50
Options Granted............................. 2,000 $40.70*
Options Granted............................. 49,600 $37.00**
-------
BALANCE AT DECEMBER 31, 1996.................. 92,400
Options Forfeited........................... (5,600) $33.50-$37.00
Options Granted............................. 48,500 $44.00**
=======
BALANCE AT DECEMBER 31, 1997.................. 135,300
=========
- -------------------------
* Represents 110% of the fair market value of the company's stock as of date of
grant.
** Fair market value of the company's stock as of date of grant.
The weighted average exercise price was $38.53 for 1997, $35.61 for 1996 and
$33.66 for 1995. The weighted average remaining life of the options outstanding
was 9.08 years for 1997, 9.56 years for 1996 and 10 years for 1995. Options
exercisable at December 31, 1997, were 11,640 at $33.50 per share. No options
were exercisable at December 31, 1996 or December 31, 1995.
The options begin vesting at 30% after the second anniversary date, 60% after
the third anniversary date and 100% after the fourth anniversary date.
Statement of Financial Accounting Standards Number 123, "Accounting for Stock
Based Compensation," issued in 1995, establishes financial accounting reporting
standards for stock based employee compensation plans. The statement defines a
fair value based method of accounting for employee stock options and encourages
entities to adopt that method. The statement also allows an entity to continue
to measure compensation cost of stock options using the intrinsic value based
method. The intrinsic value based method requires recording compensation only if
stock options are issued at an exercise price below the fair value of its stock.
The fair value based method requires the recognition of compensation cost over
the employee's service period using an option pricing model that considers the
exercise price, the expected life of the option, volatility of the underlying
stock, expected dividends on the stock and the risk-free interest rate over the
expected life of the option.
F-91
307
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The company has elected to continue recognizing compensation cost using the
intrinsic value based method. Compensation cost recognized in 1997, 1996 and
1995 was $0. Under the fair value based method, compensation cost would have
been approximately $118,615 for 1997, $0 for 1996 and $0 for 1995. The pro forma
effects on the company's net income and earnings per share are as follows:
1997 1996 1995
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ---------- ----------- ----------
Net Income........... $9,762,096 $9,688,555 $8,996,847 $8,996,847 $7,081,813 $7,081,813
========== ========== ========== ========== ========== ==========
Basic Net Income per
Share.............. $ 2.60 $ 2.58 $ 2.39 $ 2.39 $ 1.88 $ 1.88
========== ========== ========== ========== ========== ==========
Diluted Net Income
per Share.......... $ 2.60 $ 2.58 $ 2.39 $ 2.39 $ 1.88 $ 1.88
========== ========== ========== ========== ========== ==========
Assumptions used to estimate the fair value of the options are as follows:
1997 1996 1995
----------- ---------- ----------
Risk Free Interest Rate............ 5.72% 6.51% 6.10%
Expected Life...................... 10 years 10 years 10 years
Expected Volatility................ 15% 15% 15%
Expected Dividends................. $1.00/share $.87/share $.84/share
NET INCOME PER SHARE
The reconciliation of the denominators of basic and diluted per share
computations is as follows:
1997 1996 1995
--------- --------- ---------
Weighted Average Shares Outstanding..... 3,759,912 3,759,912 3,759,912
Effect of Dilutive Stock Options........ 1,970 -- --
--------- --------- ---------
3,761,882 3,759,912 3,759,912
========= ========= =========
POSTRETIREMENT HEALTH CARE PLAN
Pioneer Bank pays group health insurance premiums for non-key employees and
their eligible dependents who elected to retire under the enhanced early
retirement program as of September 30, 1992. The premiums are paid from the
actual date of early retirement until the earlier of the date the participant
becomes age 65, the date the participant becomes eligible for participation or
coverage under another employer's group health plan, or the date the participant
and spouse each would be eligible for Medicare coverage.
F-92
308
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Post-retirement expense includes the following components:
1997 1996
------- -------
Interest Cost........................................ $27,886 $22,687
Amortization of Unrecognized Transition Obligation... 57,332 57,332
Amortization of Gain................................. (686) (15,146)
------- -------
$84,532 $64,873
======= =======
The reconciliation of the funded status of the plan to amounts recognized in the
company's consolidated balance sheets is as follows:
1997 1996
--------- ---------
Accumulated Post-retirement Benefit Obligation... $(369,336) $(291,271)
Unrecognized Transition Obligation............... 229,327 286,659
Unrecognized Net Gain............................ (43,264) (137,314)
--------- ---------
Accrued Post-retirement Benefit Cost............. $(183,273) $(141,926)
========= =========
For measurement purposes, the health care cost trend rate assumed is 10%
increased to 11% for all future years, 7% decreased by 1% per year for 1 year
and leveling at 6% thereafter in 1996 and 8% decreased by 1% per year for 2
years and leveling at 6% thereafter in 1995. The discount rate used is 7.25% in
1997, 1996 and 1995. A 1% increase in health care cost trend rates for 1997
would increase post-retirement expense by $2,072 and the accumulated benefit
obligation by $20,500.
POSTRETIREMENT DEFERRED COMPENSATION PLAN
Valley Bank has a deferred compensation plan covering certain officers and
directors. Annual contributions are made to the plan and the assets funding the
plan consist of life insurance policies on the employees. Employees receive
monthly benefits upon retirement.
Post-retirement expense includes the following components:
1997 1996
------- --------
Service Cost........................................ $38,605 $ 8,268
Interest Cost....................................... 81,619 48,481
Prior Service Cost.................................. -- 36,642
Distributions....................................... (29,917) (11,116)
------- --------
$90,307 $ 82,275
======= ========
F-93
309
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the funded status of the plan to amounts recognized in the
company's consolidated financial statements is as follows:
1997 1996
-------- --------
Accumulated Post-retirement Benefit Obligation..... $861,509 $771,202
Fair Value of Plan Assets.......................... -- --
-------- --------
861,509 771,202
Unrecognized Net Gain.............................. -- --
-------- --------
Accrued Post-retirement Cost....................... $861,509 $771,202
======== ========
The plan is funded by insurance contracts totaling $2,611,034 for 1997 and
$2,528,098 for 1996 which are recorded as assets of Valley Bank and not the
plan.
LONG-TERM DEBT
Long-term debt consists of an advance of $38,000,000 from the Federal Home Loan
Bank with maturity dates ranging from April, 1998 to November, 1999 and interest
rates ranging from 5.35% to 5.95%.
Collateral consists of all Federal Home Loan Bank stock owned by Pioneer and
Valley Banks and eligible mortgage collateral.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1997 1996
----------- -----------
Average Balance During the Year............... $59,386,415 $43,858,544
Maximum Month-End Balance During the Year..... 72,307,500 51,254,272
Securities Pledged Against the Agreements at
Year-End:
Carrying Value, including accrued
interest................................. 69,115,317 59,631,998
Securities pledged against the repurchase agreements represent a portion of the
company's investment portfolio and are held in safekeeping at a correspondent
bank.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT
RISK
The banks are parties to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, commitments
under credit card arrangements 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 contract or notional amounts of those
instruments express the extent of involvement the banks have in particular
classes of financial instruments.
F-94
310
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The banks' exposure to credit loss from nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The banks
use the same credit policies in making commitments and conditional obligations
as they do for on-balance-sheet instruments.
The banks generally require collateral or other security to support financial
instruments with off-balance-sheet credit risk.
FINANCIAL INSTRUMENTS WHOSE CONTRACTS REPRESENT CREDIT RISK
CONTRACT OR NOTIONAL
AMOUNT AS OF DECEMBER 31,
---------------------------
1997 1996
------------ ------------
Commitments to Extend Credit........................ $261,398,359 $198,785,177
Standby Letters of Credit........................... 3,648,810 3,650,766
Credit Card Arrangements............................ 15,538,048 13,224,729
Commitments to extend credit are agreements to lend to customers. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of fees. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The amount drawn on the total
commitments was $152,409,622 for 1997 and $109,676,324 for 1996. Certain
directors of the banks and companies in which they are the principal owners,
officers and/or directors had commitments from the banks in the form of
contracts which represent credit risk to the banks. In the opinion of
management, these commitments are made in the ordinary course of business. The
banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the banks on extension of
credit is based on management's credit assessment of the counterparty.
Collateral held varies but may include accounts receivable; inventory; property,
plant and equipment; and existing income-producing commercial properties. The
amount collateralized was 77% for 1997 and 69% for 1996.
As of December 31, 1997, loans to one customer and related parties of Pioneer
Bank represented 15% of the company's total capital.
STOCK DIVIDEND
During 1996, the Board of Directors authorized a two-for-one stock split,
effected as a 100% stock dividend, thereby increasing the number of issued and
outstanding shares to 3,759,912. All references in the accompanying financial
statements to the number of common shares and per-share amounts for 1995 have
been restated to reflect the stock dividend.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of preferred stock in one
or more series, and to determine the designations and the powers, preferences
and other special rights of each series.
F-95
311
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS
The company is subject to legal proceedings and claims that arise in the
ordinary course of business. In management's opinion, the amount of ultimate
liability will not materially affect the financial position or results of
operations of the company.
REGULATORY MATTERS
The company and banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
company and banks must meet specific capital guidelines that involve
quantitative measures of the company and banks' assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
company and banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Pioneer Bank, f.s.b. is required to maintain a ratio of Tier 1 capital to total
assets of not less than 8% during the first three years of operations as a
condition of approval for deposit insurance by the Federal Deposit Insurance
Corporation.
Quantitative measures established by regulation to ensure capital adequacy
require the company and banks to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997, that
the company and banks meet all capital adequacy requirements to which they are
subject.
F-96
312
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1997, the most recent notifications from the Federal Reserve
(for the company) and Federal Deposit Insurance Corporation (for the banks)
categorized the company and banks as adequately capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
capitalized, the company and banks must maintain minimum total risk-based, Tier
1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the company and banks' category.
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
-------------------- -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----- ------------ ----- ------------ ------
December 31, 1997
Total Capital (To Risk
Weighted Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $100,992,581 13.99% $$57,737,347 $8.00% $$72,171,683 $10.00%
Pioneer Bank and
Subsidiaries..... 72,632,586 12.62 $ 46,045,152 $8.00 $ 57,556,440 $10.00
Valley Bank......... 17,722,886 13.18 $ 10,757,055 $8.00 $ 13,446,319 $10.00
Pioneer Bank,
f.s.b............ 7,807,180 77.24 $ 817,473 $8.00 $ 1,021,841 $10.00
Tier 1 Capital (To
Risk Weighted
Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $ 93,155,998 12.91% $$28,868,673 $4.00% $$43,303,010 $ 6.00%
Pioneer Bank and
Subsidiaries..... 66,424,274 11.54 $ 23,022,576 $4.00 $ 34,533,864 $ 6.00
Valley Bank......... 16,225,268 12.07 $ 5,378,528 $4.00 $ 8,067,792 $ 6.00
Pioneer Bank,
f.s.b............ 7,676,527 75.96 $ 408,736 $4.00 $ 613,105 $ 6.00
Tier 1 Capital (To
Average Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $ 93,155,998 10.29% $$37,891,600 $4.00% $$47,364,500 $ 5.00%
Pioneer Bank and
Subsidiaries..... 66,424,274 9.64 $ 28,859,400 $4.00 $ 36,074,250 $ 5.00
Valley Bank......... 16,225,268 9.16 $ 7,418,240 $4.00 $ 9,272,800 $ 5.00
Pioneer Bank,
f.s.b............ 7,676,527 49.61 $ 618,848 $4.00 $ 773,560 $ 5.00
F-97
313
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
-------------------- -------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----- ------------ ----- ------------ ------
December 31, 1996
Total Capital (To Risk
Weighted Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $ 92,426,005 14.78% $ 50,031,136 8.00% $ 62,538,920 10.00%
Pioneer Bank and
Subsidiaries..... 67,785,829 13.36 40,580,620 8.00 50,725,775 10.00
Valley Bank......... 24,722,295 20.93 9,451,864 8.00 11,814,829 10.00
Tier 1 Capital (To
Risk Weighted
Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $ 86,667,198 13.86% $ 25,015,568 4.00% $ 37,523,352 6.00%
Pioneer Bank and
Subsidiaries..... 63,188,884 12.46 20,290,310 4.00 30,435,465 6.00
Valley Bank......... 23,560,433 19.94 4,725,932 4.00 7,088,898 6.00
Tier 1 Capital (To
Average Assets)
Pioneer Bancshares,
Inc. and
Subsidiaries..... $ 86,667,198 10.55% $ 33,909,280 4.00% $ 42,386,600 5.00%
Pioneer Bank and
Subsidiaries..... 67,785,829 10.44 26,835,040 4.00 33,543,600 5.00
Valley Bank......... 23,560,433 13.52 7,073,880 4.00 8,842,350 5.00
SUPPLEMENTAL FINANCIAL DATA
Components of other noninterest expenses in excess of 1% of income for the
respective periods are as follows:
1997 1996 1995
---------- ---------- ----------
FDIC Insurance Premiums.............. $ 44,489 $ 3,180 $ 678,444
========== ========== ==========
Office Supplies...................... $ 829,698 $ 663,502 $ 589,317
========== ========== ==========
Amortization of Core Deposit
Intangible......................... $ 724,680 $ 724,680 $ 292,535
========== ========== ==========
Professional Fees.................... $1,142,720 $1,789,554 $1,469,165
========== ========== ==========
F-98
314
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Pioneer Bancshares, Inc. are summarized as
follows:
CONDENSED BALANCE SHEETS
1997 1996
------------ -----------
ASSETS
Cash............................................... $ 2,357,783 $ 107,210
Investment in Subsidiaries*........................ 96,864,084 93,882,143
Organization Costs, net............................ -- 15,527
Receivable*........................................ 1,476 1,476
Goodwill........................................... 74,108 98,810
Land............................................... 293,605 --
Taxes Receivable................................... 514,309 --
Prepaid Assets..................................... 131,806 --
Other.............................................. 614 13,627
------------ -----------
TOTAL ASSETS............................... $100,237,785 $94,118,793
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other.............................................. $ 25,169 $ --
Taxes Payable...................................... -- 195,326
Accrued Benefits................................... 296,658 --
------------ -----------
Total Liabilities.......................... 321,827 195,326
Stockholders' Equity................................. 99,915,958 93,923,467
------------ -----------
Total Liabilities and Stockholders'
Equity.................................. $100,237,785 $94,118,793
============ ===========
CONDENSED STATEMENTS OF INCOME
1997 1996 1995
----------- ----------- -----------
INCOME
Management Fees*........................ $ 3,311,434 $ 3,783,704 $ --
Dividends from Subsidiaries*............ 17,423,649 3,271,124 2,837,639
Other Income............................ 92,765 49,993 --
----------- ----------- -----------
Total Income.................... 20,827,848 7,104,821 2,837,639
----------- ----------- -----------
EXPENSES
Salaries and Employee Benefits.......... 4,259,006 2,636,697 --
Other Expense........................... 3,318,443 1,436,386 494,355
----------- ----------- -----------
Total Expense................... 7,577,449 4,073,083 494,355
----------- ----------- -----------
- ---------------
* Eliminated in Consolidation
F-99
315
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 1996 1995
----------- ----------- -----------
Income Before Income Taxes and Equity in
Undistributed Earnings of Subsidiary.... $13,250,399 $ 3,031,738 $ 2,343,284
Provision for Income Taxes.............. (1,569,328) (80,000) (47,209)
----------- ----------- -----------
Income Before Equity in Undistributed
Earnings of Subsidiary.................. 14,819,727 3,111,738 2,390,493
Equity in Undistributed Earnings of
Subsidiary*.......................... (5,057,631) 5,885,109 4,691,320
----------- ----------- -----------
Net Income...................... $ 9,762,096 $ 8,996,847 $ 7,081,813
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
1997 1996 1995
----------- ----------- -----------
Cash Flows From Operating
Activities
Net Income.................................. $ 9,762,096 $ 8,996,847 $ 7,081,813
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities --
Undistributed Earnings of Subsidiary..... 4,707,689 (5,885,109) (4,691,320)
Amortization Expense..................... 40,229 45,383 20,680
Increase in Liabilities.................. 126,501 123,030 15,368
Increase in Other Assets................. (633,102) (13,627) --
Decrease in Receivables.................. -- 84,622 --
----------- ----------- -----------
Net Cash Provided by Operating
Activities.......................... 14,003,297 3,351,146 2,426,541
----------- ----------- -----------
Cash Flows From Investing
Activities
Acquisition of Subsidiary................... (8,000,000) -- (4,830)
Acquisition of Land......................... (293,605) -- --
----------- ----------- -----------
Net Cash Used by Investing
Activities.......................... (8,293,605) -- (4,830)
----------- ----------- -----------
Cash Flows From Financing
Activities
Dividends Paid.............................. (3,459,119) (3,271,124) (2,525,639)
----------- ----------- -----------
Net Increase (Decrease) in Cash............... 2,250,573 80,022 (103,928)
Cash -- beginning of year..................... 107,210 27,188 131,116
----------- ----------- -----------
Cash -- end of year........................... $ 2,357,783 $ 107,210 $ 27,188
=========== =========== ===========
- ---------------
* Eliminated in Consolidation
F-100
316
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 1996 1995
----------- ----------- -----------
Supplemental Disclosures of
Noncash Investing Activities
Change in Unrealized Gain on Securities..... $ 238,014 $ 494,605 $ 5,903,139
Inter-company Lease Adjustment *............ 350,000 -- --
- -------------------------
* Eliminated in Consolidation
F-101
317
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QUARTERLY RESULTS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1997 and
1996 follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
1997:
Total interest income............... $15,265 $16,588 $17,683 $17,700
Total interest expense.............. 6,927 7,560 7,700 8,012
------- ------- ------- -------
Net interest income................. 8,338 9,028 9,983 9,688
Provision for loan losses........... 466 1,155 1,122 866
------- ------- ------- -------
Total interest income after
provision for loan losses......... 7,872 7,873 8,861 8,822
Total noninterest income............ 2,122 2,169 2,753 2,828
Total noninterest expense........... 6,748 7,187 7,572 7,866
Income tax expense.................. 850 840 884 1,591
------- ------- ------- -------
Net income.......................... $ 2,396 $ 2,015 $ 3,158 $ 2,193
======= ======= ======= =======
Per common share:
Net income........................ 0.64 0.54 0.84 0.58
Cash dividend..................... 0.23 0.23 0.23 0.23
Stock price range:
High.............................. 39.00 41.00 44.00 45.00
Low............................... 37.00 39.00 41.00 44.00
Close............................. 39.00 41.00 44.00 45.00
1996:
Total interest income............... $13,476 $14,019 $14,570 $14,899
Total interest expense.............. 6,232 6,489 6,685 6,848
------- ------- ------- -------
Net interest income................. 7,244 7,530 7,885 8,051
Provision for loan losses........... 280 255 221 341
------- ------- ------- -------
Total interest income after
provision for loan losses......... 6,964 7,275 7,664 7,710
Total noninterest income............ 1,941 1,716 2,096 2,425
Total noninterest expense........... 6,108 6,294 6,368 6,970
Income tax expense.................. 776 711 787 780
------- ------- ------- -------
Net income.......................... $ 2,021 $ 1,986 $ 2,605 $ 2,385
======= ======= ======= =======
Per common share:
Net income........................ 0.54 0.53 0.69 0.63
Cash dividend..................... 0.2175 0.2175 0.2175 0.2175
Stock price range:
High.............................. 35.00 35.00 36.00 37.00
Low............................... 33.50 35.00 35.00 36.00
Close............................. 35.00 35.00 36.00 37.00
F-102
318
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FIRST AMERICAN CORPORATION,
AND
PIONEER BANCSHARES, INC.
DATED AS OF MAY 28, 1998
A-1
319
TABLE OF CONTENTS
PAGE
----
ARTICLE 1 TRANSACTIONS AND TERMS OF
MERGER.............................. A-5
1.1 Merger........................ A-5
1.2 Time and Place of Closing..... A-5
1.3 Effective Time................ A-6
1.4 Execution of Stock Option
Agreement..................... A-6
1.5 Bank Merger................... A-6
ARTICLE 2 TERMS OF MERGER............. A-6
2.1 Charter....................... A-6
2.2 Bylaws........................ A-6
2.3 Directors and Officers........ A-6
ARTICLE 3 MANNER OF CONVERTING
SHARES.............................. A-7
3.1 Conversion of Shares.......... A-7
3.2 Anti-Dilution Provisions...... A-7
3.3 Shares Held by Pioneer or
Buyer......................... A-7
3.4 Dissenting Shareholders....... A-7
3.5 Fractional Shares............. A-8
3.6 Conversion of Stock Options;
Restricted Stock.............. A-8
ARTICLE 4 EXCHANGE OF SHARES.......... A-9
4.1 Exchange Procedures........... A-9
4.2 Rights of Former Pioneer
Shareholders.................. A-10
ARTICLE 5 REPRESENTATIONS AND
WARRANTIES OF PIONEER............... A-11
5.1 Organization, Standing, and
Power......................... A-11
5.2 Authority of Pioneer; No
Breach By Agreement........... A-11
5.3 Capital Stock................. A-12
5.4 Pioneer Subsidiaries.......... A-12
5.5 SEC Filings; Financial
Statements.................... A-13
5.6 Absence of Undisclosed
Liabilities................... A-14
5.7 Absence of Certain Changes or
Events........................ A-14
5.8 Tax Matters................... A-14
PAGE
----
5.9 Allowance for Possible Loan
Losses........................ A-15
5.10 Assets........................ A-16
5.11 Intellectual Property......... A-16
5.12 Environmental Matters......... A-17
5.13 Compliance with Laws.......... A-18
5.14 Labor Relations............... A-18
5.15 Employee Benefit Plans........ A-18
5.16 Material Contracts............ A-20
5.17 Legal Proceedings............. A-21
5.18 Reports....................... A-21
5.19 Statements True and Correct... A-22
5.20 Accounting, Tax and Regulatory
Matters....................... A-22
5.21 Opinion of Financial
Advisor....................... A-22
5.22 Board Recommendation.......... A-22
5.23 Derivatives................... A-23
ARTICLE 6 REPRESENTATIONS AND
WARRANTIES OF BUYER................. A-23
6.1 Organization, Standing, and
Power......................... A-23
6.2 Authority; No Breach By
Agreement..................... A-23
6.3 Capital Stock................. A-24
6.4 Reserved...................... A-24
6.5 SEC Filings; Financial
Statements.................... A-24
6.6 Absence of Undisclosed
Liabilities................... A-25
6.7 Absence of Certain Changes or
Events........................ A-25
6.8 Tax Matters................... A-25
A-2
320
PAGE
----
6.9 Allowance for Possible Loan
Losses........................ A-26
6.10 Assets........................ A-26
6.11 Intellectual Property......... A-27
6.12 Environmental Matters......... A-27
6.13 Compliance with Laws.......... A-28
6.14 Labor Relations............... A-28
6.15 Employee Benefit Plans........ A-29
6.16 Reserved...................... A-30
6.17 Legal Proceedings............. A-30
6.18 Reports....................... A-30
6.19 Statements True and Correct... A-30
6.20 Accounting, Tax and Regulatory
Matters....................... A-30
6.21 Rights Agreement.............. A-31
ARTICLE 7 CONDUCT OF BUSINESS PENDING
CONSUMMATION........................ A-31
7.1 Affirmative Covenants of
Pioneer....................... A-31
7.2 Negative Covenants of
Pioneer....................... A-31
7.3 Covenants of Buyer............ A-33
7.4 Reserved...................... A-34
7.5 Adverse Changes in
Condition..................... A-34
7.6 Reports....................... A-34
ARTICLE 8 ADDITIONAL AGREEMENTS....... A-34
8.1 Registration Statement; Proxy
Statement; Shareholder
Approval...................... A-34
8.2 Exchange Listing.............. A-35
8.3 Applications.................. A-35
8.4 Filings with State Offices.... A-35
8.5 Agreement as to Efforts to
Consummate.................... A-35
8.6 Investigation and
Confidentiality............... A-36
8.7 Press Releases................ A-36
8.8 Certain Actions............... A-36
8.9 Accounting and Tax
Treatment..................... A-37
8.10 Agreement of Affiliates....... A-37
8.11 Employee Benefits and
Contracts..................... A-37
PAGE
----
8.12 Indemnification............... A-38
8.13 Certain Policies of Pioneer... A-39
8.14 Coordination of Dividends..... A-39
8.15 Director...................... A-39
ARTICLE 9 CONDITIONS PRECEDENT TO
OBLIGATIONS TO CONSUMMATE........... A-40
9.1 Conditions to Obligations of
Each Party.................... A-40
9.2 Conditions to Obligations of
Buyer......................... A-41
9.3 Conditions to Obligations of
Pioneer....................... A-42
ARTICLE 10 TERMINATION................ A-43
10.1 Termination................... A-43
10.2 Effect of Termination......... A-47
10.3 Non-Survival of
Representations and
Covenants..................... A-47
ARTICLE 11 MISCELLANEOUS.............. A-47
11.1 Definitions................... A-47
11.2 Expenses...................... A-55
11.3 Brokers and Finders........... A-55
11.4 Entire Agreement.............. A-56
11.5 Amendments.................... A-56
11.6 Waivers....................... A-56
11.7 Assignment.................... A-57
11.8 Notices....................... A-57
11.9 Governing Law................. A-57
11.10 Counterparts.................. A-57
11.11 Captions; Articles and
Sections...................... A-57
11.12 Interpretations............... A-57
11.13 Enforcement of Agreement...... A-58
11.14 Severability.................. A-58
A-3
321
LIST OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
1. Form of Stock Option Agreement. (sec.sec. 1.4, 11.1).
Form of agreement of affiliates of Pioneer. (sec.sec.
2. 8.13, 9.2(g)).
Matters as to which Alston & Bird LLP will opine.
3. (sec. 9.2(d)).
Matters as to which First American's General Counsel
4. will opine. (sec.9.3(d)).
A-4
322
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered into as
of May 28, 1998, by and between FIRST AMERICAN CORPORATION ("Buyer"), a
Tennessee corporation; and PIONEER BANCSHARES, INC. ("Pioneer"), a Delaware
corporation.
PREAMBLE
The respective Boards of Directors of Pioneer and Buyer have determined that the
transactions described herein are in the best interests of the parties to this
Agreement and their respective shareholders. This Agreement provides for the
acquisition of Pioneer by Buyer pursuant to the merger of Pioneer with and into
Buyer. At the effective time of such merger, the outstanding shares of the
capital stock of Pioneer shall be converted into the right to receive shares of
the common stock of Buyer (except as provided herein). As a result, shareholders
of Pioneer shall become shareholders of Buyer and Buyer shall continue to
conduct the business and operations of Pioneer. The transactions described in
this Agreement are subject to the approvals of the shareholders of Pioneer, the
Board of Governors of the Federal Reserve System, the Comptroller of the
Currency, the Office of Thrift Supervision, and/or the Tennessee Department of
Financial Institutions and the satisfaction of certain other conditions
described in this Agreement. The parties to this Agreement intend that the
Merger qualify for federal income tax purposes as a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code, and qualify for
accounting purposes as a pooling of interests.
Immediately after the execution and delivery of this Agreement, as a condition
and inducement to Buyer's willingness to enter into this Agreement, Pioneer and
Buyer are entering into a stock option agreement the form of which is attached
hereto as Exhibit 1, pursuant to which Pioneer will grant to Buyer an option to
purchase shares of Pioneer Common Stock.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual warranties,
representations, covenants, and agreements set forth herein, and other good and
valuable consideration, the sufficiency and receipt of which are acknowledged,
the parties, intending to be legally bound, agree as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, Pioneer shall be merged with and into Buyer in accordance with
the provisions of Section 252 of the DGCL and Section 48-21-102 of the TBCA and
with the effect provided in Section 259 of the DGCL and Section 48-21-108 of the
TBCA (the "Merger"). Buyer shall be the Surviving Corporation resulting from the
Merger and shall continue to be governed by the Laws of the State of Tennessee.
The Merger shall be consummated pursuant to the terms of this Agreement, which
has been approved and adopted by the respective Boards of Directors of Pioneer
and Buyer.
1.2 Time and Place of Closing. The closing of the transactions contemplated
hereby (the "Closing") will take place at 10:00 A.M. on the day before the
Effective Time occurs, or
A-5
323
at such other time as the Parties, acting through their authorized officers, may
mutually agree. The Closing shall be held at Buyer's offices at First American
Center, Nashville, Tennessee, or such location as may be mutually agreed upon by
the Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time the Certificate of
Merger reflecting the Merger shall become effective with the Secretary of State
of the State of Delaware and the Secretary of State of Tennessee (the "Effective
Time"). Subject to the terms and conditions hereof, unless otherwise mutually
agreed upon in writing by the authorized officers of each Party, the Parties
shall use their reasonable efforts to cause the Effective Time to occur on the
first business day following the last to occur of (i) the effective date
(including expiration of any applicable waiting period) of the last required
Consent of any Regulatory Authority having authority over and approving or
exempting the Merger, and (ii) the date on which the shareholders of Pioneer
approve this Agreement to the extent such approval is required by applicable
Law.
1.4 Execution of Stock Option Agreement. Immediately following the execution of
this Agreement by the Parties and as a condition thereto, Pioneer will execute
and deliver to Buyer a stock option agreement (the "Stock Option Agreement"), in
substantially the form of Exhibit 1 hereto, pursuant to which Pioneer is
granting to Buyer an option to purchase 19.9% of the outstanding shares of
Pioneer Common Stock.
1.5 Bank Merger. Buyer may, in its discretion, effective at or after the
Effective Time, merge one or more of Pioneer Bank, Valley Bank or Pioneer Bank,
f.s.b. (collectively the "Pioneer Banks") with and into FANB (the "Bank
Merger"), pursuant to the terms and conditions of a Bank Plan of Merger ("Bank
Plan") providing therefor. The Bank Plan shall be executed and the transactions
contemplated therein shall be consummated at such time as Buyer directs. If the
Bank Plan is executed prior to the Effective Time, Pioneer shall vote the shares
of capital stock of Pioneer Bank in favor of the Bank Plan and the Bank Merger
provided therein.
ARTICLE 2
TERMS OF MERGER
2.1 Charter. The Charter of Buyer in effect immediately prior to the Effective
Time shall be the Charter of the Surviving Corporation until duly amended or
repealed.
2.2 Bylaws. The Bylaws of Buyer in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation until duly amended or
repealed.
2.3 Directors and Officers. The directors of Buyer in office immediately prior
to the Effective Time, together with such additional persons as may thereafter
be elected, shall serve as the directors of the Surviving Corporation from and
after the Effective Time in accordance with the Bylaws of the Surviving
Corporation. The officers of Buyer in office immediately prior to the Effective
Time, together with such additional persons as may thereafter be elected, shall
serve as the officers of the Surviving Corporation from and after the Effective
Time in accordance with the Bylaws of the Surviving Corporation.
A-6
324
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at the
Effective Time, by virtue of the Merger and without any action on the part of
Buyer, Pioneer, or the shareholders of either of the foregoing, the shares of
the constituent corporations shall be converted as follows:
(a) Each share of capital stock of Buyer issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from
and after the Effective Time.
(b) Each share of Pioneer Common Stock, but excluding shares held by any
Pioneer Entity or any Buyer Entity, in each case other than in a
fiduciary capacity or as a result of debts previously contracted, and
excluding shares held by shareholders who perfect their statutory
dissenters' rights, if any, as provided in Section 3.4, issued and
outstanding immediately prior to the Effective Time shall cease to be
outstanding and shall be converted into and exchanged for the right to
receive 1.65 shares of Buyer Common Stock (the "Exchange Ratio").
Pursuant to the Buyer Rights Agreement, each share of Buyer Common
Stock issued in connection with the Merger upon conversion of Pioneer
Common Stock shall be accompanied by a Buyer Right.
3.2 Anti-Dilution Provisions. In the event Buyer changes the number of shares
of Buyer Common Stock issued and outstanding prior to the Effective Time as a
result of a stock split, stock dividend, or similar recapitalization with
respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) shall be prior to
the Effective Time, the Exchange Ratio shall be proportionately adjusted.
3.3 Shares Held by Pioneer or Buyer. Each of the shares of Pioneer Common Stock
held by any Pioneer Entity or by any Buyer Entity, in each case other than in a
fiduciary capacity or as a result of debts previously contracted, shall be
canceled and retired at the Effective Time and no consideration shall be issued
in exchange therefor.
3.4 Dissenting Shareholders. In the event that dissenters' rights are available
under Section 262 of the DGCL, any holder of shares of Pioneer Common Stock who
perfects his dissenters' rights in accordance with and as contemplated by
Section 262 of the DGCL shall be entitled to receive the value of such shares in
cash as determined pursuant to such provision of Law; provided, however, no such
payment shall be made to any dissenting shareholder unless and until such
dissenting shareholder has complied with the applicable provisions of the DGCL
and surrendered to Pioneer the certificate or certificates representing the
shares for which payment is being made. In the event that after the Effective
Time a dissenting shareholder of Pioneer fails to perfect, or effectively
withdraws or loses, his right to appraisal and of payment for his shares, Buyer
shall issue and deliver the consideration to which such holder of shares of
Pioneer Common Stock is entitled under this Article 3 (without interest) upon
surrender by such holder of the certificate or certificates representing shares
of Pioneer Common Stock held by him. If and to the extent required by applicable
Law, Pioneer will establish (or cause to be established) an escrow account with
an amount sufficient to satisfy the maximum aggregate payment that may be
required to be paid to dissenting shareholders. Upon satisfaction of all claims
of dissenting shareholders, the remaining escrowed amount, reduced by payment of
the fees and expenses of the escrow agent, will be returned to the Surviving
Corporation.
A-7
325
3.5 Fractional Shares. Notwithstanding any other provision of this Agreement,
each holder of shares of Pioneer Common Stock exchanged pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of Buyer
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 Buyer Common Stock multiplied by the
market value of one share of Buyer Common Stock at the Effective Time. The
market value of one share of Buyer Common Stock at the Effective Time shall be
the closing price of such common stock on the NYSE-Composite Transactions List
or the last sale price of such common stock on the Nasdaq National Market, as
applicable (as reported by The Wall Street Journal or, if not reported thereby,
any other authoritative source selected by Buyer), on the second trading day
immediately preceding but not including the Effective Time. No holder will be
entitled to dividends, voting rights, or any other rights as a shareholder in
respect of any fractional shares.
3.6 Conversion of Stock Options; Restricted Stock.
(a) At the Effective Time, each option or other Equity Right to purchase shares
of Pioneer Common Stock pursuant to stock options or stock appreciation
rights ("Pioneer Options") granted by Pioneer under the Pioneer Stock Plans,
which are outstanding at the Effective Time, whether or not exercisable,
shall be converted into and become rights with respect to Buyer Common
Stock, and Buyer shall assume each Pioneer Option, in accordance with the
terms of the Pioneer Stock Plans and stock option agreement by which it is
evidenced, except that from and after the Effective Time, (i) Buyer and its
Compensation Committee shall be substituted for Pioneer and the Committee of
Pioneer's Board of Directors (including, if applicable, the entire Board of
Directors of Pioneer) administering such Pioneer Stock Plan, (ii) each
Pioneer Option assumed by Buyer may be exercised solely for shares of Buyer
Common Stock (or cash, if so provided under the terms of such Pioneer
Option), (iii) the number of shares of Buyer Common Stock subject to such
Pioneer Option shall be equal to the number of shares of Pioneer Common
Stock subject to such Pioneer Option immediately prior to the Effective Time
multiplied by the Exchange Ratio and rounding down to the nearest whole
share, and (iv) the per share exercise price under each such Pioneer Option
shall be adjusted by dividing the per share exercise price under each such
Pioneer Option by the Exchange Ratio and rounding up to the nearest cent.
Notwithstanding the provisions of clause (iii) of the preceding sentence,
Buyer shall not be obligated to issue any fraction of a share of Buyer
Common Stock upon exercise of Pioneer Options and any fraction of a share of
Buyer Common Stock that otherwise would be subject to a converted Pioneer
Option shall represent the right to receive a cash payment upon exercise of
such converted Pioneer Option equal to the product of such fraction and the
difference between the market value of one share of Buyer Common Stock at
the time of exercise of such Option and the per share exercise price of such
Option. The market value of one share of Buyer Common Stock at the time of
exercise of an Option shall be the closing price of such common stock on the
NYSE-Composite Transactions List or the last sale price of such common stock
on the Nasdaq National Market (as reported by The Wall Street Journal or, if
not reported thereby, any other authoritative source selected by Buyer) on
the last trading day preceding the date of exercise. In addition,
notwithstanding the provisions of clauses (iii) and (iv) of the first
sentence of this Section 3.6, each Pioneer Option which is an "incentive
stock option" shall be adjusted as required by Section 424 of the Internal
Revenue Code, and the regulations
A-8
326
promulgated thereunder, so as not to constitute a modification, extension or
renewal of the option, within the meaning of Section 424(h) of the Internal
Revenue Code. Each of Pioneer and Buyer agrees to take all necessary steps
to effectuate the foregoing provisions of this Section 3.6, including using
its reasonable efforts to obtain from each holder of a Pioneer Option any
Consent or Contract that may be deemed necessary or advisable in order to
effect the transactions contemplated by this Section 3.6. Anything in this
Agreement to the contrary notwithstanding, Buyer shall have the right, in
its sole discretion, not to deliver the consideration provided in this
Section 3.6 to a former holder of a Pioneer Option who has not delivered
such Consent or Contract.
(b) As soon as practicable after the Effective Time, Buyer shall deliver to the
participants in each Pioneer Stock Plan an appropriate notice setting forth
such participant's rights pursuant thereto and the grants subject to such
Pioneer Stock Plan shall continue in effect on the same terms and conditions
(subject to the adjustments required by Section 3.6(a) after giving effect
to the Merger), and Buyer shall comply with the terms of each Pioneer Stock
Plan to ensure, to the extent required by, and subject to the provisions of,
such Pioneer Stock Plan, that Pioneer Options which qualified as incentive
stock options prior to the Effective Time continue to qualify as incentive
stock options after the Effective Time. At or prior to the Effective Time,
Buyer shall take all corporate action necessary to reserve for issuance
sufficient shares of Buyer Common Stock for delivery upon exercise of
Pioneer Options assumed by it in accordance with this Section 3.6. As soon
as practicable after the Effective Time, Buyer shall file a registration
statement on Form S-3 or Form S-8, as the case may be (or any successor or
other appropriate SEC forms), with respect to the shares of Buyer Common
Stock subject to such options and shall use its reasonable efforts to
maintain the effectiveness of such registration statements (and maintain the
current status of the prospectus or prospectuses contained therein) for so
long as such options remain outstanding. With respect to those individuals
who subsequent to the Merger will be subject to the reporting requirements
under Section 16(a) of the Exchange Act, where applicable, Buyer shall
administer the Pioneer Stock Plan assumed pursuant to this Section 3.6 in a
manner that complies with Rule 16b-3 promulgated under the Exchange Act to
the extent the Pioneer Stock Plan complied with such rule prior to the
Effective Time.
(c) All contractual restrictions or limitations on transfer with respect to
Pioneer Common Stock awarded under the Pioneer Stock Plans or any other
plan, program, Contract or arrangement of any Pioneer Entity, to the extent
that such restrictions or limitations shall not have already lapsed (whether
as a result of the Merger or otherwise), and except as otherwise expressly
provided in such plan, program, Contract or arrangement, shall remain in
full force and effect with respect to shares of Buyer Common Stock into
which any such restricted stock is converted pursuant to Section 3.1.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time, Buyer and Pioneer
shall cause the exchange agent selected by Buyer (the "Exchange Agent") to mail
to each holder of record of a certificate or certificates which represented
shares of Pioneer Common Stock immediately prior to the Effective Time (the
"Certificates") appropriate transmittal materials and instructions (which shall
specify that delivery shall be effected, and risk of loss and title to such
Certificates shall pass, only upon proper delivery of such
A-9
327
Certificates to the Exchange Agent). The Certificate or Certificates of Pioneer
Common Stock so delivered shall be duly endorsed as the Exchange Agent may
require. In the event of a transfer of ownership of shares of Pioneer Common
Stock represented by Certificates that are not registered in the transfer
records of Pioneer, the consideration provided in Section 3.1 may be issued to a
transferee if the Certificates representing such shares are delivered to the
Exchange Agent, accompanied by all documents required to evidence such transfer
and by evidence satisfactory to the Exchange Agent that any applicable stock
transfer taxes have been paid. If any Certificate shall have been lost, stolen,
mislaid or destroyed, upon receipt of (i) an affidavit of that fact from the
holder claiming such Certificate to be lost, mislaid, stolen or destroyed, (ii)
such bond, security or indemnity as Buyer and the Exchange Agent may reasonably
require and (iii) any other documents necessary to evidence and effect the bona
fide exchange thereof, the Exchange Agent shall issue to such holder the
consideration into which the shares represented by such lost, stolen, mislaid or
destroyed Certificate shall have been converted. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate. After the Effective Time, each
holder of shares of Pioneer Common Stock (other than shares to be canceled
pursuant to Section 3.3 or as to which statutory dissenters' rights, if any have
been perfected as provided in Section 3.4) issued and outstanding at the
Effective Time shall surrender the Certificate or Certificates representing such
shares to the Exchange Agent and shall promptly upon surrender thereof receive
in exchange therefor the consideration provided in Section 3.1, together with
all undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. To the extent required by Section
3.5, each holder of shares of Pioneer Common Stock issued and outstanding at the
Effective Time also shall receive, upon surrender of the Certificate or
Certificates, cash in lieu of any fractional share of Buyer Common Stock to
which such holder may be otherwise entitled (without interest). Buyer shall not
be obligated to deliver the consideration to which any former holder of Pioneer
Common Stock is entitled as a result of the Merger until such holder surrenders
such holder's Certificate or Certificates for exchange as provided in this
Section 4.1. Any other provision of this Agreement notwithstanding, neither
Buyer nor the Exchange Agent shall be liable to a holder of Pioneer Common Stock
for any amounts paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar Law.
4.2 Rights of Former Pioneer Shareholders. At the Effective Time, the stock
transfer books of Pioneer shall be closed as to holders of Pioneer Common Stock
immediately prior to the Effective Time and no transfer of Pioneer Common Stock
by any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1, each Certificate
theretofore representing shares of Pioneer Common Stock (other than shares to be
canceled pursuant to Sections 3.3 and 3.4) shall from and after the Effective
Time represent for all purposes only the right to receive the consideration
provided in Sections 3.1 and 3.5 in exchange therefor, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which have been
declared or made by Pioneer in respect of such shares of Pioneer Common Stock in
accordance with the terms of this Agreement and which remain unpaid at the
Effective Time. To the extent permitted by Law, former shareholders of record of
Pioneer shall be entitled to vote after the Effective Time at any meeting of
Buyer shareholders the number of whole shares of Buyer Common Stock into which
their respective shares of Pioneer Common Stock are converted, regardless of
whether such holders have exchanged their Certificates for certificates
representing Buyer Common Stock in accordance with the provisions of this
A-10
328
Agreement. Whenever a dividend or other distribution is declared by Buyer on the
Buyer Common Stock, the record date for which is at or after the Effective Time,
the declaration shall include dividends or other distributions on all shares of
Buyer Common Stock issuable pursuant to this Agreement, but no dividend or other
distribution payable to the holders of record of Buyer Common Stock as of any
time subsequent to the Effective Time shall be delivered to the holder of any
Certificate until such holder surrenders such Certificate for exchange as
provided in Section 4.1. However, upon surrender of such Certificate, both the
Buyer Common Stock certificate (together with all such undelivered dividends or
other distributions without interest) and any undelivered dividends and cash
payments payable hereunder (without interest) shall be delivered and paid with
respect to each share represented by such Certificate.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PIONEER
Pioneer hereby represents and warrants to Buyer as follows:
5.1 Organization, Standing, and Power. Pioneer is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of Delaware,
and has the corporate power and authority to carry on its business as now
conducted and to own, lease and operate its material Assets. Pioneer is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually or
in the aggregate, a Pioneer Material Adverse Effect. The minute books and other
organizational documents for Pioneer have been made available to Buyer for its
review and, except as disclosed in Section 5.1 of the Pioneer Disclosure
Memorandum, are true and complete in all material respects as in effect as of
the date of this Agreement and accurately reflect in all material respects all
amendments thereto and all proceedings of the Board of Directors and
shareholders thereof. True and complete copies of the Certificate of
Incorporation and By-laws of Pioneer, and all amendments thereto, have been
delivered to Buyer.
5.2 Authority of Pioneer; No Breach By Agreement.
(a) Pioneer has the corporate power and authority necessary to execute, deliver,
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery, and performance
of this Agreement and the consummation of the transactions contemplated
herein, including the Merger, have been duly and validly authorized by all
necessary corporate action in respect thereof on the part of Pioneer,
subject to the approval of this Agreement by the holders of a majority of
the outstanding shares of Pioneer Common Stock, which is the only
shareholder vote required for approval of this Agreement and consummation of
the Merger by Pioneer. Subject to such requisite shareholder approval, this
Agreement represents a legal, valid, and binding obligation of Pioneer,
enforceable against Pioneer in accordance with its terms (except in all
cases as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium, or
similar Laws affecting the enforcement of creditors' rights generally and
except that the availability of specific performance or injunctive relief is
subject to the discretion of the court before which any proceeding may be
brought).
A-11
329
(b) Neither the execution and delivery of this Agreement by Pioneer, nor the
consummation by Pioneer of the transactions contemplated hereby, nor
compliance by Pioneer with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of Pioneer's Certificate of
Incorporation or Bylaws or the certificate or articles of incorporation or
bylaws of any Pioneer Subsidiary or any resolution adopted by the board of
directors or the shareholders of any Pioneer Entity, or (ii) except as
disclosed in Section 5.2 of the Pioneer Disclosure Memorandum, constitute or
result in a Default under, or require any Consent pursuant to, or result in
the creation of any Lien on any Asset of any Pioneer Entity under, any
Contract or Permit of any Pioneer Entity, where such Default or Lien, or any
failure to obtain such Consent, is reasonably likely to have, individually
or in the aggregate, a Pioneer Material Adverse Effect, or, (iii) subject to
receipt of the requisite Consents referred to in Section 9.1(b), constitute
or result in a Default under, or require any Consent pursuant to, any Law or
Order applicable to any Pioneer Entity or any of their respective material
Assets (including any Buyer Entity or any Pioneer Entity becoming subject to
or liable for the payment of any Tax or any of the Assets owned by any Buyer
Entity or any Pioneer Entity being reassessed or revalued by any Taxing
authority).
(c) Other than in connection or compliance with the provisions of the Securities
Laws, applicable state corporate and securities Laws, and rules of The
Nasdaq National Market, or the national securities exchange on which Buyer
Common Stock is hereafter listed, and other than Consents required from
Regulatory Authorities, and other than notices to or filings with the
Internal Revenue Service or the Pension Benefit Guaranty Corporation with
respect to any employee benefit plans, or under the HSR Act, and other than
Consents, filings, or notifications which, if not obtained or made, are not
reasonably likely to have, individually or in the aggregate, a Pioneer
Material Adverse Effect, no notice to, filing with, or Consent of, any
public body or authority is necessary for the consummation by Pioneer of the
Merger and the other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) The authorized capital stock of Pioneer consists of (i) 7,500,000 shares of
$.01 par value Pioneer Common Stock, of which 3,759,912 shares were issued
and outstanding as of the date of this Agreement, and (ii) 1,000,000 shares
of preferred stock, par value $0.01 per share, no series of which has been
designated and no shares of which are issued and outstanding. All of the
issued and outstanding shares of capital stock of Pioneer are duly and
validly issued and outstanding and are fully paid and nonassessable under
the DGCL. None of the outstanding shares of capital stock of Pioneer has
been issued in violation of any preemptive rights of the current or past
shareholders of Pioneer.
(b) Except as set forth in Section 5.3(a), or as provided in the Stock Option
Agreement, or as disclosed in Section 5.3(b) of the Pioneer Disclosure
Memorandum, there are no shares of capital stock or other equity securities
of Pioneer outstanding and no outstanding Equity Rights relating to the
capital stock of Pioneer.
5.4 Pioneer Subsidiaries. Pioneer has disclosed in Section 5.4 of the Pioneer
Disclosure Memorandum all of the Pioneer Subsidiaries (identifying its
jurisdiction of organization, and Pioneer's percentage ownership interest
therein. Except as disclosed in Section 5.4 of the Pioneer Disclosure
Memorandum, Pioneer or one of its Subsidiaries owns all of the issued and
outstanding shares of capital stock (or other equity interests) of each Pioneer
A-12
330
Subsidiary. No capital stock (or other equity interest) of any Pioneer
Subsidiary is or may become required to be issued (other than to another Pioneer
Entity) by reason of any Equity Rights, and there are no Contracts by which any
Pioneer Subsidiary is bound to issue (other than to another Pioneer Entity)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any Pioneer Entity is or may be bound to transfer any shares
of the capital stock (or other equity interests) of any Pioneer Subsidiary
(other than to another Pioneer Entity). Except as disclosed in Section 5.4 of
the Pioneer Disclosure Memorandum, Pioneer does not own, directly or indirectly
5% or more of the outstanding capital stock or other voting securities of any
corporation, bank, savings bank or other organization except for the Pioneer
Subsidiaries. There are no Contracts relating to the rights of any Pioneer
Entity to vote or to dispose of any shares of the capital stock (or other equity
interests) of any Pioneer Subsidiary. All of the shares of capital stock (or
other equity interests) of each Pioneer Subsidiary held by a Pioneer Entity are
fully paid and (except pursuant to 12 USC Section 55 in the case of national
banks and comparable, applicable state Law, if any, in the case of state
depository institutions) nonassessable under the applicable corporation Law of
the jurisdiction in which such Subsidiary is incorporated or organized and are
owned by the Pioneer Entity free and clear of any Lien. Except as disclosed in
Section 5.4 of the Pioneer Disclosure Memorandum, each Pioneer Subsidiary is
either a bank, a savings bank, or a corporation, and each such Subsidiary is
duly organized, validly existing, and (as to corporations) in good standing
under the Laws of the jurisdiction in which it is incorporated or organized, and
has the corporate power and authority necessary for it to own, lease, and
operate its Assets and to carry on its business as now conducted. Each Pioneer
Subsidiary is duly qualified or licensed to transact business as a foreign
corporation in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Pioneer Material
Adverse Effect. Each Pioneer Subsidiary that is a depository institution is an
"insured institution" as defined in the Federal Deposit Insurance Act and
applicable regulations thereunder, and the deposits in which are insured by the
Bank Insurance Fund or the Savings Association Insurance Fund. The minute book
and other organizational documents for each Pioneer Subsidiary have been made
available to Buyer for its review, and, except as disclosed in Section 5.4 of
the Pioneer Disclosure Memorandum, are true and complete in all material
respects as in effect as of the date of this Agreement and accurately reflect in
all material respects all amendments thereto and all proceedings of the Board of
Directors and shareholders thereof.
5.5 SEC Filings; Financial Statements.
(a) Pioneer has timely filed and made available to Buyer all SEC Documents
required to be filed by Pioneer since December 31, 1993 (the "Pioneer SEC
Reports"). The Pioneer SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Laws
and other applicable Laws and (ii) did not, at the time they were filed (or,
if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material
fact or omit to state a material fact required to be stated in such Pioneer
SEC Reports in order to make the statements in such Pioneer SEC Reports, in
light of the circumstances under which they were made, not misleading.
Except for Pioneer Subsidiaries that are registered as a broker, dealer, or
investment advisor, no Pioneer Subsidiary is required to file any SEC
Documents.
A-13
331
(b) Each of the Pioneer Financial Statements (including, in each case, any
related notes) contained in the Pioneer SEC Reports, including any Pioneer
SEC Reports filed after the date of this Agreement until the Effective Time,
complied as to form in all material respects with the applicable published
rules and regulations of the SEC with respect thereto, was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited interim statements, as permitted by
Form 10-Q of the SEC), and fairly presented in all material respects the
consolidated financial position of Pioneer and its Subsidiaries as at the
respective dates and the consolidated results of operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities. No Pioneer Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a Pioneer
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of Pioneer as of December 31, 1997,
included in the Pioneer Financial Statements delivered prior to the date of this
Agreement or reflected in the notes thereto. No Pioneer Entity has incurred or
paid any Liability since December 31, 1997, except for such Liabilities incurred
or paid (i) in the ordinary course of business consistent with past business
practice and which are not reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.
5.7 Absence of Certain Changes or Events. Since December 31, 1997, except as
disclosed in the Pioneer Financial Statements delivered prior to the date of
this Agreement or as disclosed in Section 5.7 of the Pioneer Disclosure
Memorandum, (i) there have been no events, changes, or occurrences which have
had, or are reasonably likely to have, individually or in the aggregate, a
Pioneer Material Adverse Effect, and (ii) the Pioneer Entities have not taken
any action, or failed to take any action, prior to the date of this Agreement,
which action or failure, if taken after the date of this Agreement, would
represent or result in a material breach or violation of any of the covenants
and agreements of Pioneer provided in Article 7.
5.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the Pioneer
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December
31, 1997, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time, except to the extent that all such
failures to file, taken together, are not reasonably likely to have a
Pioneer Material Adverse Effect, and all Tax Returns filed are complete and
accurate in all material respects to the Knowledge of Pioneer. All Taxes
shown on filed Tax Returns have been paid. As of the date of this Agreement,
there is no audit examination, deficiency, or refund Litigation with respect
to any Taxes that is reasonably likely to result in a determination that
would have, individually or in the aggregate, a Pioneer Material Adverse
Effect, except as reserved against in the Pioneer Financial Statements
delivered prior to the date of this Agreement or as disclosed in Section 5.8
of the Pioneer Disclosure Memorandum. Pioneer's federal income Tax Returns
have been audited by the IRS and accepted through December 31, 1980. All
Taxes and other Liabilities due with respect to completed and settled
examinations or
A-14
332
concluded Litigation have been paid. There are no Liens with respect to
Taxes upon any of the Assets of the Pioneer Entities, except for any such
Liens which are not reasonably likely to have a Pioneer Material Adverse
Effect.
(b) None of the Pioneer Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by
the Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) The provision for any Taxes due or to become due for any of the Pioneer
Entities for the period or periods through and including the date of the
respective Pioneer Financial Statements that has been made and is reflected
on such Pioneer Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Pioneer Entities have been provided for in accordance
with GAAP.
(e) None of the Pioneer Entities is a party to any Tax allocation or sharing
agreement except for the consolidated group of Pioneer and none of the
Pioneer Entities has been a member of an affiliated group filing a
consolidated federal income Tax Return (other than a group the common parent
of which was Pioneer) has any Liability for Taxes of any Person (other than
Pioneer and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign Law) as a transferee or
successor or by Contract or otherwise. Pioneer has delivered to Buyer a
correct and complete copy of any tax allocation or sharing agreement to
which it is a party.
(f) Each of the Pioneer Entities is in compliance with, and its records contain
all information and documents (including properly completed IRS Forms W-9)
necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances
of noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a Pioneer Material Adverse Effect.
(g) Except as disclosed in Section 5.8 of the Pioneer Disclosure Memorandum,
none of the Pioneer Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Section 280G or
162(m) of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue Code
Section 382(g), of the Pioneer Entities that occurred during or after any
Taxable Period in which the Pioneer Entities incurred a net operating loss
that carries over to any Taxable Period ending after December 31, 1998.
(i) No Pioneer Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between
the United States and such foreign country.
5.9 Allowance for Possible Loan Losses. In the opinion of management of
Pioneer, the allowance for possible loan or credit losses (the "Allowance")
shown on the consolidated balance sheets of Pioneer included in the most recent
Pioneer Financial Statements dated prior to the date of this Agreement was, and
the Allowance shown on the consolidated
A-15
333
balance sheets of Pioneer included in the Pioneer Financial Statements as of
dates subsequent to the execution of this Agreement will be, as of the dates
thereof, adequate (within the meaning of GAAP and applicable regulatory
requirements or guidelines) to provide for all known or reasonably anticipated
losses relating to or inherent in the loan and lease portfolios (including
accrued interest receivables) of the Pioneer Entities and other extensions of
credit (including letters of credit and commitments to make loans or extend
credit) by the Pioneer Entities as of the dates thereof, except where the
failure of such Allowance to be so adequate is not reasonably likely to have a
Pioneer Material Adverse Effect.
5.10 Assets.
(a) Except as disclosed in Section 5.10 of the Pioneer Disclosure Memorandum or
as disclosed or reserved against in the Pioneer Financial Statements
delivered prior to the date of this Agreement, the Pioneer Entities have
good and marketable title, free and clear of all Liens, to all of their
respective Assets, except for any such Liens or other defects of title which
are not reasonably likely to have a Pioneer Material Adverse Effect. All
tangible properties used in the businesses of the Pioneer Entities are in
good condition, reasonable wear and tear excepted, and are usable in the
ordinary course of business consistent with Pioneer's past practices.
(b) All Assets which are material to Pioneer's business on a consolidated basis,
held under leases or subleases by any of the Pioneer Entities, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium, or
other Laws affecting the enforcement of creditors' rights generally and
except that the availability of the equitable remedy of specific performance
or injunctive relief is subject to the discretion of the court before which
any proceedings may be brought), and each such Contract is in full force and
effect.
(c) The Pioneer Entities currently maintain insurance similar in amounts, scope,
and coverage to that maintained by other peer banking organizations. None of
the Pioneer Entities has received notice from any insurance carrier that (i)
any policy of insurance will be canceled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies
of insurance will be substantially increased. There are presently no claims
for amounts exceeding in any individual case $100,000 pending under such
policies of insurance and no notices of claims in excess of such amounts
have been given by any Pioneer Entity under such policies.
(d) The Assets of the Pioneer Entities include all Assets required to operate
the business of the Pioneer Entities as presently conducted.
5.11 Intellectual Property. Each Pioneer Entity owns or has a license to use
all of the Intellectual Property used by such Pioneer Entity in the course of
its business. Each Pioneer Entity is the owner of or has a license to any
Intellectual Property sold or licensed to a third party by such Pioneer Entity
in connection with such Pioneer Entity's business operations, and such Pioneer
Entity has the right to convey by sale or license any Intellectual Property so
conveyed. No Pioneer Entity is in Default under any of its Intellectual Property
licenses. No proceedings have been instituted, or are pending or to the
Knowledge of Pioneer are threatened, which challenge the rights of any Pioneer
Entity with respect to Intellectual Property used, sold or licensed by such
Pioneer Entity in the course of its business, nor has any person claimed or
alleged any rights to such Intellectual
A-16
334
Property. The conduct of the business of the Pioneer Entities does not infringe
any Intellectual Property of any other person. Except as disclosed in Section
5.11 of the Pioneer Disclosure Memorandum, no Pioneer Entity is obligated to pay
any recurring royalties to any Person with respect to any such Intellectual
Property. Except as disclosed in Section 5.11 of the Pioneer Disclosure
Memorandum, no officer, director or employee of any Pioneer Entity is party to
any Contract which restricts or prohibits such officer, director or employee
from engaging in activities competitive with any Person, including any Pioneer
Entity.
5.12 Environmental Matters.
(a) Each Pioneer Entity, and, to the Knowledge of Pioneer, its Participation
Facilities and its Operating Properties are, and have been, in compliance
with all Environmental Laws, except for violations which are not reasonably
likely to have, individually or in the aggregate, a Pioneer Material Adverse
Effect.
(b) There is no Litigation pending or, to the Knowledge of Pioneer, threatened
before any court, governmental agency, or authority or other forum in which
any Pioneer Entity or any of its Operating Properties or Participation
Facilities (or Pioneer in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened Litigation,
may be named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the release,
discharge, spillage, or disposal into the environment of any Hazardous
Material, whether or not occurring at, on, under, adjacent to, or affecting
(or potentially affecting) a site owned, leased, or operated by any Pioneer
Entity or any of its Operating Properties or Participation Facilities,
except for such Litigation pending or threatened that is not reasonably
likely to have, individually or in the aggregate, a Pioneer Material Adverse
Effect, nor is there any reasonable basis for any Litigation of a type
described in this sentence, except such as is not reasonably likely to have,
individually or in the aggregate, a Pioneer Material Adverse Effect.
(c) During the period of (i) any Pioneer Entity's ownership or operation of any
of their respective current properties, (ii) any Pioneer Entity's
participation in the management of any Participation Facility, or (iii) any
Pioneer Entity's holding of a security interest in an Operating Property,
there have been no releases, discharges, spillages, or disposals of
Hazardous Material in, on, under, adjacent to, or affecting (or potentially
affecting) such properties, except such as are not reasonably likely to
have, individually or in the aggregate, a Pioneer Material Adverse Effect.
Prior to the period of (i) any Pioneer Entity's ownership or operation of
any of their respective current properties, (ii) any Pioneer Entity's
participation in the management of any Participation Facility, or (iii) any
Pioneer Entity's holding of a security interest in an Operating Property, to
the Knowledge of Pioneer, there were no releases, discharges, spillages, or
disposals of Hazardous Material in, on, under, or affecting any such
property, Participation Facility or Operating Property, except such as are
not reasonably likely to have, individually or in the aggregate, a Pioneer
Material Adverse Effect.
A-17
335
5.13 Compliance with Laws. Pioneer is duly registered as a bank holding company
under the BHC Act. Each Pioneer Entity has in effect all Permits necessary for
it to own, lease, or operate its material Assets and to carry on its business as
now conducted, except for those Permits the absence of which are not reasonably
likely to have, individually or in the aggregate, a Pioneer Material Adverse
Effect, and there has occurred no Default under any such Permit, other than
Defaults which are not reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect. Except as disclosed in Section
5.13 of the Pioneer Disclosure Memorandum, none of the Pioneer Entities:
(a) is in Default under any of the provisions of its Certificate of
Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for Defaults
which are not reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or
any Regulatory Authority or the staff thereof (i) asserting that any
Pioneer Entity is not in compliance with any of the Laws or Orders
which such governmental authority or Regulatory Authority enforces,
where such noncompliance is reasonably likely to have, individually or
in the aggregate, a Pioneer Material Adverse Effect, (ii) threatening
to revoke any Permits, the revocation of which is reasonably likely to
have, individually or in the aggregate, a Pioneer Material Adverse
Effect, or (iii) requiring any Pioneer Entity to enter into or consent
to the issuance of a cease and desist order, formal agreement,
directive, commitment, or memorandum of understanding, or to adopt any
Board resolution or similar undertaking, which restricts materially the
conduct of its business or in any manner relates to its capital
adequacy, its credit or reserve policies, its management, or the
payment of dividends.
Copies of all material reports, correspondence, notices and other documents
relating to any inspection, audit, monitoring or other form of review or
enforcement action by a Regulatory Authority have been made available to Buyer.
5.14 Labor Relations. No Pioneer Entity is the subject of any Litigation
asserting that it or any other Pioneer Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other Pioneer Entity to bargain with
any labor organization as to wages or conditions of employment, nor is any
Pioneer Entity party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any Pioneer Entity, pending or
threatened, or to the Knowledge of Pioneer, is there any activity involving any
Pioneer Entity's employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
5.15 Employee Benefit Plans.
(a) Pioneer has disclosed in Section 5.15 of the Pioneer Disclosure Memorandum,
and has delivered or made available to Buyer prior to the execution of this
Agreement copies in each case of, all pension, retirement, profit-sharing,
deferred compensation, stock option, employee stock ownership, severance
pay, vacation, bonus, or other incentive plan, all other written employee
programs, arrangements, or agreements, all medical, vision, dental, or other
health plans, all life insurance plans, and all other employee
A-18
336
benefit plans or fringe benefit plans, including "employee benefit plans" as
that term is defined in Section 3(3) of ERISA, currently adopted, maintained
by, sponsored in whole or in part by, or contributed to by any Pioneer
Entity or ERISA Affiliate thereof 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 "Pioneer Benefit Plans"). Any of the Pioneer
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "Pioneer ERISA
Plan." Neither Pioneer nor any ERISA Affiliate currently maintains any plan
which is a "defined benefit plan" (as defined in Section 414(j) of the
Internal Revenue Code). No Pioneer Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) Pioneer has delivered or made available to Buyer prior to the execution of
this Agreement correct and complete copies of the following documents: (i)
all trust agreements or other funding arrangements for such Pioneer Benefit
Plans (including insurance contracts), and all amendments thereto, (ii) with
respect to any such Pioneer Benefits Plans or amendments, all determination
letters, material rulings, material opinion letters, material information
letters, or materials advisory opinions issued by the Internal Revenue
Service, the United States Department of Labor, or the Pension Benefit
Guaranty Corporation after December 31, 1993, (iii) annual reports or
returns, audited or unaudited financial statements, actuarial valuation and
reports, and summary annual reports prepared for any Pioneer Benefit Plan
with respect to the most recent plan year, and (iv) the most recent summary
plan descriptions and any material modifications thereto.
(c) All Pioneer Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach
or violation of which are reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect. Each Pioneer ERISA Plan which
is intended to be qualified under Section 401(a) of the Internal Revenue
Code has received a favorable determination letter from the Internal Revenue
Service and Pioneer is not aware of any circumstance that presents a
material risk of the revocation of such favorable determination letter. No
Pioneer Entity has engaged in a transaction with respect to any Pioneer
Benefit Plan that, assuming the taxable period of such transaction expired
as of the date hereof, would subject any Pioneer Entity to a Tax imposed by
either Section 4975 of the Internal Revenue Code or Section 502(i) of ERISA
in amounts which are reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect.
(d) No Pioneer Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, and the fair market value of
the assets of any such plan exceeds the plan's "benefit liabilities," as
that term is defined in Section 4001(a)(16) of ERISA, when determined under
actuarial factors that would apply if the plan terminated in accordance with
all applicable legal requirements. Since the date of the most recent
actuarial valuation, there has been (i) no material change in the financial
position of any Pioneer Pension Plan, (ii) no change in the actuarial
assumptions with respect to any Pioneer Pension Plan, and (iii) no increase
in benefits under any Pioneer Pension Plan as a result of plan amendments or
changes in applicable Law which is reasonably likely to have, individually
or in the aggregate, a Pioneer Material Adverse Effect or materially
adversely affect the funding status of
A-19
337
any such plan. Neither any Pioneer Pension Plan nor any "single-employer
plan," within the meaning of Section 4001(a)(15) of ERISA, currently or
formerly maintained by any Pioneer Entity, or the single-employer plan of
any entity which is considered one employer with Pioneer under Section 4001
of ERISA or Section 414 of the Internal Revenue Code or Section 302 of ERISA
(whether or not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Internal Revenue Code
or Section 302 of ERISA, which is reasonably likely to have a Pioneer
Material Adverse Effect. No Pioneer Entity has provided, or is required to
provide, security to a Pioneer Pension Plan or to any single-employer plan
of an ERISA Affiliate pursuant to Section 401(a)(29) of the Internal Revenue
Code.
(e) Within the six-year period preceding the Effective Time, no Liability under
Subtitle C or D of Title IV of ERISA has been or is expected to be incurred
by any Pioneer Entity with respect to any ongoing, frozen, or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate,
which Liability is reasonably likely to have a Pioneer Material Adverse
Effect. No Pioneer Entity has incurred any withdrawal Liability with respect
to a multiemployer plan under Subtitle B of Title IV of ERISA (regardless of
whether based on contributions of an ERISA Affiliate), which Liability is
reasonably likely to have a Pioneer Material Adverse Effect. No notice of a
"reportable event," within the meaning of Section 4043 of ERISA for which
the 30-day reporting requirement has not been waived, has been required to
be filed for any Pioneer Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
(f) Except as disclosed in Section 5.15 of the Pioneer Disclosure Memorandum, no
Pioneer Entity has any Liability for retiree health and life benefits under
any of the Pioneer Benefit Plans and there are no restrictions on the rights
of such Pioneer Entity to amend or terminate any such retiree health or
benefit Plan without incurring any Liability thereunder, which Liability is
reasonably likely to have a Pioneer Material Adverse Effect.
(g) Except as disclosed in Section 5.15 of the Pioneer Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of
the transactions contemplated hereby will (i) result in any payment
(including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any Pioneer
Entity from any Pioneer Entity under any Pioneer Benefit Plan or otherwise,
(ii) increase any benefits otherwise payable under any Pioneer Benefit Plan,
or (iii) result in any acceleration of the time of payment or vesting of any
such benefit, where such payment, increase, or acceleration is reasonably
likely to have, individually or in the aggregate, a Pioneer Material Adverse
Effect.
(h) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any Pioneer Entity and their respective beneficiaries, have
been fully reflected on the Pioneer Financial Statements to the extent
required by and in accordance with GAAP.
5.16 Material Contracts. Except as disclosed in Section 5.16 of the Pioneer
Disclosure Memorandum or otherwise reflected in the Pioneer Financial
Statements, none of the Pioneer Entities, nor any of their respective Assets,
businesses, or operations, is a party to, or is bound or affected by, or
receives benefits under, (i) any employment, severance,
A-20
338
termination, consulting, or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $100,000, (ii) any Contract
relating to the borrowing of money by any Pioneer Entity or the guarantee by any
Pioneer Entity of any such obligation (other than Contracts evidencing deposit
liabilities, purchases of federal funds, fully-secured repurchase agreements,
and Federal Home Loan Bank advances of depository institution Subsidiaries,
trade payables and Contracts relating to borrowings or guarantees made in the
ordinary course of business), (iii) any Contract which prohibits or restricts
any Pioneer Entity from engaging in any business activities in any geographic
area, line of business or otherwise in competition with any other Person, (iv)
any Contract involving Intellectual Property (other than Contracts entered into
in the ordinary course with customers and "shrink-wrap" software licenses), (v)
any Contract relating to the provision of data processing, network
communication, or other technical services to or by any Pioneer Entity, (vi) any
exchange-traded or over-the-counter swap, forward, future, option, cap, floor,
or collar financial Contract, or any other interest rate or foreign currency
protection Contract not included on its balance sheet or any note thereto which
is a financial derivative Contract, (vii) any contract that obligates a Pioneer
Entity to pay more than $100,000 over the life of such contract that is not
terminable with 30 days or less notice without payment of a penalty, and (vii)
any other Contract or amendment thereto that would be required to be filed as an
exhibit to a Form 10-K filed by Pioneer with the SEC as of the date of this
Agreement (together with all Contracts referred to in Sections 5.10 and 5.15(a),
the "Pioneer Contracts"). With respect to each Pioneer Contract and except as
disclosed in Section 5.16 of the Pioneer Disclosure Memorandum: (i) the Contract
is in full force and effect; (ii) no Pioneer Entity is in Default thereunder,
other than Defaults which are not reasonably likely to have, individually or in
the aggregate, a Pioneer Material Adverse Effect; (iii) no Pioneer Entity has
repudiated or waived any material provision of any such Contract; and (iv) no
other party to any such Contract is, to the Knowledge of Pioneer, in Default in
any respect, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a Pioneer Material Adverse Effect, or has
repudiated or waived any material provision thereunder. All of the indebtedness
of any Pioneer Entity for money borrowed is prepayable at any time by such
Pioneer Entity without penalty or premium.
5.17 Legal Proceedings. There is no Litigation instituted or pending, or, to
the Knowledge of Pioneer, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any Pioneer Entity, or against any director,
employee or employee benefit plan of any Pioneer Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Pioneer Material Adverse Effect, nor are
there any Orders of any Regulatory Authorities, other governmental authorities,
or arbitrators outstanding against any Pioneer Entity, that are reasonably
likely to have, individually or in the aggregate, a Pioneer Material Adverse
Effect. Section 5.17 of the Pioneer Disclosure Memorandum contains a summary of
all Litigation as of the date of this Agreement to which any Pioneer Entity is a
party and which names a Pioneer Entity as a defendant or cross-defendant or for
which any Pioneer Entity has any potential Liability.
5.18 Reports. Since January 1, 1993, or the date of organization if later, each
Pioneer Entity has timely filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities (except, in the case of state securities
authorities, failures to file which are not reasonably likely to have,
individually or in the aggregate, a Pioneer Material Adverse Effect) and
A-21
339
have paid all fees and assessments due and payable in connection therewith. As
of their respective dates, each of such reports and documents, including the
financial statements, exhibits, and schedules thereto, complied in all material
respects with all applicable Laws. As of its respective date, each such report
and document did not, in all material respects, contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
5.19 Statements True and Correct. No statement, certificate, instrument, or
other writing furnished or to be furnished by any Pioneer Entity or any
Affiliate thereof to Buyer pursuant to this Agreement or any other document,
agreement, or instrument referred to herein contains or will contain any untrue
statement of material fact or will omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. None of the information supplied or to be supplied by any
Pioneer Entity for inclusion in the Registration Statement to be filed by Buyer
with the SEC will, when the Registration Statement becomes effective, be false
or misleading with respect to any material fact, or omit to state any material
fact necessary to make the statements therein not misleading. None of the
information supplied or to be supplied by any Pioneer Entity for inclusion in
the Proxy Statement to be mailed to Pioneer's shareholders in connection with
the Shareholders' Meeting, and any other documents to be filed by a Pioneer
Entity with the SEC or any other Regulatory Authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and with respect to the Proxy Statement, when first mailed to the
shareholders of Pioneer, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the Shareholders' Meeting. All documents that
any Pioneer Entity is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable Law.
5.20 Accounting, Tax and Regulatory Matters. No Pioneer Entity has taken or
agreed to take any action or has any Knowledge of any fact or circumstance that
is reasonably likely to (i) prevent the Merger from qualifying for pooling of
interests accounting treatment or as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.1(b)
or result in the imposition of a condition or restriction of the type referred
to in the last sentence of such Section.
5.21 Opinion of Financial Advisor. Pioneer has received the opinions of The
Carson Medlin Company ("Carson Medlin") and Keefe, Bruyette & Woods, Inc.
("KBW"), dated the date of this Agreement, to the effect that the Exchange Ratio
is fair, from a financial point of view, to such holders, signed copies of which
have been delivered to Buyer.
5.22 Board Recommendation. The Board of Directors of Pioneer, at a meeting duly
called and held, has by vote of the directors present (who constituted all of
the directors then in office) (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, taken together, are fair
to and in the best interests of the
A-22
340
shareholders and (ii) resolved to recommend that the holders of the shares of
Pioneer Common Stock approve this Agreement.
5.23 Derivatives. All interest rate swaps, caps, floors, option agreements,
futures and forward contracts, and other similar risk management arrangements,
whether entered into for Pioneer's own account, or for the account of one or
more of the Pioneer Subsidiaries or their customers, were entered into (i) in
accordance with prudent business practices and all applicable Laws, and (ii)
with counter parties believed to be financially responsible.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Pioneer as follows:
6.1 Organization, Standing, and Power. Buyer is a corporation duly organized,
validly existing, and in good standing under the Laws of the State of Tennessee,
and has the corporate power and authority to carry on its business as now
conducted and to own, lease and operate its material Assets. Buyer is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually or
in the aggregate, a Buyer Material Adverse Effect.
6.2 Authority; No Breach By Agreement.
(a) Buyer has the corporate power and authority necessary to execute, deliver
and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of Buyer. This Agreement
represents a legal, valid, and binding obligation of Buyer, enforceable
against Buyer in accordance with its terms (except in all cases as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, receivership, conservatorship, moratorium, or similar Laws
affecting the enforcement of creditors' rights generally and except that the
availability of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by Buyer, nor the
consummation by Buyer of the transactions contemplated hereby, nor
compliance by Buyer with any of the provisions hereof, will (i) conflict
with or result in a breach of any provision of Buyer's Charter or Bylaws, or
(ii) constitute or result in a Default under, or require any Consent
pursuant to, or result in the creation of any Lien on any Asset of any Buyer
Entity under, any Contract or Permit of any Buyer Entity, where such Default
or Lien, or any failure to obtain such Consent, is reasonably likely to
have, individually or in the aggregate, a Buyer Material Adverse Effect, or,
(iii) subject to receipt of the requisite Consents referred to in Section
9.1(b), constitute or result in a Default under, or require any Consent
pursuant to, any Law or Order applicable to any Buyer Entity or any of their
respective material Assets (including any Buyer Entity or any Pioneer Entity
becoming subject to or liable for the payment of any Tax or any of the
Assets owned by any Buyer Entity or any Pioneer Entity being reassessed or
revalued by any Taxing authority).
A-23
341
(c) Other than in connection or compliance with the provisions of the Securities
Laws, applicable state corporate and securities Laws, and rules of the NASD,
and other than Consents required from Regulatory Authorities, and other than
notices to or filings with the Internal Revenue Service or the Pension
Benefit Guaranty Corporation with respect to any employee benefit plans, or
under the HSR Act, and other than Consents, filings, or notifications which,
if not obtained or made, are not reasonably likely to have, individually or
in the aggregate, a Buyer Material Adverse Effect, no notice to, filing
with, or Consent of, any public body or authority is necessary for the
consummation by Buyer of the Merger and the other transactions contemplated
in this Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of Buyer consists of (i) 200,000,000 shares of
$2.50 par value Buyer Common Stock, of which 106,587,874 shares are issued
and outstanding as of May 1, 1998, and (ii) 2,500,000 shares of no par value
Buyer Preferred Stock, of which no shares are issued and outstanding. All of
the issued and outstanding shares of Buyer Capital Stock are, and all of the
shares of Buyer Common Stock to be issued in exchange for shares of Pioneer
Common Stock upon consummation of the Merger, when issued in accordance with
the terms of this Agreement, will be, duly and validly issued and
outstanding and fully paid and nonassessable under the TBCA. None of the
outstanding shares of Buyer Capital Stock has been, and none of the shares
of Buyer Common Stock to be issued in exchange for shares of Pioneer Common
Stock upon consummation of the Merger will be, issued in violation of any
preemptive rights of the current or past shareholders of Buyer.
(b) Except as set forth in Section 6.3(a), or as provided pursuant to the Buyer
Dividend Reinvestment and Stock Purchase Plan or the Buyer Rights Agreement,
or as disclosed in Section 6.3 of the Buyer Disclosure Memorandum, there are
no shares of capital stock or other equity securities of Buyer outstanding
and no outstanding Equity Rights relating to the capital stock of Buyer.
6.4 Reserved.
6.5 SEC Filings; Financial Statements.
(a) Buyer has timely filed and made available to Pioneer all SEC Documents
required to be filed by Buyer since December 31, 1993 (the "Buyer SEC
Reports"). The Buyer SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Laws
and other applicable Laws and (ii) did not, at the time they were filed (or,
if amended or superseded by a filing prior to the date of this Agreement,
then on the date of such filing) contain any untrue statement of a material
fact or omit to state a material fact required to be stated in such Buyer
SEC Reports or necessary in order to make the statements in such Buyer SEC
Reports, in light of the circumstances under which they were made, not
misleading. Except for Buyer Subsidiaries that are registered as a broker,
dealer, or investment advisor, no Buyer Subsidiary is required to file any
SEC Documents.
(b) Each of the Buyer Financial Statements (including, in each case, any related
notes) contained in the Buyer SEC Reports, including any Buyer SEC Reports
filed after the date of this Agreement until the Effective Time, complied as
to form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except
as may be indicated in the notes to such
A-24
342
financial statements or, in the case of unaudited interim statements, as
permitted by Form 10-Q of the SEC), and fairly presented in all material
respects the consolidated financial position of Buyer and its Subsidiaries
as at the respective dates and the consolidated results of operations and
cash flows for the periods indicated, except that the unaudited interim
financial statements were or are subject to normal and recurring year-end
adjustments which were not or are not expected to be material in amount or
effect.
6.6 Absence of Undisclosed Liabilities. No Buyer Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a Buyer
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of Buyer as of December 31, 1997,
included in the Buyer Financial Statements delivered prior to the date of this
Agreement or reflected in the notes thereto. No Buyer Entity has incurred or
paid any Liability since December 31, 1997, except for such Liabilities incurred
or paid (i) in the ordinary course of business consistent with past business
practice and which are not reasonably likely to have, individually or in the
aggregate, a Buyer Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.
6.7 Absence of Certain Changes or Events. Since December 31, 1997, except as
disclosed in the Buyer Financial Statements delivered prior to the date of this
Agreement or as disclosed in Section 6.7 of the Buyer Disclosure Memorandum, (i)
there have been no events, changes or occurrences which have had, or are
reasonably likely to have, individually or in the aggregate, a Buyer Material
Adverse Effect, and (ii) the Buyer Entities have not taken any action, or failed
to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a material breach or violation of any of the covenants and agreements of Buyer
provided in Article 7.
6.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the Buyer
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December
31, 1997, and on or before the date of the most recent fiscal year end
immediately preceding the Effective Time, except to the extent that all such
failures to file, taken together, are not reasonably likely to have a Buyer
Material Adverse Effect, and all Tax Returns filed are complete and accurate
in all material respects to the Knowledge of Buyer. All Taxes shown on filed
Tax Returns have been paid. As of the date of this Agreement, there is no
audit examination, deficiency, or refund Litigation with respect to any
Taxes that is reasonably likely to result in a determination that would
have, individually or in the aggregate, a Buyer Material Adverse Effect,
except as reserved against in the Buyer Financial Statements delivered prior
to the date of this Agreement or as disclosed in Section 6.8 of the Buyer
Disclosure Memorandum. Buyer's federal income Tax Returns have been audited
and accepted through December 31, 1993. All Taxes and other Liabilities due
with respect to completed and settled examinations or concluded Litigation
have been paid.
(b) None of the Buyer Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due
(excluding such statutes that relate to years currently under examination by
the Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
A-25
343
(c) The provision for any Taxes due or to become due for any of the Buyer
Entities for the period or periods through and including the date of the
respective Buyer Financial Statements that has been made and is reflected on
such Buyer Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the Buyer Entities have been provided for in accordance
with GAAP.
(e) None of the Buyer Entities is a party to any Tax allocation or sharing
agreement except for the consolidated group of Buyer and none of the Buyer
Entities has been a member of an affiliated group filing a consolidated
federal income Tax Return (other than a group the common parent of which was
Buyer) has any Liability for Taxes of any Person (other than Buyer and its
Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign Law) as a transferee or successor or by
Contract or otherwise.
6.9 Allowance for Possible Loan Losses. In the opinion of management of Buyer,
the Allowance shown on the consolidated balance sheets of Buyer included in the
most recent Buyer Financial Statements dated prior to the date of this Agreement
was, and the Allowance shown on the consolidated balance sheets of Buyer
included in the Buyer Financial Statements as of dates subsequent to the
execution of this Agreement will be, as of the dates thereof, adequate (within
the meaning of GAAP and applicable regulatory requirements or guidelines) to
provide for all known or reasonably anticipated losses relating to or inherent
in the loan and lease portfolios (including accrued interest receivables) of the
Buyer Entities and other extensions of credit (including letters of credit and
commitments to make loans or extend credit) by the Buyer Entities as of the
dates thereof, except where the failure of such Allowance to be so adequate is
not reasonably likely to have a Buyer Material Adverse Effect.
6.10 Assets.
(a) The Assets of the Buyer and Buyer Entities that are "significant
subsidiaries" under SEC Rules include all assets required to operate the
business of the Buyer and Buyer Entities that are such significant
subsidiaries as presently conducted. Except as disclosed in Section 6.10 of
the Buyer Disclosure Memorandum or as disclosed or reserved against in the
Buyer Financial Statements delivered prior to the date of this Agreement,
the Buyer and Buyer Entities that are such significant subsidiaries have
good and marketable title, free and clear of all Liens, to all of their
respective Assets, except for any such Liens or other defects of title which
are not reasonably likely to have a Buyer Material Adverse Effect. All
tangible properties used in the businesses of the Buyer and the Buyer
Entities that are such significant subsidiaries are in good condition,
reasonable wear and tear excepted, and are usable in the ordinary course of
business consistent with Buyer's past practices.
(b) All Assets which are material to Buyer's business on a consolidated basis,
held under leases or subleases by any of the Buyer and Buyer Entities that
are significant subsidiaries, are held under valid Contracts enforceable in
accordance with their respective terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other Laws affecting the enforcement of creditors' rights generally and
except that the availability of the equitable remedy of specific performance
or injunctive relief is subject to the discretion of the court before which
any proceedings may be brought), and each such Contract is in full force and
effect.
A-26
344
(c) The Buyer and Buyer Entities that are significant subsidiaries currently
maintain insurance similar in amounts, scope and coverage to that maintained
by other peer banking organizations, including directors' and officers'
insurance providing for coverage of $50 million as part of an integrated
risk program. Neither Buyer nor the Buyer Entities that are significant
subsidiaries has received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. There are presently no claims pending under
such policies of insurance and no notices have been given by Buyer or Buyer
Entity that are significant subsidiaries under such policies regarding any
claim which, if determined adversely to Buyer or any Buyer Entity that is a
significant subsidiary, would have a Buyer Material Adverse Effect.
6.11 Intellectual Property. Each of Buyer and each Buyer Entity that is a
significant subsidiary owns or has a license to use all of the Intellectual
Property used by such Buyer Entity in the course of its business. Each of Buyer
and each Buyer Entity that is a significant subsidiary is the owner of or has a
license to any Intellectual Property sold or licensed to a third party by such
Buyer or such Buyer Entity that is a significant subsidiary in connection with
such Buyer's or such Buyer's Entity's business operations, and neither Buyer nor
such Buyer Entity has the right to convey by sale or license any Intellectual
Property so conveyed. Neither Buyer nor any Buyer Entity that is a significant
subsidiary is in Default under any of its Intellectual Property licenses. No
proceedings have been instituted, or are pending or to the Knowledge of Buyer
threatened, which challenge the rights of any Buyer or Buyer Entity that is a
significant subsidiary with respect to Intellectual Property used, sold or
licensed by such Buyer or Buyer Entity that is a significant subsidiary in the
course of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. The conduct of the business of Buyer and Buyer Entities
does not infringe any Intellectual Property of any other person.
6.12 Environmental Matters.
(a) Each Buyer Entity, and, to the knowledge of Buyer, its Participation
Facilities, and its Operating Properties are, and have been, in compliance
with all Environmental Laws, except for violations which are not reasonably
likely to have, individually or in the aggregate, a Buyer Material Adverse
Effect.
(b) There is no Litigation pending or, to the knowledge of Buyer, threatened
before any court, governmental agency, or authority or other forum in which
any Buyer Entity or any of its Operating Properties or Participation
Facilities (or Buyer in respect of such Operating Property or Participation
Facility) has been or, with respect to threatened Litigation, may be named
as a defendant (i) for alleged noncompliance (including by any predecessor)
with any Environmental Law or (ii) relating to the release, discharge,
spillage, or disposal into the environment of any Hazardous Material,
whether or not occurring at, on, under, adjacent to, or affecting (or
potentially affecting) a site owned, leased, or operated by any Buyer Entity
or any of its Operating Properties or Participation Facilities, except for
such Litigation pending or threatened that is not reasonably likely to have,
individually or in the aggregate, a Buyer Material Adverse Effect, nor is
there any reasonable basis for any Litigation of a type described in this
sentence, except such as is not reasonably likely to have, individually or
in the aggregate, a Buyer Material Adverse Effect.
(c) During the period of (i) any Buyer Entity's ownership or operation of any of
their respective current properties, (ii) any Buyer Entity's participation
in the management
A-27
345
of any Participation Facility, or (iii) any Buyer Entity's holding of a
security interest in a Operating Property, there have been no releases,
discharges, spillages, or disposals of Hazardous Material in, on, under,
adjacent to, or affecting (or potentially affecting) such properties, except
such as are not reasonably likely to have, individually or in the aggregate,
a Buyer Material Adverse Effect. Prior to the period of (i) any Buyer
Entity's ownership or operation of any of their respective current
properties, (ii) any Buyer Entity's participation in the management of any
Participation Facility, or (iii) any Buyer Entity's holding of a security
interest in a Operating Property, to the Knowledge of Buyer, there were no
releases, discharges, spillages, or disposals of Hazardous Material in, on,
under, or affecting any such property, Participation Facility or Operating
Property, except such as are not reasonably likely to have, individually or
in the aggregate, a Pioneer Material Adverse Effect.
6.13 Compliance with Laws. Buyer is duly registered as a bank holding company
under the BHC Act. Each Buyer Entity has in effect all Permits necessary for it
to own, lease or operate its material Assets and to carry on its business as now
conducted, except for those Permits the absence of which are not reasonably
likely to have, individually or in the aggregate, a Buyer Material Adverse
Effect, and there has occurred no Default under any such Permit, other than
Defaults which are not reasonably likely to have, individually or in the
aggregate, a Buyer Material Adverse Effect. Except as disclosed in Section 6.13
of the Buyer Disclosure Memorandum, none of the Buyer Entities:
(a) is in Default under its Charter or Bylaws (or other governing
instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults
which are not reasonably likely to have, individually or in the
aggregate, a Buyer Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or
any Regulatory Authority or the staff thereof (i) asserting that any
Buyer Entity is not in compliance with any of the Laws or Orders which
such governmental authority or Regulatory Authority enforces, where
such noncompliance is reasonably likely to have, individually or in the
aggregate, a Buyer Material Adverse Effect, (ii) threatening to revoke
any Permits, the revocation of which is reasonably likely to have,
individually or in the aggregate, a Buyer Material Adverse Effect, or
(iii) requiring any Buyer Entity to enter into or consent to the
issuance of a cease and desist order, formal agreement, directive,
commitment or memorandum of understanding, or to adopt any Board
resolution or similar undertaking, which restricts materially the
conduct of its business, or in any manner relates to its capital
adequacy, its credit or reserve policies, its management, or the
payment of dividends.
6.14 Labor Relations. No Buyer Entity is the subject of any Litigation
asserting that it or any other Buyer Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other Buyer Entity to bargain with any
labor organization as to wages or conditions of employment, nor is any Buyer
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any Buyer Entity, pending or threatened, or to the
Knowledge of Buyer, is there any activity involving any Buyer Entity's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
A-28
346
6.15 Employee Benefit Plans.
(a) Buyer has delivered or made available to Pioneer prior to the execution of
this Agreement copies in each case of all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock
ownership, severance pay, vacation, bonus, or other incentive plan, all
other written employee programs, arrangements, 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 "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, currently
adopted, maintained by, sponsored in whole or in part by, or contributed to
by any Buyer Entity or ERISA Affiliate thereof 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 "Buyer Benefit Plans"). Any of the Buyer
Benefit Plans which is an "employee pension benefit plan," as that term is
defined in Section 3(2) of ERISA, is referred to herein as a "Buyer ERISA
Plan." Each Buyer ERISA Plan which is also a "defined benefit plan" (as
defined in Section 414(j) of the Internal Revenue Code) is referred to
herein as a "Buyer Pension Plan." No Buyer Pension Plan is or has been a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(b) All Buyer Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach
or violation of which are reasonably likely to have, individually or in the
aggregate, a Buyer Material Adverse Effect. Each Buyer ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code
has received a favorable determination letter from the Internal Revenue
Service, and Buyer is not aware of any circumstances likely to result in
revocation of any such favorable determination letter. No Buyer Entity has
engaged in a transaction with respect to any Buyer Benefit Plan that,
assuming the taxable period of such transaction expired as of the date
hereof, would subject any Buyer Entity to a Tax imposed by either Section
4975 of the Internal Revenue Code or Section 502(i) of ERISA in amounts
which are reasonably likely to have, individually or in the aggregate, a
Buyer Material Adverse Effect.
(c) No Buyer Pension Plan has any "unfunded current liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions set
forth for such plan's most recent actuarial valuation. Since the date of the
most recent actuarial valuation, there has been (i) no material adverse
change in the financial position of a Buyer Pension Plan, (ii) no change in
the actuarial assumptions with respect to any Buyer Pension Plan, and (iii)
no increase in benefits under any Buyer Pension Plan as a result of plan
amendments or changes in applicable Law which is reasonably likely to have,
individually or in the aggregate, a Buyer Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither any
Buyer Pension Plan nor any "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any Buyer
Entity, or the single-employer plan of any ERISA Affiliate has an
"accumulated funding deficiency" within the meaning of Section 412 of the
Internal Revenue Code or Section 302 of ERISA, which is reasonably likely to
have a Buyer Material Adverse Effect. No Buyer Entity has provided, or is
required to provide, security to a Buyer Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of
the Internal Revenue Code.
A-29
347
6.16 Reserved.
6.17 Legal Proceedings. There is no Litigation instituted or pending, or, to
the Knowledge of Buyer, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any Buyer Entity, or against any director,
employee or employee benefit plan of any Buyer Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a Buyer Material Adverse Effect, nor are there
any Orders of any Regulatory Authorities, other governmental authorities, or
arbitrators outstanding against any Buyer Entity, that are reasonably likely to
have, individually or in the aggregate, a Buyer Material Adverse Effect.
6.18 Reports. Since January 1, 1993, or the date of organization if later, each
of Buyer and each Buyer Entity that is a significant subsidiary has filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with Regulatory Authorities
(except, in the case of state securities authorities, failures to file which are
not reasonably likely to have, individually or in the aggregate, a Buyer
Material Adverse Effect). As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material respects, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
6.19 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any Buyer Entity to Pioneer
pursuant to this Agreement or any other document, agreement or instrument
referred to herein contains or will contain any untrue statement of material
fact or will omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied or to be supplied by any Buyer
Entity for inclusion in the Registration Statement to be filed by Buyer with the
SEC, will, when the Registration Statement becomes effective, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to make the statements therein not misleading. None of the information
supplied or to be supplied by any Buyer Entity for inclusion in the Proxy
Statement to be mailed to Pioneer's shareholders in connection with the
Shareholders' Meeting, and any other documents to be filed by any Buyer Entity
with the SEC or any other Regulatory Authority in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and with respect to the Proxy Statement, when first mailed to the
shareholders of Pioneer, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or, in the case of the Proxy Statement or any amendment thereof or
supplement thereto, at the time of the Shareholders' Meeting, be false or
misleading with respect to any material fact, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of any proxy for the Shareholders' Meeting. All documents that
any Buyer Entity is responsible for filing with any Regulatory Authority in
connection with the transactions contemplated hereby will comply as to form in
all material respects with the provisions of applicable Law.
6.20 Accounting, Tax and Regulatory Matters. No Buyer Entity has taken or
agreed to take any action or has any Knowledge of any fact or circumstance that
is reasonably likely
A-30
348
to (i) prevent the Merger from qualifying for pooling of interests accounting
treatment or as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) or result in
the imposition of a condition or restriction of the type referred to in the last
sentence of such Section.
6.21 Rights Agreement. Execution of this Agreement and consummation of the
Merger and the other transactions contemplated by this Agreement will not result
in the grant of any rights to any Person under the Buyer Rights Agreement (other
than as contemplated by Section 3.1) or enable or require the Buyer Rights to be
exercised, distributed or triggered. No "Stock Acquisition Date" or "Flip-in
Date" (as such terms are defined in the Buyer Rights Agreement) has occurred.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of Pioneer. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of Buyer shall have been obtained, and except as otherwise
expressly contemplated herein, Pioneer shall and shall cause each of its
Subsidiaries to (a) operate its business only in the usual, regular, and
ordinary course, (b) use all reasonable efforts to preserve intact its business
organization and Assets and maintain its rights and franchises, and (c) take no
action which would (i) materially adversely affect the ability of any Party to
obtain any Consents required for the transactions contemplated hereby, or (ii)
materially adversely affect the ability of any Party to perform its covenants
and agreements under this Agreement.
7.2 Negative Covenants of Pioneer. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of Buyer shall have been obtained, and except as otherwise
expressly contemplated herein, Pioneer 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:
(a) amend the Certificate of Incorporation, Bylaws or other governing
instruments of any Pioneer Entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a Pioneer Entity to another Pioneer
Entity) in excess of an aggregate of $500,000 (for the Pioneer Entities
on a consolidated basis) except in the ordinary course of the business
of Pioneer Subsidiaries consistent with past practices (which shall
include, for Pioneer Subsidiaries that are depository institutions,
creation of deposit liabilities, purchases of federal funds, advances
from the Federal Reserve Bank or Federal Home Loan Bank, and entry into
repurchase agreements secured by U.S. government or agency securities),
or impose, or suffer the imposition, on any Asset of any Pioneer Entity
of any Lien or permit any such Lien to exist (other than in connection
with deposits, repurchase agreements, bankers' acceptances, "treasury
tax and loan" accounts established in the ordinary course of business,
the satisfaction of legal requirements in the exercise of trust powers,
and Liens in effect as of the date hereof that are disclosed in the
Pioneer Disclosure Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges or repurchases under any "put" obligations under Pioneer's
401(k) and Employee
A-31
349
Stock Ownership Plan in the ordinary course under employee benefit plans),
directly or indirectly, any shares, or any securities convertible into any
shares, of the capital stock of any Pioneer Entity, or declare or pay any
dividend or make any other distribution in respect of Pioneer's capital stock,
provided that Pioneer may (to the extent legally and contractually permitted to
do so), but shall not be obligated to, declare and pay regular quarterly cash
dividends on the shares of Pioneer Common Stock on the usual and regular record
and payment dates in accordance with past practice disclosed in Section 7.2(c)
of the Pioneer Disclosure Memorandum and such dates may not be changed without
the prior written consent of Buyer; and further provided that any dividend
declared or payable on the shares of Pioneer Common Stock for the quarterly
period during which the Effective Time occurs shall, unless otherwise agreed
upon in writing by Buyer and Pioneer, be declared with a record date prior to
the Effective Time only if the normal record date for payment of the
corresponding quarterly dividend to holders of Buyer Common Stock is before the
Effective Time or if the Buyer agrees that Pioneer's shareholders shall be
entitled to receive such dividend or Buyer's Common Stock as if Pioneer
shareholders had been a holder of record of Buyer Common Stock on the record
date for such dividend; or
(d) except for this Agreement, or pursuant to the exercise of stock options
outstanding as of the date hereof and pursuant to the terms thereof in
existence on the date hereof, or pursuant to the Stock Option
Agreement, or as disclosed in Section 7.2(d) of the Pioneer Disclosure
Memorandum, 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 Pioneer any Common Stock or any other capital
stock of Pioneer Entity, or any stock appreciation rights, or any
option, warrant or other Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any Pioneer
Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of Pioneer Common Stock, or
sell, lease, mortgage or otherwise dispose of or otherwise encumber (x)
any shares of capital stock of any Pioneer Subsidiary (unless any such
shares of stock are sold or otherwise transferred to another Pioneer
Entity) or (y) any Asset other than (1) other real estate owned, (2)
other property taken in full or partial satisfaction of debts
previously contracted, including foreclosures, (3) any Asset having a
book value less than $1,000,000 in the ordinary course of business for
reasonable and adequate consideration, or (4) dispositions of any
property held in a trust or fiduciary capacity other than in the
ordinary course of business for reasonable and adequate consideration;
or
(f) except for purchases of U.S. Treasury securities or U.S. Government
agency securities, which in either case have maturities of three years
or less, purchase any securities or make any material investment,
either by purchase of stock of securities, contributions to capital,
Asset transfers, or purchase of any Assets, in any Person other than a
wholly owned Pioneer Subsidiary, or otherwise acquire direct or
indirect control over any Person, other than in connection with (i)
foreclosures in the ordinary course of business, (ii) acquisitions of
control by a depository institution Subsidiary in its fiduciary
capacity, or (iii) the creation of new wholly owned Subsidiaries
organized to conduct or continue activities otherwise permitted by this
Agreement; or
A-32
350
(g) grant any increase in compensation or benefits to the employees or
officers of any Pioneer Entity, except in accordance with past practice
disclosed in Section 7.2(g) of the Pioneer Disclosure Memorandum or as
required by Law; pay any severance or termination pay or any bonus
other than pursuant to written policies or written Contracts in effect
on the date of this Agreement and disclosed in Section 7.2(g) of the
Pioneer Disclosure Memorandum; and enter into or amend any severance
agreements with officers of any Pioneer Entity; grant any material
increase in fees or other increases in compensation or other benefits
to directors of any Pioneer Entity except in accordance with past
practice or disclosed in Section 7.2(g) of the Pioneer Disclosure
Memorandum; or voluntarily accelerate the vesting of any stock options
or other stock-based compensation or employee benefits or other Equity
Rights; or
(h) enter into or amend any employment Contract between any Pioneer Entity
and any Person having a salary thereunder in excess of $100,000 per
year (unless such amendment is required by Law) that the Pioneer Entity
does not have the unconditional right to terminate without Liability
(other than Liability for services already rendered), at any time on or
after the Effective Time; or
(i) adopt any new employee benefit plan of any Pioneer Entity or terminate
or withdraw from, or make any material change in or to, any existing
employee benefit plans of any Pioneer Entity other than any such change
that is required by Law or that, in the opinion of counsel, is
necessary or advisable to maintain the tax qualified status of any such
plan, or make any distributions from such employee benefit plans,
except as required by Law, the terms of such plans or consistent with
past practice; or
(j) make any change in any Tax or accounting methods or systems of internal
accounting controls, except as may be appropriate to conform to changes
in Tax Laws or regulatory accounting requirements or GAAP; or
(k) commence any Litigation other than in accordance with past practice,
settle any Litigation involving any Liability of any Pioneer Entity for
material money damages or restrictions upon the operations of any
Pioneer Entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an
unpaid balance exceeding $5,000,000) or waive, release, compromise or
assign any material rights or claims.
7.3 Covenants of Buyer. From the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement, unless the prior
written consent of Pioneer shall have been obtained, and except as otherwise
expressly contemplated herein, Buyer covenants and agrees that it shall (a)
continue to conduct its business and the business of its Subsidiaries in a
manner designed in its reasonable judgment, to enhance the long-term value of
the Buyer Common Stock and the business prospects of the Buyer Entities and to
the extent consistent therewith use all reasonable efforts to preserve intact
the Buyer Entities' core businesses and goodwill with their respective employees
and the communities they serve, and (b) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby, or (ii) materially adversely
affect the ability of any Party to perform its covenants and agreements under
this Agreement; provided that the foregoing shall not prevent any Buyer Entity
from acquiring any Assets or other businesses or from
A-33
351
discontinuing or disposing of any of its Assets or business if such action is,
in the reasonable judgment of Buyer, desirable in the conduct of the business of
Buyer and its Subsidiaries, provided that such actions shall not materially
delay the Effective Time or materially hinder consummation of the Merger, and
provided further, that the provisions of this Section 7.3 (other than the
provisions of clause (b) above) shall not be deemed to preclude Buyer from
acquiring unaffiliated depository and nondepository institutions. Buyer further
covenants and agrees that it will not, without the prior written consent of
Pioneer, which consent shall not be unreasonably withheld, amend the Charter of
Buyer or, except as expressly contemplated by this Agreement, the Buyer Rights
Agreement, in each case, in any manner adverse to the holders of Pioneer Common
Stock as compared to rights of holders of Buyer Common Stock generally as of the
date of this Agreement.
7.4 Reserved.
7.5 Adverse Changes in Condition. Each Party agrees to give written notice
promptly to the other Party upon becoming aware of the occurrence or impending
occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Pioneer Material Adverse Effect or a Buyer Material Adverse Effect,
as applicable, 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 to remedy the same.
7.6 Reports. Each Party 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 Pioneer and the Banks shall deliver to Buyer and
Buyer and its significant subsidiaries shall deliver to Pioneer copies of all
such reports filed by them promptly after the same are filed. If financial
statements are contained in any such reports filed with the SEC, 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 the SEC will comply in all
material respects with the Securities 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 the Laws applicable to such reports.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Shareholder Approval. As soon as
reasonably practicable after execution of this Agreement, Buyer shall prepare
and file the Registration Statement with the SEC, and shall use its reasonable
efforts to cause the Registration Statement to become effective under the 1933
Act and take any action required to be taken under the applicable state Blue Sky
or securities Laws in connection with the issuance of the shares of Buyer Common
Stock upon consummation of the Merger. Pioneer shall cooperate in the
preparation and filing of the Registration Statement and shall furnish all
information concerning it and the holders of its capital stock as Buyer may
reasonably request in connection with such action. Pioneer shall call a
Shareholders'
A-34
352
Meeting, to be held as soon as reasonably practicable after the Registration
Statement is declared effective by the SEC, for the purpose of voting upon
adoption of this Agreement and such other related matters as it, with the mutual
agreement of Buyer, deems appropriate. In connection with the Shareholders'
Meeting, (i) Pioneer shall prepare and file with the SEC a Proxy Statement and
mail such Proxy Statement to its shareholders, (ii) the Parties shall furnish to
each other all information concerning them that they may reasonably request in
connection with such Proxy Statement, (iii) the Board of Directors of Pioneer
shall call a special meeting of Pioneer shareholders to consider and act upon
this Agreement and the Merger, shall establish a record for such meeting, and
shall recommend to its shareholders the approval of the matters submitted for
approval (subject to the Board of Directors of Pioneer, after having consulted
with and considered the advice of outside counsel, reasonably determining in
good faith that the making of such recommendation, or the failure to withdraw or
modify its recommendation, would constitute a breach of fiduciary duties of the
members of such Board of Directors to Pioneer's shareholder under applicable
law), and (iv) the Board of Directors and officers of Pioneer shall use their
reasonable efforts to obtain such shareholders' approval (subject to the Board
of Directors of Pioneer, after having consulted with and considered the advice
of outside counsel, reasonably determining in good faith that the taking of such
actions would constitute a breach of fiduciary duties of the members of such
Board of Directors to Pioneer's shareholder under applicable law). Buyer and
Pioneer shall make all necessary filings with respect to the Merger under the
Securities Laws.
8.2 Exchange Listing. Buyer shall use all reasonable efforts to list, prior to
the Effective Time, on the Nasdaq National Market any national securities
exchange on which Buyer Common Stock is hereafter listed, subject to official
notice of issuance, the shares of Buyer Common Stock to be issued to the holders
of Pioneer Common Stock pursuant to the Merger, and Buyer shall give all notices
and make all filings required in connection with the transactions contemplated
herein.
8.3 Applications. Buyer shall promptly prepare and file, and Pioneer shall
cooperate in the preparation and, where appropriate, filing of, applications
with all Regulatory Authorities having jurisdiction over the transactions
contemplated by this Agreement seeking the requisite Consents necessary to
consummate the transactions contemplated by this Agreement. The Parties shall
deliver to each other copies of all filings, correspondence and orders to and
from all Regulatory Authorities in connection with the transactions contemplated
hereby.
8.4 Filings with State Offices. Upon the terms and subject to the conditions of
this Agreement, Buyer shall execute and file the Articles of Merger with the
Secretary of State of the State of Tennessee and the Certificate of Merger with
the Secretary of State of the State of Delaware in connection with the Closing.
8.5 Agreement as to Efforts to Consummate. Subject to the terms and conditions
of this Agreement, each Party agrees to use, and to cause its Subsidiaries to
use, its reasonable efforts to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper, or advisable under
applicable Laws to consummate and make effective, as soon as reasonably
practicable after the date of this Agreement, the transactions contemplated by
this Agreement, including using its reasonable efforts to lift or rescind any
Order adversely affecting its ability to consummate the transactions
contemplated herein and to cause to be satisfied the conditions referred to in
Article 9; provided that nothing herein shall preclude either Party from
exercising its rights under this Agreement or the Stock Option Agreement. Each
Party shall use, and shall cause each of its Subsidiaries to
A-35
353
use, its reasonable efforts to obtain all Consents necessary or desirable for
the consummation of the transactions contemplated by this Agreement.
8.6 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party advised
of all material developments relevant to its business and to consummation of
the Merger and shall permit the other Party to make or cause to be made such
investigation of the business and properties of it and its Subsidiaries and
of their respective financial and legal conditions as the other Party
reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall
affect the representations and warranties of the other Party.
(b) In addition to the Parties' respective obligations under their
Confidentiality Agreements, which are hereby reaffirmed and adopted, and
incorporated by reference herein each Party shall, and shall cause its
advisers and agents to, maintain the confidentiality of all confidential
information furnished to it by the other Party concerning its and its
Subsidiaries' businesses, operations, and financial positions and shall not
use such information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement is terminated
prior to the Effective Time, each Party shall promptly return or certify the
destruction of all documents and copies thereof, and all work papers
containing confidential information received from the other Party.
(c) Pioneer shall use its reasonable efforts to exercise its rights under
confidentiality agreements entered into with Persons which were considering
an Acquisition Proposal with respect to Pioneer to preserve the
confidentiality of the information relating to the Pioneer Entities provided
to such Persons and their Affiliates and Representatives.
(d) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the
other Party which it has discovered through the course of its investigation
and which represents, or is reasonably likely to represent, either a
material breach of any representation, warranty, covenant or agreement of
the other Party or which has had or is reasonably likely to have a Pioneer
Material Adverse Effect or a Buyer Material Adverse Effect, as applicable.
8.7 Press Releases. Prior to the Effective Time, Pioneer and Buyer shall
consult with each other as to the form and substance of all press releases or
other public disclosure, including communications to officers and employees
materially related to this Agreement or any other transaction contemplated
hereby; provided that nothing in this Section 8.7 shall be deemed to prohibit
any Party from making any disclosure which its counsel deems necessary or
advisable in order to satisfy such Party's disclosure obligations imposed by
Law.
8.8 Certain Actions. Except with respect to this Agreement and the transactions
contemplated hereby, no Pioneer Entity nor any Affiliate thereof nor any
Representatives thereof retained by any Pioneer Entity shall directly or
indirectly solicit any Acquisition Proposal by any Person. Except to the extent
the Board of Directors of Pioneer, after having consulted with and considered
the advice of outside counsel, reasonably determines in good faith that the
failure to take such actions would constitute a breach of fiduciary duties of
the members of such Board of Directors to Pioneer's shareholders under
applicable law, no Pioneer Entity or any Affiliate or Representative thereof
shall furnish
A-36
354
any non-public information that it is not legally obligated to furnish,
negotiate with respect to, or enter into any Contract with respect to, any
Acquisition Proposal, but Pioneer may communicate information about such an
Acquisition Proposal to its shareholders if and to the extent that it is
required to do so in order to comply with its legal obligations as advised by
outside counsel. Pioneer shall promptly advise Buyer following the receipt of
any Acquisition Proposal and the details thereof, and advise Buyer of any
developments with respect to such Acquisition Proposal promptly upon the
occurrence thereof. Pioneer shall (i) immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Persons
conducted heretofore with respect to any of the foregoing, and (ii) direct and
use its reasonable efforts to cause all of its Affiliates and Representatives
not to engage in any of the foregoing.
8.9 Accounting and Tax Treatment. Each of the Parties undertakes and agrees to
use its reasonable efforts to cause the Merger, and to take no action which
would cause the Merger not, to qualify for treatment as a pooling of interests
for accounting purposes or as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code for federal income tax purposes.
8.10 Agreement of Affiliates. Pioneer has disclosed in Section 8.10 of the
Pioneer Disclosure Memorandum all Persons whom it reasonably believes is an
"affiliate" of Pioneer for purposes of Rule 145 under the 1933 Act. Pioneer
shall cause each such Person to deliver to Buyer not later than 30 days prior to
the Effective Time, a written agreement, substantially in the form of Exhibit 3,
providing that such Person will not sell, pledge, transfer, or otherwise dispose
of the shares of Pioneer Common Stock held by such Person, except as
contemplated by such agreement or by this Agreement and will not sell, pledge,
transfer, or otherwise dispose of the shares of Buyer Common Stock to be
received by such Person upon consummation of the Merger except in compliance
with applicable provisions of the 1933 Act and the rules and regulations
thereunder and until such time as financial results covering at least 30 days of
combined operations of Buyer and Pioneer have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial Reporting Policies.
Shares of Buyer Common Stock issued to such affiliates of Pioneer in exchange
for shares of Pioneer Common Stock shall not be transferable until such time as
financial results covering at least 30 days of combined operations of Buyer and
Pioneer have been published within the meaning of Section 201.01 of the SEC's
Codification of Financial Reporting Policies, regardless of whether each such
affiliate has provided the written agreement referred to in this Section 8.10
(and Buyer shall be entitled to place restrictive legends upon certificates for
shares of Buyer Common Stock issued to affiliates of Pioneer pursuant to this
Agreement to enforce the provisions of this Section 8.10). Buyer shall not be
required to maintain the effectiveness of the Registration Statement under the
1933 Act for the purposes of resale of Buyer Common Stock by such affiliates.
8.11 Employee Benefits and Contracts. Following the Effective Time, Buyer shall
provide generally to officers and employees of the Pioneer Entities employee
benefits under employee benefit and welfare plans (other than stock option or
other plans involving the potential issuance of Buyer Common Stock), on terms
and conditions which when taken as a whole are substantially similar to those
currently provided by the Buyer Entities to their similarly situated officers
and employees; provided, that, for a period of 12 months after the Effective
Time, Buyer shall provide generally to officers and employees of Pioneer
Entities severance benefits in accordance with the policies of either (i)
Pioneer as disclosed in Section 8.11 of the Pioneer Disclosure Memorandum, or
(ii) Buyer, whichever of (i) or (ii) will provide the greater benefit to the
officer or employee. For purposes of
A-37
355
participation, vesting and (except in the case of Buyer retirement plans)
benefit accrual under Buyer's employee benefit plans, the service of the
employees of the Pioneer Entities prior to the Effective Time shall be treated
as service with a Buyer Entity participating in such employee benefit plans.
Buyer also shall cause the Surviving Corporation and its Subsidiaries to honor
in accordance with their terms all employment, severance, consulting and other
compensation Contracts disclosed in Section 8.11 of the Pioneer Disclosure
Memorandum to Buyer between any Pioneer Entity and any current or former
director, officer, or employee thereof, and all provisions for vested benefits
or other vested amounts earned or accrued through the Effective Time under the
Pioneer Benefit Plans.
8.12 Indemnification.
(a) For a period of six years after the Effective Time, Buyer shall indemnify,
defend and hold harmless the present and former directors, officers,
employees and agents of the Pioneer Entities (each, an "Indemnified Party")
against all Liabilities arising out of actions or omissions arising out of
the Indemnified Party's service or services as directors, officers,
employees or agents of Pioneer or, at Pioneer's request, of another
corporation, partnership, joint venture, trust or other enterprise occurring
at or prior to the Effective Time (including the transactions contemplated
by this Agreement) to the fullest extent permitted under Delaware Law and by
Pioneer's Certificate of Incorporation and Bylaws as in effect on the date
hereof, including provisions relating to advances of expenses incurred in
the defense of any Litigation and whether or not any Buyer Entity is insured
against any such matter. Without limiting the foregoing, in any case in
which approval by the Surviving Corporation is required to effectuate any
indemnification, the Surviving Corporation shall direct, at the election of
the Indemnified Party, that the determination of any such approval shall be
made by independent counsel mutually agreed upon between Buyer and the
Indemnified Party.
(b) Buyer shall use its reasonable efforts (and Pioneer shall cooperate prior to
the Effective Time in these efforts) to maintain in effect for a period of
three years after the Effective Time Pioneer's existing directors' and
officers' liability insurance policy (provided that Buyer may substitute
therefor (i) policies of at least the same coverage and amounts containing
terms and conditions which are substantially no less advantageous or (ii)
with the consent of Pioneer given prior to the Effective Time, any other
policy) with respect to claims arising from facts or events which occurred
prior to the Effective Time and covering persons who are currently covered
by such insurance; provided that the Surviving Corporation shall not be
obligated to make aggregate premium payments for such three-year period in
respect of such policy (or coverage replacing such policy) which exceed, for
the portion related to Pioneer's directors and officers, 150% of the annual
premium payments on Pioneer's current policy in effect as of the date of
this Agreement (the "Maximum Amount"). If the amount of the premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, Buyer shall use its reasonable efforts to maintain the most
advantageous policies of directors' and officers' liability insurance
obtainable for a premium equal to the Maximum Amount.
(c) Any Indemnified Party wishing to claim indemnification under paragraph (a)
of this Section 8.12, upon learning of any such Liability or Litigation,
shall promptly notify Buyer thereof. In the event of any such Litigation
(whether arising before or after the Effective Time), (i) the Surviving
Corporation shall have the right to assume the defense thereof and the
Surviving Corporation shall not be liable to such Indemnified Parties for
any legal expenses of other counsel or any other expenses subsequently
A-38
356
incurred by such Indemnified Parties in connection with the defense thereof,
except that if the Surviving Corporation elects not to assume such defense
or counsel for the Indemnified Parties advises that there are substantive
issues which raise conflicts of interest between the Surviving Corporation
and the Indemnified Parties, the Indemnified Parties may retain counsel
satisfactory to them, and the Surviving Corporation shall pay all reasonable
fees and expenses of such counsel for the Indemnified Parties promptly as
statements therefor are received; provided that the Surviving Corporation
shall be obligated pursuant to this paragraph (c) to pay for only one firm
of counsel for all Indemnified Parties in any jurisdiction, (ii) the
Indemnified Parties will cooperate in the defense of any such Litigation,
and (iii) the Surviving Corporation shall not be liable for any settlement
effected without its prior written consent; and provided further the
Surviving Corporation shall not have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall
determine, and such determination shall have become final, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable Law.
(d) If the Surviving Corporation or any successors or assigns shall consolidate
with or merge into any other Person and shall not be the continuing or
surviving Person of such consolidation or merger or shall transfer all or
substantially all of its assets to any Person, then and in each case, proper
provision shall be made so that the successors and assigns of the Surviving
Corporation shall assume the obligations set forth in this Section 8.12.
(e) The provisions of this Section 8.12 are intended to be for the benefit of
and shall be enforceable by, each Indemnified Party and their respective
heirs and representatives.
8.13 Certain Policies of Pioneer. Buyer and Pioneer shall consult with respect
to their respective loan, litigation and real estate valuation policies and
practices (including loan classifications and levels of reserves) and Pioneer
shall make such modification or changes to its policies and practices, if any,
prior to the Effective Time on a basis mutually satisfactory to Pioneer and
Buyer, so that such policies and procedures shall be applied on a basis
consistent with that of Buyer. Buyer and Pioneer also shall consult with respect
to the character, amount and timing of restructuring and Merger-related expense
charges to be taken by each of the Parties in connection with the transactions
contemplated by this Agreement and shall take such charges in accordance with
GAAP, prior to the Effective Time, as may be mutually agreed upon by the
Parties. None of either Party's representations, warranties, covenants or
agreements contained in this Agreement shall be deemed to be inaccurate or
breached in any respect as a consequence of any modifications or charges
undertaken solely on account of this Section 8.13.
8.14 Coordination of Dividends. After the date of this Agreement each of Buyer
and Pioneer shall coordinate with the other the declaration of any dividends in
respect of the Buyer Common Stock and Pioneer Common Stock and the record dates
and payments dates relating thereto, it being the intention of the parties that
the holders of Pioneer Common Stock shall not receive more than one dividend, or
fail to receive one dividend, for any single calendar quarter with respect to
their shares of Pioneer Common Stock and any shares of Parent Common Stock any
holder of Pioneer Common Stock receives in exchange therefor in the Merger.
8.15 Director. Buyer's Board of Directors, prior to Closing, shall take all
requisite action to elect as a director of Buyer effective as of the Effective
Time, an individual, chosen in the sole discretion of the Buyer's Committee on
Directors, who is (a) either a member of
A-39
357
Pioneer's Board of Directors prior to the Effective Time or (b) George M. Clark,
Jr. or a member of the immediate family of George M. Clark, Jr.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of Each Party. The respective obligations of each
Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a)Shareholder Approval. The shareholders of Pioneer shall have adopted
this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law, by
the provisions of any governing instruments, or by the rules of the
NASD.
(b)Regulatory Approvals. All Consents of, filings and registrations with,
and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be
in full force and effect and all waiting periods required by Law shall
have expired.
(c)Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those
referred to in Section 9.1(b)) or for the preventing of any Default
under any Contract or Permit of such Party which, if not obtained or
made, is reasonably likely to have, individually or in the aggregate, a
Pioneer Material Adverse Effect or a Buyer Material Adverse Effect, as
applicable.
(d)Legal Proceedings. No court or governmental or regulatory authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any Law or Order (whether temporary, preliminary or
permanent) or taken any other action which prohibits, restricts or makes
illegal consummation of the transactions contemplated by this Agreement.
(e)Registration Statement. The Registration Statement shall be effective
under the 1933 Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness
thereof shall have been initiated and be continuing, and all necessary
approvals under state securities Laws or the 1933 Act or 1934 Act
relating to the issuance or trading of the shares of Buyer Common Stock
issuable pursuant to the Merger shall have been received.
(f)Exchange Listing. The shares of Buyer Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National
Market, or any national securities exchange on which Buyer Common Stock
is hereafter listed subject to official notice of listing by such
exchange.
(g)Pooling Letters. Each of the Parties shall have received letters, dated
as of the date of filing of the Registration Statement with the SEC and
as of the Effective Time, addressed to Buyer, in form and substance
reasonably acceptable to Buyer, from KPMG Peat Marwick LLP to the effect
that the Merger will qualify for pooling of interests accounting
treatment. Each of the Parties also shall have received letters, dated
as of the date of filing of the Registration Statement with the SEC and
as of the Effective Time, addressed to Buyer, in form and substance
A-40
358
reasonably acceptable to Buyer, from Joseph Decosimo and Company, LLP to the
effect that such firm is not aware of any matters relating to Pioneer and its
Subsidiaries which would preclude the Merger from qualifying for pooling of
interests accounting treatment.
(h)Tax Matters. Each Party shall have received a written opinion of
counsel from Arnold & Porter, in form reasonably satisfactory to such
Parties (the "Tax Opinion"), to the effect that (i) the Merger will
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, (ii) the exchange in the Merger of Pioneer Common
Stock for Buyer Common Stock will not give rise to gain or loss to the
shareholders of Pioneer with respect to such exchange (except to the
extent of any cash received in lieu of fractional share interests), and
(iii) none of Pioneer or Buyer will recognize gain or loss as a
consequence of the Merger (except for amounts resulting from any
required change in accounting methods and any income and deferred gain
recognized pursuant to Treasury regulations issued under Section 1502 of
the Internal Revenue Code). In rendering such Tax Opinion, such counsel
shall be entitled to rely upon representations of officers of Pioneer
and Buyer reasonably satisfactory in form and substance to such counsel.
9.2 Conditions to Obligations of Buyer. The obligations of Buyer to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by Buyer pursuant to Section 11.6(a):
(a)Representations and Warranties. For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of Pioneer set forth
in this Agreement shall be assessed as of the date of this Agreement and
as of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to
a specified date shall speak only as of such date). The representations
and warranties set forth in Section 5.3 shall be true and correct
(except for inaccuracies which are de minimis in amount). The
representations and warranties set forth in Sections 5.20, 5.21, and
5.22 shall be true and correct in all material respects. There shall not
exist inaccuracies in the representations and warranties of Pioneer set
forth in this Agreement (including the representations and warranties
set forth in Sections 5.3 and 5.20) such that the aggregate effect of
such inaccuracies has, or is reasonably likely to have, a Pioneer
Material Adverse Effect; provided that, for purposes of this sentence
only, those representations and warranties which are qualified by
references to "material" or "Material Adverse Effect" or to the
"Knowledge" of any Person shall be deemed not to include such
qualifications.
(b)Performance of Agreements and Covenants. Each and all of the agreements
and covenants of Pioneer to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects.
(c)Certificates. Pioneer shall have delivered to Buyer (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that
the conditions set forth in Section 9.1 as relates to Pioneer and in
Section 9.2(a) and 9.2(b) have been satisfied, and (ii) certified copies
of resolutions duly adopted by Pioneer's Board of Directors
A-41
359
and shareholders evidencing the taking of all corporate action necessary to
authorize the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such reasonable
detail as Buyer and its counsel shall request.
(d)Opinion of Counsel. Buyer shall have received an opinion of Alston &
Bird LLP, counsel to Pioneer, dated as of the Closing, in form
reasonably satisfactory to Buyer, as to the matters set forth in Exhibit
4.
(e)Accountant's Letters. Buyer shall have received from Joseph Decosimo
and Company, LLP letters dated not more than five days prior to (i) the
date of the Proxy Statement and (ii) the Effective Time, with respect to
certain financial information regarding Pioneer, in form and substance
reasonably satisfactory to Buyer, which letters shall be based upon
customary specified procedures undertaken by such firm in accordance
with Statement of Auditing Standard Nos. 72 and 75.
(f)Affiliates' Agreements. Buyer shall have received from each affiliate
of Pioneer the affiliates' letter referred to in Section 8.13, to the
extent necessary to assure in the reasonable judgment of Buyer that the
transactions contemplated hereby will qualify for pooling of interests
accounting treatment.
9.3 Conditions to Obligations of Pioneer. The obligations of Pioneer to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by Pioneer pursuant to Section 11.6(b):
(a)Representations and Warranties. For purposes of this Section 9.3(a),
the accuracy of the representations and warranties of Buyer set forth in
this Agreement shall be assessed as of the date of this Agreement and as
of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to
a specified date shall speak only as of such date). There shall not
exist inaccuracies in the representations and warranties of Buyer set
forth in this Agreement such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a Buyer Material
Adverse Effect; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to
"material" or "Material Adverse Effect" or to the "Knowledge" of any
Person shall be deemed not to include such qualifications.
(b)Performance of Agreements and Covenants. Each and all of the agreements
and covenants of Buyer to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with.
(c)Certificates. Buyer shall have delivered to Pioneer (i) a certificate,
dated as of the Effective Time and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that
the conditions set forth in Section 9.1 as relates to Buyer and in
Section 9.3(a) and 9.3(b) have been satisfied, and (ii) certified copies
of resolutions duly adopted by Buyer's Board of Directors evidencing the
taking of all corporate action necessary to authorize the execution,
delivery and performance of this Agreement, and the consummation of the
A-42
360
transactions contemplated hereby, all in such reasonable detail as Pioneer and
its counsel shall request.
(d)Opinion of Counsel. Pioneer shall have received an opinion of Mary Neil
Price, Esq., Executive Vice President and General Counsel, counsel to
Buyer, dated as of the Effective Time, in form reasonably acceptable to
Pioneer, as to the matters set forth in Exhibit 5.
(e)Accountant's Letters. Pioneer shall have received from KPMG Peat
Marwick LLP letters dated not more than five days prior to (i) the date
of the Proxy Statement and (ii) the Effective Time, with respect to
certain financial information regarding Buyer, in form and substance
reasonably satisfactory to Pioneer, which letters shall be based upon
customary specified procedures undertaken by such firm in accordance
with Statement of Auditing Standard Nos. 72 and 75.
(f)Fairness Opinion. Pioneer shall have received from KBW and Carson
Medlin letters, dated as of the date hereof to the effect that, in the
opinions of such firms, the consideration or Exchange Ratio to be
received by Pioneer shareholders in connection with the Merger is fair,
from a financial point of view, to such shareholders.
(g)Exchange Agent Certification. The Exchange Agent shall have delivered
to Pioneer a certificate, dated as of the Effective Time, to the effect
that the Exchange Agent has received from Buyer appropriate instructions
and authorization for the Exchange Agent to issue a sufficient number of
shares of Buyer Common Stock in exchange for outstanding shares of
Pioneer Common Stock and that Buyer has deposited with the Exchange
Agent sufficient funds to pay a reasonable estimate of the cash payments
necessary to make all fractional share payments as required by Section
3.5.
ARTICLE 10
TERMINATION
10.1 Termination. Notwithstanding any other provision of this Agreement, and
notwithstanding the approval of this Agreement by the shareholders of Pioneer,
this Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time:
(a) By mutual consent of Buyer and Pioneer; or
(b) By either Party, (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material
breach by the other Party of any representation or warranty contained
in this Agreement which cannot be or has not been cured within 30 days
after the giving of written notice to the breaching Party of such
breach and which breach is reasonably likely, in the judgment of the
non-breaching Party, to have, individually or in the aggregate, a
Pioneer Material Adverse Effect or a Buyer Material Adverse Effect, as
applicable, on the breaching Party; or
(c) By either Party, (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material
breach by the other Party of any covenant or agreement contained in
this Agreement which cannot be or has not
A-43
361
been cured within 30 days after the giving of written notice to the breaching
Party of such breach; or
(d) By either Party, (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event (i) any Consent of
any Regulatory Authority required for consummation of the Merger and
the other transactions contemplated hereby shall have been denied by
final nonappealable action of such authority or if any action taken by
such authority is not appealed within the time limit for appeal, or
(ii) the shareholders of Pioneer fail to vote their approval of the
matters relating to this Agreement and the transactions contemplated
hereby at the Shareholders' Meeting where such matters were presented
to such shareholders for approval and voted upon; or
(e) By either Party, in the event that the Merger shall not have been
consummated by December 31, 1998; or
(f) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event that any of the
conditions precedent to the obligations of such Party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in
Section 10.1(e); or
(g) By Buyer, in the event that the Board of Directors of Pioneer shall
have failed to reaffirm its approval of the Merger and the transactions
contemplated by this Agreement (to the exclusion of any other
Acquisition Proposal), or shall have resolved not to reaffirm the
Merger, or shall have affirmed, recommended or authorized entering into
any other Acquisition Proposal or other transaction involving a merger,
share exchange, consolidation or transfer of substantially all of the
Assets of Pioneer; or
(h) By Pioneer if:
(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").
If Pioneer elects to exercise its termination right pursuant to the immediately
preceding sentence, it shall give to Buyer written notice on or before the
second trading day after the Determination Date. During the five-day period
commencing on the date of such notice, Buyer shall have the option 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
of which is the Index Ratio multiplied by the Exchange Ratio (as then in effect)
and the denominator of which is the FAC Ratio. If Buyer makes an election
contemplated by the preceding sentence, within such five-day period, it shall
give prompt written notice to Pioneer of such
A-44
362
election and the revised Exchange Ratio, whereupon no termination shall have
occurred pursuant to this Section, 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.
For purposes of this Section only, the following terms shall have the meanings
indicated:
"AVERAGE CLOSING PRICE" means the average of the last reported sale prices
per share of Buyer Common Stock as reported on The Nasdaq Stock Market or
such successor exchange on which Buyer Common Stock may then be traded (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 or such successor exchange on which Buyer
Common Stock may then be traded 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
Buyer, without regard to any requisite waiting periods in respect thereof.
A-45
363
"INDEX GROUP" means the group of the 17 bank holding companies listed
below, the common stock of all of which shall be publicly traded and as to
which there shall not have been, since the Starting Date and before the
Determination Date, an announcement 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 bank
holding companies and the weights attributed to them are as follows:
BB&T Corp............................................. 9.9%
Regions Financial Corp................................ 9.3%
Mercantile Bancorporation............................. 8.3%
Union Planters Corp................................... 8.1%
Southtrust Corp....................................... 7.2%
Star Banc Corp........................................ 7.1%
Crestar Financial Corp................................ 6.8%
Huntington Bancshares Inc............................. 6.8%
Marshall & Ilsley Corp................................ 6.6%
Firstar Corp.......................................... 5.6%
First Tennessee National Corp......................... 4.7%
Old Kent Financial Corp............................... 4.3%
Zions Bancorp......................................... 3.9%
Hibernia Corp......................................... 3.4%
Amsouth Bancorporation................................ 3.4%
National Commerce Bancorporation...................... 2.5%
Commerce Bancshares Inc............................... 2.0%
"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 May 28, 1998.
"STARTING PRICE" shall mean the last reported sale price per share of Buyer
Common Stock on the Starting Date, as reported by The Nasdaq Stock Market
or such successor exchange on which Buyer Common Stock may then be traded
(as reported in The Wall Street Journal or, if not reported therein, in
another mutually agreed upon authoritative source).
If any company belonging to the Index Group or Buyer 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
Buyer shall be appropriately adjusted for the purposes of applying this
Section.
A-46
364
10.2 Effect of Termination. In the event of the termination and abandonment of
this Agreement pursuant to Section 10.1, this Agreement shall become void and
have no effect, except that (i) the provisions of this Section 10.2 and Article
11 and Section 8.6(b) shall survive any such termination and abandonment, and
(ii) a termination pursuant to Sections 10.1(b), 10.1(c) or 10.1(f) shall not
relieve the breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement giving rise to such
termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time, except this Section 10.3 and
Articles 1, 2, 3, 4 and 11 and Sections 8.10, 8.11 and 8.12.
ARTICLE 11
MISCELLANEOUS
11.1 Definitions. (a) Except as otherwise provided herein, the capitalized
terms set forth below shall have the following meanings:
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as amended.
"ACQUISITION PROPOSAL" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the
stock or assets of, or other business combination involving the acquisition
of such Party or any of its Subsidiaries or the acquisition of a
substantial equity interest in, or a substantial portion of the assets of,
such Party or any of its Subsidiaries.
"AFFILIATE" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by
or under common control with such Person; (ii) any officer, director,
partner, employer, or direct or indirect beneficial owner of any 10% or
greater equity or voting interest of such Person; or (iii) any other Person
for which a Person described in clause (ii) acts in any such capacity.
"AGREEMENT" shall mean this Agreement and Plan of Merger, including the
Exhibits delivered pursuant hereto and incorporated herein by reference.
"ARTICLES OF MERGER" shall mean the Articles of Merger to be executed by
Buyer and filed with the Secretary of State of the State of Tennessee
relating to the Merger as contemplated by Section 1.1.
"ASSETS" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or
contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the
books and records of such Person, and whether or not owned in the name of
such Person or any Affiliate of such Person and wherever located.
"BHC ACT" shall mean the Federal Bank Holding Company Act of 1956, as
amended.
"BUYER CAPITAL STOCK" shall mean, collectively, the Buyer Common Stock, the
Buyer Preferred Stock and any other class or series of capital stock of
Buyer.
"BUYER COMMON STOCK" shall mean the $2.50 par value common stock of Buyer.
A-47
365
"BUYER DISCLOSURE MEMORANDUM" shall mean the written information entitled
"Acquiring Company Disclosure Memorandum" delivered prior to the date of
this Agreement to Pioneer describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
"BUYER ENTITIES" shall mean, collectively, Buyer and all Buyer
Subsidiaries.
"BUYER FINANCIAL STATEMENTS" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of Buyer as of March 31,
1998 and as of December 31, 1997 and 1996, and the related statements of
income, changes in shareholders' equity, and cash flows (including related
notes and schedules, if any) for the three months ended March 31, 1998 and
for each of the three fiscal years ended December 31, 1997, 1996 and 1995,
as filed by Buyer in SEC Documents, and (ii) the consolidated balance
sheets of Buyer (including related notes and schedules, if any) and related
statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents
filed with respect to periods ended subsequent to March 31, 1998.
"BUYER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence,
has a material adverse impact on (i) the financial position, business, or
results of operations of Buyer and its Subsidiaries, taken as a whole, or
(ii) the ability of Buyer to perform its obligations under this Agreement
or to consummate the Merger or the other transactions contemplated by this
Agreement, provided that "Material Adverse Effect" shall not be deemed to
include the impact of (a) changes in banking and similar Laws of general
applicability or interpretations thereof by courts or governmental
authorities, (b) changes in generally accepted accounting principles or
regulatory accounting principles generally applicable to banks and thrifts
and their holding companies and applicable to Buyer, (c) actions and
omissions of Buyer (or any of its Subsidiaries) taken with the prior
informed written Consent of Pioneer in contemplation of the transactions
contemplated hereby, and (d) the direct effects of compliance with this
Agreement on the operating performance of Buyer and its subsidiaries,
including expenses incurred by Buyer in consummating the transactions
contemplated by this Agreement.
"BUYER PREFERRED STOCK" shall mean the no par value preferred stock of
Buyer.
"BUYER RIGHTS AGREEMENT" shall mean that certain Rights Agreement, dated
December, 1998 between Buyer and First American Trust company, as Rights
Agent, previously delivered to Pioneer.
"BUYER RIGHTS" shall mean the preferred stock purchase rights issued
pursuant to the Buyer Rights Agreement.
"BUYER STOCK PLANS" shall mean the existing stock option and other
stock-based compensation plans of Buyer designated as follows: the First
American Corporation 1991 Employee Stock Incentive Plan, the First American
Corporation 1993 Non-Employee Director Stock Option Plan, the First
American Corporation STAR Award Plan, the First American Corporation First
Incentive Reward Savings Thrift Plan, the First American Corporation
Dividend Reinvestment and Stock Purchase Plan, the Heritage Federal
Bancshares, Inc. 1994 Stock Option Plan for Non-Employee
A-48
366
Directors and the 1992 Stock Option Incentive Compensation Plan for Non-Employee
Directors, the Deposit Guaranty Corp. Stock-Based, Long-Term Incentive Plan
dated April 15, 1986 and the Stock-Based Long-Term Incentive Plan II dated April
20, 1993.
"BUYER SUBSIDIARIES" shall mean the Subsidiaries of Buyer, which shall
include the Buyer Subsidiaries described in Section 6.4 and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of Buyer in the future and held as a Subsidiary by Buyer at the
Effective Time.
"CERTIFICATE OF MERGER" shall mean the Certificate of Merger to be executed
by Buyer and filed with the Secretary of State of the State of Delaware
relating to the Merger as contemplated by Section 1.1.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CONFIDENTIALITY AGREEMENTS" shall mean that certain Confidentiality
Agreement, dated April 24, 1998, between Pioneer and Buyer.
"CONSENT" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"CONTRACT" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease,
obligation, plan, practice, restriction, understanding, or undertaking of
any kind or character, or other document to which any Person is a party or
that is binding on any Person or its capital stock, Assets or business.
"DEFAULT" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit,
(ii) any occurrence of any event that with the passage of time or the
giving of notice or both would constitute a breach or violation of, default
under, contravention of, or conflict with, any Contract, Law, Order, or
Permit, or (iii) any occurrence of any event that with or without the
passage of time or the giving of notice would give rise to a right of any
Person to exercise any remedy or obtain any relief under, terminate or
revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to
increase or impose any Liability under, any Contract, Law, Order, or
Permit, where, in any such event, such Default is reasonably likely to
have, individually or in the aggregate, a Pioneer Material Adverse Effect
or a Buyer Material Adverse Effect, as applicable.
"DGCL" shall mean the Delaware General Corporation Law.
"ENVIRONMENTAL LAWS" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air,
surface water, ground water, land surface, or subsurface strata) and which
are administered, interpreted, or enforced by the United States
Environmental Protection Agency and state and local agencies with
jurisdiction over, and including common law in respect of, pollution or
protection of the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq.
("CERCLA"), the Resource Conservation and Recovery Act, as amended, 42
U.S.C. 6901 et seq. ("RCRA"), and other Laws relating to emissions,
discharges, releases, or threatened releases of any Hazardous Material, or
otherwise relating to the manufacture,
A-49
367
processing, distribution, use, treatment, storage, disposal, transport, or
handling of any Hazardous Material.
"EQUITY RIGHTS" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities
or rights convertible into or exchangeable for, shares of the capital stock
of a Person or by which a Person is or may be bound to issue additional
shares of its capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"EXHIBITS" 1 through 5, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be
referred to in this Agreement and any other related instrument or document
without being attached hereto.
"FANB" shall mean First American National Bank, a national banking
association and a Buyer Subsidiary.
"GAAP" shall mean United States generally accepted accounting principles,
consistently applied during the periods involved.
"HAZARDOUS MATERIAL" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as
those terms are defined by any applicable Environmental Laws) and (ii) any
chemicals, pollutants, contaminants, petroleum, petroleum products, or oil
(and specifically shall include asbestos requiring abatement, removal, or
encapsulation pursuant to the requirements of governmental authorities and
any polychlorinated biphenyls).
"HOLA" shall mean the Home Owners' Loan Act of 1933, as amended.
"HSR ACT" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.
"INTELLECTUAL PROPERTY" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, technology rights
and licenses, computer software (including any source or object codes
therefor or documentation relating thereto), trade secrets, franchises,
know-how, inventions, and other intellectual property rights.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"KNOWLEDGE" as used with respect to a Person (including references to such
Person being aware of a particular matter) shall mean the personal
knowledge after due inquiry of the chairman, president, chief financial
officer, chief accounting officer, chief operating officer, chief credit
officer, general counsel, any assistant or deputy general counsel, or any
senior, executive or other vice president of such Person.
"LAW" shall mean any code, law (including common law), ordinance,
regulation, reporting or licensing requirement, rule, or statute applicable
to a Person or its Assets, Liabilities, or business, including those
promulgated, interpreted or enforced by any Regulatory Authority.
A-50
368
"LIABILITY" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including
costs of investigation, collection and defense), claim, deficiency,
guaranty or endorsement of or by any Person (other than endorsements of
notes, bills, checks, and drafts presented for collection or deposit in the
ordinary course of business) of any type, whether accrued, absolute or
contingent, liquidated or unliquidated, matured or unmatured, or otherwise.
"LIEN" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title
retention or other security arrangement, or any adverse right or interest,
charge, or claim of any nature whatsoever of, on, or with respect to any
property or property interest, other than (i) Liens for current property
Taxes not yet due and payable, (ii) for depository institution Subsidiaries
of a Party, pledges to secure deposits and other Liens incurred in the
ordinary course of the banking business, and (iii) Liens which do not
materially impair the use of or title to the Assets subject to such Lien.
"LITIGATION" shall mean any action, arbitration, cause of action, claim,
complaint, criminal prosecution, governmental or other examination or
investigation, hearing, administrative or other proceeding relating to or
affecting a Party, its business, its Assets (including Contracts related to
it), or the transactions contemplated by this Agreement, but shall not
include regular, periodic examinations of depository institutions and their
Affiliates by Regulatory Authorities.
"MATERIAL" for purposes of this Agreement shall be determined in light of
the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine
materiality in that instance.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NASDAQ NATIONAL MARKET" shall mean the National Market Inc.
"NYSE" shall mean the New York Stock Exchange, Inc.
"OPERATING PROPERTY" shall mean any property owned, leased, or operated by
the Party in question or by any of its Subsidiaries or in which such Party
or Subsidiary holds a security interest or other interest (including an
interest in a fiduciary capacity), and, where required by the context,
includes the owner or operator of such property, but only with respect to
such property.
"ORDER" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or
writ of any federal, state, local or foreign or other court, arbitrator,
mediator, tribunal, administrative agency, or Regulatory Authority.
"PARTICIPATION FACILITY" shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management
and, where required by the context, said term means the owner or operator
of such facility or property, but only with respect to such facility or
property.
"PARTY" shall mean either Pioneer or Buyer, and "Parties" shall mean both
Pioneer and Buyer.
"PERMIT" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to
A-51
369
which any Person is a party or that is or may be binding upon or inure to
the benefit of any Person or its securities, Assets, or business.
"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,
trust, business association, group acting in concert, or any person acting
in a representative capacity.
"PIONEER BANK" shall mean Pioneer Bank, a Tennessee bank and a Pioneer
Subsidiary.
"PIONEER COMMON STOCK" shall mean the $0.01 par value common stock of
Pioneer.
"PIONEER DISCLOSURE MEMORANDUM" shall mean the written information entitled
"Pioneer Bancshares, Inc. Disclosure Memorandum" delivered prior to the
date of this Agreement to Buyer describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
"PIONEER ENTITIES" shall mean, collectively, Pioneer and all Pioneer
Subsidiaries.
"BUYER FINANCIAL STATEMENTS" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of Buyer as of March 31,
1998 and as of December 31, 1997 and 1996, and the related statements of
income, changes in shareholders' equity, and cash flows (including related
notes and schedules, if any) for the three months ended March 31, 1998 and
for each of the three fiscal years ended December 31, 1997, 1996 and 1995,
as filed by Buyer in SEC Documents, and (ii) the consolidated balance
sheets of Buyer (including related notes and schedules, if any) and related
statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents
filed with respect to periods ended subsequent to March 31, 1998
"PIONEER FINANCIAL STATEMENTS" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of Pioneer as of
March 31, 1998 and as of December 31, 1997 and 1996, and the related
statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) for the three months ended
March 31, 1998 and as of each of the three fiscal years ended December 31,
1997, 1996 and 1995, as filed by Pioneer in SEC Documents, and (ii) the
consolidated balance sheets of Pioneer (including related notes and
schedules, if any) and related statements of income, changes in
shareholders' equity, and cash flows (including related notes and
schedules, if any) included in SEC Documents filed with respect to periods
ended subsequent to December 31, 1997.
"PIONEER MATERIAL ADVERSE EFFECT" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence,
has a material adverse effect on (i) the financial position, business, or
results of operations of Pioneer and its Subsidiaries, taken as a whole, or
(ii) the ability of Pioneer to perform its obligations under this Agreement
or to consummate the Merger or the other transactions contemplated by this
Agreement, provided that "Material Adverse Effect" shall not be deemed to
include the impact of (a) changes in banking and similar Laws of general
applicability or interpretations thereof by courts or governmental
authorities, (b) changes in generally accepted accounting principles or
regulatory
A-52
370
accounting principles generally applicable to banks and thrifts and their
holding companies, (c) actions and omissions of Pioneer (or any of its
Subsidiaries) taken with the prior informed written Consent of Buyer in
contemplation of the transactions contemplated hereby, and (d) the direct
effects of compliance with this Agreement on the operating performance or
financial condition of Pioneer and its Subsidiaries, including expenses
incurred by Pioneer in consummating the transactions contemplated by this
Agreement.
"PIONEER STOCK PLANS" shall mean the existing stock option and other
stock-based compensation plans of Pioneer designated as follows: "The
Pioneer Bancshares, Inc. 1994 Long-Term Incentive Plan" and the "Pioneer
401(k) and Employee Stock Ownership Plan".
"PIONEER SUBSIDIARIES" shall mean the Subsidiaries of Pioneer, which shall
include the Pioneer Subsidiaries described in Section 5.4 and any
corporation, bank, savings association, or other organization acquired as a
Subsidiary of Pioneer in the future and held as a Subsidiary by Pioneer at
the Effective Time.
"PROXY STATEMENT" shall mean the proxy statement used by Pioneer to solicit
the approval of its shareholders of the transactions contemplated by this
Agreement, which shall include the prospectus of Buyer relating to the
issuance of the Buyer Common Stock to holders of Pioneer Common Stock.
"REGISTRATION STATEMENT" shall mean the Registration Statement on SEC Form
S-4, or other appropriate form, including any pre-effective or
post-effective amendments or supplements thereto, filed with the SEC by
Buyer under the 1933 Act with respect to the shares of Buyer Common Stock
and related Buyer Rights to be issued to the shareholders of Pioneer in
connection with the transactions contemplated by this Agreement.
"REGULATORY AUTHORITIES" shall mean, collectively, the SEC, the NYSE, the
NASD, the Federal Trade Commission, the United States Department of
Justice, the Board of the Governors of the Federal Reserve System, the
Office of Thrift Supervision (including its predecessor, the Federal Home
Loan Bank Board), the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, and all other federal, state,
county, local or other governmental or regulatory agencies, authorities
(including self-regulatory authorities), instrumentalities, commissions,
boards or bodies having jurisdiction over the Parties and their respective
Subsidiaries.
"REPRESENTATIVE" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a
Person.
"SEC DOCUMENTS" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to
be filed, by a Party or any of its Subsidiaries with any Regulatory
Authority pursuant to the Securities Laws.
"SECURITIES LAWS" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"SHAREHOLDERS' MEETING" shall mean the meeting of the shareholders of
Pioneer to be held pursuant to Section 8.1, including any adjournment or
adjournments thereof.
"SIGNIFICANT SUBSIDIARY" shall mean any present or future consolidated
Subsidiary of the Party in question, the assets of which constitute ten
percent (10%) or more of the
A-53
371
consolidated assets of such Party as reflected on such Party's consolidated
statement of condition prepared in accordance with GAAP.
"STOCK OPTION AGREEMENT" shall mean the stock option agreement of even date
herewith issued to Buyer by Pioneer, substantially in the form of Exhibit
1.
"SUBSIDIARIES" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or
controls 50% or more of the outstanding equity securities either directly
or through an unbroken chain of entities as to each of which 50% or more of
the outstanding equity securities is owned directly or indirectly by its
parent (provided there shall not be included any such entity the equity
securities of which are owned or controlled in a fiduciary capacity), (ii)
in the case of partnerships, serves as a general partner, (iii) in the case
of a limited liability company, serves as a managing member, or (iv)
otherwise has the ability to elect a majority of the directors, trustees or
managing members thereof.
"SURVIVING CORPORATION" shall mean Buyer as the surviving corporation
resulting from the Merger.
"TAX RETURN" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection
with Taxes, including any return of an affiliated or combined or unitary
group that includes a Party or its Subsidiaries.
"TAX" or "Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments,
including income, gross receipts, excise, employment, sales, use, transfer,
license, payroll, franchise, severance, stamp, occupation, windfall
profits, environmental, federal highway use, commercial rent, customs
duties, capital stock, paid-up capital, profits, withholding, Social
Security, single business and unemployment, disability, real property,
personal property, registration, ad valorem, value added, alternative or
add-on minimum, estimated, or other tax or governmental fee of any kind
whatsoever, imposed or required to be withheld by the United States or any
state, county, local or foreign government or subdivision or agency
thereof, including any interest, penalties, and additions imposed thereon
or with respect thereto.
"TBCA" shall mean the Tennessee Business Corporation Act.
(b) The terms set forth below shall have the meanings ascribed thereto in the
referenced sections:
Allowance............................... Section 5.9
Average Closing Price................... Section 10.1(h)
Bank Merger............................. Section 1.5
Bank Plan............................... Section 1.5
Buyer Benefit Plans..................... Section 6.15(a)
Buyer ERISA Plan........................ Section 6.15(a)
Buyer Pension Plan...................... Section 6.15(a)
Buyer SEC Reports....................... Section 6.5(a)
Carson Medlin........................... Section 5.21
Certificates............................ Section 4.1
Closing................................. Section 1.2
A-54
372
Determination Date...................... Section 10.1(h)
Effective Time.......................... Section 1.3
ERISA Affiliate......................... Section 5.15(d)
Exchange Agent.......................... Section 4.1
Exchange Ratio.......................... Section 3.1(b)
FAC Ratio............................... Section 10.1(h)
Indemnified Party....................... Section 8.12(a)
Index Group............................. Section 10.1(h)
Index Price............................. Section 10.1(h)
Index Ratio............................. Section 10.1(h)
KBW..................................... Section 5.21
Maximum Amount.......................... Section 8.12(b)
Merger.................................. Section 1.1
Pioneer Banks........................... Section 1.5
Pioneer Benefit Plans................... Section 5.15(a)
Pioneer Contracts....................... Section 5.16
Pioneer ERISA Plan...................... Section 5.15(a)
Pioneer Options......................... Section 3.6(a)
Pioneer SEC Reports..................... Section 5.5(a)
Starting Date........................... Section 10.1(h)
Starting Price.......................... Section 10.1(h)
Stock Option Agreement.................. Section 1.2
Tax Opinion............................. Section 9.1(h)
(c) Any singular term in this Agreement shall be deemed to include the plural,
and any plural term the singular. Whenever the words "include," "includes"
or "including" are used in this Agreement, they shall be deemed followed by
the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the Parties shall
bear and pay all direct costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including
filing, registration and application fees, printing fees, and fees and
expenses of its own financial or other consultants, investment bankers,
accountants, and counsel, except that each of the Parties shall bear and pay
one-half of the filing fees payable in connection with the Registration
Statement and the Proxy Statement and printing costs incurred in connection
with the printing of the Registration Statement and the Proxy Statement.
(b) Nothing contained in this Section 11.2 shall constitute or shall be deemed
to constitute liquidated damages for the willful breach by a Party of the
terms of this Agreement or otherwise limit the rights of the nonbreaching
Party.
11.3 Brokers and Finders. Except for Carson Medlin and KBW as to Pioneer and
except for Salomon Smith Barney as to Buyer, each of the Parties represents and
warrants that neither it nor any of its officers, directors, employees, or
Affiliates has employed any broker or finder or incurred any Liability for any
financial advisory fees, investment bankers' fees,
A-55
373
brokerage fees, commissions, or finders' fees in connection with this Agreement
or the transactions contemplated hereby. In the event of a claim by any broker
or finder based upon his or its representing or being retained by or allegedly
representing or being retained by Pioneer or by Buyer, each of Pioneer and
Buyer, as the case may be, agrees to indemnify and hold the other Party harmless
of and from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (except, as to Section
8.6(b), for the Confidentiality Agreement). Nothing in this Agreement expressed
or implied, is intended to confer upon any Person (whether as third party
beneficiaries or otherwise), other than the Parties or their respective
successors, any rights, remedies, obligations, or liabilities under or by reason
of this Agreement, other than as provided in Section 8.12.
11.5 Amendments. To the extent permitted by Law, this Agreement may be amended
by a subsequent writing signed by each of the Parties upon the approval of each
of the Parties, whether before or after shareholder approval of this Agreement
has been obtained; provided that after any such approval by the holders of
Pioneer Common Stock, there shall be made no amendment that reduces or modifies
in any material respect the consideration to be received by holders of Pioneer
Common Stock pursuant to Section 251(d) and 252(e) of the DGCL requires further
approval by such shareholder.
11.6 Waivers.
(a) Prior to or at the Effective Time, Buyer, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this
Agreement by Pioneer, to waive or extend the time for the compliance or
fulfillment by Pioneer of any and all of its obligations under this
Agreement, and to waive any or all of the conditions precedent to the
obligations of Buyer under this Agreement, except any condition which, if
not satisfied, would result in the violation of any Law. No such waiver
shall be effective unless in writing signed by a duly authorized officer of
Buyer.
(b) Prior to or at the Effective Time, Pioneer, acting through its Board of
Directors, Executive Committee of the Board of Directors, chief executive
officer or other authorized officer, shall have the right to waive any
Default in the performance of any term of this Agreement by Buyer, to waive
or extend the time for the compliance or fulfillment by Buyer of any and all
of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of Pioneer under this Agreement,
except any condition which, if not satisfied, would result in the violation
of any Law. No such waiver shall be effective unless in writing signed by a
duly authorized officer of Pioneer.
(c) The failure of any Party at any time or times to require performance of any
provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this
Agreement in one or more instances shall be deemed to be or construed as a
further or continuing waiver of such condition or breach or a waiver of any
other condition or of the breach of any other term of this Agreement.
A-56
374
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. 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.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
Pioneer: Pioneer Bancshares, Inc.
801 Broad Street
Chattanooga, Tennessee 37402
Telecopy Number: (423) 755-0161
Attention: Rodger B. Holley,
Chairman, President and CEO
Copy to Counsel: Alston & Bird LLP
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309-3423
Telecopy Number: (404) 881-4777
Attention: Ralph F. MacDonald, III
Buyer: First American Corporation
First American Center
Nashville, Tennessee 37237-0700
Telecopy Number: (615) 748-2412
Attention: Dale W. Polley, President
Copy to Counsel: Mary Neil Price, Esq.
Executive Vice President and General Counsel
721 First American Center
Nashville, Tennessee 37237-0700
Telecopy Number: (615) 748-2538
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Tennessee, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
11.11 Captions; Articles and Sections. The captions contained in this Agreement
are for reference purposes only and are not part of this Agreement. Unless
otherwise indicated, all references to particular Articles or Sections shall
mean and refer to the referenced Articles and Sections of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against any party, whether under any rule
of construction or otherwise, on account of any party being considered the
draftsman hereof. The parties
A-57
375
acknowledge and agree that this Agreement has been reviewed, negotiated, and
accepted by all parties and their attorneys and shall be construed and
interpreted according to the ordinary meaning of the words used so as fairly to
accomplish the purposes and intentions of all parties hereto.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
11.14 Severability. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed
on its behalf by its undersigned duly authorized officer as of the day and year
first above written.
FIRST AMERICAN CORPORATION
By: /s/ DALE W. POLLEY
-----------------------------------
Dale W. Polley
President
PIONEER BANCSHARES, INC.
By: /s/ RODGER B. HOLLEY
-----------------------------------
Rodger B. Holley
President
A-58
376
APPENDIX B
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT (this "Agreement") is made and entered into as of
May 28, 1998, by and between Pioneer Bancshares, Inc., a Delaware corporation
("Issuer"), and First American Corporation, a Tennessee corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into that certain Agreement and Plan of
Merger, dated as of May 28, 1998 (the "Merger Agreement"), providing for, among
other things, the merger of Issuer with and into Grantee, with Grantee as the
surviving entity; and
WHEREAS, as a condition and inducement to Grantee's execution of the Merger
Agreement, Grantee has required that Issuer agree, and Issuer has agreed, to
grant Grantee the Option (as defined below);
NOW, THEREFORE, in consideration of the respective representations, warranties,
covenants and agreements set forth herein and in the Merger Agreement, and
intending to be legally bound hereby, Issuer and Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but not defined herein shall
have the meanings ascribed to such terms in the Merger Agreement.
2. Grant of Option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 748,222 shares (as adjusted as set forth herein, the "Option Shares,"
which shall include the Option Shares before and after any transfer of such
Option Shares) of common stock, $0.01 par value per share ("Issuer Common
Stock"), of Issuer at a purchase price per Option Share (subject to adjustment
as set forth herein, the "Purchase Price") equal to $67.50; provided, however,
that in no event shall the number of shares of Issuer Common Stock for which
this Option is exercisable exceed 19.9% of the issued and outstanding Issuer
Common Stock without giving effect to the shares subject to or issued pursuant
to the Option.
3. Exercise of Option.
(a) Provided that (i) Grantee or Holder (as hereinafter defined), as applicable,
shall not be in material breach of its agreements or covenants contained in
this Agreement or the Merger Agreement, and (ii) no preliminary or permanent
injunction or other order against the delivery of shares covered by the
Option issued by any court of competent jurisdiction in the United States
shall be in effect, Holder may exercise the Option, in whole or in part, at
any time and from time to time following the occurrence of a Purchase Event;
provided that the Option shall terminate and be of no further force and
effect upon the earliest to occur of (A) the Effective Time, (B) termination
of the Merger Agreement in accordance with the terms thereof prior to the
occurrence of a Purchase Event or a Preliminary Purchase Event (other than a
termination of the Merger Agreement by Grantee pursuant to Section 10.1(b)
or Section 10.1(c) thereof (but only if such termination was a result of a
willful breach by Issuer) (each a "Default Termination")), (C) 12 months
after a Default Termination (provided, that if, within 12 months after such
termination of the Merger Agreement, a Purchase Event or a Preliminary
Purchase Event shall occur, then notwithstanding anything to the contrary
contained herein (including clause (D) of this sentence), this Option shall
terminate 12 months after the first occurrence of such
B-1
377
an event), and (D) 12 months after any termination of the Merger Agreement
(other than a Default Termination) following the occurrence of a Purchase
Event or a Preliminary Purchase Event; provided further, that any purchase
of shares upon exercise of the Option shall be subject to compliance with
applicable law. The term "Holder" shall mean the holder or holders of the
Option from time to time, and which initially is the Grantee. The rights set
forth in Section 8 shall terminate when the right to exercise the Option
terminates (other than as a result of a complete exercise of the Option) as
set forth herein.
(b) As used herein, a "Purchase Event" means any of the following events
subsequent to the date of this Agreement:
(i) without Grantee's prior written consent, Issuer shall have authorized,
recommended, publicly proposed or publicly announced an intention to
authorize, recommend or propose, or entered into an agreement with any
person (other than Grantee or any Subsidiary of Grantee) to effect an
Acquisition Transaction (as defined below). As used herein, the term
Acquisition Transaction shall mean (A) a merger, consolidation or
similar transaction involving Issuer or any of its Subsidiaries (other
than transactions solely between Issuer's Subsidiaries), (B) except as
permitted pursuant to Section 7.1 of the Merger Agreement, the
disposition, by sale, lease, exchange or otherwise, of Assets of
Issuer or any of its Subsidiaries representing in either case 20% or
more of the consolidated assets of Issuer and its Subsidiaries, or (C)
the issuance, sale or other disposition of (including by way of
merger, consolidation, share exchange or any similar transaction)
securities representing 20% or more of the voting power of Issuer or
any of its Subsidiaries (any of the foregoing, an "Acquisition
Transaction"); or
(ii) any person (other than Grantee or any Subsidiary of Grantee) shall
have acquired beneficial ownership (as such term is defined in Rule
13d-3 promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under
the Exchange Act), other than a group of which Grantee or any of its
Subsidiaries of Grantee is a member, shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of,
20% or more of the then-outstanding shares of Issuer Common Stock.
(c) As used herein, a "Preliminary Purchase Event" means any of the following
events:
(i) any person (other than Grantee or any Subsidiary of Grantee) shall
have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the
Securities Act with respect to, a tender offer or exchange offer to
purchase any shares of Issuer Common Stock such that, upon
consummation of such offer, such person would own or control 20% or
more of the then-outstanding shares of Issuer Common Stock (such an
offer being referred to herein as a "Tender Offer" or an "Exchange
Offer," respectively); or
(ii) the holders of Issuer Common Stock shall not have approved the Merger
Agreement at the meeting of such stockholders held for the purpose of
voting on the Merger Agreement, such meeting shall not have been held
or shall have been canceled prior to termination of the Merger
Agreement, or Issuer's Board of Directors shall have withdrawn or
modified in a manner adverse to Grantee the recommendation of Issuer's
Board of Directors with respect to the Merger
B-2
378
Agreement, in each case after it shall have been publicly announced that any
person (other than Grantee or any Subsidiary of Grantee) shall have (A) made, or
disclosed an intention to make, a proposal to engage in an Acquisition
Transaction, (B) commenced a Tender Offer or filed a registration statement
under the Securities Act with respect to an Exchange Offer, or (C) filed an
application (or given a notice), whether in draft or final form, under any
federal or state statute or regulation (including a notice filed under the HSR
Act) seeking the Consent to an Acquisition Transaction from any federal or state
governmental or regulatory authority or agency.
As used in this Agreement, "person" shall have the meaning specified in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act.
(d) In the event Holder wishes to exercise the Option, it shall send to Issuer a
written notice (the date of which being herein referred to as the "Notice
Date") specifying (i) the total number of Option Shares it intends to
purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 30 business days from the Notice
Date for the closing (the "Closing") of such purchase (the "Closing Date"),
subject to possible extension in accordance with the next sentence. If prior
Consent of any governmental or regulatory agency or authority is required in
connection with such purchase, Issuer shall cooperate with Holder in the
filing of the required notice or application for such Consent and the
obtaining of such Consent and the Closing shall occur immediately following
receipt of such Consents (and the expiration of any mandatory waiting
periods).
4. Payment and Delivery of Certificates.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares
to be purchased on such Closing Date, and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section
13(f) hereof.
(b) At each Closing, simultaneously with the delivery of immediately available
funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates
representing the Option Shares to be purchased at such Closing, which Option
Shares shall be free and clear of all liens, claims, charges and
encumbrances of any kind whatsoever and subject to no pre-emptive rights,
and (B) if the Option is exercised in part only, an executed new agreement
with the same terms as this Agreement evidencing the right to purchase the
balance of the shares of Issuer Common Stock purchasable hereunder, and (ii)
Holder shall deliver to Issuer a letter agreeing that Holder shall not offer
to sell or otherwise dispose of such Option Shares in violation of
applicable federal and state law or of the provisions of this Agreement.
(c) In addition to any other legend that is required by applicable law,
certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as
follows:
THE TRANSFER OF THE STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF MAY 27,
1998. A COPY OF SUCH AGREEMENT WILL BE PROVIDED TO THE
B-3
379
HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST
THEREFOR.
It is understood and agreed that (i) the above legend shall be removed by
delivery of substitute certificate(s) without such legend if Holder shall
have delivered to Issuer a copy of a letter from the staff of the SEC, or
an opinion of counsel in form and substance reasonably satisfactory to
Issuer and its counsel, to the effect that such legend is not required for
purposes of the Securities Act; (ii) the references in the above legend to
the provisions of this Agreement shall be removed by delivery of substitute
certificate(s) without such references if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference, and
(iii) the legend shall be removed in its entirety if the conditions in the
preceding clauses (i) and (ii) are both satisfied.
5. Representations and Warranties of Issuer. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals referred to herein, 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 Issuer. This Agreement has been duly
executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate and other action to authorize
and reserve and to permit it to issue, and, at all times from the date
hereof until the obligation to deliver Issuer Common Stock upon the
exercise of the Option terminates, will have reserved for issuance,
upon exercise of the Option, the number of shares of Issuer Common
Stock necessary for Holder to exercise the Option, and Issuer will take
all necessary corporate action to authorize and reserve for issuance
all additional shares of Issuer Common Stock or other securities which
may be issued pursuant to Section 7 upon exercise of the Option. The
shares of Issuer Common Stock to be issued upon due exercise of the
Option, including all additional shares of Issuer Common Stock or other
securities which may be issuable pursuant to Section 7, upon issuance
pursuant hereto, shall be duly and validly issued, fully paid, and
nonassessable, and shall be delivered free and clear of all liens,
claims, charges, and encumbrances of any kind or nature whatsoever,
including any preemptive rights of any stockholder of Issuer.
6. Representations and Warrants of Grantee. Grantee hereby represents and
warrants to Issuer that:
(a) Grantee has all requisite corporate power and authority to enter into
this Agreement and, subject to any approvals or consents referred to
herein, 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 Grantee. This Agreement has
been duly executed and delivered by Grantee.
(b) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be
transferred or otherwise disposed of
B-4
380
except in a transaction registered or exempt from registration under the
Securities Laws.
7. Adjustment upon Changes in Capitalization, etc.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the agreements
governing such transaction so that Holder shall receive, upon exercise of
the Option, the number and class of shares or other securities or property
that Holder would have received in respect of Issuer Common Stock if the
Option had been exercised immediately prior to such event, or the record
date therefor, as applicable. If any additional shares of Issuer Common
Stock are issued after the date of this Agreement (other than pursuant to an
event described in the first sentence of this Section 7(a)), the number of
shares of Issuer Common Stock subject to the Option shall be adjusted so
that, after such issuance, it, together with any shares of Issuer Common
Stock previously issued pursuant hereto, equals 19.9% of the number of
shares of Issuer Common Stock then issued and outstanding, without giving
effect to any shares subject to or issued pursuant to the Option.
(b) In the event that Issuer shall enter into an agreement: (i) to consolidate
with or merge into any person, other than Grantee or one of its
Subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger; (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such merger,
the then-outstanding shares of Issuer Common Stock shall be changed into or
exchanged for stock or other securities of Issuer or any other person or
cash or any other property or the outstanding shares of Issuer Common Stock
immediately prior to such merger shall after such merger represent less than
50% of the outstanding shares and share equivalents of the merged company;
or (iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries, then,
and in each such case, the agreement governing such transaction shall make
proper provisions so that upon the consummation of any such transaction and
upon the terms and conditions set forth herein, Holder shall receive for
each Option Share with respect to which the Option has not been exercised an
amount of consideration in the form of and equal to the per share amount of
consideration that would be received by the holder of one share of Issuer
Common Stock less the Purchase Price (and, in the event of an election or
similar arrangement with respect to the type of consideration to be received
by the holders of Issuer Common Stock, subject to the foregoing, proper
provision shall be made so that Holder would have the same election or
similar rights as would the holder of the number of shares of Issuer Common
Stock for which the Option is then exercisable).
(c) Issuer shall not enter into any agreement of the type described in Section
7(b) unless the other party thereto consents to provide the funding required
for Issuer to pay the Section 8 Repurchase Consideration.
B-5
381
8. Repurchase at the Option of Holder.
(a) Subject to the last sentence of Section 3(a), at the request of Holder at
any time commencing upon the first occurrence of a Repurchase Event (as
defined in Section 8(d)) and ending 12 months immediately thereafter, Issuer
shall repurchase from Holder the Option and all shares of Issuer Common
Stock purchased by Holder pursuant hereto with respect to which Holder then
has beneficial ownership. The date on which Holder exercises its rights
under this Section 8 is referred to as the "Request Date." Such repurchase
shall be at an aggregate price (the "Section 8 Repurchase Consideration")
equal to the sum of:
(i) the aggregate Purchase Price paid by Holder for any shares of Issuer
Common Stock acquired by Holder pursuant to the Option with respect
to which Holder then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined below)
for each share of Issuer Common Stock over (y) the Purchase Price
(subject to adjustment pursuant to Section 7), multiplied by the
number of shares of Issuer Common Stock with respect to which the
Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price over the Purchase Price
(subject to adjustment pursuant to Section 7) paid (or, in the case
of Option Shares with respect to which the Option has been exercised
but the Closing Date has not occurred, payable) by Holder for each
share of Issuer Common Stock with respect to which the Option has
been exercised and with respect to which Holder then has beneficial
ownership, multiplied by the number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer shall, within 10
business days after the Request Date, pay the Section 8 Repurchase
Consideration to Holder in immediately available funds, and
contemporaneously with such payment Holder shall surrender to Issuer the
Option and the certificates evidencing the shares of Issuer Common Stock
purchased thereunder with respect to which Holder then has beneficial
ownership, and Holder shall warrant that it has sole record and beneficial
ownership of such shares and that the same are then free and clear of all
liens, claims, charges and encumbrances of any kind whatsoever.
Notwithstanding the foregoing, to the extent that prior notification to or
Consent of any governmental or regulatory agency or authority is required in
connection with the payment of all or any portion of the Section 8
Repurchase Consideration, Holder shall have the ongoing option to revoke its
request for repurchase pursuant to Section 8, in whole or in part, or to
require that Issuer deliver from time to time that portion of the Section 8
Repurchase Consideration that it is not then so prohibited from paying and
promptly file the required notice or application for Consent and
expeditiously process the same (and each party shall cooperate with the
other in the filing of any such notice or application and the obtaining of
any such Consent). If any governmental or regulatory agency or authority
disapproves of any part of Issuer's proposed repurchase pursuant to this
Section 8, Issuer shall promptly give notice of such fact to Holder. If any
governmental or regulatory agency or authority prohibits the repurchase in
part but not in whole, then Holder shall have the right (i) to revoke the
repurchase request or (ii) to the extent permitted by such agency or
authority, determine whether the repurchase should apply to the Option
and/or Option Shares and to what extent to each, and Holder shall thereupon
have the right to exercise the Option as to the number of Option Shares for
which the Option was exercisable at the Request Date less the sum of the
number of shares covered by the Option in respect of which
B-6
382
payment has been made pursuant to Section 8(a)(ii) and the number of shares
covered by the portion of the Option (if any) that has been repurchased.
Holder shall notify Issuer of its determination under the preceding sentence
within five business days of receipt of notice of disapproval of the
repurchase.
Notwithstanding anything herein to the contrary, all of Holder's rights
under this Section 8 shall terminate on the date of termination of this
Option pursuant to Section 3(a).
(c) For purposes of this Agreement, the "Applicable Price" means the highest of
(i) the highest price per share of Issuer Common Stock paid for any such
share by the person or groups described in Section 8(d)(i), (ii) the price
per share of Issuer Common Stock received by holders of Issuer Common Stock
in connection with any merger or other business combination transaction
described in subsections 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the
highest closing sales price per share of Issuer Common Stock quoted on the
Nasdaq National Market (or if Issuer Common Stock is not quoted on the
Nasdaq National Market, the highest bid price per share as quoted on the
principal trading market or securities exchange on which such shares are
traded (including the OTC Bulletin Board) as reported by a recognized source
chosen by Holder) during the 60 business days preceding the Request Date;
provided, however, that in the event of a sale of less than all of Issuer's
Assets, the Applicable Price shall be the sum of the price paid in such sale
for such assets and the current market value of the remaining assets of
Issuer as determined by an independent nationally recognized investment
banking firm selected by Holder and reasonably acceptable to Issuer (which
determination shall be conclusive for all purposes of this Agreement),
divided by the number of shares of the Issuer Common Stock outstanding at
the time of such sale. If the consideration to be offered, paid or received
pursuant to either of the foregoing clauses (i) or (ii) shall be other than
in cash, the value of such consideration shall be determined in good faith
by an independent nationally recognized investment banking firm selected by
Holder and reasonably acceptable to Issuer, which determination shall be
conclusive for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if (i) any person (other than
Grantee or any Subsidiary of Grantee) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act) or control or the right to acquire beneficial ownership or
control, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which shall have acquired beneficial ownership or
control or has the right to acquire beneficial ownership or control, of 50%
or more of the then-outstanding shares of Issuer Common Stock, or (ii) any
of the transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii)
shall be consummated.
10. Registration Rights.
(a) For a period of 24 months, following termination of the Merger Agreement,
Issuer shall, subject to the conditions of subparagraph (c) below, if
requested by any Holder, including Grantee and any permitted transferee
("Selling Holder"), as expeditiously as possible prepare and file a
registration statement under the Securities Laws if necessary in order to
permit the sale or other disposition of any or all shares of Issuer Common
Stock or other securities that have been acquired by or are issuable to
Selling Holder upon exercise of the Option in accordance with the intended
method of sale or other disposition stated by Holder in such request (it
being understood and
B-7
383
agreed that any such sale or other disposition shall be effected on a widely
distributed basis so that, upon consummation thereof, no purchaser or
transferee shall beneficially own more than 5% of the shares of Issuer
Common Stock then outstanding), including, without limitation, a "shelf"
registration statement under Rule 415 under the Securities Act or any
successor provision, and Issuer shall use its reasonable best efforts to
qualify such shares or other securities for sale under any applicable state
securities laws.
(b) If Issuer at any time after the exercise of the Option proposes to register
any shares of Issuer Common Stock under the Securities Laws in connection
with an underwritten public offering of such Issuer Common Stock, Issuer
will promptly give written notice to Holder of its intention to do so and,
upon the written request of Holder given within 30 days after receipt of any
such notice (which request shall specify the number of shares of Issuer
Common Stock intended to be included in such underwritten public offering by
Selling Holder), Issuer will cause all such shares, the holders of which
shall have requested participation in such registration, to be so registered
and included in such underwritten public offering; provided, that Issuer may
elect to not cause any such shares to be so registered (i) if the
underwriters in good faith object for valid business reasons, or (ii) in the
case of a registration solely to implement a dividend reinvestment or
similar plan, an employee benefit plan or a registration filed on Form S-4
or any successor form, or a registration filed on a form which does not
permit registrations of resales; provided, further, that such election
pursuant to clause (i) may only be made two times. If some but not all the
shares of Issuer Common Stock, with respect to which Issuer shall have
received requests for registration pursuant to this subparagraph (b), shall
be excluded from such registration, Issuer shall make appropriate allocation
of shares to be registered among Selling Holders and any other person (other
than Issuer or any person exercising demand registration rights in
connection with such registration) who or which is permitted to register
their shares of Issuer Common Stock in connection with such registration pro
rata in the proportion that the number of shares requested to be registered
by each Selling Holder bears to the total number of shares requested to be
registered by all persons then desiring to have Issuer Common Stock
registered for sale.
(c) Issuer shall use all reasonable efforts to cause each registration statement
referred to in subparagraph (a) above to become effective and to obtain all
consents or waivers of other parties which are required therefor and to keep
such registration statement effective, provided, that Issuer may delay any
registration of Option Shares required pursuant to subparagraph (a) above
for a period not exceeding 90 days provided Issuer shall in good faith
determine that any such registration would adversely affect an offering or
contemplated offering of other securities by Issuer, and Issuer shall not be
required to register Option Shares under the Securities Laws pursuant to
subparagraph (a) above:
(i) prior to the earliest of (a) termination of the Merger Agreement
pursuant to Section 10.1 thereof, (b) failure to obtain the requisite
stockholder approval pursuant to Section 9.1(a) of the Merger
Agreement, and (c) a Purchase Event or a Preliminary Purchase Event;
(ii) on more than two occasions;
(iii) more than once during any calendar year;
B-8
384
(iv) within 90 days after the effective date of a registration referred to
in subparagraph (b) above pursuant to which the Selling Holders
concerned were afforded the opportunity to register such shares under
the Securities Laws and such shares were registered as requested; and
(v) unless a request therefor is made to Issuer by Selling Holders holding
at least 15% or more of the aggregate number of Option Shares then
outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of nine
months from the effective date of such registration statement. Issuer shall
use all reasonable efforts to make any filings, and take all steps, under
all applicable state securities laws to the extent necessary to permit the
sale or other disposition of the Option Shares so registered in accordance
with the intended method of distribution for such shares, provided, that
Issuer shall not be required to consent to general jurisdiction or qualify
to do business in any state where it is not otherwise required to so
consent to such jurisdiction or to so qualify to do business.
(d) Except where applicable state law prohibits such payments, Issuer will pay
all expenses (including without limitation registration fees, qualification
fees, blue sky fees and expenses (including the fees and expenses of
counsel), accounting expenses, legal expenses including the reasonable fees
and expenses of one counsel to the Selling Holders, printing expenses,
expenses of underwriters, excluding discounts and commissions but including
liability insurance if Issuer so desires or the underwriters so require, and
the reasonable fees and expenses of any necessary special experts) in
connection with each registration pursuant to subparagraph (a) or (b) above
(including the related offerings and sales by Selling Holders) and all other
qualifications, notifications or exemptions pursuant to subparagraph (a) or
(b) above. Underwriting discounts and commissions relating to Option Shares,
fees and disbursements of counsel to the Selling Holders and any other
expenses incurred by such Selling Holders in connection with any such
registration shall be borne by such Selling Holders.
(e) In connection with any registration under subparagraph (a) or (b) above,
Issuer hereby indemnifies the Selling Holders, and each underwriter thereof,
including each person, if any, who controls such holder or underwriter
within the meaning of Section 15 of the Securities Act, against all
expenses, losses, claims, damages and liabilities caused by any untrue
statement of a material fact contained in any registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) or any preliminary prospectus, or caused by any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
such expenses, losses, claims, damages or liabilities of such indemnified
party are caused by any untrue statement or alleged untrue statement that
was included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon and in conformity with, information furnished in
writing to Issuer by such indemnified party expressly for use therein, and
Issuer and each officer, director and controlling person of Issuer shall be
indemnified by such Selling Holder, or by such underwriter, as the case may
be, for all such expenses, losses, claims, damages and liabilities caused by
any untrue, or alleged untrue, statement, that was included by Issuer in any
such registration statement or prospectus or notification or offering
circular (including any amendments
B-9
385
or supplements thereto) in reliance upon, and in conformity with,
information furnished in writing to Issuer by such holder or such
underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this subparagraph (e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this subparagraph (e), such indemnified party
shall notify the indemnifying party in writing of the commencement of such
action, but the failure so to notify the indemnifying party shall not
relieve it of any liability which it may otherwise have to any indemnified
party under this subparagraph (e). In case notice of commencement of any
such action shall be given to the indemnifying party as above provided, the
indemnifying party shall be entitled to participate in and, to the extent
it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense of such action at its own expense, with counsel
chosen by it and satisfactory to such indemnified party. The indemnified
party shall have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of such
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) the indemnifying party either agrees to pay
the same, (ii) the indemnifying party falls to assume the defense of such
action with counsel satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal
defenses may be available to the indemnifying party that may be contrary to
the interest of the indemnified party, in which case the indemnifying party
shall be entitled to assume the defense of such action notwithstanding its
obligation to bear fees and expenses of such counsel. No indemnifying party
shall be liable for any settlement entered into without its consent, which
consent may not be unreasonably withheld.
If the indemnification provided for in this subparagraph (e) is unavailable
to a party otherwise entitled to be indemnified in respect of any expenses,
losses, claims, damages or liabilities referred to herein, then the
indemnifying party, in lieu of indemnifying such party otherwise entitled
to be indemnified, shall contribute to the amount paid or payable by such
party to be indemnified as a result of such expenses, losses, claims,
damages or liabilities in such proportion as is appropriate to reflect the
relative benefits received by Issuer, all selling stockholders and the
underwriters from the offering of the securities and also the relative
fault of Issuer, all selling stockholders and the underwriters in
connection with the statements or omissions which resulted in such
expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as
a result of the expenses, losses, claims, damages and liabilities referred
to above shall be deemed to include any legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or claim; provided, that in no case shall any Selling
Holder be responsible, in the aggregate, for any amount in excess of the
net offering proceeds attributable to its Option Shares included in the
offering. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Any obligation by any holder to indemnify shall be
several and not joint with other holders.
In connection with any registration pursuant to subparagraph (a) or (b)
above, Issuer and each Selling Holder (other than Grantee) shall enter into
an agreement containing the indemnification provisions of this subparagraph
(e).
B-10
386
(f) Issuer shall comply with all reporting requirements and will do all such
other things as may be necessary to permit the expeditious sale at any time
of any Option Shares by Holder in accordance with and to the extent
permitted by any rule or regulation promulgated by the SEC from time to
time, including, without limitation, Rules 144 and 144A. Issuer shall at
its expense provide Holder with any information necessary in connection
with the completion and filing of any reports or forms required to be filed
by them under the Securities Laws, or required pursuant to any state
securities laws or the rules of any stock exchange.
(g) Issuer will pay all stamp taxes in connection with the issuance and the
sale of the Option Shares and in connection with the exercise of the
Option, and will save Holder harmless, without limitation as to time,
against any and all liabilities, with respect to all such taxes.
11. Quotation; Listing. If Issuer Common Stock or any other securities to be
acquired upon exercise of the Option are then authorized for quotation or
trading or listing on the Nasdaq National Market or any securities exchange or
any automated quotations system maintained by a self-regulatory organization,
Issuer, upon the request of Holder, will promptly file an application, if
required, to authorize for quotation or trading or listing the shares of Issuer
Common Stock or other securities to be acquired upon exercise of the Option on
the Nasdaq National Market or any securities exchange or any automated
quotations system maintained by a self-regulatory organization and will use its
reasonable efforts to obtain approval, if required, of such quotation or listing
as soon as practicable.
12. Division of Option. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the aggregate the same number of shares of Issuer Common
Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any other Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
13. Miscellaneous.
(a) Expenses. Except as otherwise provided in Section 11, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived at any
time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon
the execution and delivery of a written agreement executed by the parties
hereto.
(c) Entire Agreement; No Third-Party Beneficiary; Severability. This Agreement,
together with the Merger Agreement and the other documents and instruments
referred to herein and therein, between Grantee and Issuer (a) constitutes
the entire
B-11
387
agreement and supersedes all prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter
hereof and (b) is not intended to confer upon any person other than the
parties hereto (other than any transferees of the Option Shares or any
permitted transferee of this Agreement pursuant to Section 13(h)) any rights
or remedies hereunder. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or a federal or
state governmental or regulatory agency or authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated. If for any reason such
court or regulatory agency determines that the Option does not permit Holder
to acquire, or does not require Issuer to repurchase, the full number of
shares of Issuer Common Stock as provided in Sections 3 and 8 (as adjusted
pursuant to Section 7), it is the express intention of Issuer to allow
Holder to acquire or to require Issuer to repurchase such lesser number of
shares as may be permissible without any amendment or modification hereof.
(d) Governing Law. This Agreement shall be governed and construed in accordance
with the laws of the State of Delaware without regard to any applicable
conflicts of law rules.
(e) Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt
requested) or delivered by reliable overnight delivery service to the
parties at the addresses set forth in the Merger Agreement(or at such other
address for a party as shall be specified by like notice).
(g) Counterparts. This Agreement and any amendments hereto may be executed in
two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been
signed, it being understood that both parties need not sign the same
counterpart.
(h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party, except that Grantee may assign this
Agreement to a wholly owned Subsidiary of Grantee and Grantee may assign its
rights hereunder in whole or in part after the occurrence of a Purchase
Event. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
(i) Further Assurances. In the event of any exercise of the Option by Holder,
Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
(j) Specific Performance. The parties hereto agree that this Agreement may be
enforced by either party through specific performance, injunctive relief
and other equitable relief. Both parties further agree to waive any
requirement for the securing or posting of any bond in connection with the
obtaining of any such equitable relief
B-12
388
and that this provision is without prejudice to any other rights that the
parties hereto may have for any failure to perform this Agreement.
(k) Confidentiality Agreement. The parties hereto agree that this Agreement
supersedes any provision of the Confidentiality Agreement that could be
interpreted to preclude the exercise of any rights or the fulfillment of
any obligations under this Agreement, and that none of the provisions
included in the Confidentiality Agreement will act to preclude Holder from
exercising the Option or exercising any other rights under this Agreement
or act to preclude Issuer from fulfilling any of its obligations under this
Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option Agreement
to be signed by their respective officers thereunto duly authorized, all as of
the day and year first written above.
ATTEST: PIONEER BANCSHARES, INC.
By: /s/ RALPH M. WEST By: /s/ RODGER B. HOLLEY
------------------------------------------- -------------------------------------------
Secretary President
[CORPORATE SEAL]
ATTEST: FIRST AMERICAN CORPORATION
By: /s/ MARY NEIL PRICE By: /s/ DALE W. POLLEY
------------------------------------------- -------------------------------------------
Secretary President
[CORPORATE SEAL]
B-13
389
APPENDIX C
OPINION OF KEEFE, BRUYETTE & WOODS, INC.
October , 1998
Board of Directors
Pioneer Bancshares, Inc.
801 Broad Street
Chattanooga, TN 37402
Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial point of view, to the common stockholders of Pioneer Bancshares, Inc.
("Pioneer") of the consideration to be received by such stockholders in the
proposed merger (the "Merger") of Pioneer with and into First American
Corporation. ("First American"), pursuant to the Agreement and Plan of Merger
("Agreement") dated as of May 28, 1998, between Pioneer and First American (the
"Agreement"). Under the terms of the Merger, stockholders of Pioneer will
receive 1.65 shares of First American's common stock, subject to adjustment as
described in the Agreement (the "Exchange Ratio") for each of their shares of
common stock, par value $.01 per share of Pioneer. It is our understanding that
the Merger will be accounted for as a pooling accounting transaction under
generally accepted accounting practices.
Keefe, Bruyette & Woods, Inc. as part of its investment banking business, is
continually engaged in the valuation of banking businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. As
specialists in the securities of banking companies, we have experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
our business as a broker-dealer, we may, from time to time, purchase securities
from, and sell securities to, Pioneer and First American and as a market maker
in securities we may from time to time have a long or short position in, and buy
or sell, debt or equity securities of Pioneer and First American for our own
account and for the accounts of our customers. We have acted exclusively for the
Board of Directors of Pioneer in rendering this fairness opinion and will
receive a fee from Pioneer for our services.
In rendering our opinion, we have (i) reviewed, among other things, the Merger
Agreement, Annual Reports to stockholders and Annual Reports on Form 10-K of
Pioneer and First American for the four years ended December 31, 1997, certain
interim reports to stockholders and Quarterly Reports on Form 10-Q of Pioneer
and First American, and certain internal financial analyses and forecasts for
Pioneer prepared by management; (ii) held discussions with members of senior
management of Pioneer and First American regarding past and current business
operations, regulatory relationships, financial condition and future prospects
of the respective companies; (iii) compared certain financial and stock market
information for First American with similar information for certain other
companies the securities of which are publicly traded; (iv) reviewed the
financial terms of certain recent business combinations in the savings industry;
and (v) performed such other studies and analyses as we considered appropriate.
C-1
390
In conducting our review and arriving at our opinion, we have relied upon and
assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying any of such information. We have
relied upon the management of Pioneer as to the reasonableness and achievability
of the financial and operating forecasts and projections (and the assumptions
and bases therefor) provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of
Pioneer and that such forecasts and projections will be realized in the amounts
and in the time periods currently estimated by such management. We have also
assumed, without independent verification, that the aggregate allowances for
loan losses for Pioneer and First American are adequate to cover such losses. In
rendering our opinion, we have not made or obtained any evaluations or
appraisals of the property of Pioneer or First American, nor have we examined
any individual credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of
Pioneer and First American; (ii) the assets and liabilities of Pioneer and First
American; and (iii) the nature and terms of certain other merger transactions
involving thrift and bank holding companies. We have also taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation and our knowledge of the banking industry generally. Our opinion is
necessarily based upon conditions as they exist and can be evaluated on the date
hereof and the information made available to us through the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair, from a financial point of view, to the
common stockholders of Pioneer.
Very truly yours,
KEEFE, BRUYETTE & WOODS, INC.
C-2
391
APPENDIX D
OPINION OF THE CARSON MEDLIN COMPANY
October , 1998
Board of Directors
Pioneer Bancshares, Inc.
P. O. Box 1527
Chattanooga, TN
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Pioneer Bancshares, Inc. ("Pioneer") of the
exchange ratio pursuant to the terms of the Agreement and Plan of Merger dated
May 28, 1998 (the "Agreement") between Pioneer and First American Corporation,
Nashville, Tennessee ("First American") pursuant to which Pioneer shall be
merged with and into First American (the "Merger"). Under the terms of the
Agreement, each of the outstanding shares of Pioneer Common Stock shall be
converted into and exchanged for the right to receive 1.65 shares of First
American Common Stock (the "Exchange Ratio"). The foregoing summary of the
Merger is qualified in its entirety by reference to the Agreement.
The Carson Medlin Company is a National Association of Securities Dealers, Inc.
(NASD) member investment banking firm which specializes in the securities of
southeastern United States financial institutions. As part of our investment
banking activities, we are regularly engaged in the valuation of southeastern
United States financial institutions and transactions relating to their
securities. We regularly publish our research on independent community banks
regarding their financial and stock price performance. We are familiar with the
commercial banking industry in Tennessee and the major commercial banks
operating in that market. We have been retained by Pioneer in a financial
advisory capacity to render our opinion hereunder, for which we will receive
compensation.
In reaching our opinion, we have analyzed the respective financial positions,
both current and historical, of First American and Pioneer. We have reviewed:
(i) the Agreement; (ii) the annual reports to shareholders of First American,
including audited financial statements for the five years ended December 31,
1997; (iii) audited financial statements of Pioneer for the five years ended
December 31, 1997; (iv) the unaudited interim financial statements of First
American for the six months ended June 30, 1998; (v) the unaudited interim
financial statements of Pioneer for the six months ended June 30, 1998; (vi)
certain financial and operating information with respect to the business,
operations and prospects of First American and Pioneer; (vii) this
Prospectus/Proxy Statement. We also: (i) held discussions with members of the
senior management of First American and Pioneer regarding historical and current
business operations, financial condition and future prospects of their
respective companies; (ii) reviewed the historical market prices and trading
activity for the common stocks of First American and Pioneer and compared them
with those of certain publicly traded companies which we deemed to be relevant;
(iii) compared the results of operations of First American and Pioneer with
those of certain banking companies which we deemed to be relevant; (iv) compared
the proposed financial terms of the Merger with the financial terms, to the
extent publicly available, of certain other recent business combinations of
commercial banking organizations;
D-1
392
(v) analyzed the pro forma financial impact of the Merger on First American; and
(vi) conducted such other studies, analyses, inquiries and examinations as we
deemed appropriate.
We have relied upon and assumed, without independent verification, the accuracy
and completeness of all information provided to us. We have not performed or
considered any independent appraisal or evaluation of the assets of First
American or Pioneer. The opinion we express herein is necessarily based upon
market, economic and other relevant considerations as they exist and can be
evaluated as of the date of this letter.
Based upon the foregoing, it is our opinion that the Exchange Ratio provided for
in the Agreement is fair, from a financial point of view, to the shareholders of
Pioneer Bancshares, Inc.
Very truly yours,
THE CARSON MEDLIN COMPANY
D-2
393
APPENDIX E
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
SEC. 262 APPRAISAL RIGHTS.
(a) Any shareholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this Section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to sec. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the shareholder's shares of stock under the circumstances described in
subsections (b) and (c) of this Section. As used in this section, the word
"shareholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to Sections 251 (other than a merger effected pursuant to Section
251(g) of this title), 252, 254, 257, 258, 263, or 264 of this title:
(1) Provided, however, that no appraisal rights under this Section shall be
available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the shareholders entitled to receive notice of and to vote at
the meeting of shareholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers,
Inc. or (ii) held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any shares of
stock of the constituent corporation surviving a merger if the merger
did not require for its approval the vote of the shareholders of the
surviving corporation as provided in subsection (f) of Section 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation
pursuant to sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof (or depository receipts in respect thereof), which
shares of stock or depository receipts at the effective date of the
merger or consolidation will be
E-1
394
either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or depository receipts described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a
meeting of shareholders, the corporation, not less than 20 days prior
to the meeting, shall notify each of its shareholders who was such on
the record date for such meeting with respect to shares for which
appraisal rights are available pursuant to subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of
this section. Each shareholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote
on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the shareholder and that the shareholder
intends thereby to demand for appraisal of his shares. A proxy or vote
against the merger or consolidation shall not constitute such a demand.
A shareholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each shareholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that
appraisal rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall include in
such notice a copy of
E-2
395
this Section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be
given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also
notify such shareholders of the effective date of the merger or
consolidation. Any shareholder entitled to appraisal rights may, within
20 days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the shareholder and that the
shareholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify shareholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation
or (ii) the surviving or resulting corporation shall send such a second
notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second notice
need only be sent to each shareholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall,
in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the shareholders entitled to
receive either notice, each constituent corporation may fix, in
advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the record
date shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any shareholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such shareholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any shareholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the shareholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
E-3
396
(f) Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all shareholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the shareholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the shareholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the shareholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceeding; and if any shareholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
shareholder.
(h) After determining the shareholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any shareholder entitled to participate
in the appraisal proceedings, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such shareholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a
E-4
397
shareholder, the Court may order all or a portion of the expenses incurred by
any shareholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or consolidation, no
shareholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to shareholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such shareholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such shareholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any shareholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting shareholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
E-5
398
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 48-18-501 through 48-18-507 of the TBCA provide that a business
corporation may indemnify directors and officers against liabilities they may
incur in such capacities provided certain standards are met, including good
faith and the belief that the particular action is in the best interests of the
corporation. In general, this power to indemnify does not exist in the case of
actions against a director or officer by or in the right of the corporation if
the person entitled to indemnification shall have been adjudged to be liable to
the corporation. A corporation is required to indemnify directors and officers
against expenses they may incur in defending actions against them in such
capacities if they are successful on the merits or otherwise in the defense of
such actions.
Section 48-18-507 of the TBCA provides that the foregoing provisions shall not
be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled, consistent with public policy, pursuant to any
provision of a corporation's charter, bylaws, general or specific action of its
board of directors, or contract, provided that no indemnification may be made in
connection with any proceeding charging improper personal benefit to an officer
or director, where such officer or director is adjudged liable on the basis that
personal benefit was improperly received.
The First American Charter provides for the mandatory indemnification of
directors and officers in accordance with and to the full extent permitted by
the laws of Tennessee as in effect at the time of such indemnification. The
First American Bylaws provide that no indemnification of an officer or director
shall be made by First American (i) if a judgment or other final adjudication
adverse to such person establishes his liability for intentional misconduct or
knowing violation of the law or for unlawful distributions, (ii) if a judgment
or other final adjudication adverse to such person for breach of a duty of
loyalty to First American is based upon such person's gaining in fact personal
profit or advantage to which he was not entitled; and (iii) in a proceeding by
or in the right of the corporation, for any amounts if such person is adjudged
liable to the corporation, or for any amounts paid to First American in
settlement of such a proceeding by such person. First American has purchased
directors' and officers' liability insurance covering certain liabilities which
may be incurred by the officers and directors of First American in connection
with the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith or incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 -- Agreement and Plan of Merger, by and between Pioneer
Bancshares, Inc. and First American Corporation, dated as of
May 28, 1998, included as Appendix A to the accompanying
Prospectus/Proxy Statement.
4 -- Rights Agreement, dated December 14, 1988, between First
American Corporation and First American Trust Company, N.A.
(incorporated herein by reference to Exhibit 1 to First
American's Current Report on Form 8-K dated December 14,
1988).
II-1
399
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Restated Charter of First American Corporation currently in
effect as amended and corrected is incorporated herein by
reference to Exhibit 3.1 of First American Corporation's
Form 10-Q for the period ended March 31, 1998.
3.2 -- By-laws of First American Corporation currently in effect as
amended July16, 1998, are incorporated by reference to
Exhibit 3.2 of First American Corporation's Form 10-Q for
the period ended June 30, 1998.
5 -- Opinion of Mary Neil Price, Esq., General Counsel of First
American Corporation, filed herewith.
8 -- Opinion of Arnold & Porter, filed herewith.
15 -- Letter of KPMG Peat Marwick LLP re: unaudited interim
financial information for First American Corporation, filed
herewith.
21 -- List of Subsidiaries of First American Corporation, filed
herewith.
23.1 -- Consent of KPMG Peat Marwick LLP (with respect to First
American Corporation), filed herewith.
23.2 -- Consent of Joseph Decosimo and Company, LLP (with respect to
Pioneer Bancshares, Inc.), filed herewith.
23.3 -- Consent of Mary Neil Price, Esq., General Counsel of First
American Corporation, included in Exhibit 5 to this
Registration Statement.
23.4 -- Consent of Arnold & Porter, included in Exhibit 8 to this
Registration Statement.
23.5 -- Consent of Keefe, Bruyette & Woods, Inc., filed herewith.
23.6 -- Consent of The Carson Medlin Company, filed herewith.
23.7 -- Consent of George M. Clark, III, filed herewith.
24 -- Powers of Attorney, filed herewith.
99.1 -- Form of Proxy for Special Meeting of Shareholders of Pioneer
Bancshares, Inc., filed herewith.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change in such information in the
registration statement;
II-2
400
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(c) The undersigned registrant hereby undertakes that every prospectus (i) that
is filed pursuant to paragraph (c) immediately preceding, or (ii) that purports
to meet the requirements of Sections 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(e) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
401
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, this 27th day of October, 1998.
FIRST AMERICAN CORPORATION
(Registrant)
By: /s/ DENNIS C. BOTTORFF*
-----------------------------------
Dennis C. Bottorff
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities indicated
on this 27th day of October, 1998.
SIGNATURE CAPACITY
--------- --------
/s/ DENNIS C. BOTTORFF* Chairman, Chief Executive Officer and Director
- ----------------------------------- (Principal Executive Officer)
Dennis C. Bottorff
/s/ DALE W. POLLEY Director and President
- -----------------------------------
Dale W. Polley
/s/ ALLAN R. LANDON Executive Vice President and Principal Financial
- ----------------------------------- Officer
Allan R. Landon
/s/ M. JACK VANNATTA, JR. Executive Vice President (Principal Accounting
- ----------------------------------- Officer)
Marvin Jack Vannatta, Jr.
/s/ EARNEST W. DEAVENPORT, JR.* Director
- -----------------------------------
Earnest W. Deavenport, Jr.
/s/ REGINALD D. DICKSON* Director
- -----------------------------------
Reginald D. Dickson
/s/ JAMES A. HASLAM II* Director
- -----------------------------------
James A. Haslam II
/s/ WARREN A. HOOD* Director
- -----------------------------------
Warren A. Hood
/s/ MARTHA R. INGRAM* Director
- -----------------------------------
Martha R. Ingram
/s/ WALTER G. KNESTRICK* Director
- -----------------------------------
Walter G. Knestrick
/s/ GENE C. KOONCE* Director
- -----------------------------------
Gene C. Koonce
/s/ JAMES R. MARTIN* Director
- -----------------------------------
James R. Martin
II-4
402
SIGNATURE CAPACITY
--------- --------
/s/ ROBERT A. MCCABE, JR.* Director
- -----------------------------------
Robert A. McCabe, Jr.
/s/ HOWARD L. MCMILLAN, JR.* Director
- -----------------------------------
Howard L. McMillan, Jr.
/s/ JOHN N. PALMER* Director
- -----------------------------------
John N. Palmer
/s/ E.B. ROBINSON, JR.* Director
- -----------------------------------
E.B. Robinson, Jr.
/s/ ROSCOE R. ROBINSON* Director
- -----------------------------------
Roscoe R. Robinson
/s/ JAMES F. SMITH, JR. * Director
- -----------------------------------
James F. Smith, Jr.
/s/ CAL TURNER, JR.* Director
- -----------------------------------
Cal Turner, Jr.
/s/ CELIA A. WALLACE* Director
- -----------------------------------
Celia A. Wallace
/s/ TED H. WELCH* Director
- -----------------------------------
Ted H. Welch
/s/ J. KELLY WILLIAMS* Director
- -----------------------------------
J. Kelly Williams
Director
- -----------------------------------
David K. Wilson
/s/ TOBY S. WILT* Director
- -----------------------------------
Toby S. Wilt
/s/ WILLIAM S. WIRE II* Director
- -----------------------------------
William S. Wire II
*By: /s/ MARY NEIL PRICE
------------------------------
Attorney-in-Fact
II-5
403
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 -- Agreement and Plan of Merger, by and between Pioneer
Bancshares, Inc. and First American Corporation, dated as of
May 28, 1998, included as Appendix A to the accompanying
Prospectus/Proxy Statement.
3.1 -- Restated Charter of First American Corporation currently in
effect as amended and corrected is incorporated herein by
reference to Exhibit 3.1 of First American Corporation's
Form 10-Q for the period ended March 31, 1998.
3.2 -- By-laws of First American Corporation currently in effect as
amended July 16, 1998, are incorporated by reference to
Exhibit 3.2 of First American Corporation's Form 10-Q for
the period ended June 30, 1998.
4 -- Rights Agreement, dated December 14, 1988, between First
American Corporation and First American Trust Company, N.A.
(incorporated herein by reference to Exhibit 1 to First
American's Current Report on Form 8-K dated December 14,
1988).
5 -- Opinion of Mary Neil Price, Esq., General Counsel of First
American Corporation, filed herewith.
8 -- Opinion of Arnold & Porter, filed herewith.
15 -- Letter of KPMG Peat Marwick LLP re: unaudited interim
financial information for First American Corporation, filed
herewith.
21 -- List of Subsidiaries of First American Corporation, filed
herewith.
23.1 -- Consent of KPMG Peat Marwick LLP (with respect to First
American Corporation), filed herewith.
23.2 -- Consent of Joseph Decosimo and Company, LLP (with respect to
Pioneer Bancshares, Inc.), filed herewith.
23.3 -- Consent of Mary Neil Price, Esq., General Counsel of First
American Corporation, included in Exhibit 5 to this
Registration Statement.
23.4 -- Consent of Arnold & Porter, included in Exhibit 8 to this
Registration Statement.
23.5 -- Consent of Keefe, Bruyette & Woods, Inc., filed herewith.
23.6 -- Consent of The Carson Medlin Company, filed herewith.
23.7 -- Consent of George M. Clark, III, filed herewith.
24 -- Powers of Attorney, filed herewith.
99.1 -- Form of Proxy for Special Meeting of Shareholders of Pioneer
Bancshares, Inc., filed herewith.