1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1998
REGISTRATION NO. 333-______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------
FIRST FARMERS AND MERCHANTS CORPORATION
(Exact name of Registrant as specified in its charter)
TENNESSEE 6702 62-1148660
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
816 SOUTH GARDEN STREET
COLUMBIA, TENNESSEE 38402
(931) 388-3145
(Address, Including Zip Code, and Telephone Number, including
Area Code, of Registrant's principal executive offices)
WAYMON L. HICKMAN
FIRST FARMERS AND MERCHANTS CORPORATION
816 SOUTH GARDEN STREET
COLUMBIA, TENNESSEE 38402
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------
With copies to:
RALPH W. DAVIS, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PLLC
511 UNION STREET, SUITE 2100
NASHVILLE, TENNESSEE 37219
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, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
==================================================================================================================
Title of securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price per share aggregate offering price registration fee
- ------------------------------------------------------------------------------------------------------------------
Common stock, par value
$10.00 per share 120,000 shares $46.00 (1) $5,520,000 $1,535
==================================================================================================================
(1) Determined solely by the Registrant's Board of Directors based
primarily on the Registrant's shareholders' equity, its earnings and
prospects, and prices at which the Registrant believes such shares have
recently traded.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
[FARMERS & MERCHANTS BANK LOGO]
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
Farmers & Merchants Bank - White Bluff, Tenn. has entered into a merger
agreement with First Farmers and Merchants Corporation, which provides that,
subject to shareholder and regulatory approval and other conditions, Farmers &
Merchants Bank will merge into First Farmers and Merchants National Bank of
Columbia (a subsidiary of First Farmers and Merchants Corporation). The combined
company will have banking operations in Maury, Dickson, Hickman, Lawrence and
Marshall Counties in middle Tennessee, and, based upon the companies' September
30, 1998 balance sheets, total assets of about $584.9 million, deposits of about
$510.1 million and shareholders' equity of about $68.5 million.
If the merger is completed, shareholders of Farmers & Merchants Bank
will receive shares of common stock of First Farmers and Merchants Corporation
in exchange for their shares of common stock of Farmers & Merchants Bank.
However, rather than receiving any fractional shares of First Farmers and
Merchants Corporation common stock, you will receive cash in lieu of any
fraction of a share of First Farmers and Merchants Corporation common stock to
which you otherwise would be entitled.
The merger cannot be completed without the approval of Farmers &
Merchants Bank's shareholders. Farmers & Merchants Bank has scheduled a special
meeting for its shareholders to vote on the merger agreement. In order for the
merger to be approved, at least two-thirds of the outstanding shares of common
stock of Farmers & Merchants Bank must be voted in favor of the merger
agreement. The date, time and place of the special meeting is as follows:
______________, 1999
______ __.m. (local time)
Farmers & Merchants Bank
2011 Highway 47 North
White Bluff, Tennessee 37187.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend your
special shareholders meeting, please take the time to vote by completing and
mailing the enclosed proxy card to us. If you sign, date and mail your proxy
card without indicating how you want to vote, your proxy will be counted as a
vote in favor of the merger agreement. If you don't return your card, the effect
will be a vote against the merger agreement.
The attached Prospectus/Proxy Statement provides you with detailed
information about the proposed merger and the companies involved. We encourage
you to read this entire document carefully. You can also obtain information
about First Farmers and Merchants Corporation from documents it has filed with
the Securities and Exchange Commission.
The Board of Directors of Farmers & Merchants Bank unanimously
recommends that shareholders vote "FOR" approval of the merger agreement.
Very truly yours,
Richard C. Bibb
Chairman, Chief Executive Officer
and President
3
[FARMERS & MERCHANTS BANK LOGO]
NOTICE OF SPECIAL SHAREHOLDERS MEETING
TO BE HELD ON ________, 1999
TO THE SHAREHOLDERS OF FARMERS & MERCHANTS BANK - White Bluff, Tenn.:
This serves as notice to you that a special meeting of shareholders of
Farmers & Merchants Bank will be held on ___________, 1999 at ____ __.m., local
time, at the office of Farmers & Merchants Bank, 2011 Highway 47 North, White
Bluff, Tennessee, for the purpose of considering and voting upon the following
matters:
1. Merger. Approval and adoption of the Agreement and Plan of
Merger, dated as of October 26, 1998 and amended as of December 15, 1998, among
Farmers & Merchants Bank - White Bluff, Tenn., First Farmers and Merchants
Corporation and First Farmers and Merchants National Bank of Columbia, which
provides for the merger of Farmers & Merchants Bank - White Bluff, Tenn. with
and into First Farmers and Merchants National Bank of Columbia.
2. Other Matters. To consider and vote on other matters that
properly come before the special meeting or any adjournments or postponements of
the special meeting.
Only holders of record of Farmers & Merchants Bank common stock at the
close of business on December __, 1998 are entitled to notice of and to vote at
the special meeting or any adjournments or postponements of the special meeting.
Under Section 45-2-1309 of the Tennessee Banking Act, holders of
Farmers & Merchants Bank common stock who comply with the requirements of
Chapter 23 of the Tennessee Business Corporation Act (the "TBCA"), will have the
right to dissent from the merger and to obtain payment of the fair value of
their shares. A copy of Chapter 23 of the TBCA is attached as Annex B to the
attached Prospectus/Proxy Statement. In addition, please see the section
entitled "THE MERGER -- Dissenters' Rights" in the attached Prospectus/Proxy
Statement for a discussion of the procedures to be followed in asserting these
dissenters' rights.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT
YOU PLAN TO ATTEND 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 the enclosed proxy in the enclosed
return envelope. 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.
BY ORDER OF THE BOARD OF DIRECTORS
Richard C. Bibb
Chairman, Chief Executive Officer
and President
December __, 1998
THE BOARD OF DIRECTORS OF FARMERS & MERCHANTS BANK UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
4
PROSPECTUS AND PROXY STATEMENT
120,000 SHARES
[FIRST FARMERS AND MERCHANTS CORPORATION LOGO]
COMMON STOCK
This Prospectus/Proxy Statement provides you with detailed information
about a proposed merger in which, if completed, Farmers & Merchants Bank - White
Bluff, Tenn. will merge into First Farmers and Merchants National Bank of
Columbia, and shareholders of Farmers & Merchants Bank will be issued shares of
First Farmers and Merchants Corporation common stock in exchange for their
shares of Farmers & Merchants Bank common stock. This document also contains
information about First Farmers and Merchants Corporation, First Farmers and
Merchants National Bank and Farmers & Merchants Bank.
You can obtain additional information about First Farmers and Merchants
Corporation from documents that it has filed with the Securities and Exchange
Commission. See "Where You Can Find More Information" on page ___ of this
document for information on how to obtain copies of these documents.
IN CONSIDERING WHETHER OR NOT TO INVEST IN SHARES OF FIRST FARMERS AND
MERCHANTS CORPORATION COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE RISK
FACTORS THAT ARE DESCRIBED BEGINNING ON PAGE 21 OF THIS DOCUMENT.
The merger cannot be completed unless the merger agreement among
Farmers & Merchants Bank, First Farmers and Merchants Corporation and First
Farmers and Merchants National Bank is approved by shareholders of Farmers &
Merchants Bank. Farmers & Merchants Bank has scheduled a special meeting of its
shareholders to vote on the merger agreement, to be held as follows:
_______, 1999
______ __.m. (local time)
Farmers & Merchants Bank
2011 Highway 47 North
White Bluff, Tennessee.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSIONER HAS APPROVED OR DISAPPROVED OF THE SHARES OF FIRST FARMERS AND
MERCHANTS CORPORATION COMMON STOCK TO BE ISSUED UNDER THIS PROSPECTUS/PROXY
STATEMENT OR DETERMINED IF THIS PROSPECTUS/PROXY STATEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF FIRST FARMERS AND MERCHANTS CORPORATION COMMON STOCK ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
The date of this Prospectus/Proxy Statement is December __, 1998.
5
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER........................................................................5
SUMMARY.......................................................................................................6
SELECTED FINANCIAL DATA......................................................................................13
RISK FACTORS.................................................................................................20
Limited Trading Market For First Farmers And Merchants Corporation Common Stock........................20
First Farmers And Merchants Corporation And Its Subsidiary Bank Are Subject To Extensive
Governmental Regulation..........................................................................20
First Farmers And Merchants National Bank Is Subject To Competition....................................20
Interest Rates Being Paid On Interest-Bearing Deposits And Liabilities May Exceed The
Interest Rates Being Charged On Outstanding Loans...............................................20
Monetary Policies And Economic Factors May Limit The Bank's Ability To Attract Deposits Or
Make Loans......................................................................................21
Computer Systems May Malfunction In Connection With Year 2000..........................................21
Ability To Declare And Pay Dividends Is Limited By Law.................................................21
THE SPECIAL MEETING..........................................................................................22
General................................................................................................22
Proxies................................................................................................22
Solicitation Of Proxies................................................................................23
Record Date And Voting Rights..........................................................................23
Recommendation Of The Board Of Directors...............................................................24
Dissenters'Rights......................................................................................24
THE MERGER...................................................................................................29
Description Of The Merger..............................................................................29
Background Of The Merger...............................................................................30
Reasons For The Merger; Recommendation Of The Board Of Directors.......................................31
Fairness Opinion.......................................................................................32
Regulatory Approval....................................................................................35
Accounting Treatment...................................................................................36
Certain Federal Income Tax Consequences................................................................36
Interests Of Certain Persons In The Merger.............................................................37
Comparison Of Rights Of Shareholders...................................................................38
Restrictions On Resales By Affiliates..................................................................38
THE MERGER AGREEMENT.........................................................................................39
Exchange Of Certificates...............................................................................39
Conditions To The Merger...............................................................................40
Termination Of The Merger Agreement....................................................................41
Conduct Of Business Prior To The Merger And Other Covenants............................................42
Amendment Of The Merger Agreement; Waiver; Expenses....................................................43
PRICE RANGE OF COMMON STOCK AND DIVIDENDS....................................................................45
Market Prices..........................................................................................45
Dividends..............................................................................................46
6
INFORMATION ABOUT FIRST FARMERS AND MERCHANTS CORPORATION....................................................47
General................................................................................................47
Description of capital stock...........................................................................47
FARMERS AND MERCHANTS BANK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................................................49
General................................................................................................49
Summary................................................................................................49
Financial Condition....................................................................................49
Balance Sheet Management...............................................................................50
Results of Operations..................................................................................51
Effects of Inflation And Changing Prices...............................................................53
Net Interest Income....................................................................................54
Liability And Asset Management.........................................................................56
Capital Adequacy.......................................................................................58
Impact of Recently Issued Accounting Standards on the Financial Statements when Adopted
in Future Period.....................................................................................59
INFORMATION ABOUT FARMERS & MERCHANTS BANK...................................................................60
General................................................................................................60
Properties.............................................................................................60
Competition............................................................................................60
Customers..............................................................................................60
Loan and Loan Review...................................................................................60
Asset/Liability Management.............................................................................61
Legal Proceedings......................................................................................61
"Year 2000" Information System Issues..................................................................61
Supervision and Regulation.............................................................................63
Effect of Governmental Policies........................................................................65
Directors and Executive Officers.......................................................................66
Ownership of Farmers & Merchants Bank Common Stock.....................................................68
Description of Farmers & Merchants Bank Capital Stock..................................................69
COMPARISON OF RIGHTS OF SHAREHOLDERS.........................................................................70
Voting Rights; Cumulative Voting.......................................................................70
Preemptive Rights......................................................................................70
Board Of Directors.....................................................................................70
Removal Of Directors...................................................................................71
Nomination of Directors................................................................................71
Annual Meeting of Shareholders.........................................................................71
Rights Of Shareholders To Call Special Meetings........................................................72
Amendment of Charter and Bylaws........................................................................72
Indemnification........................................................................................72
Taxation of Dividends..................................................................................73
Preferred Stock........................................................................................73
Authorized Capital Stock...............................................................................74
WHERE YOU CAN FIND MORE INFORMATION..........................................................................75
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION..................................................77
LEGAL MATTERS................................................................................................78
EXPERTS......................................................................................................78
FARMERS & MERCHANTS BANK FINANCIAL STATEMENTS...............................................................F-1
ANNEX A - AGREEMENT AND PLAN OF MERGER....................................................................A-1
ANNEX B - PROVISIONS OF CHAPTER 23 OF THE TENNESSEE BUSINESS CORPORATION ACT,
RELATING TO DISSENTERS' RIGHTS..................................................................B-1
ANNEX C - FAIRNESS OPINION OF PROFESSIONAL BANK SERVICES, INC.............................................C-1
ATTACHMENTS:
FIRST FARMERS AND MERCHANTS CORPORATION 1997 ANNUAL REPORT TO SHAREHOLDERS
FIRST FARMERS AND MERCHANTS CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 1998
7
QUESTIONS AND ANSWERS
ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A: Whether or not you plan to attend the special meeting of Farmers &
Merchants Bank shareholders, please indicate on the enclosed 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 shareholders meeting. If you sign and send
in your proxy but don't indicate how you want to vote, your proxy will
be counted as a vote in favor of the merger agreement among Farmers &
Merchants Bank, First Farmers and Merchants Corporation and First
Farmers and Merchants National Bank. If you don't vote on the merger
agreement or if you abstain, the effect will be a vote against the
merger agreement.
You are invited to the special shareholders meeting to vote your shares
in person. If you do sign your proxy card, you can take back your proxy
at any time until the special shareholders meeting and either change
your vote or attend the special shareholders meeting and vote in
person.
Regardless of whether you plan to attend the special meeting in person,
we encourage you to complete and return your signed proxy using the
enclosed reply envelope. This will help to ensure that a quorum is
present at the special meeting and will help reduce the costs
associated with the solicitation of proxies.
THE BOARD OF DIRECTORS OF FARMERS & MERCHANTS BANK UNANIMOUSLY
RECOMMENDS VOTING "FOR" APPROVAL OF THE MERGER AGREEMENT.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, you will be sent written
instructions on how to exchange your shares of common stock of Farmers
& Merchants Bank for shares of First Farmers and Merchants Corporation
common stock.
Q. WHOM DO I CONTACT IF I HAVE QUESTIONS ABOUT THE MERGER?
A: If you have more questions about the merger, you should contact:
Farmers & Merchants Bank
P.O. Box 129
2011 Highway 47 North
White Bluff, Tennessee 37187
Attention: Richard C. Bibb
Phone Number: (615) 797-3153.
5
8
SUMMARY
This summary highlights selected information from this document. It
does not contain all of the information that is important to you. You should
carefully read this entire document and the documents to which it refers you in
order to understand fully the merger and to obtain a more complete description
of the companies and the legal terms of the merger. See "Where You Can Find More
Information." 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 47)
FIRST FARMERS AND MERCHANTS CORPORATION
816 South Garden Street
Columbia, Tennessee 38402
(931) 388-3145
First Farmers and Merchants Corporation is incorporated in the State of
Tennessee and is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended. Its wholly-owned bank subsidiary, First Farmers
and Merchants National Bank of Columbia, conducts a commercial banking and trust
business through 16 offices in Maury, Hickman, Lawrence and Marshall Counties in
southern middle Tennessee. First Farmers and Merchants Corporation's principal
asset is the stock of First Farmers and Merchants National Bank. As of September
30, 1998, First Farmers and Merchants Corporation and its subsidiary had total
assets of about $563.7 million, deposits of about $492.7 million and
shareholders' equity of about $65.1 million.
FARMERS & MERCHANTS BANK - White Bluff, Tenn.
2011 Highway 47 North
White Bluff, Tennessee 37187
(615) 797-3153
Farmers & Merchants Bank - White Bluff, Tenn. is a state bank
incorporated in the State of Tennessee. Farmers & Merchants Bank has one banking
location, which is located in White Bluff, Dickson County, Tennessee. As of
September 30, 1998, Farmers & Merchants Bank had total assets of about $21.2
million, deposits of about $17.4 million and shareholders' equity of about $3.4
million.
THE MERGER (PAGE 29)
First Farmers and Merchants Corporation, First Farmers and Merchants
National Bank and Farmers & Merchants Bank entered into a merger agreement
whereby Farmers & Merchants Bank will merge into First Farmers and Merchants
National Bank, subject to shareholder and regulatory approval and other
conditions. The merger agreement is attached to this Prospectus/Proxy Statement
as Annex A. You should read it carefully.
If this merger is completed, the businesses and operations of First
Farmers and Merchants National Bank and Farmers & Merchants Bank will be
combined into a single, larger bank. The parties hope to complete the merger by
the end of January 1999, after obtaining approvals from the shareholders of
Farmers & Merchants Bank and the Office of the Comptroller of the Currency.
If the merger is completed, Farmers & Merchants Bank shareholders will
receive 40 shares of First Farmers and Merchants Corporation common stock for
each share of Farmers & Merchants Bank common stock they own (which is referred
to as the "exchange ratio"). Although the exchange ratio for the merger is fixed
at 40, the market price of First Farmers and Merchants Corporation
6
9
common stock may vary prior to and after the merger, and could decrease. First
Farmers and Merchants Corporation will not issue any fractional shares of First
Farmers and Merchants Corporation common stock. Instead, you will receive cash
equal to the product of $46.00 times the fraction of a share of First Farmers
and Merchants Corporation common stock to which you otherwise would be entitled.
SPECIAL SHAREHOLDERS MEETING (PAGE 22)
A special meeting of the shareholders of Farmers & Merchants Bank will
be held on ______, 1999 at the following time and place. At the special meeting,
shareholders of Farmers & Merchants Bank will be asked to approve the merger
agreement among Farmers & Merchants Bank, First Farmers and Merchants
Corporation and First Farmers and Merchants National Bank.
______________, 1999
______ __.m. (local time)
Farmers & Merchants Bank
2011 Highway 47 North
White Bluff, Tennessee
RECOMMENDATION TO SHAREHOLDERS (PAGE 31)
The Board of Directors of Farmers & Merchants Bank believes that the
merger between Farmers & Merchants Bank and First Farmers and Merchants National
Bank is in the best interests of the shareholders of Farmers & Merchants Bank,
and unanimously recommends that you vote "FOR" the proposal to approve the
merger agreement. The conclusion of the Board of Directors of Farmers &
Merchants Bank with respect to the merger is based on a number of factors
described in this document, including the receipt of a fairness opinion from its
financial advisor.
RECORD DATE; VOTING POWER (PAGE 23)
You can vote at the special meeting of shareholders of Farmers &
Merchants Bank if you owned common stock of Farmers & Merchants Bank as of the
close of business on December __, 1998, the record date set by the Board of
Directors of Farmers & Merchants Bank. Each share of common stock of Farmers &
Merchants Bank is entitled to one vote. On December __, 1998, there were 3,000
shares of common stock of Farmers & Merchants Bank outstanding and entitled to
vote on the merger agreement.
VOTE REQUIRED (PAGE 23)
In order for the merger to be approved, at least two-thirds of the
outstanding shares of common stock of Farmers & Merchants Bank must be voted in
favor of the merger agreement. Farmers & Merchants Bank expects that its
executive officers and directors will vote all of their shares in favor of the
merger agreement.
7
10
The following chart describes the voting requirements for the merger
agreement:
Shares of common stock of Farmers & Merchants
Bank outstanding on December __, 1998......................... 3,000
Votes necessary to approve the merger agreement............... 1,980
Votes that executive officers and directors of Farmers
& Merchants Bank can cast .................................... 1,437
Percentage of votes that executive officers and
directors of Farmers & Merchants Bank can cast ............... 47.9%
BACKGROUND OF THE MERGER (PAGE 30)
During late 1997 and early 1998, management of Farmers & Merchants Bank
considered strategic alternatives for the bank, in light of the bank's
increasing capital levels and potential for lower returns on equity, and
expressions of interest from other financial institutions in acquiring Farmers &
Merchants Bank.
On October 8, 1998, the Chairman of the Board of Farmers & Merchants
Bank met with the Chairman of the Board of First Farmers and Merchants
Corporation and discussed the advisability of pursuing a transaction to best
realize shareholder value. They discussed several factors, including the trend
of industry consolidation, multiples being paid for independent community banks,
liquidity for Farmers & Merchants Bank shareholders and successor management
issues. On October 13, 1998, the Chairman of the Board of Farmers & Merchants
Bank began a series of discussions with the Farmers & Merchants Bank Board of
Directors concerning the sale of Farmers & Merchants Bank.
The Farmers & Merchants Bank Board of Directors met on October 22, 1998
(with legal advisors present) to discuss the fiduciary duties of the directors,
a range of values that could be expected if the bank were sold, and the proposed
form of merger agreement. The meeting was adjourned until October 27, 1998, at
which time the Farmers & Merchants Bank Board of Directors unanimously agreed to
accept the offer from First Farmers and Merchants Corporation and authorized
Farmers & Merchants Bank management to execute the merger agreement. The merger
agreement was signed by the parties on October 27, 1998. An amendment to the
merger agreement, which amended sections of the merger agreement addressing the
accounting treatment of the merger, was signed by the parties on December 15,
1998.
REASONS FOR THE MERGER (PAGE 31)
The merger will combine the strengths of First Farmers and Merchants
National Bank and Farmers & Merchants Bank. The combined bank resulting from the
merger should be able to achieve superior financial performance compared to each
bank operating independently. One reason for this is that the combined bank
should be able to reduce costs by eliminating overlap in the banks' operations
and by applying First Farmers and Merchants National Bank's investments in
technology to Farmers & Merchants Bank's operations. Another reason is that the
combined bank should have opportunities to increase revenue by bringing a larger
universe of customers in contact with a broader range of products and services.
The competitiveness of the financial services industry is increasing
continually, and the greater strength realized through combining the banks
should enable them to provide superior products and services to their customers
and substantial benefits to their shareholders.
8
11
FEDERAL INCOME TAX CONSEQUENCES (PAGE 36)
The parties have structured the merger with the intent that Farmers &
Merchants Bank, its shareholders, First Farmers and Merchants Corporation and
its shareholders will not recognize any gain or loss for U.S. federal income tax
purposes in the merger, except in connection with cash received instead of
fractional shares by shareholders of Farmers & Merchants Bank, or with respect
to shareholders of Farmers & Merchants Bank who dissent from the merger under
Tennessee law. The merger is conditioned on receipt of a legal opinion that this
will be the case, but this opinion won't bind the Internal Revenue Service,
which could take a different view. Determining the actual tax consequences of
the merger to you can be complicated. They will depend on your specific
situation and many variables not within the companies' control. You should
consult your own tax advisor for a full understanding of the merger's tax
consequences.
ACCOUNTING TREATMENT (PAGE 36)
The parties expect that the merger of Farmers & Merchants Bank into
First Farmers and Merchants National Bank will be accounted for as a purchase.
FAIRNESS OPINION (PAGE 32)
Professional Bank Services, Inc. rendered an opinion to the Board of
Directors of Farmers & Merchants Bank that, as of the date of the opinion, the
exchange ratio in the merger was fair from a financial point of view to the
shareholders of Farmers & Merchants Bank. This opinion is attached as Annex C to
this document. You should read it carefully.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 37)
Directors and executive officers of Farmers & Merchants Bank will be
issued shares of First Farmers and Merchants Corporation common stock in the
merger on the same basis as other shareholders of Farmers & Merchants Bank. The
following chart shows the number of shares of First Farmers and Merchants
Corporation common stock that may be issued to directors and executive officers
of Farmers & Merchants Bank in the merger:
Shares of common stock of Farmers & Merchants
Bank beneficially owned by its executive officers and
directors on December __, 1998................................ 1,437
Shares of First Farmers and Merchants Corporation
common stock that may be received by executive
officers and directors of Farmers & Merchants Bank
based upon this beneficial ownership.......................... 57,480
DISSENTERS' RIGHTS (PAGE 24)
Tennessee law permits you to dissent from the merger and to have the
fair value of your shares of common stock of Farmers & Merchants Bank paid to
you in cash. To do this, you must follow certain procedures, including filing
certain notices with Farmers & Merchants Bank and refraining from voting your
shares in favor of the merger. If you dissent from the merger, your shares of
Farmers & Merchants Bank common stock will not be exchanged for shares of First
Farmers and Merchants Corporation common stock in the merger, and your only
right will be to receive the appraised fair value of your shares of common stock
of Farmers & Merchants Bank in cash.
9
12
REGULATORY APPROVAL (PAGE 35)
The companies cannot complete the merger unless they obtain the
approval of the Office of the Comptroller of the Currency. The U.S. Department
of Justice has input into the OCC's approval process. Federal law requires the
companies to wait 15 to 30 days before completing the merger after the OCC has
approved it. First Farmers and Merchants Corporation filed an application with
the OCC on November 13, 1998, and expects to obtain approval from the OCC on or
about January 4, 1999 and that the waiting period will have expired by January
19, 1999.
While the companies are not aware of any reason why they should not
obtain any remaining regulatory approvals in a timely manner, they cannot be
certain when they will obtain the approvals or that the companies will obtain
them.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 40)
The completion of the merger depends on a number of conditions being
met, including the following:
1. Shareholders of Farmers & Merchants Bank approving the merger;
2. Receipt of all required regulatory approvals, including that
of the OCC, and the expiration of any regulatory waiting
periods;
3. The absence of any governmental order blocking completion of
the merger, or of any proceedings by a government body trying
to block it;
4. Receipt of a legal opinion that the U.S. federal income tax
treatment in the merger will generally be as described in this
document;
5. Satisfactory completion of each party's due diligence review
of the other party to the merger agreement; and
6. Receipt by Farmers & Merchants Bank of a fairness opinion from
its financial advisor to the effect that the exchange ratio in
the merger is fair from a financial point of view to
shareholders of Farmers & Merchants Bank.
In cases where the law permits, a party to the merger agreement could
elect to waive a condition that has not been satisfied and complete the merger
although it is entitled not to. The companies cannot be certain whether or when
any of these conditions will be satisfied (or waived, where permissible), or
that the merger will be completed.
TERMINATION OF THE MERGER AGREEMENT (PAGE 41)
The companies can agree at any time to terminate the merger agreement
without completing the merger, even if the shareholders of Farmers & Merchants
Bank have already voted to approve it. Also, First Farmers and Merchants
Corporation can terminate the merger agreement if the Board of Directors of
Farmers & Merchants Bank withdraws, or modifies in any way adverse to First
Farmers and Merchants Corporation, its recommendation that its shareholders
approve the merger.
Moreover, either company can terminate the merger agreement in the
following circumstances:
10
13
1. After a final decision by a governmental authority to prohibit
the merger, or after 60 days following the rejection of an
application for a governmental approval required to complete
the merger;
2. If the merger isn't completed by April 30, 1999;
3. If the shareholders of Farmers & Merchants Bank do not approve
the merger; or
4. If the other party violates, in a significant way, any of its
representations, warranties, covenants or obligations
contained in the merger agreement.
Generally, a party can only terminate the merger agreement in one of
the preceding four situations if that party is not in violation of the merger
agreement or if its violations of the merger agreement are not the cause of the
event permitting termination.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 45)
There is no established trading market for shares of First Farmers and
Merchants Corporation common stock, which is inactively traded in private
transactions and is not listed or quoted on any stock exchange or market.
Therefore, reliable information is not available about the prices at which
shares of First Farmers and Merchants Corporation common stock have been bought
and sold.
There is no established trading market for shares of Farmers &
Merchants Bank common stock, which is inactively traded in private transactions
and is not listed or quoted on any stock exchange or market. Therefore, reliable
information is not available about the prices at which shares of Farmers &
Merchants Bank common stock have been bought and sold.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE 77)
This document, and other documents to which you are referred in this
document, contain forward-looking statements that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of the companies' operations or the
performance of the combined banks after the merger. Forward-looking statements
generally include any of the words "believes," "expects," "anticipates" or
similar expressions. Many possible events or factors could affect the future
financial results and performance of each of the companies and the combined
banks after the merger and could cause those results or performance to differ
materially from those expressed in forward-looking statements. These possible
events or factors include the following:
1. Problems or delays in bringing the banks together, either
before or after the merger is consummated;
2. Legal and regulatory risks and uncertainties;
3. Economic, political and competitive forces affecting the
companies' businesses, markets, constituencies or securities;
and
4. Inaccuracies in the companies' analyses of these risks and
forces, and lack of success of strategies developed to deal
with them.
11
14
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information, for the periods indicated, about
First Farmers and Merchants Corporation and Farmers & Merchants Bank's
historical net income per share, dividends per share and book value per share.
The table also provides similar information that reflects the merger of First
Farmers and Merchants National Bank and Farmers & Merchants Bank (which is
referred to as "pro forma" information). The pro forma information has been
prepared giving effect to the consolidation using the purchase accounting method
assuming the consolidation was in effect for the periods presented. In
presenting the comparative pro forma information for certain time periods, it is
assumed that Farmers & Merchants Bank and First Farmers and Merchants National
Bank had been merged throughout those periods for accounting and financial
reporting purposes. In addition, the table provides "pro forma equivalent"
information for Farmers & Merchants Bank, which was obtained by multiplying the
First Farmers and Merchants Corporation and Farmers & Merchants Bank pro forma
amounts by the exchange ratio of 40. It is intended to reflect the fact that
shareholders will be receiving more than one share of First Farmers and
Merchants Corporation common stock for each share of Farmers & Merchants Bank
common stock exchanged in the merger.
BOOK VALUE PER SHARE: DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
First Farmers and Merchants Corporation historical...... $ 21.48 $ 23.25
Farmers & Merchants Bank historical..................... 1,077.52 1,146.00
First Farmers and Merchants Corporation and
Farmers & Merchants Bank pro forma (1)............. 21.70 23.48
Farmers & Merchants Bank pro forma equivalent (2)....... 868.00 939.20
NINE-MONTHS
NET INCOME PER SHARE: YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -------------------
1995 1996 1997 1998
---- ---- ---- ----
First Farmers and Merchants Corporation historical...... $ 2.18 $ 2.45 $ 2.52 $ 1.98
Farmers & Merchants Bank historical..................... 99.00 113.33 103.00 79.00
First Farmers and Merchants Corporation and
Farmers & Merchants Bank pro forma (1)............. 2.20 2.47 2.52 1.98
Farmers & Merchants Bank pro forma equivalent (2)....... 88.00 98.80 100.80 79.20
NINE-MONTHS
CASH DIVIDENDS PER SHARE: YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -------------------
1995 1996 1997 1998
---- ---- ---- ----
First Farmers and Merchants Corporation historical...... $ 0.44 $ 0.49 $ 0.55 $ 0.31
Farmers & Merchants Bank historical..................... 34.00 40.00 48.00 42.00
First Farmers and Merchants Corporation and
Farmers & Merchants Bank pro forma (1)............. 0.46 0.51 0.57 0.34
Farmers & Merchants Bank pro forma equivalent (2)....... 18.40 20.40 22.80 13.60
- --------------------
(1) Presented as if the merger of Farmers & Merchants Bank into First
Farmers and Merchants National Bank had been effective throughout the
periods presented.
(2) Calculated by multiplying the First Farmers and Merchants Corporation
and Farmers & Merchants Bank pro forma amount by the exchange ratio of
40.
12
15
SELECTED FINANCIAL DATA
The following tables show summarized unaudited historical consolidated
financial data for First Farmers and Merchants Corporation and for Farmers &
Merchants Bank and also show similar pro forma consolidated financial
information reflecting the merger of First Farmers and Merchants National Bank
and Farmers & Merchants Bank. The pro forma information reflects the purchase
method of accounting for the merger of Farmers & Merchants Bank into First
Farmers and Merchants National Bank.
First Farmers and Merchants Corporation and Farmers & Merchants Bank
expect to incur merger-related expenses as a result of combining the banks. They
also anticipate that the merger will provide the combined banks with financial
benefits such as reduced operating expenses and the opportunity to earn more
revenue. However, none of these anticipated expenses or benefits have been
factored into the pro forma income statement information. For that reason, the
pro forma information, while helpful in illustrating the financial attributes of
the combined banks under one set of assumptions, doesn't attempt to predict or
suggest future results. Also, the information set forth for the nine-month
period ended September 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 Farmers and Merchants Corporation that has been
presented in its prior filings with the Securities and Exchange Commission (and
which has been incorporated by reference into this Prospectus/Proxy Statement)
and on the historical financial information of Farmers & Merchants Bank included
in this Prospectus/Proxy Statement. All of the summary financial information
provided in the following tables should be read in connection with this
historical financial information. See "Where You Can Find More Information." The
financial information as of and for the interim periods ended September 30, 1998
and 1997 has not been audited and in the respective opinions of management
reflects all adjustments (consisting only of normal recurring adjustments)
necessary to a fair presentation of such data.
13
16
First Farmers and Merchants Corporation
Selected Historical Consolidated Financial Data
(Dollars in thousands, except per share amounts)
For the Nine
Months Ended
September 30,
For the Years Ended December 31, (Unaudited)
------------------------------------------------------------ ---------------------
EARNINGS SUMMARY: 1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
Interest revenue .................. $ 28,720 $ 30,817 $ 34,493 $ 37,082 $ 38,647 $ 28,842 $ 29,987
Interest expense .................. 12,036 12,863 15,422 16,712 17,304 12,951 13,157
-------- -------- -------- -------- -------- -------- --------
Net interest revenue ........... 16,684 17,954 19,071 20,370 21,343 15,891 16,830
Provision for credit losses ....... 470 660 670 1,300 1,940 1,290 2,195
Non-interest income ............... 3,917 3,979 4,573 5,806 6,942 4,785 5,304
Non-interest expense .............. 12,654 13,508 14,340 15,121 16,063 11,973 12,039
-------- -------- -------- -------- -------- -------- --------
Income before income tax ....... 7,477 7,765 8,634 9,755 10,282 7,413 7,900
Applicable income taxes ........... 2,221 2,204 2,519 2,889 3,228 2,270 2,348
-------- -------- -------- -------- -------- -------- --------
Net income ........................ $ 5,256 $ 5,561 $ 6,115 $ 6,866 $ 7,054 $ 5,143 $ 5,552
======== ======== ======== ======== ======== ======== ========
PER SHARE DATA:
Basic earnings .................. $ 1.88 $ 1.99 $ 2.18 $ 2.45 $ 2.52 $ 1.84 $ 1.98
Diluted earnings ................ 1.88 1.99 2.18 2.45 2.52 1.84 1.98
Cash dividends .................. 0.37 0.40 0.44 0.49 0.55 0.27 0.31
Book value ...................... 14.07 15.65 17.50 19.43 21.48 21.15 23.25
BALANCE SHEET DATA (PERIOD END):
Total assets ...................... $432,597 $460,794 $477,035 $525,330 $537,322 $531,325 $563,731
Loans, net of unearned income ..... 243,915 262,694 291,930 303,732 331,360 328,265 320,615
Allowance for credit losses ....... 2,024 2,342 2,678 2,926 2,943 2,947 3,890
Securities ........................ 150,110 155,626 138,932 174,683 145,787 154,007 192,900
Deposits .......................... 388,935 405,152 410,778 460,573 470,282 466,152 492,660
Long-term debt
Parent
Subsidiaries
Total shareholders' equity ........ 39,408 43,828 48,996 54,401 60,143 59,217 65,113
BALANCE SHEET DATA (AVERAGES):
Total assets ...................... $420,760 $451,953 $463,739 $502,700 $527,926 $527,000 $548,900
Total shareholders' equity ........ 37,454 41,820 46,755 52,067 57,806 57,000 62,800
Average number of diluted shares .. 2,800 2,800 2,800 2,800 2,800 2,800 2,800
outstanding
SELECTED RATIOS (ANNUALIZED):
Return on average assets .......... 1.25% 1.23% 1.32% 1.37% 1.34% 1.30% 1.35%
Return on average shareholders'
equity ......................... 14.93% 14.11% 13.95% 14.01% 12.97% 12.61% 12.31%
Net interest margin ............... 4.58% 4.68% 4.79% 4.66% 4.65% 4.60% 4.60%
Net chargeoffs to average loans ... 0.30% 0.14% 0.12% 0.36% 0.61% 0.58% 0.57%
Tier 1 capital to riskweighted
assets ......................... 16.44% 17.79% 16.94% 17.71% 18.74% 18.74% 20.34%
Total capital to riskweighted
assets ......................... 17.29% 18.76% 17.87% 18.69% 19.68% 19.68% 21.59%
Leverage ratio .................... 9.14% 9.55% 10.30% 10.25% 11.12% 11.35% 11.92%
14
17
Farmers & Merchants Bank
Selected Historical Financial Data
(Dollars in thousands, except per share amounts)
For the Nine
Months Ended
September 30,
For the Years Ended December 31, (Unaudited)
--------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ---- ----
EARNINGS SUMMARY:
Interest revenue ................... $ 1,415 $ 1,333 $ 1,367 $ 1,427 $ 1,439 $ 1,088 $ 1,063
Interest expense ................... 485 448 563 569 565 426 419
------- ------- ------- --------- -------- -------- --------
Net interest revenue ............ 930 885 804 858 874 662 644
Provision for credit losses ........ -- -- -- -- -- -- --
Non-interest income ................ 164 136 214 206 158 111 116
Non-interest expense ............... 672 677 626 609 621 445 463
------- ------- ------- --------- -------- -------- --------
Income before income tax ........ 422 344 392 455 411 328 297
Applicable income taxes ............ 93 71 95 115 102 85 60
------- ------- ------- --------- -------- -------- --------
Net income ......................... 329 273 297 340 309 243 237
======= ======= ======= ========= ======== ======== ========
PER SHARE DATA:
Basic earnings ..................... $109.67 $ 91.00 $ 99.00 $ 113.33 $ 103.00 $ 81.00 $ 79.00
Diluted earnings ................... 109.67 91.00 99.00 113.33 103.00 81.00 79.00
Cash dividends ..................... 24.00 30.00 34.00 40.00 48.00 36.00 42.00
Book value ......................... 783.33 740.67 966.00 1,002.67 1,077.67 1,058.33 1,146.00
BALANCE SHEET DATA (PERIOD END):
Total assets ....................... $19,889 $19,000 $19,405 $ 20,071 $ 19,921 $ 19,792 $ 21,167
Loans, net of unearned income ...... 4,835 4,595 4,822 4,985 5,372 5,672 5,327
Allowance for credit losses ........ 236 244 243 241 240 241 239
Securities ......................... 12,970 12,194 13,216 13,502 13,148 12,322 14,032
Deposits ........................... 17,347 16,690 16,181 16,814 16,442 16,359 17,391
Long-term debt ..................... -- -- -- -- -- -- --
Total shareholders' equity ......... 2,350 2,222 2,898 3,008 3,233 3,175 3,438
BALANCE SHEET DATA (AVERAGES):
Total assets ....................... $19,691 $19,445 $19,203 $ 19,738 $ 19,996 $ 19,766 $ 20,582
Total shareholders' equity ......... 2,222 2,286 2,560 2,958 3,121 3,164 3,280
Average number of diluted shares
outstanding ..................... 3 3 3 3 3 3 3
SELECTED RATIOS (ANNUALIZED):
Return on average assets ........... 1.66% 1.41% 1.53% 1.72% 1.55% 1.64% 1.54%
Return on average shareholders'
equity .......................... 14.80% 11.94% 11.60% 11.49% 9.90% 10.25% 9.19%
Net interest margin ................ 5.60% 5.43 4.86% 4.93% 5.00% 4.81% 5.08%
Net charge-offs to average loans ... (0.11)% (0.17)% 0.02% 0.04% 0.02% -- 0.08%
Tier 1 capital to risk-weighted
assets .......................... 40.51% 44.40% 46.46% 49.14% 46.96% 45.57% 46.06%
Total capital to risk-weighted
assets .......................... 40.81% 45.69% 47.74% 50.13% 48.24% 46.85% 47.34%
Leverage ratio ..................... 11.80% 13.14% 14.11% 14.53% 15.76% 15.38% 15.84%
15
18
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1997
(Unaudited)
Historical
-------------------------------
First Farmers
and Merchants Farmers &
Corporation Merchants Bank Adjustments Pro Forma(1)
------------- -------------- ----------- ------------
(In thousands)
ASSETS
Cash and due from banks ................... $ 29,873 $ 712 $ -- $ 30,585
Held-to-maturity securities ............... 96,266 -- -- 96,266
Available-for-sale securities ............. 49,521 13,148 -- 62,669
Federal funds sold ........................ 12,800 300 -- 13,100
Loans and leases .......................... 331,360 5,372 -- 336,732
Less: Allowance for credit losses ......... 2,943 240 -- 3,183
-------- ------- ------ --------
Net loans and leases ................ 328,417 5,132 -- 333,549
Mortgages held for sale ................... -- -- -- --
Premises and equipment, net ............... 6,413 360 -- 6,773
Investment in subsidiary bank ............. -- -- 3,232 2,514
Goodwill .................................. -- -- 2,288 3,006
Other assets .............................. 14,032 269 -- 14,301
-------- ------- ------ --------
Total assets ........................... $537,322 $19,921 $5,520 $562,763
======== ======= ====== ========
LIABILITIES
Deposits
Non-interest bearing ................... $ 80,205 $ 2,917 $ -- $ 83,122
Interest bearing ....................... 390,077 13,526 -- 403,603
-------- ------- --------
Total deposits ......................... 470,282 16,443 -- 486,725
Short-term borrowings ..................... -- -- -- --
Long-term debt ............................ -- -- -- --
Other liabilities ......................... 6,897 246 -- 7,143
-------- ------- ------ --------
Total liabilities ...................... 477,179 16,689 -- 493,868
-------- ------- ------ --------
SHAREHOLDERS' EQUITY
Common stock .............................. 14.000 300 120 (2) 14,120
(300)(2)
Capital surplus ........................... -- 300 (300)(2) --
Unrealized gain on available-for-sale
securities ............................. 360 118 -- 478
Retained earnings ......................... 45,783 2,514 2,514 (2) 54,297
480 (2)
--------
3,006 (3)
Total shareholders' equity ............. 60,143 3,232 5,520 68,895
--------- ------- ------ --------
Total liabilities and shareholders'
equity ............................... $537,322 $19,921 $5,520 $562,763
======== ======= ====== ========
- ----------------------
(1) Reclassification of capital accounts to reflect the exchange of Farmers
& Merchants Bank common stock for First Farmers and Merchants
Corporation common stock.
(2) Elimination of Farmers & Merchants Bank's existing capitalization and
issuance of 120,000 shares of First Farmers and Merchants Corporation's
common stock.
(3) New goodwill resulting from Farmers & Merchants Bank acquisition.
16
19
Pro Forma Condensed Consolidated Balance Sheet
September 30, 1998
(Unaudited)
Historical
-------------------------------
First Farmers
and Merchants Farmers &
Corporation Merchants Bank Adjustments Pro Forma(1)
------------- -------------- ----------- ------------
(In thousands)
ASSETS
Cash and due from banks ................... $ 21,785 $ 830 $ -- $ 22,615
Held-to-maturity securities ............... 112,966 -- -- 112,966
Available-for-sale securities ............. 79,934 14,032 -- 93,966
Federal funds sold ........................ 10,400 550 -- 10,950
Loans and leases .......................... 320,615 5,327 -- 325,942
Less: Unearned discount ................... -- -- -- --
Allowance for credit losses ......... 3,890 239 -- 4,129
-------- ------- --------
Net loans and leases ................... 316,725 5,088 -- 321,813
Mortgages held for sale ................... -- -- -- --
Premises and equipment, net ............... 6,584 340 -- 6,924
Investment in subsidiary bank ............. -- -- 3,438 (2) 2,625
Goodwill .................................. -- -- 2,082 (3) 2,895
Other assets .............................. 15,338 327 -- 15,665
-------- ------- ------ --------
Total assets ........................... $563,732 $21,167 $5,520 $590,419
======== ======= ====== ========
LIABILITIES
Deposits
Non-interest bearing ................... $ 70,667 $ 3,098 -- $ 73,765
Interest bearing ....................... 421,993 14,293 -- 436,286
-------- ------- --------
Total deposits ......................... 492,660 17,391 -- 510,051
Short-term borrowings ..................... -- -- -- --
Long-term debt ............................ -- -- -- --
Other liabilities ......................... 5,959 338 -- 6,297
-------- ------- ------ --------
Total liabilities ...................... 498,619 17,729 -- 516,348
-------- ------- ------ --------
SHAREHOLDERS' EQUITY
Common stock .............................. 28,000 300 120 (2) 28,120
300 (2)
Capital surplus ........................... -- 300 (300)(2) --
Accumulated other comprehensive income .... 646 213 -- 859
Retained earnings ......................... 36,467 2,625 2,625 (2) 45,092
480 (2) --
2,895 (3) --
-------- ------- ------ --------
Total shareholders' equity ............. 65,113 3,438 5,520 74,071
-------- ------- ------ --------
Total liabilities and shareholders'
equity ............................... $563,732 $21,167 $5,520 $590,419
======== ======= ====== ========
- -------------------------
(1) Reclassification of capital accounts to reflect the exchange of Farmers
& Merchants Bank common stock for First Farmers and Merchants
Corporation common stock.
(2) Elimination of Farmers & Merchants Bank's existing capitalization and
issuance of 120,000 shares of First Farmers and Merchants Corporation's
common stock.
(3) New goodwill resulting from Farmers & Merchants Bank acquisition.
17
20
Pro Forma Condensed Consolidated Statements of Income
(Unaudited)
For the years ended December 31,
---------------------------------------------------------------------------------------------------
1995 1996
------------------------------------------------ ------------------------------------------------
First First
Farmers Farmers
and Farmers & and Farmers &
Merchants Merchants Merchants Merchants
Corporation Bank Corporation Bank
Historical Historical Adjustments Pro Forma Historical Historical Adjustments Pro Forma
----------- ---------- ----------- --------- ----------- ---------- ----------- ---------
(In thousands, except per share amounts)
Interest revenue............... $34,493 $ 1,367 -- $35,860 $37,082 $ 1,427 -- $38,509
Interest expense............... 15,422 563 -- 15,985 16,712 569 -- 17,281
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue........... 19,071 804 -- 19,875 20,370 858 -- 21,228
Provision for credit losses.... 670 -- -- 670 1,300 -- -- 1,300
------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue, after
provision for credit losses.. 18,401 804 -- 19,205 19,071 858 -- 19,929
Non-interest income............ 4,573 214 -- 4,787 5,806 206 -- 6,012
Non-interest expense........... 14,340 626 -- 14,966 15,121 609 -- 15,730
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax....... 8,634 392 -- 9,026 9,755 455 -- 10,210
Applicable income taxes........ 2,519 95 -- 2,614 2,889 115 -- 3,004
------- ------- ------- ------- ------- ------- ------- -------
Net income..................... $ 6,115 $ 297 -- $ 6,412 $ 6,866 $ 340 -- $ 7,206
======= ======= ======= ======= ======= ======= ======= =======
EARNINGS PER SHARE
Basic........................ $ 2.18 $ 99.00 $ 2.20 $ 2.45 $113.33 -- $2.47
Diluted...................... 2.18 99.00 -- 2.20 2.45 113.33 -- 2.47
AVERAGE SHARES
Basic........................ 2,800 3 -- 2,920 2,800 3 -- 2,920
Diluted...................... 2,800 3 -- 2,920 2,800 3 -- 2,920
For the years ended December 31,
-----------------------------------------------------------------
1997
-----------------------------------------------------------------
First Farmers and
Merchants Farmers &
Corporation Merchants Bank
Historical Historical Adjustments Pro Forma
----------------- -------------- ----------- ---------
(In thousands, except per share amounts)
Interest revenue.......................................... $38,647 $ 1,439 -- $40,086
Interest expense.......................................... 17,304 565 -- 17,869
------- ------- ------- -------
Net interest revenue...................................... 21,343 874 -- 22,217
Provision for credit losses............................... 1,940 -- -- 1,940
------- ------- ------- -------
Net interest revenue, after provision for credit losses... 19,403 874 -- 20,277
Non-interest income....................................... 6,942 158 -- 7,100
Non-interest expense...................................... 16,063 621 -- 16,684
------- ------- ------- -------
Income before income tax.................................. 10,282 411 -- 10,693
Applicable income taxes................................... 3,228 102 -- 3,330
------- ------- ------- -------
Net income................................................ $ 7,054 $ 309 -- $ 7,363
======= ======= ======= =======
EARNINGS PER SHARE
Basic................................................... $ 2.52 $103.00 -- $ 2.52
Diluted................................................. 2.52 103.00 -- 2.52
AVERAGE SHARES
Basic................................................... 2,800 3 -- 2,920
Diluted................................................. 2,800 3 -- 2,920
18
21
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the nine months ended September 30,
----------------------------------------------------------------------------------------------------
1997 1998
------------------------------------------------- -------------------------------------------------
First Farmers Farmers & First Farmers Farmers &
and Merchants Merchants and Merchants Merchants
Corporation Bank Corporation Bank
Historical Historical Adjustments Pro Forma Historical Historical Adjustments Pro Forma
------------- ---------- ----------- --------- ------------- ---------- ----------- ---------
(In thousands, except per share amounts)
Interest revenue ............. $28,843 $1,088 $ -- $29,931 $29,988 $1,063 $ -- $31,051
Interest expense ............. 12,951 426 -- 13,377 13,158 419 -- 13,577
------- ------ ------- ------- ------- ----- ------- -------
Net interest revenue ......... 15,892 662 -- 16,554 16,830 644 -- 17,474
Provision for credit losses .. 1,290 -- -- 1,290 2,195 -- -- 2,195
------- ------ ------- ------- ------- ----- ------- -------
Net interest revenue, after
provision for credit losses . 14,602 662 -- 15,264 14,635 644 -- 15,279
Non-interest income .......... 4,785 111 -- 4,896 5,305 116 -- 5,421
Non-interest expense ......... 11,974 445 -- 12,419 12,040 463 -- 12,503
------- ------ ------- ------- ------- ----- ------- -------
Income before income tax ..... 7,413 328 -- 7,741 7,900 297 -- 8,197
Applicable income taxes ...... 2,269 85 -- 2,354 2,348 60 -- 2,408
------- ------ ------- ------- ------- ----- ------- -------
Net income ................... $ 5,144 $ 243 -- $ 5,387 $ 5,552 $ 237 -- $ 5,789
======= ====== ======= ======= ======= ====== ======= =======
EARNINGS PER SHARE
Basic ..................... $ 1.84 $81.00 -- $ 1.84 $ 1.98 $79.00 -- $ 1.98
Diluted ................... 1.84 81.00 -- 1.84 1.98 79.00 -- 1.98
AVERAGE SHARES
Basic ..................... 2,800 3 -- 2,920 2,800 3 -- 2,920
Diluted ................... 2,800 3 -- 2,920 2,800 3 -- 2,920
19
22
RISK FACTORS
In evaluating an investment in shares of First Farmers and Merchants
Corporation common stock (such as would occur in connection with the merger),
you should carefully consider the following factors, along with other matters
discussed in reports, proxy statements and other filings made with the SEC by
First Farmers and Merchants Corporation. You should not assume that the risk
factors listed below are the only risks that could affect the future performance
of First Farmers and Merchants Corporation or its common stock.
LIMITED TRADING MARKET FOR FIRST FARMERS AND MERCHANTS CORPORATION COMMON STOCK
Shares of First Farmers and Merchants Corporation common stock are
inactively traded in private transactions, and are not listed on any stock
exchange or the Nasdaq Stock Market. First Farmers and Merchants Corporation
cannot assure you that an active trading market will develop in the foreseeable
future, and does not currently intend to qualify or list First Farmers and
Merchants Corporation common stock on any securities market or exchange to
facilitate such trading.
FIRST FARMERS AND MERCHANTS CORPORATION AND ITS SUBSIDIARY BANK ARE SUBJECT TO
EXTENSIVE GOVERNMENTAL REGULATION
First Farmers and Merchants Corporation, as a registered bank holding
company under the Bank Holding Company Act of 1956, as amended, and First
Farmers and Merchants National Bank, as a national banking association, are
subject to extensive governmental regulation, legislation and control. These
laws may limit the operations of First Farmers and Merchants National Bank,
including its ability to extend loans, pay or charge interest and charge fees
for certain services. We cannot predict whether, or the extent to which, the
government may change any of these laws or controls, or the extent to which such
a change could result in a material adverse effect on the business and prospects
of First Farmers and Merchants Corporation and First Farmers and Merchants
National Bank.
FIRST FARMERS AND MERCHANTS NATIONAL BANK IS SUBJECT TO COMPETITION
The banking business is extremely competitive in First Farmers and
Merchants National Bank's service area. First Farmers and Merchants National
Bank competes, and will compete, with well established financial institutions,
several of which have significantly greater resources and lending limits than
First Farmers and Merchants National Bank. Some of these competitors provide
services which First Farmers and Merchants National Bank does not provide.
INTEREST RATES BEING PAID ON INTEREST-BEARING DEPOSITS AND LIABILITIES MAY
EXCEED THE INTEREST RATES BEING CHARGED ON OUTSTANDING LOANS
During periods of rising interest rates, First Farmers and Merchants
National Bank may make loans at interest rates that are lower than the interest
rates that First Farmers and Merchants National Bank is then paying for certain
of its interest-bearing deposits and other liabilities. This would result in a
negative interest rate spread with respect to those loans, and would have an
adverse effect on First Farmers and Merchants Corporation's earnings. This
adverse effect would increase in the event that interest rates continued to rise
and First Farmers and Merchants National Bank had outstanding loans at fixed
interest rates that could not be adjusted to a higher interest rate.
20
23
MONETARY POLICIES AND ECONOMIC FACTORS MAY LIMIT THE BANK'S ABILITY TO ATTRACT
DEPOSITS OR MAKE LOANS
The monetary policies of federal regulatory authorities, particularly
the Federal Reserve, and economic conditions in First Farmers and Merchants
National Bank's service area and the United States generally, affect First
Farmers and Merchants National Bank's ability to attract deposits and extend
loans. First Farmers and Merchants Corporation cannot predict either the nature
and timing of any changes in such conditions and policies or their impact. First
Farmers and Merchants Corporation's business is subject to various material
business risks. Some of these risks may become more acute in periods of economic
slowdown or recession. During such periods, loan defaults and foreclosures
generally increase, and such conditions also could lead to a potential decline
in deposits and demand for loans.
COMPUTER SYSTEMS MAY MALFUNCTION IN CONNECTION WITH YEAR 2000
Many software applications and operational programs are not designed to
recognize calendar dates beginning in the Year 2000. The failure of such
applications or systems to properly recognize the dates beginning in the Year
2000 could result in miscalculations or system failures. First Farmers and
Merchants National Bank's business depends in part upon its ability to store,
retrieve, process and manage significant databases. First Farmers and Merchants
National Bank has established a Year 2000 Compliance Task Force, which has
conducted a comprehensive review of the bank's computer systems to identify the
systems that could be affected by the Year 2000 issue and developed an
implementation plan to resolve potential problems. First Farmers and Merchants
National Bank has obtained representations from its computer software and
hardware vendors confirming compatibility with the Year 2000.
The Year 2000 issue may also affect the systems of various entities
with which First Farmers and Merchants National Bank interacts, including
depositors, vendors and those to which the bank has extended loans. First
Farmers and Merchants National Bank has corresponded with its primary vendors
and customers regarding their compliance with Year 2000 issues. We cannot assure
you, however, that the systems of these or other companies on which First
Farmers and Merchants National Bank's systems rely will be Year 2000 compliant.
Also, we cannot assure you that a failure by any of these companies to be Year
2000 compliant will not have material adverse effect on First Farmers and
Merchants National Bank.
ABILITY TO DECLARE AND PAY DIVIDENDS IS LIMITED BY LAW
First Farmers and Merchants Corporation derives its income solely from
dividends on its shares of First Farmers and Merchants National Bank common
stock. First Farmers and Merchants National Bank's ability to declare and pay
dividends is limited by law. In addition, the Federal Reserve may impose
restrictions on First Farmers and Merchants Corporation's ability to pay
dividends on First Farmers and Merchants Corporation common stock. We cannot
assure you that First Farmers and Merchants Corporation will declare or pay
dividends on shares of First Farmers and Merchants Corporation common stock in
the future, given the restrictions imposed by applicable regulatory authorities
on First Farmers and Merchants Corporation and First Farmers and Merchants
National Bank, the need to maintain adequate capital and the need to support the
company's growth.
21
24
THE SPECIAL MEETING
GENERAL
This Prospectus/Proxy Statement is first being mailed on or about
December __, 1998 to the holders (the "Farmers & Merchants Bank Shareholders")
of shares of common stock, $100.00 par value per share (the "Farmers & Merchants
Bank Common Stock"), of Farmers & Merchants Bank - White Bluff, Tenn., a
Tennessee banking corporation ("Farmers & Merchants Bank").
This Prospectus/Proxy Statement is accompanied by a Notice of Special
Meeting from, and form of proxy that is solicited by, the Board of Directors of
Farmers & Merchants Bank (the "Farmers & Merchants Bank Board") for use at the
special meeting of Farmers & Merchants Bank Shareholders (the "Special Meeting")
and at any adjournments or postponements thereof.
The Special Meeting is to be held as follows:
___________, 1999
______ _.m. (local time)
Farmers & Merchants Bank
2011 Highway 47 North
White Bluff, Tennessee.
At the Special Meeting, Farmers & Merchants Bank Shareholders will
consider and vote upon a proposal to approve and adopt an Agreement and Plan of
Merger, dated as of October 26, 1998 and amended as of December 15, 1998 (the
"Merger Agreement"), among Farmers & Merchants Bank, First Farmers and Merchants
Corporation, a Tennessee corporation ("First Farmers and Merchants
Corporation"), and First Farmers and Merchants National Bank of Columbia, a
national banking association and wholly-owned subsidiary of First Farmers and
Merchants Corporation ("First Farmers and Merchants National Bank"), which
provides for the merger of Farmers & Merchants Bank with and into First Farmers
and Merchants National Bank (the "Merger").
PROXIES
Farmers & Merchants Bank Shareholders may use the accompanying proxy
solicited by the Farmers & Merchants Bank Board if any such shareholder is
unable to attend the Special Meeting in person or wishes to have his or her
shares voted by proxy even if such shareholder does attend the meeting. Farmers
& Merchants Bank Shareholders may revoke any proxy given pursuant to this
solicitation by:
1. Delivering to the corporate Secretary of Farmers & Merchants
Bank a written notice revoking the proxy prior to the taking
of the vote at the Special Meeting;
2. Delivering a duly executed proxy relating to the same shares
bearing a later date; or
3. Attending the meeting and voting in person (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 proxies should be addressed to the following:
22
25
Farmers & Merchants Bank
P.O. Box 129
White Bluff, Tennessee 37187
Attention: Carol Thompson, Secretary.
For a notice of revocation or later proxy to be valid, however, it must
actually be received by Farmers & Merchants Bank prior to the vote of the
Farmers & Merchants Bank 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 Merger Agreement.
Farmers & Merchants Bank is currently 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, then shares represented by proxies will be
voted (or not voted) by the persons named in the proxies in their discretion.
SOLICITATION OF PROXIES
The cost of soliciting proxies from Farmers & Merchants Bank
Shareholders will be borne by the parties to the Merger Agreement. In addition
to the solicitation of proxies by mail, Farmers & Merchants Bank 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. Farmers & Merchants Bank will reimburse such record holders for their
reasonable expenses in so doing. If necessary, Farmers & Merchants Bank may also
use several of its regular employees, who will not be specially compensated, to
solicit proxies from Farmers & Merchants Bank Shareholders, either personally or
by telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
The Farmers & Merchants Bank Board has fixed December __, 1998 as the
record date (the "Record Date") for the determination of the Farmers & Merchants
Bank Shareholders entitled to receive notice of and to vote at the Special
Meeting. Accordingly, only Farmers & Merchants Bank Shareholders of record at
the close of business on the Record Date will be entitled to notice of and to
vote at the Special Meeting. At the close of business on the Record Date, there
were 3,000 shares of Common Stock entitled to vote at the Special Meeting held
by approximately 44 holders of record.
The presence, in person or by proxy, of shares of Farmers & Merchants
Bank Common Stock representing a majority of the votes entitled to be cast at
the Special Meeting is necessary to constitute a quorum. Each share of Farmers &
Merchants Bank Common Stock outstanding on the Record Date entitles its holder
to one vote as to the approval of (1) the Merger Agreement, and (2) any other
proposal that may properly come before the Special Meeting.
For purposes of determining the presence or absence of a quorum for the
transaction of business, Farmers & Merchants Bank will count shares of Farmers &
Merchants Bank Common Stock present in person at the Special Meeting but not
voting, and shares of Farmers & Merchants Bank 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. Abstentions are counted as present
at the Special Meeting for purposes of determining whether a quorum exists and
have the effect of a vote "against" any matter as to which they are specified.
Proxies submitted by brokers that do not indicate a vote for some or all of the
proposals because they don't have discretionary voting authority and have not
received instructions as to how to vote on those proposals (so-called "broker
non-votes") will be counted as present at the Special Meeting for purposes of
determining whether a quorum
23
26
exists and have the effect of a vote "against" any proposal as to which
instructions on how to vote were not provided.
Under the Tennessee Business Corporation Act (the "Tennessee
Corporation Act"), approval of the Merger Agreement requires the affirmative
vote of the holders of at least two-thirds of all votes entitled to be cast on
the Merger Agreement at the Special Meeting. Because approval of the Merger
Agreement requires the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Farmers & Merchants Bank Common Stock, abstentions and
broker non-votes will have the same effect as negative votes. Accordingly, the
Farmers & Merchants Bank Board urges Farmers & Merchants Bank Shareholders to
complete, date and sign the accompanying proxy and return it promptly in the
enclosed, postage-paid envelope.
As of the Record Date, about 1,437 shares of Farmers & Merchants Bank
Common Stock, or about 47.9% of the shares entitled to vote at the Special
Meeting, were beneficially owned by directors and executive officers of Farmers
& Merchants Bank. It is expected that each director and executive officer of
Farmers & Merchants Bank will vote the shares of Farmers & Merchants Bank Common
Stock beneficially owned by him or her for approval of the Merger Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Farmers & Merchants Bank Board has unanimously approved the Merger
Agreement. Farmers & Merchants Bank Board believes that the Merger is in the
best interests of Farmers & Merchants Bank and Farmers & Merchants Bank
Shareholders and unanimously recommends that Farmers & Merchants Bank
Shareholders vote "FOR" approval and adoption of the Merger Agreement. See "THE
MERGER -- Reasons for the Merger; Recommendation of the Board of Directors."
DISSENTERS' RIGHTS
Any holder of Farmers & Merchants Bank Common Stock is entitled to
dissenters' rights under Chapter 23 of the Tennessee Corporation Act as a result
of the Merger. The following discussion is not a complete statement of the law
pertaining to dissenters' rights under the Tennessee Corporation Act. Any
Farmers & Merchants Bank Shareholder who wishes to exercise such dissenters'
rights, or who wishes to preserve his or her right to do so, should review
Chapter 23 of the Tennessee Corporation Act, a copy of which is attached as
Annex B to this Prospectus/Proxy Statement, and the following discussion
carefully. Failure to timely and properly comply with the procedures specified
will result in the complete loss of dissenters' rights under the Tennessee
Corporation Act.
The availability of dissenters' rights is conditioned upon compliance
with applicable law. Accordingly, any Farmers & Merchants Bank Shareholder who
wishes to dissent from the Merger and receive the value of his or her shares of
Farmers & Merchants Bank Common Stock in cash should consult with his or her own
legal counsel.
A Farmers & Merchants Bank Shareholder's failure to vote against the
Merger Agreement will not constitute a waiver of his or her appraisal or similar
rights. A vote against the Merger Agreement will not be deemed to satisfy all of
the notice requirements under Tennessee law with respect to dissenters' rights.
In order to be eligible to exercise the right to dissent, a Farmers &
Merchants Bank Shareholder must:
1. Give notice in writing to Farmers & Merchants Bank prior to
the vote on the Merger Agreement that such Farmers & Merchants
Bank Shareholder intends to demand
24
27
payment for his or her shares of Farmers & Merchants Bank
Common Stock if the Merger is consummated; and
2. Not vote such shareholder's shares of Farmers & Merchants Bank
Common Stock in favor of the Merger Agreement.
If the Merger is approved at the Special Meeting, Farmers & Merchants
Bank must deliver a written notice (the "Dissenters' Notice") to all Farmers &
Merchants Bank Shareholders who satisfied the requirements referred to in the
preceding paragraph. Farmers & Merchants Bank must deliver the Dissenters'
Notice within ten days after the date on which the Merger is completed. This
notice must:
1. State where the payment demand ("Payment Demand") must be sent
and where Farmers & Merchants Bank Common Stock certificates
must be deposited;
2. Inform holders of uncertificated shares of Farmers & Merchants
Bank Common Stock to what extent transfer of the shares will
be restricted after the Payment Demand is received;
3. Supply a form for demanding payment that includes the date of
the first announcement to the news media or to Farmers &
Merchants Bank Shareholders of the principal terms of the
Merger, and requires that the Farmers & Merchants Bank
Shareholder asserting dissenters' rights to certify whether he
or she acquired beneficial ownership of the shares of Farmers
& Merchants Bank Common Stock before that date;
4. Set a date by which First Farmers and Merchants Corporation
must receive the Payment Demand, which date may not be fewer
than one nor more than two months after the date the
Dissenters' Notice is delivered; and
5. Be accompanied by a copy of Chapter 23 of the Tennessee
Corporation Act (if not previously provided).
A shareholder who is sent a Dissenters' Notice must demand payment in
accordance with the terms of the Dissenters' Notice and certify that he or she
acquired beneficial ownership of the shares of Farmers & Merchants Bank Common
Stock before the date required to be set forth in the Dissenters' Notice. The
dissenting shareholder must, deposit his or her stock certificates representing
shares of Farmers & Merchants Bank Common Stock in accordance with the terms of
the Dissenters' Notice.
A Farmers & Merchants Bank Shareholder who demands payment and deposits
his or her stock certificates in accordance with the previous paragraph retains
all other rights of a Farmers & Merchants Bank Shareholder until those rights
are canceled or modified by the consummation of the Merger.
A shareholder who does not demand payment or deposit his or her stock
certificates where required, in each case by the date set forth in the
Dissenters' Notice, is not entitled to payment for his or her shares of Farmers
& Merchants Bank Common Stock.
As soon as the Merger is effective, or upon receipt of a Payment
Demand, First Farmers and Merchants Corporation must pay each dissenting Farmers
and Merchants Shareholder who has complied with his or her obligations under
Section 48-23-204 of the Tennessee Corporation Act the amount First Farmers and
Merchants Corporation estimates to be the fair value of such Farmers &
25
28
Merchants Bank Shareholder's shares of Farmers & Merchants Bank Common Stock,
plus accrued interest. This payment must be accompanied by the following:
1. Farmers & Merchants Bank's balance sheet as of the end of a
fiscal year ending not more than 16 months before the date of
payment, an income statement for that year and the latest
available interim financial statements, if any;
2. A statement of First Farmers and Merchants Corporation's
estimate of the fair value of the shares of Farmers &
Merchants Bank Common Stock;
3. An explanation of how the interest was calculated;
4. A statement of the dissenting shareholder's right to demand
payment under Section 48-23-209 of the Tennessee Corporation
Act; and
5. A copy of Chapter 23 of the Tennessee Corporation Act (unless
previously provided).
Each dissenter who agrees to accept First Farmers and Merchants
Corporation's offer of payment in full satisfaction of his or her demand must
surrender to First Farmers and Merchants Corporation his or her certificate or
certificates in accordance with the terms of the Dissenters' Notice. Upon
receipt of the certificate or certificates, First Farmers and Merchants
Corporation will pay the dissenter the fair value of his or her shares, plus
accrued interest.
First Farmers and Merchants Corporation may elect to withhold an offer
of payment from a dissenter who was not the beneficial owner of the shares
("After-acquired Shares") of Farmers & Merchants Bank Common Stock before the
date set forth in the Dissenters' Notice as the date of the first announcement
to news media or to Farmers & Merchants Bank Shareholders of the principal terms
of the Merger. To the extent First Farmers and Merchants Corporation does elect
to withhold payment under those circumstances, First Farmers and Merchants
Corporation must estimate, after consummation of the Merger, the fair value of
the shares of Farmers & Merchants Bank Common Stock, plus accrued interest, and
pay this amount to each dissenting Farmers & Merchants Bank Shareholder who
agrees to accept it in full satisfaction of such shareholder's demand. First
Farmers and Merchants must send with its offer:
1. A statement of First Farmers and Merchants Corporation's
estimate of the fair value of the shares of Farmers &
Merchants Bank Common Stock;
2. An explanation of how the interest was calculated; and
3. A statement of the dissenting Farmers & Merchants Bank
Shareholder's right to demand payment pursuant to Section
48-23-209 of the Tennessee Corporation Act.
A dissenting shareholder may notify First Farmers and Merchants in
writing of such shareholder's own estimate of the fair value of his or her
shares of Farmers & Merchants Bank Common Stock and the amount of interest due.
The dissenting shareholder may demand payment of such estimate (less any
payments previously made) or reject First Farmers and Merchants Corporation's
offer and demand payment of the fair value of such shares and interest due, if:
1. The dissenting shareholder believes that the amount offered to
be paid by First Farmers and Merchants Corporation is less
than the fair value of such shares or that the interest due is
incorrectly calculated;
2. First Farmers and Merchants Corporation fails to make an offer
of payment within two months after the date set forth
demanding payment; or
26
29
3. First Farmers and Merchants Corporation, having failed to
complete the Merger, does not return the deposited
certificates or release the transfer restrictions imposed on
uncertificated shares of Farmers & Merchants Bank Common Stock
within two months after the date set for demanding payment.
However, a dissenting shareholder waives the right to demand such payment unless
the shareholder notifies First Farmers and Merchants Corporation of such demand
in writing within one month after First Farmers and Merchants Corporation made
or offered payment for the shareholder's shares of Farmers & Merchants Bank
Common Stock.
If First Farmers and Merchants Corporation does not take the proposed
corporate action within two months after the date set for demanding payment of
such dissenting shareholder's shares of Farmers & Merchants Bank Common Stock
and depositing certificates representing those shares, First Farmers and
Merchants Corporation must return the deposited certificates or release the
transfer restrictions imposed on such shares of Farmers & Merchants Bank Common
Stock. If First Farmers and Merchants Corporation, after releasing the transfer
restrictions imposed upon the shareholder's shares of Farmers & Merchants Bank
Common Stock, takes the proposed corporate action, a new Dissenters' Notice must
be delivered to the shareholder and the Payment Demand procedure discussed above
must be repeated.
If a demand for payment under Section 48-23-209 of the Tennessee
Corporation Act remains unsettled, First Farmers and Merchants Corporation must
commence a proceeding within two months after receiving the Payment Demand and
petition the court to determine the fair value of the shares of Farmers &
Merchants Bank Common Stock and accrued interest. If First Farmers and Merchants
Corporation does not commence this proceeding within this two month period, it
must pay each dissenting Farmers & Merchants Bank Shareholder whose demand
remains unsettled the amount demanded.
First Farmers and Merchants Corporation must commence any such
proceeding relating to Farmers & Merchants Bank Common Stock in the chancery
court of Dickson County, Tennessee (the "Court"). First Farmers and Merchants
Corporation must make all dissenting shareholders whose demands remain
unsettled, parties to the proceeding and all parties must be served with a copy
of the petition. The Court may appoint one or more persons as appraisers to
receive evidence and recommend a decision on the question of fair value. The
appraisers will have the powers described in the order appointing them, or in
any amendment to it. Dissenting shareholders are entitled to the same discovery
rights as parties to other civil proceedings.
Each dissenting Farmers & Merchants Bank Shareholder made a party to
the proceeding is entitled to judgment for the amount, if any, by which the
Court finds the fair value of such shareholder's shares of Farmers & Merchants
Bank Common Stock, plus accrued interest, to exceed the amount paid by First
Farmers and Merchants Corporation, plus the fair value, plus accrued interest,
of any After-acquired Shares for which payment was withheld.
The Court, in an appraisal proceeding, must determine all costs of the
proceeding, including the compensation and expense of appraisers appointed by
the Court. The Court must assess these costs against First Farmers and Merchants
Corporation, except that the Court may assess costs against all or some of the
dissenting shareholders, in amounts the Court finds equitable, to the extent the
Court finds the dissenting shareholders acted arbitrarily, vexatiously or not in
good faith in demanding payment.
The Court may also assess the reasonable fees and expenses of counsel
and experts for the respective parties, in amounts the Court finds equitable, as
follows:
27
30
1. Against First Farmers and Merchants Corporation and in favor
of any and all dissenting shareholders if the court finds that
First Farmers and Merchants Corporation did not substantially
comply with the requirements of Sections 48-23-201 through
48-23-209 of the Tennessee Corporation Act, or
2. Against either First Farmers and Merchants Corporation or a
dissenting shareholder, in favor of any other party, if the
court finds that the party against whom the fees and expenses
are assessed acted arbitrarily, vexatiously or not in good
faith with respect to the rights provided by Chapter 23 of the
Tennessee Corporation Act.
If the Court finds that the services of counsel for any dissenting
shareholder were of substantial benefit to other dissenting shareholders
similarly situated, and that the fees for those services should not be assessed
against First Farmers and Merchants Corporation, the Court may award to those
counsel reasonable fees to be paid out of the amounts awarded to the dissenting
shareholders who were benefited.
28
31
THE MERGER
DESCRIPTION OF THE MERGER
At the effective time of the Merger (the "Effective Time"), Farmers &
Merchants Bank will merge into First Farmers and Merchants National Bank, the
separate corporate existence of Farmers & Merchants Bank will cease and First
Farmers and Merchants National Bank will be the surviving bank (the "Surviving
Bank"). First Farmers and Merchants National Bank will continue to exist as a
national banking association. Subject to the satisfaction or waiver of certain
conditions set forth in the Merger Agreement, the Merger will become effective
upon the filing of articles of merger (the "Articles of Merger") in the offices
of the Commissioner of the Tennessee Department of Financial Institutions
("TDFI") and the Office of the Comptroller of the Currency ("OCC"). See "THE
MERGER AGREEMENT -- Conditions to the Merger."
The Merger will have the effects set forth in Section 215 of the
National Bank Act and Sections 45-2-1301 et seq. of the Tennessee Banking Act.
First Farmers and Merchants National Bank's articles of association
and bylaws as in effect at the Effective Time will be those of the Surviving
Bank.
At the Effective Time, automatically by virtue of the Merger and
without any action on the part of any party or shareholder, each share of
Farmers & Merchants Bank Common Stock issued and outstanding immediately prior
to the Effective Time will become and be converted into the right to receive 40
shares of common stock, $10.00 par value per share (the "First Farmers and
Merchants Corporation Common Stock"), of First Farmers and Merchants
Corporation. However, shares with respect to which appraisal or dissenters'
rights have been properly demanded in accordance with Chapter 23 of the
Tennessee Corporation Act ("Dissenting Shares"), or held by Farmers & Merchants
Bank (other than shares held in a fiduciary capacity ("Trust Account Shares")
or in respect of a debt previously contracted ("DPC Shares")), will not be
converted into First Farmers and Merchants Corporation Common Stock
automatically at the Effective Time of the Merger. If, prior to the Effective
Time, shares of First Farmers and Merchants Corporation Common Stock are
changed into a different number or class of shares due to any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment, or
if a stock dividend is declared on the shares of Farmers & Merchants Bank
Common Stock with a record date prior to the Effective Time, the exchange ratio
will be adjusted accordingly.
The market price of First Farmers and Merchants Corporation Common
Stock may fluctuate between the date of this Prospectus/Proxy Statement and the
date on which the Merger is completed, and thereafter, and may decrease. For
further information concerning the historical market prices of First Farmers
and Merchants Corporation Common Stock and Farmers & Merchants Bank Common
Stock, see "PRICE RANGE OF COMMON STOCK AND DIVIDENDS." We can give you no
assurance concerning the market price of First Farmers and Merchants
Corporation Common Stock before or after the Effective Time.
At the Effective Time, Farmers & Merchants Bank Shareholders, other
than those who perfect dissenters' rights under the Tennessee Corporation Act
(see "THE SPECIAL MEETING -- Dissenters' Rights"), will cease to be, and will
have no rights as, Farmers & Merchants Bank Shareholders, other than to receive
the consideration to be issued to them in the Merger (the "Merger
Consideration"). After the Effective Time, there will be no transfers on the
stock transfer books of Farmers & Merchants Bank of shares of Farmers &
Merchants Bank Common Stock. If, after the Effective Time, stock certificates
representing shares of Farmers & Merchants Bank Common Stock are presented for
transfer to First Farmers and Merchants National Bank as exchange agent (the
"Exchange Agent"), they will be canceled and exchanged for certificates
29
32
representing shares of First Farmers and Merchants Corporation Common Stock as
provided in the Merger Agreement.
At the Effective Time, all shares of Farmers & Merchants Bank Common
Stock held by Farmers & Merchants Bank, other than Trust Account Shares or DPC
Shares, will be canceled and will cease to exist, and no First Farmers and
Merchants Common Stock or other consideration will be delivered in exchange for
such shares. Also at the Effective Time, all shares of First Farmers and
Merchants Common Stock held by Farmers & Merchants Bank, other than Trust
Account Shares or DPC Shares, will become treasury stock and all other shares
of First Farmers and Merchants Corporation Common Stock outstanding as of the
Effective Time will remain outstanding.
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 in accordance with Chapter 23 of the Tennessee Corporation
Act. However, if any holder of Dissenting Shares subsequently delivers a
written withdrawal of their demand for appraisal, or if any holder fails to
establish his or her entitlement to dissenters' rights under Chapter 23 of the
Tennessee Corporation Act, the holder will forfeit the right to appraisal and
his or her shares will be deemed to have been converted into the right to
receive, and to have become exchangeable for, the Merger Consideration. See
"THE SPECIAL MEETING -- Dissenters' Rights."
BACKGROUND OF THE MERGER
Management of Farmers & Merchants Bank recognized that Farmers &
Merchants Bank was at a crossroads in late 1997 and early 1998. Farmers &
Merchants Bank had always been more than adequately capitalized and management
was faced with the prospect of steadily increasing capital levels and
potentially lower equity returns. Management and the Farmers & Merchants Bank
Board did not consider branching or acquisitions outside of Dickson County,
Tennessee as a viable alternative to leverage this excess capital. In addition,
Farmers & Merchants Bank had continued to be contacted by other financial
institutions as to its interest in being acquired. On October 8, 1998, the
Chairman of the Board of Farmers & Merchants Bank met with the Chairman of the
Board of First Farmers & Merchants Corporation and discussed the advisability
of pursuing a transaction to best realize shareholder value. They discussed
several factors, including the trend of industry consolidation, multiples being
paid for independent community banks, liquidity for Farmers & Merchants Bank
Shareholders and successor management issues. On October 13, 1998, the Chairman
of the Board of Farmers & Merchants Bank began a series of discussions with the
Farmers & Merchants Bank Board concerning the sale of Farmers & Merchants Bank.
Baker, Donelson, Bearman and Caldwell, P.C. ("Baker Donelson") was retained to
serve as special legal counsel for Farmers & Merchants Bank.
The Farmers & Merchants Bank Board met on October 22, 1998 (with legal
advisors present) to discuss the fiduciary duties of the directors, a range of
values that could be expected if the bank were sold, and a form of merger
agreement proposed by First Farmers and Merchants Corporation and negotiated by
the Chairman of the Board of Farmers & Merchants Bank with the assistance of
Baker Donelson. The Chairman of the Board of Farmers & Merchants Bank
recommended that the Farmers & Merchants Bank Board accept First Farmers and
Merchants Corporation's offer. The meeting was adjourned until October 27,
1998, to give the directors additional time to review the proposed merger
agreement, at which time the Farmers & Merchants Bank Board unanimously agreed
to accept the offer from First Farmers and Merchants Corporation and authorized
Farmers & Merchants Bank management to execute the Merger Agreement. The Merger
Agreement was signed by the parties on October 27, 1998. On December 15, 1998,
the parties signed an amendment to the Merger Agreement, which amended certain
provisions of the Merger Agreement relating to the accounting treatment of the
Merger.
30
33
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of First Farmers and Merchants Corporation
believes that the market area of Farmers & Merchants Bank is compatible with
First Farmers and Merchants National Bank's existing market areas. In addition,
it perceives that economies of scale and cost savings available through
combining administrative functions and increased competitiveness resulting from
combined marketing efforts and budgets should enhance the operations and
financial results of First Farmers and Merchants National Bank. In addition,
the Board of Directors of First Farmers and Merchants Corporation believes that
the Merger should strengthen the ability of Farmers & Merchants Bank (as a part
of First Farmers and Merchants National Bank) to compete and be successful in
its existing market since First Farmers and Merchants National Bank offers
services that are not currently available to customers of Farmers & Merchants
Bank and possesses technology that is not currently possessed by Farmers &
Merchants Bank.
In approving the Merger, the directors of Farmers & Merchants Bank
considered a number of factors. Without assigning any relative or specific
weights to the factors, the Farmers & Merchants Bank Board considered the
following material factors:
1. The information presented to the directors by the management
of Farmers & Merchants Bank concerning the business,
operations, earnings, asset quality and financial condition
of Farmers & Merchants Bank, including the competitive and
regulatory environment for financial institutions generally;
2. The financial terms of the Merger, including the relationship
of the Merger price to the market value, tangible book value
and earnings per share of Farmers & Merchants Bank Common
Stock;
3. The nonfinancial terms of the Merger, including the treatment
of the Merger as a tax-free exchange of Farmers & Merchants
Bank Common Stock for First Farmers and Merchants Corporation
Common Stock for federal income tax purposes (except with
respect to cash received for Farmers & Merchants Bank Common
Stock);
4. That the Merger will enable Farmers & Merchants Bank
Shareholders to exchange their shares of Farmers & Merchants
Bank Common Stock for stock in a larger and more diversified
entity, the stock of which is more widely held and more
actively traded;
5. The likelihood of the Merger being approved by applicable
regulatory authorities without undue conditions or delay; and
6. The fact that a condition to the Merger was that a fairness
opinion would be obtained from a third party financial
advisor to the effect that the aggregate consideration
provided for in the Merger Agreement is fair, from a
financial point of view, to Farmers & Merchants Bank
Shareholders.
BASED ON A THOROUGH EVALUATION OF THESE FACTORS, THE FARMERS &
MERCHANTS BANK BOARD BELIEVES THE MERGER IS IN THE BEST INTERESTS OF FARMERS &
MERCHANTS BANK AND FARMERS & MERCHANTS BANK SHAREHOLDERS. THE FARMERS &
MERCHANTS BANK BOARD UNANIMOUSLY RECOMMENDS THAT FARMERS & MERCHANTS BANK
SHAREHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
31
34
FAIRNESS OPINION
Professional Bank Services, Inc. ("PBS") was engaged by Farmers &
Merchants Bank to advise the Farmers & Merchants Bank Board as to the fairness
of the consideration, from a financial perspective, to be paid by First Farmers
and Merchants Corporation to the Farmers & Merchants Bank Shareholders as set
forth in the Merger Agreement.
PBS is a bank consulting firm with offices in Louisville, Chicago,
Nashville and Washington, D.C. As part of its investment banking business, PBS
is regularly engaged in reviewing the fairness of financial institution
acquisition transactions from a financial perspective and in the valuation of
financial institutions and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other transactions. Neither
PBS nor any of its affiliates has a material financial interest in Farmers &
Merchants Bank or First Farmers and Merchants Corporation. PBS was selected to
advise the Farmers & Merchants Bank Board based upon its familiarity with
Tennessee financial institutions and knowledge of the banking industry as a
whole.
PBS performed certain analyses described herein and presented the
range of values for Farmers & Merchants Bank resulting from such analyses to
the Farmers & Merchants Bank Board in connection with its advice as to the
fairness of the consideration to be paid by First Farmers and Merchants
Corporation.
A Fairness Opinion of PBS was delivered to the Farmers & Merchants
Bank Board on November 27, 1998, at a meeting of the Farmers & Merchants Bank
Board and has been updated as of the date of this Prospectus/Proxy Statement. A
copy of the Fairness Opinion, which includes a summary of the assumptions made
and information analyzed in deriving the Fairness Opinion, is attached as
Appendix C to this Prospectus/Proxy Statement and should be read in its
entirety.
In arriving at its Fairness Opinion, PBS reviewed certain publicly
available business and financial information relating to Farmers & Merchants
Bank and First Farmers and Merchants Corporation. PBS considered certain
financial and stock market data of Farmers & Merchants Bank and First Farmers
and Merchants Corporation, compared that data with similar data for certain
other publicly-held bank holding companies and considered the financial terms
of certain other comparable bank transactions in the states of Alabama,
Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina,
Tennessee, Virginia and West Virginia (the "Regional Area") that had recently
been effected. PBS also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria that it
deemed relevant. In connection with its review, PBS did not independently
verify the foregoing information and relied on such information as being
complete and accurate in all material respects. Financial forecasts prepared by
PBS were based on assumptions believed by PBS to be reasonable and to reflect
currently available information. PBS did not make an independent evaluation or
appraisal of the assets of Farmers & Merchants Bank or First Farmers and
Merchants Corporation.
As part of preparing this Fairness Opinion, PBS performed a due
diligence review of First Farmers and Merchants Corporation on November 18,
1998. As part of the due diligence, PBS reviewed the following items:
regulatory reports of examination of First Farmers and Merchants Corporation;
December 31, 1996 and 1997 audited annual reports and any supplemental
management letters issued by First Farmers and Merchants Corporation's
independent external auditors; the September 30, 1998 Consolidated Reports of
Condition and Income for First Farmers and Merchants National Bank; June 30,
1998 Quarterly Report on Form 10-Q filed with the SEC, the Bank Holding Company
Performance Report for June 30, 1998; various asset quality related reports;
the most recent allowance for loan and lease loss analysis reports for First
Farmers and Merchants Corporation and First Farmers and Merchants National
Bank; and independent internal audit reports. Discussions were also held with
First Farmers and Merchants Corporation management.
32
35
PBS reviewed and analyzed the historical performance of Farmers &
Merchants Bank contained in: audited financial statements dated December 31,
1996 and 1997 of Farmers & Merchants Bank; September 30, 1998 Consolidated
Reports of Condition and Income filed by Farmers & Merchants Bank with the
FDIC; June 30, 1998 Uniform Bank Performance Report of Farmers & Merchants
Bank; historical common stock trading activity of Farmers & Merchants Bank; and
the premises and other fixed assets. PBS reviewed and tabulated statistical
data regarding the loan portfolio, securities portfolio and other performance
ratios and statistics. Financial projections were prepared and analyzed as well
as other financial studies, analyses and investigations as deemed relevant for
the purposes of this opinion. In review of the aforementioned information, PBS
took into account its assessment of general market and financial conditions,
its experience in other similar transactions, and its knowledge of the banking
industry generally.
In connection with rendering the Fairness Opinion and preparing its
written and oral presentation to the Farmers & Merchants Banks Board, PBS
performed a variety of financial analyses, including those summarized herein.
The summary does not purport to be a complete description of the analyses
performed by PBS in this regard. The preparation of a Fairness Opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the separate factors
summarized below, PBS believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors considered by
it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. In performing its
analyses, PBS made numerous assumptions with respect to industry performance,
business and economic conditions and other matters, many of which are beyond
the control of Farmers & Merchants Bank or First Farmers and Merchants
Corporation. The analyses performed by PBS are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to
the values of businesses do not purport to be appraisals or to reflect the
process by which businesses actually may be sold.
Acquisition Comparison Analysis. In performing this analysis, PBS
reviewed all bank acquisition transactions in the Regional Area since 1995.
There were 337 bank acquisition transactions in the Regional Area announced
since 1995 for which detailed financial information was available. The purpose
of the analysis was to obtain an evaluation range based on these Regional Area
bank acquisition transactions. Median multiples of earnings and book value
implied by the comparable transactions were utilized in obtaining a range for
the acquisition value of Farmers & Merchants Bank. In addition to reviewing
recent Regional Area bank transactions, PBS performed separate comparable
analyses for acquisitions of banks which, like Farmers & Merchants Bank, had an
equity-to-asset ratio greater than 13.00%, had total assets less than $50.0
million, had a return on average equity ("ROAE") less than 10.00%, bank
transactions effected in the state of Tennessee since January 1, 1995 and bank
transactions effected in the Regional Area since January 1, 1997. In addition,
median values for the 337 Regional Area acquisitions expressed as multiples of
both book value and earnings were 2.21 and 20.18, respectively. The median
multiples of book value and earnings for acquisitions of Regional Area banks
which, like Farmers & Merchants Bank, had an equity-to-asset ratio greater than
13.00% were 1.71 and 20.16, respectively. For acquisitions of Regional Area
banks with assets less than $50.0 million the median multiples were 1.75 and
17.97, respectively. For Regional Area acquisitions of banks with a ROAE less
than 10.00%, the median multiples of book value and earnings were 1.77 and
26.42, respectively. The median multiples of book value and earnings for
acquisitions of Tennessee banks since January 1, 1995 were 2.07 and 19.86,
respectively. The median multiples of book value and earnings for acquisitions
of Regional Area banks since January 1, 1997 were 2.75 and 22.08, respectively.
In the proposed transaction, Farmers & Merchants Bank Shareholders will
receive an aggregate of $5,520,000 or $1,840.00 per share of Common Stock based
on the a First
33
36
Farmers and Merchants Corporation stock price of $46.00, as further defined in
the Agreement. The $1,840.00 per Company common share represents a multiple of
Farmers & Merchants Bank's September 30, 1998 book value and a multiple of
Farmers & Merchants Bank's annualized September 30, 1998 net income of 1.61X
and 17.47X, respectively.
The market value of the proposed transaction's percentile ranking was
prepared and analyzed with respect to the above Regional Area comparable
transaction groups. Compared to all Regional Area bank transactions, the
acquisition value ranked in the 15th percentile as a multiple of book value and
in the 34th percentile as a multiple of earnings. Compared to Regional Area
bank transactions where the acquired institution had an equity-to-asset ratio
greater than 13.00%, the acquisition value ranked in the 37th percentile as a
multiple of book value and the 31st percentile as a multiple of earnings. For
Regional Area bank acquisitions where the acquired institution had less than
$50.0 million in assets, the acquisition value ranked in the 35th percentile as
a multiple of book value and the 49th percentile as a multiple of earnings. For
Regional Area bank transactions where the acquired institution had a ROAE less
than 10.00%, the acquisition value ranked in the 31st percentile as a multiple
of book value and the 18th percentile as a multiple of earnings. For Tennessee
bank transactions effected since January 1, 1995, the acquisition value ranked
in the 8th percentile as a multiple of book value and in the 37th percentile as
a multiple of earnings. For Regional Area bank transactions effected since
January 1, 1997, the acquisition value ranked in the 8th percentile as a
multiple of book value and in the 23rd percentile as a multiple of earnings.
Adjusted Net Asset Value Analysis. PBS reviewed Farmers & Merchants
Bank's balance sheet data to determine the amount of material adjustments
required to the stockholders' equity of Farmers & Merchants Bank based on
differences between the market value of Farmers & Merchants Bank's assets and
their value reflected on Farmers & Merchants Bank's financial statements. PBS
determined that one adjustment was warranted. PBS reflected a value of the
non-interest bearing demand deposits of approximately $676,000. The aggregate
adjusted net asset value of Farmers & Merchants Bank was determined to be
$4,114,000 or $1,371.33 per share of Farmers & Merchants Common Stock.
Discounted Earnings Analysis. A dividend discount analysis was
performed by PBS pursuant to which a range of values of Farmers & Merchants
Bank was determined by adding (i) the present value of estimated future
dividend streams that Farmers & Merchants Bank could generate over a five-year
period and (ii) the present value of the "terminal value" of Farmers &
Merchants Bank's earnings at the end of the fifth year. The "terminal value" of
Farmers & Merchants Bank's earnings at the end of the five-year period was
determined by applying a multiple of 20.18 times the projected terminal year's
earnings. The 20.18 multiple represents the median price paid as a multiple of
earnings for all Regional Area bank transactions since 1995.
Dividend streams and terminal values were discounted to present values
using a discount rate of 12%. This rate reflects assumptions regarding the
required rate of return of holders or buyers of Farmers & Merchants Bank Common
Stock. The aggregate value of Farmers & Merchants Bank, determined by adding
the present value of the total cash flows, was $5,013,000 or $1,671.05 per
share. In addition, using the five-year projection as a base, a twenty-year
projection was prepared assuming an annual growth rate of 2.5%, and a return on
assets of 1.55% throughout the analysis. Dividends were equal to 80.0% of
income throughout the analysis. This long-term projection resulted in an
aggregate value of $3,312,000 or $1,103.90 per share of Farmers & Merchants
Common Stock.
Specific Acquisition Analysis. PBS valued Farmers & Merchants Bank
based on an acquisition analysis assuming a "break-even" earnings scenario to
an acquiror as to price, current interest rates and amortization of the premium
paid. Based on this analysis, an acquiring institution would pay in aggregate
$5,051,000, or $1,683.67 per share, assuming they were willing to accept no
impact to their net income in the initial year. This analysis was based on a
funding cost of 6.5% adjusted for taxes, amortization of the acquisition
premium over 15 years and a projected December
34
37
31, 1998 earnings level of $316,000. This analysis was repeated assuming a
potential acquiror would attain non-interest expense reductions of 10% in the
transaction. Based on this analysis an acquiring institution would pay in
aggregate $5,419,000 or $1,806.33 per share of Farmers & Merchants Common
Stock.
Pro Forma Merger Analysis. PBS compared the historical performance of
Farmers & Merchants Bank to that of First Farmers and Merchants Corporation and
other regional holding companies. This analysis included, among other things, a
comparison of profitability, asset quality and capital measures. In addition,
the contribution of Farmers & Merchants Bank and First Farmers and Merchants
Corporation to the income statement and balance sheet of the pro forma combined
company was analyzed.
The effect of the affiliation on the historical and pro forma
financial data of Farmers & Merchants Bank was prepared and analyzed. Farmers &
Merchants Bank's historical financial data was compared to the pro forma
combined historical and projected earnings, book value and dividends per share.
The Fairness Opinion is directed only to the question of whether the
consideration to be received by Farmers & Merchants Bank Shareholders under the
Merger Agreement is fair and equitable from a financial perspective and does
not constitute a recommendation to any shareholder to vote in favor of the
Merger. No limitations were imposed on PBS regarding the scope of its
investigation or otherwise by Farmers & Merchants Bank.
Based on the results of the various analyses described above, PBS
concluded that the consideration to be received by Farmers & Merchants Bank
Shareholders under the Merger Agreement is fair and equitable from a financial
perspective to the shareholders of Farmers & Merchants Bank Shareholder.
PBS will receive fees of approximately $16,000 for all services
performed in connection with the sale of Farmers & Merchants Bank and the
rendering of the Fairness Opinion. In addition, Farmers & Merchants Bank has
agreed to indemnify PBS and its directors, officers and employees, from
liability in connection with the transaction, and to hold PBS harmless from any
losses, actions, claims, damages, expenses or liabilities related to any of
PBS' acts or decisions made in good faith and in the best interest of Farmers &
Merchants Bank.
REGULATORY APPROVAL
Consummation of the Merger is conditioned on, among other things, the
receipt of approvals by governmental authorities required in connection with
the Merger ("Requisite Regulatory Approvals"), including approval by the OCC.
The Board of Governors of the Federal Reserve System (the "Federal Reserve")
has waived its notification filing requirements with respect to the Merger.
As a national bank, First Farmers and Merchants National Bank must
file an application with the OCC for approval of the Merger pursuant to
provisions of the National Bank Act and rules under that act. The OCC may
disapprove the application if it finds that the Merger tends to create or
result in a monopoly, substantially lessen competition or would be in restraint
of trade. First Farmers and Merchants National Bank filed such application with
the OCC on November 13, 1998. Following approval of the application by the OCC,
the United States Department of Justice would have 15 to 30 calendar days to
submit any adverse comments with regard to the Merger relating to competitive
factors. Such approval is expected to be obtained from the OCC on or about
January 4, 1999, and the waiting period is expected to have expired by January
19, 1999.
First Farmers and Merchants National Bank must also file a notice with
the TDFI regarding the Merger. First Farmers and Merchants National Bank filed
such notice on November 30, 1998.
35
38
ACCOUNTING TREATMENT
It is intended that the Merger will be accounted for as a purchase
under generally accepted accounting principles ("GAAP"). Under the purchase
method of accounting, the assets and liabilities of Farmers & Merchants Bank
will be recorded on the consolidated financial statements of First Farmers and
Merchants Corporation based upon their respective fair market values as of the
date on which the Merger is completed. The amount by which the total Merger
consideration exceeds the fair market value of Farmers & Merchants Bank's assets
as of the date on which the Merger is completed will be recorded as "goodwill"
on First Farmers and Merchants Corporation's consolidated financial statements.
The unaudited pro forma financial information included in this Prospectus/Proxy
Statement reflects the Merger using the purchase method of accounting. See
"SUMMARY -- Comparative Unaudited Per Share Data" and "Selected Financial Data."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material anticipated U.S. federal
income tax consequences of the Merger to Farmers & Merchants Bank Shareholders
who hold Farmers & Merchants Bank Common Stock as a capital asset. The summary
is based on the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), Treasury regulations thereunder, and administrative rulings and
court decisions in effect as of the date hereof, all of which are subject to
change at any time, possibly with retroactive effect. This summary is not a
complete description of all of the consequences of the Merger and, in
particular, may not address U.S. federal income tax considerations applicable
to shareholders subject to special treatment under U.S. federal income tax law
(such as non-U.S. persons, financial institutions, dealers in securities,
insurance companies, tax-exempt entities, holders who acquired Farmers &
Merchants Bank Common Stock pursuant to the exercise of an employee stock
option or right or otherwise as compensation, and holders who hold Farmers &
Merchants Bank Common Stock as part of a hedge, straddle or conversion
transaction). In addition, no information is provided herein with respect to
the tax consequences of the Merger under applicable foreign, state or local
laws. FARMERS & MERCHANTS BANK SHAREHOLDERS ARE URGED TO CONSULT WITH THEIR TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE
EFFECTS OF U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND OF
POTENTIAL CHANGES TO APPLICABLE TAX LAW.
First Farmers and Merchants Corporation has received a legal opinion
from Baker, Donelson Bearman & Caldwell, P.C., Nashville, Tennessee, dated
December __, 1998, addressing the U.S. federal income tax consequences of the
Merger described below. Such letter has been rendered on the basis of facts,
representations and assumptions set forth or referred to in such letter which
are consistent with the expected state of facts existing at the Effective Time.
In rendering this letter, such firm has required and relied upon
representations and covenants, including those contained in certificates of
officers of Farmers & Merchants Bank and First Farmers and Merchants
Corporation. The letter is to the effect that, for U.S. federal income tax
purposes:
1. The Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code;
2. No gain or loss will be recognized by First Farmers and
Merchants Corporation or Farmers & Merchants Bank as a result
of the Merger;
3. No gain or loss will be recognized by Farmers & Merchants
Bank Shareholders who exchange all of their respective common
stock solely for First Farmers and Merchants Corporation
Common Stock pursuant to the Merger (except with respect to
cash received in lieu of a fractional share interest in First
Farmers and Merchants Corporation Common Stock); and
36
39
4. The aggregate tax basis of the First Farmers and Merchants
Corporation Common Stock received by Farmers & Merchants Bank
Shareholders who exchange all of their respective shares of
Farmers & Merchants Bank Common Stock solely for First
Farmers and Merchants Corporation Common Stock pursuant to
the Merger will be the same as the aggregate tax basis of
Farmers & Merchants Bank Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional
share interest for which cash is received).
Farmers & Merchants Bank's obligation to consummate the Merger is
conditioned upon the receipt of a legal opinion, to be dated the date on which
the Merger is completed, addressing the same U.S. federal income tax
consequences discussed in the immediately preceding paragraph. This legal
opinion to be delivered in connection with the Merger is not binding on the
Internal Revenue Service (the "IRS") or the courts. The parties do not intend
to request a ruling from the IRS with respect to the Merger. Accordingly, there
can be no assurance that the IRS will not challenge the conclusions reflected
in such opinions or that a court will not sustain such challenge.
Generally, cash received by a Farmers & Merchants Bank Shareholder in
lieu of a fractional share interest in First Farmers and Merchants Corporation
Common Stock will be treated as received in redemption of such fractional share
interest, and such Farmers & Merchants Bank Shareholder should generally
recognize capital gain or loss for federal income tax purposes measured by the
difference between the amount of cash received and the portion of the tax basis
of the share of Farmers & Merchants Bank Common Stock treated as redeemed. Such
gain or loss should be a long-term capital gain or loss if the holding period
for shares of Farmers & Merchants Bank Common Stock is greater than one year at
the Effective Time. Generally, in the case of individual shareholders, such
capital gain will be taxed at a maximum rate of 20% (10%, if the gain would be
taxed at 15% if it were treated as ordinary income) if such shareholder's
holding period is more than one year. The holding period of a share of First
Farmers and Merchants Corporation Common Stock received in the Merger
(including a fractional share interest deemed received and redeemed as
described above) will include the holder's holding period in Farmers &
Merchants Bank Common Stock surrendered in exchange for First Farmers and
Merchants Corporation Common Stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of management of Farmers & Merchants Bank and the
Farmers & Merchants Bank Board may be deemed to have certain interests in the
Merger that are in addition to their interests as shareholders generally.
Farmers & Merchants Bank Board was aware of these interests and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby.
Directors and executive officers of Farmers & Merchants Bank will be
issued shares of First Farmers and Merchants Corporation Common Stock in the
Merger on the same basis as other Farmers & Merchants Bank Shareholders. The
following chart shows the number of shares of First Farmers and Merchants
Corporation Common Stock that may be issued to directors and executive officers
of Farmers & Merchants Bank in the Merger:
37
40
Beneficial ownership of shares of Farmers &
Merchants Bank Common Stock by executive officers
and directors as of December __, 1998......................................... 1,437
Shares of First Farmers and Merchants Corporation
Common Stock to be received at the Effective Time
(based on such beneficial ownership)........................................... 57,480
COMPARISON OF RIGHTS OF SHAREHOLDERS
At the Effective Time, Farmers & Merchants Bank Shareholders will
automatically become First Farmers and Merchants Corporation shareholders
(except for those shareholders who exercise Dissenters' Rights). First Farmers
and Merchants Corporation is a Tennessee corporation governed by provisions of
the Tennessee Corporation Act, the charter of First Farmers and Merchants
Corporation (the "First Farmers and Merchants Corporation Charter") and the
bylaws of First Farmers and Merchants Corporation (the "First Farmers and
Merchants Corporation Bylaws"). Farmers & Merchants Bank is a Tennessee banking
corporation governed by provisions of the Tennessee Banking Act and the
Tennessee Corporation Act, the charter of Farmers & Merchants Bank (the
"Farmers & Merchants Bank Charter") and the bylaws of Farmers & Merchants Bank
(the "Farmers & Merchants Bank Bylaws"). See "COMPARISON OF RIGHTS OF
SHAREHOLDERS."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of First Farmers and Merchants Corporation Common Stock
issuable to Farmers & Merchants Bank Shareholders upon consummation of the
Merger have been registered under the Securities Act of 1933 (the "Securities
Act"). Such securities may be traded freely without restriction by those
shareholders who are not deemed to be "affiliates" of Farmers & Merchants Bank
or First Farmers and Merchants Corporation, as that term is defined in the
rules promulgated under the Securities Act.
Shares of First Farmers and Merchants Corporation Common Stock
received by those Farmers & Merchants Bank Shareholders who are deemed to be
affiliates of Farmers & Merchants Bank 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.
Farmers & Merchants Bank agreed in the Merger Agreement to use its
reasonable best efforts to cause each person who is an affiliate (for purposes
of Rule 145 under the Securities Act) of Farmers & Merchants Bank to deliver to
First Farmers and Merchants Corporation a written agreement intended to ensure
compliance with the Securities Act.
38
41
THE MERGER AGREEMENT
The following summary of certain terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement,
which is incorporated into this document by reference and, with the exception
of certain exhibits and schedules thereto, is attached as Annex A to this
Prospectus/Proxy Statement.
EXCHANGE OF CERTIFICATES
At or prior to the Effective Time, First Farmers and Merchants
Corporation will deposit, or will cause to be deposited, with the Exchange
Agent, certificates representing the shares of First Farmers and Merchants
Corporation Common Stock ("First Farmers and Merchants Corporation
Certificates") and cash to be paid in lieu of fractional shares to which a
holder of certificates formerly representing Farmers & Merchants Bank Common
Stock ("Farmers & Merchants Bank Certificates") would otherwise be entitled
based on the Merger exchange ratio of 40 (such cash and First Farmers and
Merchants Corporation Certificates, together with any dividends or
distributions with respect thereto, the "Exchange Fund").
Within three business days after the date on which the Merger is
completed (the "Effective Date"), the Exchange Agent will mail to each holder
of record of a Farmers & Merchants Bank Certificate a letter of transmittal for
use in exchanging such shareholder's Farmers & Merchants Bank Certificates for
the Merger Consideration. Upon surrender of a Farmers & Merchants Bank
Certificate for exchange and cancellation to the Exchange Agent, together with
a duly executed letter of transmittal, the holder of a Farmers & Merchants Bank
Certificate will be entitled to receive in exchange for such Farmers &
Merchants Bank Certificate a First Farmers and Merchants Corporation
Certificate representing the number of whole shares of First Farmers and
Merchants Corporation Common Stock to which such holder has become entitled
pursuant to the Merger Agreement. The holder of the Farmers & Merchants Bank
Certificate may also receive a check in the amount of cash in lieu of
fractional shares, if any, of First Farmers and Merchants Corporation Common
Stock to which such holder has become entitled pursuant to the Merger
Agreement. Farmers & Merchants Bank Certificates so surrendered will
immediately be canceled. No interest will be paid or accrued on any cash to be
paid upon such surrender, whether in lieu of fractional shares of First Farmers
and Merchants Corporation Common Stock or with respect to unpaid dividends or
distributions thereon.
FARMERS & MERCHANTS BANK SHAREHOLDERS SHOULD NOT SEND IN THEIR STOCK
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE EXCHANGE
AGENT.
First Farmers and Merchants Corporation will not issue any fractional
shares of First Farmers and Merchants Corporation Common Stock, or First
Farmers and Merchants Corporation Certificates or scrip representing such
fractional shares, in the Merger. Also, no dividend or distribution will be
payable on or with respect thereto, nor will any such fractional share entitle
the holder thereof to vote or to any other rights of a First Farmers and
Merchants Corporation Shareholder. Instead, First Farmers and Merchants
Corporation will pay to each Farmers & Merchants Bank Shareholder who would
otherwise be entitled to a fractional share of First Farmers and Merchants
Corporation Common Stock (after taking into account all Farmers & Merchants
Bank Certificates delivered by such shareholder) an amount in cash to be paid
in lieu of fractional shares (without interest) determined by multiplying such
fraction by $46.00.
Any part of the Exchange Fund that remains unclaimed by Farmers &
Merchants Bank Shareholders for 12 months after the Effective Time will be paid
to First Farmers and Merchants Corporation. After such time Farmers & Merchants
Bank Shareholders may look only to First Farmers and Merchants Corporation for
payment of the Merger Consideration and unpaid dividends
39
42
and distributions, if any, on Farmers & Merchants Bank Common Stock deliverable
in respect of each share of Farmers & Merchants Bank Common Stock held by such
shareholder, in each case, without interest thereon. None of Farmers &
Merchants Bank, First Farmers and Merchants Corporation or the Exchange Agent,
or any other person, will be liable to any former Farmers & Merchants Bank
Shareholder for any amounts properly delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
If any Farmers & Merchants Bank Certificate is lost, stolen or
destroyed, First Farmers and Merchants Corporation can require, at its
discretion, the making of an affidavit of that fact by the person claiming the
same and/or the posting of a bond by such person in an amount that First
Farmers and Merchants Corporation or the Exchange Agent may direct as indemnity
against any claim that may be made against it with respect to such Farmers &
Merchants Bank Certificate. Upon making such affidavit and/or posting such
bond, the Exchange Agent will issue in exchange for such Farmers & Merchants
Bank Certificate the shares of First Farmers and Merchants Corporation Common
Stock and cash in lieu of fractional shares deliverable in respect thereof.
No dividends or other distributions with respect to First Farmers and
Merchants Corporation Common Stock declared after the Effective Time and
payable to First Farmers and Merchants Corporation Shareholders of record will
be paid to the holder of any unsurrendered Farmers & Merchants Bank Certificate
until the holder thereof surrenders such Farmers & Merchants Bank Certificate
in accordance with the Merger Agreement. After the proper surrender of a
Farmers & Merchants Bank Certificate, the record holder of the certificate will
be entitled to receive any such dividends or other distributions, without any
interest thereon, which had become payable with respect to shares of First
Farmers and Merchants Corporation Common Stock represented by such Farmers &
Merchants Bank Certificate upon completion of the Merger.
CONDITIONS TO THE MERGER
The obligations of Farmers & Merchants Bank and First Farmers and
Merchants Corporation to complete the Merger are subject to the satisfaction
(or waiver, where legally allowed), at or prior to the Effective Time, of a
number of conditions, which are set forth in the Merger Agreement. These
conditions include:
1. Approval of the Merger Agreement by Farmers & Merchants Bank
Shareholders;
2. Receipt of the Requisite Regulatory Approvals;
3. The absence of any legal prohibition to completion of the
Merger;
4. The accuracy of the parties' representations and performance
of the parties' obligations under the Merger Agreement; and
5. Satisfactory completion of each party's due diligence review
of the other party to the Merger Agreement.
In addition, the obligation of Farmers & Merchants Bank to consummate
the Merger is conditioned upon receipt of a legal opinion to the effect that
the Merger will be treated as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code and that, accordingly, for federal income
tax purposes:
1. No gain or loss will be recognized by First Farmers and
Merchants Corporation or Farmers & Merchants Bank as a result
of the Merger;
40
43
2. No gain or loss will be recognized by Farmers & Merchants
Bank Shareholders who exchange all of their respective shares
of Farmers & Merchants Bank Common Stock solely for First
Farmers and Merchants Corporation Common Stock pursuant to
the Merger (except with respect to cash received in lieu of a
fractional share interest in First Farmers and Merchants
Corporation Common Stock); and
3. The aggregate tax basis of the First Farmers and Merchants
Corporation Common Stock received by Farmers & Merchants Bank
Shareholders who exchange all of their respective shares of
Farmers & Merchants Bank Common Stock solely for First
Farmers and Merchants Corporation Common Stock pursuant to
the Merger will be the same as the aggregate tax basis of
Farmers & Merchants Bank Common Stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional
share interest for which cash is received).
Further, the obligation of Farmers & Merchants Bank to complete the
Merger is conditioned upon receipt by Farmers & Merchants Bank of an opinion
from its financial advisor to the effect that as of the date of the opinion and
based upon and subject to the matters set forth in the opinion, the exchange
ratio in the Merger is fair to Farmers & Merchants Bank Shareholders from a
financial point of view. See "THE MERGER -- Fairness Opinion."
The parties cannot guarantee that the Requisite Regulatory Approvals
will be obtained or that 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 MERGER AGREEMENT
The Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger by Farmers & Merchants
Bank Shareholders, as set forth in the Merger Agreement, including by mutual
consent of First Farmers and Merchants Corporation and Farmers & Merchants
Bank. In addition, the Merger Agreement may be terminated by either party if:
1. A governmental entity issues a final order prohibiting the
Merger or (subject to a 60 day waiting period) rejects an
application for a Requisite Regulatory Approval;
2. The Merger is not consummated on or before April 30, 1999;
3. Farmers & Merchants Bank Shareholders fail to approve the
Merger; or
4. The other party materially breaches its representations or
covenants set forth in the Merger Agreement and fails to cure
that breach within the prescribed time limit.
In addition, First Farmers and Merchants Corporation may terminate the
Merger Agreement if the Farmers & Merchants Bank Board has withdrawn, modified
or changed in a manner adverse to First Farmers and Merchants Corporation its
approval of the Merger, or its recommendation to Farmers & Merchants Bank
Shareholders that such shareholders approve the Merger Agreement and the
Merger.
In the event of termination of the Merger Agreement pursuant to its
terms, the Merger Agreement will become void and have no effect, except with
respect to the parties' obligations regarding confidential information and
expenses as set forth in the Merger Agreement. Termination also will not
relieve or release a breaching party from liability or damages for its willful
breach of the Merger Agreement.
41
44
CONDUCT OF BUSINESS PRIOR TO THE MERGER AND OTHER COVENANTS
In the Merger Agreement, each of the parties agreed that, prior to the
Effective Time and except as expressly contemplated or permitted by the Merger
Agreement or with the prior written consent of the other party, such party and
its subsidiaries will carry on their businesses in the ordinary course
consistent with past practice. Each of the parties also agreed to refrain from
engaging in, or permitting its subsidiaries to engage in, certain activities
which are described in the Merger Agreement.
Farmers & Merchants Bank agreed to refrain from:
1. Declaring or paying any dividends on, or making other
distributions in respect of any of its capital stock during
any period (except that Farmers & Merchants Bank may declare
and pay normal quarterly dividends for the third and fourth
quarter of 1998 in an amount not to exceed $14.00 per share
of Farmers & Merchants Bank Common Stock);
2. Issuing or acquiring its capital stock;
3. Issuing any options or other securities convertible into or
exchangeable for its capital stock;
4. Amending its charter or bylaws;
5. Making any capital expenditure in excess of $25,000;
6. Engaging in a material acquisition of another business;
7. Adopting or amending any employee benefit plan or
compensation arrangement;
8. Incurring any indebtedness other than in the ordinary course
of business consistent with past practice;
9. Disposing of any material assets other than in the ordinary
course of business consistent with past practice; or
10. Entering into, renewing, amending or terminating any material
contract.
In addition, Farmers & Merchants Bank agreed that, prior to the
Effective Time, it will not authorize or permit any of its officers, directors,
employees or agents to, directly or indirectly, solicit, initiate, facilitate,
encourage or participate in any inquiries, proposals, discussions or
negotiations relating to a tender or exchange offer, merger, consolidation or
other business combination involving Farmers & Merchants Bank or the
acquisition of a substantial portion of its capital stock or assets (a
"Takeover Proposal"). Farmers & Merchants Bank agreed to immediately cease and
terminate any existing activities, discussions or negotiations previously
conducted with any parties other than First Farmers and Merchants Corporation
with respect to any Takeover Proposal, and to notify First Farmers and
Merchants Corporation immediately if it receives any Takeover Proposal, inquiry
or request for information. Farmers & Merchants Bank also agreed to promptly
inform First Farmers and Merchants Corporation in writing of all of the
relevant details with respect to any Takeover Proposal or request for
information, including the material terms and conditions and the identity of
the person or group making such request or proposal. Additionally, Farmers &
Merchants Bank agreed to keep First Farmers and Merchants Corporation fully
informed of the status and details (including amendments or proposed
amendments) of any such request or Takeover Proposal.
42
45
Farmers & Merchants Bank further agreed that it would not provide
third parties with any nonpublic information relating to any such Takeover
Proposal. It may, however, communicate information about any such Takeover
Proposal to its shareholders without a favorable recommendation if, in the
judgment of the Farmers & Merchants Bank Board, such communication is required
under applicable law. In addition, Farmers & Merchants Bank may, and may
authorize and permit its officers, directors, employees or agents to, provide
or cause to be provided such information and participate in such discussions or
negotiations if the Farmers & Merchants Bank Board has determined that the
failure to do so could cause the members of the Farmers & Merchants Bank Board
to breach their fiduciary duties under applicable laws.
The Merger Agreement also contains certain other agreements relating
to the conduct of the parties prior to the Effective Time, including, among
other things, those requiring each party:
1. To apply for and obtain all consents and approvals required
to consummate the Merger;
2. Except for privileged or confidential information, to afford
to the other party and its representatives access during
normal business hours to all of such party's information
concerning its business, properties and personnel as such
other party may reasonably request; and
3. To take all actions required to comply with any legal
requirements to consummate the Merger.
Farmers & Merchants Bank also agreed to call and hold a special
shareholders meeting and, through the Farmers & Merchants Bank Board, to
recommend for approval to its shareholders the Merger Agreement and the Merger.
First Farmers and Merchants Corporation also agreed that employees of
Farmers & Merchants Bank will be eligible to participate in First Farmers and
Merchants Corporation's employee benefit plans in a manner comparable to that
of similarly situated employees of First Farmers and Merchants National Bank
with respect to the employee benefit plans, prior service with Farmers &
Merchants Bank will be treated as service with First Farmers and Merchants
Corporation for purposes of vacation entitlement, satisfying waiting periods,
evidence of insurability requirements or application of pre-existing condition
limitations (but not for profit-sharing benefits), except to the extent that
such treatment would result in a duplication or increase in benefits.
In addition, First Farmers and Merchants Corporation agreed to provide
indemnification to the officers, directors and employees of Farmers & Merchants
Bank to the full extent permitted by law from and after the Effective Time and
to provide, for a period of three years after the Effective Time, directors'
and officers' liability insurance for the directors and officers of Farmers &
Merchants Bank to the maximum extent available at an annual premium not to
exceed 120% of the amount expended by Farmers & Merchants Bank as of the date
of the Merger Agreement.
AMENDMENT OF THE MERGER AGREEMENT; WAIVER; EXPENSES
Subject to compliance with applicable law, the Merger Agreement may be
amended by the parties thereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by Farmers & Merchants Bank
Shareholders. However, after any approval of the Merger Agreement by Farmers &
Merchants Bank Shareholders, there may not be, without further approval of such
shareholders, any amendment of the Merger Agreement which reduces the amount or
changes the form of the Merger Consideration. The Merger Agreement may not be
amended except by an instrument in writing signed on behalf of First Farmers
and Merchants Corporation and Farmers & Merchants Bank.
43
46
Prior to the Effective Time, First Farmers and Merchants Corporation
and Farmers & Merchants Bank may extend the time for the performance of any of
the obligations or other acts of the other party to the Merger Agreement, waive
any inaccuracies in the representations or warranties of the other party
contained in the Merger Agreement or waive compliance with any of the
agreements or conditions of the other party contained in the Merger Agreement.
Each party to the Merger Agreement will bear all expenses incurred by
it in connection with the Merger Agreement and the Merger.
44
47
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
MARKET PRICES
FARMERS & MERCHANTS BANK
There is no established trading market for shares of Farmers &
Merchants Bank Common Stock, which is not listed or quoted on any securities
exchange or the Nasdaq Stock Market. First Farmers & Merchants Bank Common
Stock is inactively traded in private transactions. Therefore, reliable
information is not available about the prices at which shares of Farmers &
Merchants Bank Common Stock have been bought and sold. As of December __, 1998,
Farmers & Merchants Bank Common Stock was held of record by approximately 44
persons.
FIRST FARMERS AND MERCHANTS CORPORATION
There is no established trading market for shares of First Farmers and
Merchants Corporation Common Stock, which is not listed or quoted on any
securities exchange or the Nasdaq Stock Market. First Farmers and Merchants
Corporation Common Stock is inactively traded in private transactions.
Therefore, reliable information is not available about the prices at which
shares of First Farmers and Merchants Corporation Common Stock have been bought
and sold. As of December 17, 1998, First Farmers and Merchants Corporation
Common Stock was held of record by approximately 1,650 persons.
Management of First Farmers and Merchants Corporation has reviewed the
limited information provided to First Farmers and Merchants National Bank in its
capacity as transfer agent for certain actual purchases and sales of First
Farmers and Merchants Common Stock with respect to the ranges at which shares
of First Farmers and Merchants Corporation Common Stock have been sold. The
following data regarding shares of First Farmers and Merchants Corporation
Common Stock is provided for informational purposes only and should not be
viewed as necessarily indicative of the actual market value of shares of First
Farmers and Merchants Corporation Common Stock.
Estimated Price Range Per Share (1)
-----------------------------------
High Low
------------------ ---------
1998
First Quarter............................................ $40.00 $39.00
Second Quarter........................................... 45.00 40.00
Third Quarter............................................ 46.00 45.00
Fourth Quarter (through December 8, 1998)............... 46.00 46.00
1997
First Quarter............................................ $33.50 $32.50
Second Quarter........................................... 34.50 34.50
Third Quarter............................................ 36.00 35.00
Fourth Quarter........................................... 39.00 36.00
1996
First Quarter............................................ $28.00 $28.00
Second Quarter........................................... 29.00 28.00
Third Quarter............................................ 31.50 30.00
Fourth Quarter........................................... 32.50 31.50
- ----------------
(1) Adjusted to reflect a stock split in the form of a 100% stock
dividend effective as of April 21, 1998.
45
48
DIVIDENDS
The following table sets forth cash dividends declared per share of
First Farmers and Merchants Corporation Common Stock and Farmers & Merchants
Common Stock for the periods indicated. The ability of either of these
companies to pay dividends to its respective shareholders is subject to certain
restrictions.
FIRST FARMERS AND MERCHANTS CORPORATION
DIVIDENDS
PER SHARE(1)
------------
1998
First Quarter............................................ --
Second Quarter........................................... $0.31
Third Quarter............................................ --
Fourth Quarter (through December __, 1998)............... 1.00
1997
First Quarter............................................ --
Second Quarter........................................... $0.265
Third Quarter............................................ --
Fourth Quarter........................................... 0.28
1996
First Quarter............................................ --
Second Quarter........................................... $0.235
Third Quarter............................................ --
Fourth Quarter........................................... 0.255
---------
(1) Adjusted to reflect a stock split in the form of a 100% stock
dividend effective as of April 21, 1998.
FARMERS & MERCHANTS BANK
DIVIDENDS
PER SHARE
---------
1998
First Quarter............................................ $14.00
Second Quarter........................................... 14.00
Third Quarter ........................................... 14.00
Fourth Quarter (through December __, 1998)............... 14.00
1997
First Quarter............................................ $12.00
Second Quarter........................................... 12.00
Third Quarter............................................ 12.00
Fourth Quarter........................................... 12.00
1996
First Quarter............................................ $10.00
Second Quarter........................................... 10.00
Third Quarter............................................ 10.00
Fourth Quarter........................................... 10.00
46
49
INFORMATION ABOUT FIRST FARMERS AND MERCHANTS CORPORATION
GENERAL
First Farmers and Merchants Corporation was incorporated in 1982 as a
Tennessee corporation, and is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended. First Farmers and Merchants
Corporation is the sole shareholder of First Farmers and Merchants National
Bank. At September 30, 1998, First Farmers and Merchants Corporation and its
subsidiary had consolidated assets of about $563.7 million, deposits of about
$492.7 million and shareholders equity of about $65.1 million.
First Farmers and Merchants National Bank is a national banking
association which was organized in 1954 as a successor to a state bank
organized in 1909. First Farmers and Merchants National Bank conducts a
full-service commercial banking business at its principal office at 816 South
Garden Street, Columbia, Tennessee and at 15 branch locations in Maury,
Hickman, Lawrence and Marshall Counties in southern middle Tennessee. Of these
branch locations, five are located in Columbia, Tennessee, two are located in
Lawrenceburg, Tennessee, two are located in Lewisburg, Tennessee, and one is
located in each of Centerville, Chapel Hill, Leoma, Loretto, Mt. Pleasant and
Spring Hill, Tennessee. First Farmers and Merchants National Bank also provides
automatic teller machine (or ATM) services in the Northfield Complex at the
Saturn Corporation location near Spring Hill, Tennessee, and at the Tennessee
Farm Bureau, Columbia State Community College and Maury Regional Hospital
locations in Columbia, Tennessee.
The community service area of First Farmers and Merchants National
Bank is comprised of Maury, Lawrence, Marshall, Hickman and adjacent counties
in southern middle Tennessee. Commercial banking in the service area served by
First Farmers and Merchants National Bank is highly competitive. Although First
Farmers and Merchants National Bank is ranked as the largest bank in its
service area in terms of total deposits within the service area, it faces
substantial competition from 14 other banks, two savings and loan associations
and several credit unions located in its service area.
For additional information about First Farmers and Merchants
Corporation, you should review its 1997 Annual Report to Shareholders and
Quarterly Report on Form 10-Q for the three months ended September 30, 1998,
which are included with this Prospectus/Proxy Statement. In addition, you
should review the reports, proxy statements and other documents that First
Farmers and Merchants Corporation has filed with the SEC. See "WHERE YOU CAN
FIND MORE INFORMATION."
DESCRIPTION OF CAPITAL STOCK
First Farmers and Merchants Corporation is authorized to issue
8,000,000 shares of First Farmers and Merchants Corporation Common Stock,
$10.00 par value per share. The holders of First Farmers and Merchants
Corporation Common Stock are entitled to one vote per share on all matters to
be voted on by shareholders and are not entitled to cumulative voting in the
election of directors, which means that the holders of a majority of the shares
voting for the election of directors can elect all of the directors then
standing for election by the holders of First Farmers and Merchants Corporation
Common Stock. The holders of First Farmers and Merchants Corporation Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. The holders of First Farmers and Merchants
Corporation Common Stock are entitled to share ratably in any assets remaining
after satisfaction of all prior claims upon liquidation of First Farmers and
Merchants Corporation. First Farmers and Merchants Corporation's Charter gives
holders of First Farmers and Merchants Corporation Common Stock no preemptive
or other subscription or conversion rights, and
47
50
there are no redemption provisions with respect to such shares. All outstanding
shares of First Farmers and Merchants Corporation Common Stock are, and the
shares offered hereby will be, when issued and paid for, fully paid and
nonassessable. For additional information about First Farmers and Merchants
Corporation Common Stock, see the section of this document captioned
"COMPARISON OF RIGHTS OF SHAREHOLDERS."
48
51
FARMERS & MERCHANTS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations for Farmers & Merchants Bank should be read
in conjunction with the information and tables which follow, and the financial
statements for Farmers & Merchants Bank that are included in this
Prospectus/Proxy Statement.
SUMMARY
Farmers & Merchants Bank's net income for 1997 was $309,185 a 9%
decrease from Farmers & Merchants Bank's net income of $340,223 in 1996. Net
income for 1996 was $340,223 or 15% higher than the 1995 net income of $297,097
in 1996. Net income per share of Farmers & Merchants Bank Common Stock for
1997, 1996 and 1995 was $103.00, $113.33 and $99.00 respectively. Pretax income
for 1997 decreased $43,444 or 10% from 1996 and increased $62,935 or 16% from
1995 to 1996.
The decrease in net income from 1996 to 1997 was primarily due to a
decrease in noninterest income. The increase in net income from 1995 to 1996
was attributable to an increase in noninterest income.
The nine months ended September 30, 1998 reflected net income of
$236,784, 2% less than the $243,046 earned for the nine months ended September
30, 1997. Net income for the quarter ended September 30, 1998 was $87,000 or
10% increase as compared to $79,000 for the quarter ended September 30, 1997.
Net income per share for the nine-month ended September 30, 1998 was $79.00 as
compared to $81.00 for the nine months ended September 30, 1997. Net income for
the quarter ended September 30, 1998 was $29.00 as compared to $26.33 for the
quarter ended September 30, 1997.
FINANCIAL CONDITION
Earning Assets. Farmers & Merchants Bank's average earning assets in
1997 decreased $564,000 or 3% under 1996 primarily due to a decrease in taxable
investments. Average earning assets in 1996 increased by $1,015,000 or 6% over
1995 due primarily to an increase in taxable investments.
Loan Portfolio. Farmers & Merchants Bank's average loans for 1997 were
$5,522,000, an increase of 13% over $4,887,000 in average loans for 1996. Loan
growth for 1997 was primarily funded by $355,000 decrease in investments
securities. The increase in ending balance form 1996 to 1997 and 1995 to 1996
was consistent with the increase in average funds available.
Investment Portfolio. Farmers & Merchants Bank's investment securities
portfolio decreased by 7% or $884,000 from 1996 to 1997. The 1996 investment
securities portfolio increased by $311,000 from 1995, an increase of 2%.
Farmers & Merchants Bank maintains an investment strategy of seeking
portfolio yields within acceptable risk levels, as well as providing liquidity.
Farmers & Merchants Bank maintains one classification of investment securities:
"Available for Sale". "Available for Sale" securities are carried at fair
market value. At year-end 1997, unrealized gains in the "Available for Sale"
portfolio
49
52
amounted to $118,341, net of tax effect. At the end of 1996 the unrealized
gains in the "Available for Sale" portfolio amounted to $59,206.
Deposits. Farmers & Merchants Bank's average deposits decreased
$878,000 or 5% from 1996 to 1997. Average deposits increased $1,064,000 or 7%
from 1995 to 1996. The largest reduction during 1997 was in interest-bearing
deposits that decreased $1,153,000 or 8%. From 1996 to 1997, interest-bearing
transaction deposits decreased $642,000 or 16%, savings deposits decreased
$423,000 or 10% and time deposits decreased $88,000. From 1995 to 1996,
interest-bearing transaction deposits increased $859,000 or 28%, savings
deposits decreased $36,000 or 1% and time deposits decreased $228,000 or 3%.
Capital Resources, Capital and Dividends. Historically, internal
growth has financed the capital needs of Farmers & Merchants Bank. At September
30, 1998, Farmers & Merchants Bank had a ratio of average Tier 1 capital to
average assets of 15.84%. At December 31, 1997, Farmers & Merchants Bank had a
ratio of average Tier 1 capital to average assets of 15.76%. This compares to a
ratio of average Tier 1 capital to average assets of 14.53% at December 31,
1996, and 14.11% at December 31, 1995.
Cash dividends of $126,000 were declared for the nine months ended
September 30, 1998. Cash dividends declared in 1997 were $144,000 or 20% more
than those paid in 1996. The dividend to net income ratio was 45% for 1997.
Farmers & Merchants Bank plans to maintain or increase the payment ratio while
continuing to maintain a capital to asset ratio reflecting financial strength
and adherence to regulatory guidelines.
As of September 30, 1998, Farmers & Merchants Bank's ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets were
46.06% and 47.34%. As of December 31, 1997.Farmers & Merchants Bank ratios of
Tier 1 capital to risk-weighted assets and total capital to risk-weighted
assets were 46.96% and 48.24% respectively at December 31, 1996, the comparable
ratios were 49.14% and 50.43% respectively.
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert
assets into cash without significant loss and to raise funds by increasing
liabilities. Liquidity management involves the ability to meet day-to-day cash
flow requirements of 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 Farmers & Merchants Bank to meet the
needs of its customer base, but to maintain an appropriate balance between
interest sensitive assets and interest-sensitive liabilities so that Farmers &
Merchants Bank 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 repayments and maturities of investment securities. 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 interest-bearing and noninterest-bearing deposit accounts. At December
31, 1997, Farmers & Merchants Bank had $300,000 of federal funds available and
a line of credit from a commercial bank, of which approximately $1,000,000 was
available and unused.
50
53
RESULTS OF OPERATIONS
Net Interest Income. Net interest income is the principal component of
a financial institution's income stream and represents the spread between
interest and fee income generated from earning assets and the interest expense
paid on deposits. The following discussion is on a fully taxable equivalent
basis.
Net interest income decreased by $3,000 or 1% for quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997. Net
interest income increased by $243,000 or 32% for the nine months ended
September 30, 1998 as compared to the nine month ended September 30, 1997. The
decrease for the nine months ended September 30, 1998, is primarily to increase
of $265,000 in the interest-bearing deposits.
Farmers & Merchants Bank's net interest income for 1997 increased
$17,000 or 2% over 1996 and $56,000 or 6% in 1996 over 1995. The increase in
the net interest income from 1996 to 1997 is primarily due to increases in loan
volumes. The increase in the net interest income from 1995 to 1996 was
attributable to increase in loan volumes.
Interest income increased $13,000 or 1% in 1997 from 1996, and
increased $62,000 or 4% in 1996 from 1995. Interest income produced by the loan
portfolio increased $41,000 or 7% in 1997 from 1996, and increased $23,000 or
4% in 1996 from 1995. Interest income on investment securities decreased
$19,000 or 2% from 1996 to 1997, and increased $42,000 or 5% from 1995 to 1996.
The decrease in investment income from 1996 to 1997 is due to a decrease in
yields from the portfolio.
Total interest expense increased $6,000 or 4% for the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997. Total
interest expense increased $28,000 or 51% for the nine months ended September
30, 1998, as compared to September 30, 1997.
Total interest expense decreased by $4,000 or 0.7% in 1997 from 1996,
and increased $6,000 or 1% in 1996 from 1995. The interest expense decrease
from 1996 to 1997 is primarily due to a decrease in interest bearing deposits,
as well as a decrease in the level of interest rates.
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 on average earning
assets and the average rate paid for all funds used to support those earning
assets. The net interest margin increased seven basis points in 1997 to 5.00%.
The net cost of funds, defined as interest expense divided by average-earning
assets, decreased three basis points from 2.98% in 1996 to 2.95% in 1997. The
yield on earning assets increased three basis points to 7.97% in 1997 from
7.91% in 1996.
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 interests rate
spreads have been under intense pressure to maintain historical levels, due in
part to tax laws that discouraged investment in tax-exempt securities and
intense competition for funds with non-bank institutions. As a result of higher
market interest rates during 1997, the interest rate spread increased seven
basis points form 1996 to 1997 and an interest rate spread increase of seven
basis points from 1995 to 1996.
Allowance for Loan Losses. Farmers & Merchants Bank's lending officers
are responsible for the ongoing review and administration of each loan. They
make the initial identification of loans,
51
54
which present some difficulty in collection or where there is an indication
that the probability of loss exists. Lending officers are responsible for the
collection effort on a delinquent loan. Farmers & Merchants Bank's senior
management is informed of the status of delinquent and problem loans on a
monthly basis.
Farmers & Merchants Bank's senior management makes recommendations
monthly to the Farmers & Merchants Bank's Board as to charge-offs. Senior
management reviews the allowance for possible loan losses on a quarterly basis.
Farmers & Merchants Bank's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears.
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 provisions 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 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 which affect the allowance
for potential credit losses.
While it is Farmers & Merchants Bank's 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.
Management of Farmers & Merchants Bank believes that the $239,005 for
September 30, 1998, and $240,076 for December 31, 1997, in the allowance for
loan losses was adequate to absorb known risks in the portfolio. No assurance
can be given, however, that adverse economic circumstances will not result in
increased losses in the loan portfolio, and require greater provisions for
possible loan losses in the future.
Nonperforming Assets. Nonperforming assets include nonperforming loans
and foreclosed real estate held for sale. Nonperforming loans include loans
classified as nonaccrual or renegotiated. Farmers & Merchants Bank's policy is
to place a loan on nonaccrual status when it is contractually past due 90 days
of more as to payment of principal and interest. At the time a loan is placed
on nonaccrual status, interest previously accrued by 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.
Farmers & Merchants Bank had nonperforming assets at September 30,
1998 of $134,975 and $142,870 as of December 31, 1997.
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. Noninterest
income increased $7,000 or 20% for the quarter ended September 30, 1998, as
compared to the quarter ended September 30, 1997. Noninterest income increased
$5,000 or 5% for the nine months ended September 30, 1998, as compared to the
nine months ended September 30, 1997. Total noninterest income decreased
$48,000 or 23% in 1997 compared to 1996. Noninterest income for 1996 showed a
decrease of $8,000 or 4.0% from 1995.
52
55
Noninterest Expenses. Noninterest expense increased $1,000 for the
quarter ended September 30, 1998, as compared to the quarter ended September
30, 1997. Noninterest expense increased $18,000 or 4% for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997.
Noninterest expense for 1997 increased $12,000 or 2% from 1996 and decreased
$18,000 or 3% in 1996 from 1995 and decreased $52,000 or 7.7% in 1995 from
1994. Salaries and employee benefits in 1997 decreased $10,000 or 3% from 1996
to a total of $351,000 at year-end 1997. Salaries and employee benefits in 1996
increased $6,000 or 2% from 1995. The decrease in 1997 was the result of
improved efficiencies and technologies in the operations of the bank.
Net Income. Net income was $8,000 or 10% higher for the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997. Net
income was $6,000 or 3% lower for the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997.
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. At the
beginning of 1996, the Federal reserve decreased interest rates 75 basis points
in an effort to enhance growth in the economy through monetary policy. The
prime rate remained unchanged through 1996. Until March of 1997, the prime rate
was 8.25%, but at that time it increase to 8.50%. The Federal Reserve recently
decreased interest rates, and the prime rate recently decreased to 7.75%. In
addition, inflation affects financial institutions' cost of 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 affect liquidity,
earnings and stockholders' equity.
53
56
NET INTEREST INCOME
The following table sets forth weighted yields earned by Farmers &
Merchants Bank on its earning assets and the weighted average rates paid on its
deposits and other interest-bearing liabilities for the years indicated and
certain other information:
1997 1996
--------------------------------- ---------------------------------
(Fully taxable equivalent) Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- -----
ASSETS: (Dollars in thousands)
Interest-earning assets:
Loans....................................... $ 5,522 $ 597 10.81% $ 4,887 $ 557 11.40%
U.S. Treasury and other U.S.
Government agencies.................... 9,365 639 6.82 10,107 658 6.51
States and municipalities................... 3,031 258(1) 8.51 3,224 258(1) 8.00
Federal funds sold.......................... 857 43 5.02 1,121 52 4.64
------- ------ ------- ------
Total interest-earning assets/interest
income................................. 18,775 1,537 8.19 19,339 1,525 7.89
------ ------
Cash and due from banks..................... 794 733
Other assets................................ 663 807
Allowance for loan losses................... (241) (241)
------- -------
Total assets................................ $19,991 $20,638
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits............................. $ 3,390 104 3.07 $ 4,032 90 2.23
Savings..................................... 3,812 127 3.33 4,235 134 3.16
Time certificates........................... 6,449 332 5.15 6,537 345 5.28
------- ------ -------- ------
Total interest-bearing liabilities/
interest expense................... 13,651 563 4.12 14,804 569 3.84
------ ------
Non-interest-bearing demand
deposits............................... 2,789 2,423
Other liabilities........................... 506 530
Shareholders' equity........................ 3,045 2,881
------- -------
Total liabilities and shareholders'
equity................................. $19,991 $20,638
======= =======
Net interest on interest-earning assets..... $974 $ 956
====== ======
Spread between combined rates earned and
combined rates paid.................... 4.07 4.05
Net interest on interest-earning assets
(1)..................................... 5.19 4.94
- --------------------
(1) Taxable equivalent basis.
54
57
1995
------------------------------------------------
Average Interest Average
Balance Income/Expense Yields/Rates
------- -------------- ------------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Loans ........................................................ $ 4,800 $ 534 11.13%
U.S. Treasury and other U.S. Government agencies ............. 10,034 622 6.20
States and municipalities .................................... 2,613 253 9.68
Federal funds sold ........................................... 877 55 6.27
-------- --------
Total interest-earning assets/interest income ................ 18,324 1,464 7.99
--------
Cash and due from banks ...................................... 368
Other assets ................................................. 711
Allowance for loan losses .................................... (242)
--------
Total assets ................................................. $ 19,161
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing liabilities:
Demand deposits .............................................. $ 3,483 89 2.56
Savings ...................................................... 4,053 133 3.28
Time certificates ............................................ 6,688 341 5.10
-------- --------
Total interest-bearing liabilities/interest expense ......... 14,224 563 3.96
--------
Non-interest-bearing demand deposits ......................... 1,939
Other liabilities ............................................ 288
Shareholders' equity ......................................... 2,710
--------
Total liabilities and shareholder's equity ................... $ 19,161
========
Net interest on interest-earning assets ...................... $ 901
========
Spread between combined rates earned and
combined rates paid .......................................... 4.03
Net interest on interest-earning assets(1) ................... 4.92
- -----------------
(1) Taxable equivalent basis.
55
58
The following table sets forth, for the periods indicated, a summary
of changes in interest earned and interest paid separated into the amount
generated by volume changes and the amount generated by changes in the yield or
rate.
VOLUME AND YIELD/RATE VARIANCES
(TAXABLE EQUIVALENT BASIS - IN THOUSANDS)
1997 Compared to 1996 1996 Compared to 1995
------------------------------- -------------------------------
RATE/ NET RATE/ NET INCREASE
VOLUME YIELD INCREASE VOLUME YIELD (DECREASE)
(DECREASE)
Revenue earned on
Net loans............................ $ 72 $(32) $ 40 $ 10 $ 13 $23
U.S. Treasury and other U.S. (48) 29 (19) 5 31 36
Government agencies................
State and municipalities............. (15) 15 - 59 (54) 5
Federal funds sold................... (12) 3 (9) (15) (18) (3)
---- ---- ---- ---- ---- ---
Total interest earning assets............. (3) 15 12 89 (28) 61
---- ---- ---- ---- ---- ---
Interest paid on
Demand deposits...................... (14) 28 14 14 (13) 1
Savings deposits..................... (13) 6 (7) 6 (5) 1
Time deposits........................ (5) (8) (13) 8 12 4
---- ---- ---- ---- ---- ---
Total interest bearnings.................. (32) 26 (6) 12 (6) 6
---- ---- ---- ---- ---- ---
Net interest earnings..................... $(29) $ 11 $ 18 $ 71 $(22) $55
---- ---- ---- ---- ---- ---
Notes:
(1) The change in interest resulting from both volume and yield/rate has
been allocated to change due to volume and change due to yield/rate in
proportion to the relationship of the absolute dollar amounts of the
change in each.
(2) The computation of the taxable equivalent adjustment has given effect
to the disallowance of interest expense, for federal income tax
purposes, related to certain tax-free assets.
LIABILITY AND ASSET MANAGEMENT
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate sensitive"
and by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income.
Farmers & Merchants Bank's Investment Committee, which consists of the
president and one other director of Farmers & Merchants Bank, is charged with
monitoring the liquidity and funds position of Farmers & Merchants Bank. The
Investment Committee regularly reviews (a) the rate sensitivity position on a
three-month, six-month, and one-year time horizon; (b) loans to deposit ratios;
and (c) average maturity for certain categories of liabilities.
56
59
The following table represents an interest sensitivity profile for
Farmers & Merchants Bank as of December 31, 1997. The table represents a static
point in time and does not consider other variables, such as changing spread
relationships or interest rate levels. "Net funding gap" is the difference
between total earning assets and total interest bearing liabilities repricing
in any given period and "cumulative gap" is the sum of the net repricing gap
from period to period.
WITHIN THREE WITHIN 12 OVER A
Months Months YEAR Total
------ ----- ---- -----
(Dollars in thousands)
EARNING ASSETS:
Loans..................................... $ 406 $ 897 $ 4,069 $ 5,372
Investment securities..................... 600 2,609 9,939 13,148
Federal funds sold........................ 300 -- -- 300
---------- ---------- -------- --------
Total earning assets................. 1,306 3,506 14,008 18,820
---------- ---------- -------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits................. 4,040 1,990 1,990 (8,020)
---------- ---------- -------- --------
Total interest-bearing liabilities..... 4,040 1,990 1,990 $(8,020)
---------- ---------- -------- --------
Interest-bearing, net..................... -- -- ( 10,800)
Net asset/liability funding gap........... (2,734) 1,516 ( 1,218)
---------- ---------- --------
Cumulative net asset/liability ........
funding gap........................ $ (2,734) $ (1,218) $ --
========== ========== ========
Management's estimate of charge-offs for 1998 is based upon historical
data as well as the composition of the loan portfolio at December 31, 1997.
Management believes the allowance for loan losses is adequate to absorb such
anticipated charge-offs. Management does not believe that there is a
concentration of loans to a multiple number of borrowers engaged in similar
activities.
The following table sets forth information with respect to
nonperforming loans of Farmers & Merchants Bank on the dates indicated. Accrual
of interest is discontinued when there is reasonable doubt as to the full,
timely collections of interest or principal. When a loan becomes contractually
past due 90 days with respect to interest or principal, it is reviewed and a
determination is made as to whether it should be placed on nonaccrual status.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on
such loans is then recognized only to the extent that cash is received and
where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
principal and interest and when, in the judgment of management, the loans are
estimated to be fully collectible as to principal and interest. Restructured
loans are those loans on which concessions in terms have been granted because
of a borrower's financial difficulty. Interest is generally accrued on such
loans in accordance with the new terms. The information provided below is as of
December 31 for the years indicated.
57
60
RISK ELEMENTS IN THE LOAN PORTFOLIO
(Dollars in thousands)
December 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Average amount of loans outstanding ..................... $ 5,522 $ 4,887 $ 4,800 $ 4,623 $ 4,902
======= ======= ======= ======= =======
Balance of allowance for possible loan losses
at beginning of year ................................ $ 241 $ 243 $ 244 $ 236 $ 231
Loans charged-off:
Loans secured by real estate ............................ -- -- -- -- --
Commercial and industrial loans ......................... -- -- -- -- --
Individuals ............................................. 1 2 1 1 15
------- ------- ------- ------- -------
Total Loans Charged Off ................................. 1 2 1 1 15
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Loans secured by real estate ............................ -- -- -- -- --
Commercial and industrial loans ......................... -- -- -- -- --
Individuals ............................................. -- -- -- 9 20
------- ------- ------- ------- -------
Total Recoveries ........................................ -- -- -- 9 20
------- ------- ------- ------- -------
Net Loans Charged-Off (Recovered) ....................... 1 2 1 (8) (5)
Provision charged to operating expenses ................. -- -- -- -- --
------- ------- ------- ------- -------
Balance of Allowance For Possible
Loan Losses at End of Year .......................... $ 240 $ 241 $ 243 $ 244 $ 236
======= ======= ======= ======= =======
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding ................. $ 0.02 $ 0.04 $ 0.02 $ (0.17) $ (0.10)
======= ======= ======= ======= =======
Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. Farmers & Merchants Bank's liquidity, represented
by cash and cash due from banks, is a result of its operating, investing and
financing activities. In order to insure funds are available at all times,
Farmers & Merchants Bank devotes resources to projecting on a monthly basis the
amount of funds which will be required and maintains relationships with a
diversified customer base so funds are accessible. Liquidity requirements can
also be met through short-term borrowings or the disposition of short-term
assets which are generally matched to correspond to the maturity of
liabilities.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of Farmers &
Merchants Bank's management is to maintain a level of capitalization that is
sufficient to take advantage of profitable growth opportunities while meeting
regulatory requirements. This is achieved by improving profitability through
effectively allocating resources to more profitable businesses, improving asset
quality, strengthening service quality, and streamlining costs. The primary
measures used by management to monitor the results of these efforts are the
ratios of average equity to average assets, average tangible equity to average
tangible assets, and average equity to net loans. The FDIC has adopted capital
guidelines governing the activities of banks. These guidelines require the
maintenance of an amount of capital based on risk-adjusted assets so that
categories of assets with potentially higher credit risk will require more
capital backing than assets with lower risk. In addition, banks are required to
maintain capital to support, on a risk-adjusted basis, certain off-balance
sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common
58
61
shareholders' equity less goodwill and Tier II capital which is primarily a
portion of the allowance for loan losses and certain qualifying debt
instruments. In determining risk-based capital requirements, either 0%, 20%,
50% or 100%, depending primarily on the 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
the regulators. The framework for calculating risk-based capital requires banks
to meet the regulatory minimums of 4% Tier I and 8% total risk-based capital.
In 1990, regulators added a leverage computation to the capital requirements,
comparing Tier I capital to total average assets less goodwill.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
ON THE FINANCIAL STATEMENTS WHEN ADOPTED IN FUTURE PERIOD
The Financial Accounting Standards Board has issued three standards
that have been adopted by Farmers & Merchants Bank as follows: (1) Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share"
requires a reconciliation of the numerators and the denominators of the basic
and diluted per-share computation for income from continuing operations. The
statement is effective prospectively for earnings per share computation for
both interim and annual periods ending after December 31, 1997. Because Farmers
& Merchants Bank has no potential common stock outstanding, it is required to
present only basic earnings per share and its presentation of earnings per
share did not change. (2) Statement of Financial Accounting Standards No. 129
(SFAS 129), "Disclosure of Information about Capital Structure" requires an
entity to explain, in summary form within its financial statements, the
pertinent rights and privileges of the various securities outstanding. Farmers
& Merchants Bank only has one class of common stock outstanding and this
statement had no material effect on the financial statements. (3) Statement of
Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income" purposes that an entity report a measure of all change in equity that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The statement
is effective for fiscal years beginning after December 15, 1997. Management
does not believe this statement will have any material effect on future
financial statements except for disclosures.
The Financial Accounting Standards Board has issued two standards that
have not been adopted: (1) Statement of Financial Accounting Standards No. 131
(SFAS 131), "Disclosures About Segments of an Enterprise and Related
Information", establishes guidelines for reporting financial information about
an operating segment or component of an enterprise for public companies. The
statement is effective for fiscal years beginning after December 15, 1997.
Since Farmers & Merchants Bank is not a public company, this statement will
have no effect. (2) Statement of Financial Accounting Standards No. 133 (SFAS
133) "Accounting for Derivative Instruments and Hedging Activities" 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.
The statement shall be effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. Management does not believe this statement will
have any material effect on future financial statements except for disclosures.
59
62
INFORMATION ABOUT FARMERS & MERCHANTS BANK
GENERAL
Farmers & Merchants Bank was organized and began business in White
Bluff, Dickson County, Tennessee in 1904. Farmers & Merchants Bank is a state
chartered, nonmember, FDIC insured commercial bank, offering a wide range of
commercial banking services, including checking, savings, money market deposit
accounts, certificates of deposit, and loans for consumer, commercial,
agricultural and real estate purposes. Farmers & Merchants Bank considers its
primary market for its products and services to be individuals, professionals
and small to medium size businesses located in Dickson County, Tennessee.
PROPERTIES
Farmers & Merchants Bank has its principal offices at 2011 Highway 47
North, White Bluff, Tennessee 37187, which is owned and occupied by Farmers &
Merchants Bank. Farmers & Merchants Bank has no branch offices.
One ATM is located at the bank's main office.
COMPETITION
All phases of Farmers & Merchants Bank's banking activities are
subject to extensive competition. Farmers & Merchants Bank competes actively
with regional and community banks, as well as finance companies, credit unions,
brokerage firms and other financial institutions located in its service area.
The following demographic and economic facts provide a basic barometer
of growth and business activity in Dickson County, Tennessee:
1996 population....................................... 41,064
1995 labor force...................................... 19,520
1996 unemployment rate................................ 3.5%
Manufacturing units................................... 50
Average annual manufacturing employment............... 4,000
Number of farms (1992)................................ 1,009
Average size of farms (1992).......................... 149 acres
Total value of agricultural products (1992)........... $11,454,000
Per capita personal income............................ $ 17,359 (25th in the State of
Tennessee)
1995 sales tax collections............................ $24,370,010 state taxes
$ 7,602,904 local taxes
1996 building permits................................. 601
CUSTOMERS
It is the opinion of management of Farmers & Merchants Bank that there
is no single customer or affiliated group of customers whose deposits, if
withdrawn, would have a materially adverse effect on the business of Farmers &
Merchants Bank.
LOANS AND LOAN REVIEW
Farmers & Merchants Bank offers various types of secured and unsecured
commercial, consumer, agricultural, and real estate loans. Loans are generally
made to customers who also have
60
63
other relationships with Farmers & Merchants Bank. Most loans made by Farmers &
Merchants Bank are secured.
Farmers & Merchants Bank has an established written loan policy for
loan officers regarding the types, maturities, security requirements, pricing
and loan to value ratios (in the case of real estate loans) to which each loan
officer is expected to adhere. In addition, each loan officer is provided a
maximum loan limit authority. Loans for an amount in excess of an officer's
authority or those which would require an exception to Farmers & Merchants
Bank's loan policy must be approved by higher authorities within the bank
including other officers and the Farmers & Merchants Bank Board.
Loans are reviewed periodically by management personnel. This process
is utilized by Farmers & Merchants Bank to grade the bank's loans and determine
the adequacy of Farmers & Merchants Bank's loan loss reserve.
ASSET/LIABILITY MANAGEMENT
Farmers & Merchants Bank's Asset/Liability Management Committee is
comprised of senior Farmers & Merchants Bank officers who are charged with
managing the bank's assets and liabilities. This committee is responsible for
providing reasonable growth of assets, earnings, adequate liquidity and return
on assets and shareholders' equity as well as adequacy of capital resources at
the level of interest rate risk deemed acceptable.
LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation
against Farmers & Merchants Bank involving matters arising in the ordinary
course of business. No legal proceedings are currently pending.
"YEAR 2000" INFORMATION SYSTEM ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems such 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
Farmers & Merchants Bank, but virtually all companies, organizations and
governments worldwide that use computer information systems.
To address the Year 2000 issue, Farmers & Merchants Bank has adopted
broad-based approaches designed to encompass their total systems and
non-systems environments. 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.
Farmers & Merchants Bank has adopted a testing plan to assure
customers, employees, management and the Farmers & Merchants Bank Board that
Farmers & Merchants Bank has successful testing methods in place in preparing
its systems and applications for the Year 2000. The objective is to minimize
risk due to operational failures. The purpose is to ensure that the
institution's daily operations suffer little or no impact from the century date
change.
The fact that Farmers & Merchants Bank is a small community bank, the
complexity of its operation and the level of risk exposure will be taken into
consideration. Both internal and external systems (including hardware,
software, and environmental systems) will be tested. The following elements are
included in the plan: testing environment, testing methodology, testing
schedules,
61
64
human and financial resources, critical test dates, documentation and
contingency planning. The testing process will be verified by qualified
sources.
Farmers & Merchants Bank has completed the following measures in
preparation for the testing phase of Year 2000:
1. An inventory of hardware, software applications,
environmental systems and contracts. This identifies each
system of process as to the priority of being: (a) mission
critical or must be tested, (b) non-mission critical or
should be tested, or (c) non-mission critical or testing not
required.
2. Farmers & Merchants Bank has taken steps to make aware and
continually update not only its employees, but also
customers, of the implications of the Year 2000. Brochures
are available in the bank's lobby as well as a mass mailing
in account statements. Plans for future statement messages
and other means of awareness have been made.
3. Core system vendors, as well as other vendors, have been
contacted to assist in assessing the status of their Year
2000 readiness.
4. Customers possibly being effected in their business
operations by the century date change have been identified.
These customers are in the process of being contacted for
awareness and assistance.
5. Farmers & Merchants Bank expects to meet the following key
milestones in its testing process:
(i) December 31, 1998: Internal mission - critical
systems testing should be
substantially complete.
Service providers should be
ready to test.
(ii) March 31, 1999: Service providers testing of
mission - critical systems
should be substantially
complete. External testing
should begin with third
parties, such as other
financial institutions,
payment system providers, etc.
(iii) June 30, 1999: Testing of mission - critical
systems should be complete and
implementation should be
substantially complete.
The purpose of contingency planning is to provide options should any
or all systems/applications fail or cannot be made Year 2000 ready. Farmers &
Merchants Bank's contingency plan will strive to minimize the risks associated
with:
1. Failure to successfully complete renovation, validation, or
implementation of its Year 2000 readiness plan (or
remediation contingency plan); and
2. Failure of systems at critical dates (or business resumption
contingency planning).
Farmers & Merchants Bank expects to be substantially Year 2000
compliant by the end of 1998. As of November 15, 1998, all of Farmers &
Merchants Bank's core applications are operating on certified Year 2000
compliant software. Management anticipates that internally-developed and
third-party provided applications will be tested for compliance by year end
1998. The costs of its
62
65
overall Year 2000 initiatives have not yet been finally determined, but are not
expected to exceed the budgeted amount of $25,000.
SUPERVISION AND REGULATION
Farmers & Merchants Bank is subject to extensive regulation under
state and federal statutes and regulations. The discussion in this section,
which briefly summarizes certain of such statutes, does not purport to be
complete, and is qualified in its entirety by reference to such statutes. Other
state and federal legislation and regulations directly and indirectly affecting
banks and other financial institutions may be enacted or implemented in the
future; however, such legislation and regulations and their effect on the
business of Farmers & Merchants Bank cannot be predicted.
Farmers & Merchants Bank is incorporated under the laws of the State
of Tennessee and is subject to the applicable provisions of that law, including
the Tennessee Banking Act. As a state banking corporation, Farmers & Merchants
Bank is subject to the supervision of the Tennessee Department of Financial
Institutions and to regular examination by that agency. In addition, Farmers &
Merchants Bank is a member of the Federal Deposit Insurance Corporation
("FDIC") and its deposits are insured by the FDIC. Therefore, Farmers &
Merchants Bank is subject to examination and regulation by the FDIC and is
subject to the applicable provisions of federal law including the Federal
Deposit Insurance Act ("FDIA") .
Farmers & Merchants Bank also is subject to regulation respecting the
maintenance of certain minimum capital levels (See "FARMERS & MERCHANTS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS--Capital Resources--Liquidity), and
Farmers & Merchants Bank is required to file annual reports and such additional
information as the Tennessee Banking Act and FDIC regulations require. Farmers
& Merchants Bank is also subject to certain restrictions on loan amounts,
interest rates, "insider" loans to officers, directors and principal
shareholders, tie-in arrangements and transactions with affiliates, as well as
many other matters. Strict compliance at all times with state and federal
banking laws is required.
In December 1991, a major banking bill entitled the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted, which
substantially revised the bank regulatory and funding provisions of the FDIA
and makes revisions to several other federal banking statutes. Among other
things, FDICIA requires the federal banking regulators to take "prompt
corrective action" in respect of depository institutions that do not meet
minimum capital requirements. In addition, an institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market and also may not be able to "pass through" insurance coverage for
certain employee benefit accounts. FDICIA also requires the holding company of
any undercapitalized depository institution to guarantee, in part, certain
aspects of such depository institution's capital plan for such plan to be
acceptable. FDICIA contains numerous other provisions, including new
accounting, audit and reporting requirements, termination of the "too big to
fail" doctrine except in special cases, limitations on the FDIC's payment of
deposits at foreign branches, new regulatory standards in such areas as asset
quality, earnings and compensation and revised regulatory standards for, among
other things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches.
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, banks have a continuing and affirmative obligation consistent with
their safe and sound operation to help meet the credit needs of their entire
community, including low- and moderate-income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community. The
CRA requires the FDIC, in
63
66
connection with its examination of banks, to assess the companies' record of
meeting the credit needs of its communities and to take such record into
account in its evaluation of certain applications by such institution. The CRA
also requires public disclosure of an institution's CRA rating and that the
FDIC provide a written evaluation of an institution's CRA performance utilizing
a four-tiered descriptive rating system in lieu of the then existing
five-tiered numerical rating system. Farmers & Merchants Bank is subject to
these regulations.
Tennessee law contains limitations on the interest rates that may be
charged on various types of loans. The maximum permissible rates of interest on
most commercial and consumer loans made by Farmers & Merchants Bank are
governed by Tennessee's general usury law and the Tennessee Industrial Loan and
Thrift Companies Act ("Industrial Loan Act"). Certain other usury laws affect
limited classes of loans, but the laws referenced above are by far the most
significant. Tennessee's general usury law authorizes a floating rate of 4% per
annum over the average prime or bases commercial loan rate, as published by the
Federal Reserve Board from time to time, subject to an absolute 24% per annum
limit. The Industrial Loan Act authorizes an interest rate of 24% per annum and
also allows certain loan charges, generally on a more liberal basis than does
the general usury law.
The operations of banks are also affected by various consumer laws and
regulations, including those relating to equal credit opportunity and
regulation of consumer lending practices. All state-chartered banks in
Tennessee must become and remain insured banks under the FDIC.
The U.S. federal and state banking agencies have broad enforcement
powers over banks and their subsidiaries, 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 Farmers & Merchants Bank to these enforcement
provisions.
Subject to certain exceptions, the Tennessee Banking Act and the
federal Change in Bank Control Act, together with regulations thereunder,
require TDFI and FDIC approval (or, depending on the circumstances, no notice
of disapproval) prior to any person or company acquiring "control" of a bank,
such as Farmers & Merchants Bank. Control is conclusively presumed to exist if
an individual or company acquires 25% or more of any class of voting securities
of the bank. Control is rebuttably presumed to exist if a person acquires 10%
or more but less than 25% of any class of voting securities and either the bank
has registered securities under Section 12 of the Exchange Act or no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), bank
holding companies may acquire banks in states other than their home states
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement
that the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and less than 30% of such deposits in that
state (or such lesser or greater amount set by state law). The Interstate
Banking and Branching Act also authorizes banks to merge across state lines,
thereby creating interstate branches. This provision, which became effective
June 1, 1997, allowed each state, prior to the effective date, the opportunity
to "opt out" of this provision, thereby prohibiting interstate branching within
that state. Tennessee did not adopt legislation to "opt out" of the interstate
branching provisions.
64
67
FDIC regulations have adopted certain portions of the Federal Reserve
Act which places restrictions on a bank's loans or extensions of credit to,
purchases of or investments in the securities of, and purchases of assets from
an affiliate, a bank's loans or extensions of credit to third parties
collateralized by the securities or obligations of an affiliate, the issuance
of guarantees, acceptances, and letters of credit on behalf of an affiliate,
and certain bank transactions with an affiliate, or with respect to which an
affiliate acts as agent, participates, or has a financial interest.
Furthermore, a bank and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services.
EFFECT OF GOVERNMENTAL POLICIES
Farmers & Merchants Bank is affected by the policies of regulatory
authorities, including the Federal Reserve. An important function of the
Federal Reserve is to regulate the national money supply. Among the instruments
of monetary policy used by the Federal Reserve are: purchases and sales of U.S.
Government securities in the marketplace; changes in the discount rate, which
is the rate any depository institution must pay to borrow from the Federal
Reserve; and changes in the reserve requirements of depository institutions.
These instruments are effective in influencing economic and monetary growth,
interest rate levels and inflation.
The monetary policies of the Federal Reserve and other governmental
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of changing conditions in the national economy and in the money market, as well
as the result of actions by monetary and fiscal authorities, it is not possible
to predict with certainty future changes in interest rates, deposit levels,
loan demand or the business and earnings of Farmers & Merchants Bank or whether
the changing economic conditions will have a positive or negative effect on
operations and earnings.
Bills are pending before the United States Congress and the Tennessee
General Assembly which could affect the business of Farmers & Merchants Bank,
and there are indications that other similar bills may be introduced in the
future. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of Farmers & Merchants Bank
may be affected thereby.
65
68
MANAGEMENT OF FARMERS & MERCHANTS BANK
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides certain information regarding directors
and executive officers of Farmers & Merchants Bank.
PRINCIPAL OCCUPATION FOR
NAME AGE POSITIONS SINCE PREVIOUS FIVE YEARS
- -------------------------- --- --------------------- ----- ---------------------------
Harold Bibb............... 50 Director 1997 U.S. Government
Richard C. Bibb........... 55 Chairman of the Board 1972 Farmer
President, CEO
Bessie Bradley............ 73 Director 1985 Retired Banker
Whitfield Burcham......... 57 Director 1993 Farmer
John T. Corkan, Jr........ 72 Director 1970 Retired Banker
Charles Glenn Kane........ 52 First Vice President 1991 Banker
Carol Thompson............ 52 Secretary, Cashier 1984 Banker
No director of Farmers & Merchants Bank is related to any other
director, other than Messrs. Richard C. Bibb and Harold Bibb, who are brothers.
No director of Farmers & Merchants Bank is a director or executive officer of
another bank holding company, bank, savings and loan association or credit
union.
TRANSACTIONS WITH MANAGEMENT
Farmers & Merchants Bank has and expects to have in the future banking
and other business transactions in the ordinary course of its banking business
with directors, officers, and 10% beneficial owners of Farmers & Merchants Bank
and their affiliates, including members of their families or corporations,
partnerships or other organizations in which such officers or directors have a
controlling interest, on substantially the same terms (including price or
interest rates and collateral) as those prevailing at the time for comparable
transactions with unrelated parties. Any such banking transactions will not
involve more than the normal risk of collectability nor present other
unfavorable features to Farmers & Merchants Bank.
FARMERS & MERCHANTS BANK BOARD AND ITS COMMITTEES
Directors of Farmers & Merchants Bank are elected annually and each
director holds office until his or her successor is elected and qualified.
Committees of the Farmers & Merchants Bank Board, their duties and their
members include:
Executive Committee:
Reviews all loans weekly and lines greater than $100,000. Also
reviews all letters of credit. The committee met weekly during
1998 and 1997. All members made at least 75% of meetings.
66
69
Members: Richard C. Bibb
Bessie Bradley
John T. Corkan, Jr.
Audit Committee:
Reviews the internal audit function and examinations of the
bank. The committee has not met in 1998 and met once in 1997.
Members: Harold Bibb
Whitfield Burcham
John T. Corkan, Jr.
Investment Committee:
The committee meets quarterly to review the investment decisions
of the bank. The committee met three times in 1998 and four
times in 1997.
Members: Richard Bibb
John T. Corkan, Jr.
EXECUTIVE COMPENSATION
No officer of Farmers & Merchants Bank received compensation in
excess of $100,000 for the year ended December 31, 1997, 1996,
or 1995.
COMPENSATION OF DIRECTORS
During 1997, each director of Farmers & Merchants Bank received
$60 per meeting attended.
67
70
OWNERSHIP OF FARMERS & MERCHANTS BANK COMMON STOCK
As of December __, 1998, Farmers & Merchants Bank's records indicated
the following number of shares of Farmers & Merchants Bank Common Stock were
beneficially owned by:
ALL PERSONS WHO OWN BENEFICIALLY 5% OR MORE OF THE FARMERS & MERCHANTS
BANK COMMON STOCK:
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned Percent of Class
- ----------------------------------------------------- ------------------ ----------------
Harold Bibb
White Bluff, Tennessee............................... 373 12.4%
Richard C. Bibb
White Bluff, Tennessee(1)............................ 607 20.2%
Whitfield Burcham
Goodlettsville, Tennessee............................ 350 11.7%
Grayward Company
Nashville, Tennessee................................. 231 7.7%
Estate of Calvin Larkins
White Bluff, Tennessee............................... 279 9.3%
Estate of Ann W. Smith
White Bluff, Tennessee............................... 296 9.9%
- ----------------------
(1) 50 shares are held jointly with Hazel Bibb, 50 are held jointly with
Patricia T. Bibb.
EACH PERSON WHO IS A DIRECTOR OR AN EXECUTIVE OFFICER OF FARMERS &
MERCHANTS BANK:
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned Percent of Class
- ------------------------------------------ ------------------ ----------------
Harold Bibb
White Bluff, Tennessee.................... 373 12.4%
Richard C. Bibb
White Bluff, Tennessee(1)................. 607 20.2%
Bessie Bradley
Burns, Tennessee.......................... 50 1.7%
Whitfield Burcham
Goodlettsville, Tennessee................. 350 11.7%
John T. Corkan, Jr.
White Bluff, Tennessee(2)................. 35 1.2%
Charles Glenn Kane
Whites Creek, Tennessee................... 2 0.1%
Carol Thompson
White Bluff, Tennessee(3)................. 20 0.7%
Directors and executive officers as a group
(seven persons)........................... 1,437 48.0%
- ---------------------
(1) 50 shares are held jointly with Hazel Bibb, and 50 shares are held
jointly with Patricia T. Bibb.
(2) Held jointly with Rubie Corkan.
(3) Held jointly with Charles B. Thompson.
68
71
DESCRIPTION OF FARMERS & MERCHANTS BANK CAPITAL STOCK
Farmers & Merchants Bank is authorized by its charter to issue a
maximum of 4,000 shares of Farmers and Merchants Common Stock, which has a par
value of $100.00 per share, and of which 3,000 shares were outstanding at
December __, 1998, and 3,000 shares of perpetual preferred stock, $100.00 par
value (the "Farmers & Merchants Bank Preferred Stock"), none of which are
outstanding.
The holders of Farmers & Merchants Bank Common Stock and Farmers &
Merchants Bank Preferred Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting is
not allowed. Holders of Farmers & Merchants Bank Preferred Stock are entitled
to an annual cumulative dividend of $10.00 per share. Holders of Farmers &
Merchants Bank Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Farmers & Merchants Bank Board out of funds
legally available therefore and, in the event of liquidation, dissolution or
winding up of Farmers & Merchants Bank, will be entitled to share ratably in
all assets remaining after payment of liabilities and the par value of any
outstanding Farmers & Merchants Bank Preferred Stock. The declaration and
payment of dividends by the Farmers & Merchants Bank Board shall be 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.
Holders of Farmers & Merchants Bank Common Stock and Farmers &
Merchants Bank Preferred Stock have preemptive rights. Neither holders of
Farmers & Merchants Bank Common Stock nor Farmers & Merchants Bank Preferred
Stock have any right to convert their shares into any other securities. All
outstanding shares of Farmers & Merchants Bank are fully paid and
nonassessable.
69
72
COMPARISON OF RIGHTS OF SHAREHOLDERS
Farmers & Merchants Bank Shareholders, whose rights are governed by
the Farmers & Merchants Bank Charter, the Farmers & Merchants Bank Bylaws, the
Tennessee Banking Act and, to the extent provided in the Tennessee Banking Act,
the Tennessee Corporation Act, will become shareholders of First Farmers and
Merchants Corporation upon completion of the Merger. As such, the rights of the
former Farmers & Merchants Bank Shareholders will be governed by the First
Farmers and Merchants Corporation Charter, the First Farmers and Merchants
Corporation Bylaws and the Tennessee Corporation Act.
While it is impractical to summarize all such differences, set forth
below are the material differences between the rights of Farmers & Merchants
Bank Shareholders under Farmers & Merchants Bank's governing documents and
governing law and the rights of First Farmers and Merchants Corporation
shareholders under the First Farmers and Merchants Corporation Charter, First
Farmers and Merchants Corporation Bylaws and the Tennessee Corporation Act.
VOTING RIGHTS; CUMULATIVE VOTING
FARMERS & MERCHANTS BANK. Each Farmers & Merchants Bank Shareholder
entitled to vote on the Merger Agreement is entitled to one vote for each share
of Farmers & Merchants Bank Common Stock held by the shareholder.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Bylaws provide that each share of issued and outstanding
First Farmers and Merchants Corporation Common Stock entitles the holder to one
vote on each matter with respect to which shareholders are entitled to vote.
The First Farmers and Merchants Corporation Charter and Bylaws do not provide
for cumulative voting by shareholders.
PREEMPTIVE RIGHTS
FARMERS & MERCHANTS BANK. In the case of any increase in the capital
stock of Farmers & Merchants Bank other than by stock dividend, each Farmers &
Merchants Bank Shareholder has the preemptive right to purchase such
shareholder's pro rata portion of the issuance of any shares of Farmers &
Merchants Bank capital stock (of whatever class) according to the proportion of
such shareholder's holdings of Farmers & Merchants Bank capital stock (of
whatever class). Such right is exercisable within 30 days of the mailing of
transferable subscription warrants by First Farmers & Merchants Bank to its
shareholders, at such price and on such terms as shall be fixed and determined
by the Farmers & Merchants Bank Board.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Charter and Bylaws do not provide for preemptive rights
for First Farmers and Merchants Corporation shareholders.
BOARD OF DIRECTORS
FARMERS & MERCHANTS BANK. The Farmers & Merchants Bank Board is to
consist of five to 11 members, as determined from time to time by resolution of
the Farmers & Merchants Bank Shareholders at their annual meeting. On the date
of this Prospectus/Proxy Statement the Farmers & Merchants Bank Board consisted
of five members. Any vacancy on the Farmers & Merchants Bank Board may be
filled by a majority vote of the remaining directors, unless such vacancy
occurs because of removal of a director by the Farmers & Merchants Bank
Shareholders or unless the number of vacancies exceeds one-third of the number
of memberships on the Farmers & Merchants Bank Board, in which case such
directorship or directorships must be filled by election at an annual meeting
or at a special meeting of Farmers & Merchants Bank Shareholders called for
such purpose.
70
73
Directors of Farmers & Merchants Bank serve one year terms and must be Farmers
& Merchants Bank Shareholders. Three-fourths of the directors must be United
States citizens, two-thirds of the directors must reside in Tennessee or within
25 miles of the main office of Farmers & Merchants Bank, and a majority of the
directors must reside within 100 miles of the main office of Farmers &
Merchants Bank.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Board is to consist of five to 25 members, as determined
from time to time by the First Farmers and Merchants Corporation Board, and on
the date of this Prospectus/Proxy Statement consisted of 16 members. Any
vacancy on the First Farmers and Merchants Corporation Board may be filled by a
majority vote of the remaining directors, unless such vacancy occurs because of
removal of a director by First Farmers and Merchants Corporation shareholders
without cause, in which case such directorship must be filled by election of
the First Farmers and Merchants Corporation Shareholders. Directors of First
Farmers & Merchants Corporation serve one year terms.
REMOVAL OF DIRECTORS
FARMERS & MERCHANTS BANK The Farmers & Merchants Bank Bylaws provide
that one or more directors of Farmers & Merchants Bank may be removed with or
without cause by the affirmative vote of the holders of a majority of shares of
Farmers & Merchants Bank Common Stock then entitled to vote at an election of
directors at a regular meeting or a special meeting called for the purpose of
such removal. Farmers & Merchants Bank Shareholders entitled to vote at such
meeting may also elect a successor director or directors to hold office until
the next annual meeting of Farmers & Merchants Bank Shareholders.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Bylaws provide that a director of First Farmers and
Merchants Corporation may be removed for cause or without cause by vote of a
majority of the First Farmers and Merchants Corporation shareholders entitled
to vote at a regular or special meeting. If the First Farmers and Merchants
Corporation shareholders remove a director without cause, such directorship
must be filled by election of the First Farmers and Merchants Corporation
shareholders. A director elected to fill a vacancy shall hold office for the
unexpired term of his predecessor.
NOMINATION OF DIRECTORS
FARMERS & MERCHANTS BANK. The Charter and Bylaws of Farmers &
Merchants Bank have no special provisions for the nomination of directors.
FIRST FARMERS AND MERCHANTS CORPORATION. Pursuant to the First Farmers
and Merchants Corporation Bylaws, nominations for election to the First Farmers
and Merchants Corporation Board may be made by the Board itself or by any
shareholder of any outstanding class of capital stock entitled to vote for
election of directors. Nominations must be in writing and must be delivered or
mailed to the Chief Executive Officer of First Farmers and Merchants
Corporation not less than 14 nor more than 50 days prior to any shareholders
meeting called for the election of directors, unless less than 21 days notice
of such meeting is given to First Farmers and Merchants Corporation
shareholders, in which case such nominations must be delivered or mailed not
later than the close of business on the date on which the notice of meeting was
mailed.
ANNUAL MEETING OF SHAREHOLDERS
FARMERS & MERCHANTS BANK. The Farmers & Merchants Bank Bylaws provide
that annual meetings of Farmers & Merchants Bank Shareholders shall be held in
Dickson County, Tennessee, on the third Thursday in January of each year if not
a legal holiday. If such day is a legal holiday, the annual meeting is to be
held on the next business day.
71
74
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Bylaws provide that annual meetings of First Farmers and
Merchants Corporation shareholders may be held at a time and place as set by
the First Farmers and Merchants Corporation Board each year. If no other
designation is made, the place of the annual meeting shall be First Farmers and
Merchants Corporation's principal office.
RIGHTS OF SHAREHOLDERS TO CALL SPECIAL MEETINGS
FARMERS & MERCHANTS BANK. The Farmers & Merchants Bank Bylaws state
that a special meeting of Farmers & Merchants Bank Shareholders may be called
by one-third of the Farmers & Merchants Bank Board, the Chairman of the Farmers
& Merchants Bank Board, the holders of 20% or more of the outstanding shares of
Farmers & Merchants Bank capital stock or the Commissioner of the Tennessee
Department of Financial Institutions.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Bylaws state that a special meeting of the First Farmers
and Merchants Corporation shareholders may be called by the Chairman of the
First Farmers and Merchants Corporation Board, by the President of First
Farmers and Merchants Corporation or at the request of the holders of at least
25% of the shares of First Farmers and Merchants Corporation Common Stock
entitled to vote at such meeting.
AMENDMENT OF CHARTER AND BYLAWS
FARMERS & MERCHANTS BANK. The Farmers & Merchants Bank Charter may be
amended by a majority vote of the outstanding shares of Farmers & Merchants
Bank capital stock. The Farmers & Merchants Bank Bylaws provide that, except
for those provisions relating to the duties, terms of office or indemnification
of directors, the Bylaws may be amended, altered or repealed and new Bylaws
adopted by a majority vote of members present at any regular Farmers &
Merchants Bank Board meeting or special Farmers & Merchants Bank Board meeting
called for such purpose. Any Bylaw so adopted by the Farmers & Merchants Bank
Board may be amended or repealed by a majority vote of the Farmers & Merchants
Bank Shareholders.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Charter generally provides that amendments thereto may be
adopted in any manner permitted by Tennessee state law. The Tennessee
Corporation Act provides that a corporation's charter may be amended by a
majority of shareholder votes entitled to be cast on the amendment, subject to
any condition the board of directors may place on the submission of the
amendment to the shareholders. The First Farmers and Merchants Corporation
Bylaws provide for the alteration, amendment or repeal of the Bylaws and the
adoption of new Bylaws by a vote of the First Farmers and Merchants Corporation
shareholders representing a majority of all shares issued and outstanding at
any annual shareholders' meeting or at any special shareholder's meeting called
for such purpose. The First Farmers and Merchants Corporation Board may also
make, adopt, alter and amend the Bylaws, other than those provisions relating
to the quorum for shareholder and Board meetings, the removal of Board members
or the filling of Board vacancies resulting from removal by the shareholders,
by a two-thirds majority of the entire Board. The First Farmers and Merchants
Corporation shareholders may alter, amend or repeal such Bylaws adopted by the
First Farmers and Merchants Corporation Board.
INDEMNIFICATION
FARMERS & MERCHANTS BANK. The Farmers & Merchants Bank Bylaws state
that Farmers & Merchants Bank shall indemnify its officers, directors or
employees and their heirs, executors and administrators against judgments
resulting from and expenses reasonably incurred by the indemnified party in
connection with any action to which he is made a party by reason of his being
72
75
an officer, director or employee of Farmers & Merchants Bank, except with
respect to matters as to which he is finally adjudged to be liable for
negligence or misconduct. In the event of a settlement, Farmers & Merchants
Bank shall only indemnify such officer, director or employee if it is advised
by counsel that the person to be indemnified was not liable for negligence or
misconduct.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Bylaws state that, to the extent not inconsistent with
Tennessee law, First Farmers and Merchants Corporation shall indemnify its
officers and directors against any liability and reasonable expense incurred in
connection with any claim, action, suit or proceeding, if (i) such person is
wholly successful with respect to such claim or such person acted in good
faith, in what he reasonably believed to be the best interest of First Farmers
and Merchants Corporation and, (ii) if the case is criminal in nature, the
indemnified party had no reasonable cause to believe that his conduct was
unlawful. The First Farmers and Merchants Corporation Bylaws also provide for
indemnification of employees of First Farmers and Merchants Corporation, who
are not directors or officers, to the extent authorized at any time or from
time to time by the First Farmers and Merchants Board. The First Farmers and
Merchants Corporation Bylaws also authorize the Board to approve
indemnification of directors, officers or other persons to the full extent
permitted by Tennessee law in effect at the time with respect to past
transactions.
TAXATION OF DIVIDENDS
FARMERS & MERCHANTS BANK. Under Tennessee tax law, cash dividends paid
by banks (such as Farmers & Merchants Bank) are exempt from state income tax.
FIRST FARMERS AND MERCHANTS CORPORATION. Under Tennessee tax law, cash
dividends paid by business corporations (such as First Farmers and Merchants
Corporation) to Tennessee residents would be subject to a state income tax.
PREFERRED STOCK
FARMERS & MERCHANTS BANK. On January 31, 1984, the Farmers & Merchants
Bank Charter was amended to authorize 3,000 shares of Farmers & Merchants Bank
Preferred Stock, convertible into shares of Farmers & Merchants Bank Common
Stock on a one-for-one basis at any time prior to January 1, 1990, with an
annual dividend of $10 per share. The Farmers & Merchants Bank Preferred Stock
has the same voting rights as the Farmers & Merchants Bank Common Stock. Any
shares of the Farmers & Merchants Bank Preferred Stock not converted prior to
January 1, 1990 became perpetual preferred stock.
Upon liquidation of Farmers & Merchants Bank, holders of the Farmers &
Merchants Bank Preferred Stock have the right to receive the par value of their
shares and all unpaid dividends, whether or not earned or declared, accrued to
the date of payment. Pursuant to the Farmers & Merchants Bank Charter, the
holders of Farmers & Merchants Bank Preferred Stock are entitled to receive,
when and as declared by the First Farmers & Merchants Bank Board, cash
dividends at a rate of 5% per year of the par value of the shares held, with
such dividends to be paid semi-annually on February 1 and August 1. As long as
there is Farmers & Merchants Bank Preferred Stock outstanding, on each February
1 and August 1, Farmers & Merchants Bank must apply net profits for the six
month periods ending on the preceding December 31 or June 30, respectively, in
the following order: (i) to the payment of dividends on outstanding Farmers &
Merchants Bank Preferred Stock; (ii) to payment into a Farmers & Merchants Bank
Preferred Stock retirement fund of a sum equal to 40% of the remainder of net
profits (not to exceed 5% of the maximum aggregate par value of the Farmers &
Merchants Bank Preferred Stock at any time outstanding and not to be paid from
net profits accruing from and after December 31, 1935, unless elected by the
Farmers & Merchants Bank Board); and (iii) to other lawful purposes determined
by the Farmers & Merchants Bank Board.
73
76
If as many as two semi-annual dividend payments on the Farmers &
Merchants Bank Preferred Stock are in arrears, until all arrears on the Farmers
& Merchants Bank Preferred Stock dividends have been paid in full and funds
have been set apart for the payment of current dividends declared, the holders
of Farmers & Merchants Bank Preferred Stock shall be entitled, as a class, to
vote on all matters twice the number of the votes to which the holders of
Farmers & Merchants Bank Common Stock, as a class, are at the time entitled to
vote, with each holder of Farmers & Merchants Bank Preferred Stock entitled to
a pro rata share of the votes to which his class is entitled.
FIRST FARMERS AND MERCHANTS CORPORATION. The First Farmers and
Merchants Corporation Charter does not authorize the issuance of preferred
stock.
AUTHORIZED CAPITAL STOCK
Authorized Shares
-------------------------
Common Preferred Par Value per
Stock Stock Share
--------- --------- -------------
Farmers & Merchants Bank..................................... 4,000 3,000 $100.00
First Farmers and Merchants Corporation...................... 8,000,000 -- $ 10.00
74
77
WHERE YOU CAN FIND MORE INFORMATION
First Farmers and Merchants Corporation has filed with the Securities
and Exchange Commission ("SEC") under the Securities Act a Registration
Statement on Form S-4 that registers the distribution to Farmers & Merchants
Bank Shareholders of the shares of First Farmers and Merchants Corporation
Common Stock to be issued in connection with the Merger (the "Registration
Statement"). The Registration Statement, including the attached exhibits and
schedules, contain additional relevant information about First Farmers and
Merchants Corporation, First Farmers and Merchants National Bank, Farmers &
Merchants Bank and the First Farmers and Merchants Corporation Common Stock. The
rules and regulations of the SEC allow the companies to omit certain information
included in the Registration Statement from this Prospectus/Proxy Statement.
In addition, First Farmers and Merchants Corporation files reports,
proxy statements and other information with the SEC under the Exchange Act. You
may read and copy this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of
the SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like First
Farmers and Merchants Corporation, which file electronically with the SEC.
The address of that site is http://www.sec.gov.
The SEC allows First Farmers and Merchants Corporation to "incorporate
by reference" information into this Prospectus/Proxy Statement from documents
that First Farmers and Merchants Corporation has previously filed with the SEC.
This means that First Farmers and Merchants Corporation can disclose important
information to you by referring you to another document filed separately with
the SEC. These documents contain important information about First Farmers and
Merchants Corporation and its financial condition. The information incorporated
by reference is considered to be a part of this Prospectus/Proxy Statement,
except for any information that is superseded by other information that is set
forth directly in this document.
This Prospectus/Proxy Statement incorporates by reference the
following documents with respect to First Farmers and Merchants Corporation:
1. First Farmers and Merchants Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997, and an
amendment thereto on Form 10-K/A that was filed with the SEC
on April 1, 1998;
2. First Farmers and Merchants Corporation's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998;
3. First Farmers and Merchants Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998; and
75
78
4. First Farmers and Merchants Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
In addition, a copy of each of the following documents with respect to
First Farmers and Merchants Corporation is being furnished to you concurrently
with this Prospectus Supplement/Proxy Statement:
1. First Farmers and Merchants Corporation's 1997 Annual Report
to Shareholders; and
2. First Farmers and Merchants Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998.
First Farmers and Merchants Corporation has supplied all information
contained or incorporated by reference in this Prospectus/Proxy Statement
relating to First Farmers and Merchants Corporation and First Farmers and
Merchants National Bank, as well as all pro forma financial information.
Farmers & Merchants Bank has supplied all information contained in
this Prospectus/Proxy Statement relating to Farmers & Merchants Bank.
You can obtain copies of the documents incorporated by reference in
this Prospectus/Proxy Statement with respect to First Farmers and Merchants
Corporation without charge, excluding any exhibits to those documents unless
the exhibit is specifically incorporated by reference as an exhibit in this
Prospectus/Proxy Statement, by requesting them in writing or by telephone from
First Farmers and Merchants at the following:
First Farmers and Merchants Corporation
816 South Garden Street
Columbia, Tennessee 38402
(931) 388-3145
Attention: Secretary
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM FIRST FARMERS AND
MERCHANTS CORPORATION, PLEASE DO SO BY ____________________, 1999 TO RECEIVE
THEM BEFORE THE SPECIAL MEETING. You can also obtain copies of these documents
from the SEC through the SEC's Internet world wide web site or at the SEC's
address described in this section above.
You should rely only on the information contained in or incorporated
by reference in this Prospectus/Proxy Statement in considering how to vote your
shares at the Special Meeting. Neither First Farmers and Merchants Corporation
nor Farmers & Merchants Bank has authorized anyone to provide you with
information that is different from the information in this document. This
Prospectus/Proxy Statement is dated December __, 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 Farmers and Merchants Corporation Common Stock in the
Merger shall create any implication to the contrary.
76
79
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 Farmers and Merchants Corporation and Farmers & Merchants Bank and about
the combined companies following the Merger. These statements concern the cost
savings, revenue enhancements and other advantages the companies expect to
obtain from the Merger, the anticipated impact of the Merger on First Farmers
and Merchants Corporation's financial performance and earnings estimates for
the combined company. These statements appear in several Sections of this
Prospectus/Proxy Statement, including "SUMMARY," "THE MERGER -- Reasons for the
Merger" and "THE MERGER -- Fairness Opinion." Also, the forward-looking
statements generally include any of the words "believes," "expects,"
"anticipates," "intends," "estimates," "plans" or similar expressions.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. The future results and
shareholder values of First Farmers and Merchants Corporation and Farmers &
Merchants Bank, and of the combined companies, 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 Farmers and Merchants Corporation or Farmers & Merchants Bank.
In addition, neither First Farmers and Merchants Corporation nor Farmers &
Merchants Bank intends to, nor are they obligated to, update these
forward-looking statements after this Prospectus/Proxy Statement is
distributed, 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 Farmers and Merchants Corporation claims 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:
1. Cost savings the companies expect from the Merger might not be
fully realized or realized within the time frame the
companies anticipate;
2. Revenues following the Merger may be lower than expected;
3. Loss of deposits, customers or revenues may be greater than
anticipated;
4. Competitive pressure among financial services providers may
increase significantly;
5. Costs or difficulties related to regulatory requirements
involved in combining the companies, including the subsidiary
banks, may be greater than expected;
6. Interest rates may change in such a way as to reduce the
companies' margins;
7. General economic or monetary conditions, either nationally or
regionally, may be less favorable than expected, resulting in
a deterioration in credit quality or a diminished demand for
the companies' services and products;
8. Changes in laws or government rules, or the way in which
courts interpret these laws or rules, may adversely affect
the companies' businesses; and
9. Business conditions, inflation or securities markets may
undergo significant change.
77
80
LEGAL MATTERS
The validity of the shares of First Farmers and Merchants Corporation
Common Stock to be issued in the Merger will be passed upon by Waller Lansden
Dortch & Davis, A Professional Limited Liability Company, Nashville, Tennessee,
special counsel to First Farmers and Merchants Corporation.
EXPERTS
The Consolidated Financial Statements of First Farmers and Merchants
Corporation as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, have been incorporated by reference
in this Prospectus/Proxy Statement and in the Registration Statement in
reliance upon the report of Kraft Bros., Esstman, Patton & Harrell, PLLC,
independent certified public accountants, incorporated by reference herein, and
upon the authority of such firm as experts in accounting and auditing.
The Financial Statements of Farmers & Merchants Bank at December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997, included in this Prospectus/Proxy Statement and Registration Statement,
have been audited by Marlin & Edmondson, P.C., Nashville, Tennessee,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
78
81
FARMERS & MERCHANTS BANK
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
CONTENTS
--------
PAGE
----
NINE MONTHS ENDED SEPTEMBER 30, 1998
CONDENSED BALANCE SHEETS............................................................................. F-2
CONDENSED STATEMENTS OF INCOME....................................................................... F-3
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY......................................................... F-4
CONDENSED STATEMENTS OF CASH FLOWS................................................................... F-5
NOTES TO CONDENSED FINANCIAL STATEMENTS.............................................................. F-6
YEARS ENDED DECEMBER 31, 1997 AND 1996
REPORT OF INDEPENDENT AUDITORS....................................................................... F-8
BALANCE SHEETS....................................................................................... F-9
STATEMENTS OF INCOME................................................................................. F-10
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY........................................................ F-11
STATEMENTS OF CASH FLOWS............................................................................. F-12
NOTES TO FINANCIAL STATEMENTS........................................................................ F-13
YEARS ENDED DECEMBER 31, 1996 AND 1995
REPORT OF INDEPENDENT AUDITORS....................................................................... F-20
BALANCE SHEETS....................................................................................... F-21
STATEMENTS OF INCOME................................................................................. F-22
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY........................................................ F-23
STATEMENTS OF CASH FLOWS............................................................................. F-24
NOTES TO FINANCIAL STATEMENTS........................................................................ F-25
F-1
82
FARMERS & MERCHANTS BANK
CONDENSED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30 December 31
1998 1997
------------ -----------
ASSETS
Cash and due from banks.................................................. $ 830 $ 712
Securities available for sale, at fair value............................. 14,032 13,148
Federal funds sold....................................................... 550 300
Loans, net of unearned income and allowance for possible loan losses..... 5,088 5,132
Bank premises and equipment, at cost less accumulated depreciation....... 340 360
Other assets............................................................. 327 269
------- -------
TOTAL ASSETS............................................................. $21,167 $19,921
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing................................................. $ 3,098 $ 2,917
Interest-bearing.................................................... 14,293 13,525
------- -------
17,391 16,442
Other liabilities........................................................ 338 247
------- -------
TOTAL LIABILITIES........................................................ 17,729 16,689
======= =======
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock - $100 per value, 3,000 share authorized; 3,000
shares issued and outstanding....................................... 300 300
Additional paid-in capital............................................... 300 300
Undivided profits........................................................ 2,625 2,514
Accumulated other comprehensive income................................... 213 118
------- -------
TOTAL STOCKHOLDERS' EQUITY............................................... 3,438 3,232
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................... $21,167 $19,921
======= =======
F-2
83
FARMERS & MERCHANTS BANK
CONDENSED STATEMENTS OF INCOME
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1998 1997 1998 1997
------ ------ ------ ------
TOTAL INTEREST INCOME $ 361 $ 358 $1,063 $1,088
INTEREST EXPENSE 145 139 419 426
------ ------ ------ ------
NET INTEREST INCOME 216 219 644 662
PROVISION FOR POSSIBLE LOAN LOSSES -- -- -- --
------ ------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 216 219 644 662
TOTAL NONINTEREST INCOME 42 35 116 111
TOTAL NONINTEREST EXPENSES 148 147 463 445
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 110 107 297 328
PROVISION FOR INCOME TAXES 23 28 60 85
------ ------ ------ ------
NET INCOME $ 87 $ 79 $ 237 $ 243
------ ------ ------ ------
BASIC EARNINGS PER SHARE (based on 3,000
shares outstanding $29.00 $26.33 $79.00 $81.00
See accompanying notes.
F-3
84
FARMERS AND MERCHANTS BANK
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Other
Additional Undivided Comprehensive
Common Stock Paid-In Capital Profits Income Total
------------ --------------- --------- ------------- ------
BALANCE AT JANUARY 1, 1997 $300 $300 $2,349 $ 59 $3,008
Net income for nine-month period -- -- 243 0 243
Cash dividends, $36 per share -- -- (108) -- (108)
Change in unrealized gain on available-for-
sale securities, net of deferred income taxes -- -- -- 32 32
---- ---- ------ ---- ------
BALANCE AT SEPTEMBER 30, 1997 $300 $300 $2,484 $ 91 $3,175
BALANCE AT JANUARY 30, 1998 $300 $300 $2,514 $118 $3,232
Net income for nine-month period -- -- 237 -- 237
Cash dividends, $42 per share -- -- (126) -- (126)
Change in unrealized gain on available-for-
sale-securities, net of deferred income taxes -- -- -- 95 95
---- ---- ------ ---- ------
BALANCE AT SEPTEMBER 30, 1998 $300 $300 $2,625 $213 $3,438
==== ==== ====== ==== ======
F-4
85
FARMERS AND MERCHANTS BANK
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine-Months Ended September 30,
-------------------------------
1998 1997
------ ------
OPERATING ACTIVITIES
Net income for the period............................................. $ 237 $ 243
Adjustments to reconcile net income to net cash provided by ------ ------
operating activities:
Provision for depreciation............................................ 29 31
Increase (decrease) in other assets................................... 50 (11)
Increase (decrease) in other liabilities.............................. 91 11
------ ------
TOTAL ADJUSTMENTS..................................................... 170 31
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 407 274
------ ------
INVESTING ACTIVITIES
Purchases of available-for-sale securities............................ (806) 1,233
Net increase (decreases) in loans..................................... (44) (687)
Purchases of premises and equipment................................... (12) (48)
------ ------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES................................................ (862) 498
------ ------
FINANCING ACTIVITIES
Net increase (decrease) in deposits................................... 949 (455)
Cash dividends paid................................................... (126) (108)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITES.............................. 823 (563)
INCREASE IN CASH AND CASH EQUIVALENTS................................. 368 209
CASH AND CASH EQUIVALENTS - BEGINNING OF
YEAR.................................................................. 1,012 1,174
------ ------
CASH AND CASH EQUIVALENTS - END OF PERIOD............................. $1,380 $1,383
====== ======
See accompanying notes.
F-5
86
FARMERS AND MERCHANTS BANK
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed financial statements present the accounts and
operations of Farmers & Merchants Bank, a Tennessee banking
corporation (the "Bank"), with an officer in White Bluff,
Tennessee.
In the opinion of management, the accompanying unaudited
condensed financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair presentation only of normal recurring adjustments) necessary
for a fair presentation of the financial condition and results of
operations of the Bank for the interim periods. The results of
operations for the three-months and nine-months ended September
30, 1998, are not necessarily indicative of the results which may
be expected for the entire year.
NOTE 2 - STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows for 1998 and 1997,
the Bank has considered cash equivalents to include amounts due
from banks and federal funds sold. Total interest paid for the
nine-months ended September 30, 1998 and 1997, was $419,000 and
$426,000 respectively. Total income taxes paid for the
nine-months ended September 30, 1998 and 1997 was $45,000 and
$60,000, respectively.
NOTE 3 - COMPREHENSIVE INCOME
The Bank adopted SFAS No. 130, "Reporting Comprehensive Income,"
as of January 1, 1998. Accounting principles generally require
that recognized revenue, expenses, gains and losses be included
in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items,
along with net income, are components of comprehensive income.
The adoption of SFAS No. 130 had no effect on the Bank's net
income or shareholders' equity.
NOTE 4 - SUBSEQUENT EVENTS AND PENDING TRANSACTIONS
Effective October 27, 1998, the Bank's Board of Directors approved an agreement
and plan of merger pursuant to which the Bank will become a branch of First
Farmers and Merchants National Bank, a national banking corporation with its
principal office located in Columbia, Tennessee. The agreement is subject to
the approval of the Bank's shareholders and appropriate regulatory authorities.
Such approval is pending.
F-6
87
FARMERS & MERCHANTS BANK
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(WITH INDEPENDENT ACCOUNTANTS' REPORT THEREON)
F-7
88
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
FARMERS & MERCHANTS BANK:
We have audited the accompanying balance sheets of Farmers & Merchants Bank as
of December 31, 1997 and 1996, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmers & Merchants Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Marlin & Edmondson, P.C.
January 9, 1998
Nashville, Tennessee
F-8
89
FARMERS & MERCHANTS BANK
Balance Sheets
December 31, 1997 and 1996
1997 1996
------------ -----------
Assets
------
Cash and due from banks $ 711,825 523,618
Federal funds sold 300,000 650,000
Investment securities,
available-for-sale (note 2) 13,147,936 13,501,700
Loans (notes 3 and 4) 5,372,075 4,985,179
Allowance for loan losses (240,076) (241,253)
------------ -----------
Net loans 5,131,999 4,743,926
------------ -----------
Premises and equipment (note 5) 359,734 353,073
Accrued income receivable 226,752 249,748
Other assets 43,063 49,289
------------ -----------
Total assets $ 19,921,309 20,071,354
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits (note 6):
Noninterest-bearing accounts $ 2,916,713 2,274,892
Interest-bearing accounts 13,525,583 14,538,945
------------ -----------
Total deposits 16,442,296 16,813,837
Accrued interest 88,602 87,932
Other liabilities (note 7) 157,860 161,354
------------ -----------
Total liabilities 16,688,758 17,063,123
------------ -----------
Stockholders' equity:
Common stock, $100 par value; authorized
3,000 shares; issued 3,000 shares 300,000 300,000
Additional paid-in capital 300,000 300,000
Undivided profits 2,514,210 2,349,025
Net unrealized gain on securities
available for sale, net of tax effect 118,341 59,206
------------ -----------
Total stockholders' equity 3,232,551 3,008,231
------------ -----------
Total liabilities and stockholders'
equity $ 19,921,309 20,071,354
============ ===========
F-9
90
FARMERS & MERCHANTS BANK
Statements of Income
Years Ended December 31, 1997 and 1996
1997 1996
---------- ---------
Interest income:
Interest and fees on loans $ 596,934 557,065
Interest on investment securities:
Taxable 639,411 657,495
Exempt from federal taxes 160,113 160,014
Interest on federal funds sold 42,721 52,147
---------- ---------
1,439,179 1,426,721
Interest expense:
Interest on deposits 564,772 569,164
---------- ---------
Net interest income 874,407 857,557
---------- ---------
Other income:
Service charges on deposit accounts 119,873 114,946
Gain on sale of other real estate 30,334 85,609
Miscellaneous 7,872 5,921
---------- ---------
158,079 206,476
---------- ---------
Other expenses:
Salaries and wages 286,387 288,537
Employee benefits (note 8) 64,701 72,904
Occupancy expenses 42,723 45,702
Furniture and fixture expense 37,892 33,069
Other expenses 189,196 168,790
---------- ---------
620,899 609,002
---------- ---------
Income before income taxes 411,587 455,031
Applicable income taxes (note 7) 102,402 114,808
---------- ---------
Net income $ 309,185 340,223
========== =========
Earnings per common share $ 103.06 113.41
========== ===========
Weighted average common share outstanding 3,000 3,000
========== ============
F-10
91
FARMERS & MERCHANTS BANK
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997 and 1996
Net
Unrealized
Gain
(Loss) on
Additional Securities
Common Paid-In Undivided Available
Stock Capital Profits for Sale Total
------ ---------- --------- ---------- -----
Balance at
at December 31,
1995 $300,000 300,000 2,128,802 169,289 2,898,091
Net income -- -- 340,223 -- 340,223
Net change in
unrealized
gain on
securities
available for
sale, net of
tax effect -- -- -- (110,083) (110,083)
Cash dividends:
$40 per share
on common stock -- -- (120,000) -- (120,000)
-------- ------- --------- -------- ---------
Balance at
December 31,
1996 300,000 300,000 2,349,025 59,206 3,008,231
Net income -- -- 309,185 -- 309,185
Net change in
unrealized
gain on
securities
available for
sale, net of
tax effect -- -- -- 59,135 59,135
Cash dividends:
$48 per share
on common
stock -- -- (144,000) -- (144,000)
-------- ------- --------- -------- ---------
Balance at
December 31,
1997 $300,000 300,000 2,514,210 118,341 3,232,551
======== ======= ========= ======== =========
F-11
92
FARMERS & MERCHANTS BANK
Statements of Cash Flows
Years Ended December 31, 1997 and 1996
1997 1996
----------- ----------
Cash flows from operating activities:
Net income $ 309,185 340,223
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,924 37,706
Deferred income tax expense (3,006) (11,856)
Gain on sale of securities 486 --
(Increase) decrease in interest receivable 22,996 (13,045)
Decrease in other assets 6,226 102,502
Increase (decrease) in interest payable 670 (7,673)
Increase (decrease) in other liabilities (36,733) 10,942
----------- ----------
Net cash provided by operating activities 338,748 458,799
----------- ----------
Cash flows from investing activities:
Net (increase) decrease in fed funds sold 350,000 (25,000)
Proceeds from sale of investments 74,438 --
Proceeds from maturities of investments 3,266,394 2,250,000
Purchases of investment securities (2,892,174) (2,713,687)
Purchase of premises and equipment (45,585) (6,833)
Net increase in loans (388,073) (165,531)
----------- ----------
Net cash provided (used) by investing
activities 365,000 (661,051)
----------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts (371,541) 632,451
Cash dividends paid (144,000) (120,000)
----------- ----------
Net cash provided (used) by financing
activities (515,541) 512,451
----------- ----------
Net increase in cash and due from banks 188,207 310,199
Cash and due from banks, beginning of year 523,618 213,419
----------- ----------
Cash and due from banks, end of year $ 711,825 523,618
=========== ==========
Cash paid during the year for:
Interest $ 564,102 576,837
Income taxes 154,530 114,190
=========== ==========
F-12
93
FARMERS & MERCHANTS BANK
Notes to Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations
Farmers and Merchants Bank provides a variety of financial services to
individuals and corporate customers through its White Bluff, Tennessee
office. The Bank's primary source of income is from commercial,
consumer, and real estate loans and investment securities.
Basis of Accounting
The accounting policies of Farmers & Merchants Bank conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Investment Securities
The unrealized portion of the gain or loss, net of tax, on debt and
other securities designated as available-for-sale are reported as a
separate component of shareholders' equity until realized.
Gain or loss on sale of investment securities is recognized at the
time of the sale. The cost of investment securities sold is based on
the specific identification of the security sold..
Loans
Loans are stated at the principal amount outstanding, net of unearned
discount. Income on installment loans is recognized by the
sum-of-the-months digits accrual method. Income on other loans is
accrued as earned. Interest accruals are discontinued when, in the
opinion of management, it is not reasonable to expect that such
interest will be collected.
The allowance for loan losses, which is reported as a reduction of
loans, is available for future loan charge-offs. The provision for
loan losses charged to operating expenses is determined based on
management's evaluation of the loan portfolio in light of current
economic conditions and other factors.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation has been computed on the straight-line
method based on the estimated useful lives of the respective assets.
Costs of maintenance and repairs are charged to expense as incurred.
Costs of replacing structural parts and major units are considered
individually and are expensed or capitalized as the facts dictate.
Income Taxes
The provision for income taxes relates to items of income and expenses
after elimination of tax-free income, principally tax-exempt interest
on securities.
Deferred income taxes arise from timing differences between financial
and tax reporting, principally relating to conversion to cash basis of
accounting and depreciation.
F-13
94
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Continued)
Other
The Bank recognizes substantially all income and expense on the
accrual method of accounting.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require 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 revenue and expenses during the
period reported. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior year have been reclassified to conform
with current year presentation.
(2) INVESTMENT SECURITIES
Investments can be designated as either held-to-maturity, trading or
available for sale. Investments designated as held-to-maturity are
carried at amortized cost and investments designated as available for
sale are reported at fair value. The Bank has designated all of its
securities as available for sale.
The amortized cost and estimated market values of investments in debt
securities are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 1997:
U.S. Treasury
securities $ 5,845,471 79,529 -- 5,925,000
Securities of U.S.
government agencies 3,795,796 13,361 -- 3,809,157
Obligations of states
and political
subdivisions 3,315,797 97,982 -- 3,413,779
----------- ------- ---------- ----------
$12,957,064 190,872 -- 13,147,936
=========== ======= ========== ==========
F-14
95
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(2) INVESTMENT SECURITIES, (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 1996:
U.S. Treasury
securities $ 6,491,647 -- (13,834) 6,477,813
Securities of U.S.
government agencies 3,940,170 32,926 -- 3,973,096
Obligations of states
and political
subdivisions 2,974,390 76,401 -- 3,050,791
----------- -------- ---------- ----------
$13,406,207 109,327 (13,834) 13,501,700
=========== ======== ========== ==========
The amortized cost and estimated market value of debt securities by
contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Market
Cost Value
--------- ----------
December 31, 1997:
Due in one year or less $ 2,395,797 2,392,877
Due after one year through five years 5,705,470 5,763,548
Due after five years through ten years 4,160,797 4,285,662
Due after ten years 695,000 705,849
----------- ----------
$12,957,064 13,147,936
=========== ==========
Investment securities carried in the balance sheets on December 31,
1997 and 1996, at approximately $300,000 for both years, were pledged
to secure public deposits and for other purposes as required or
permitted by law.
Proceeds from maturities of investment securities for 1997 amounted to
$3,266,394 and there was no related net gain.
F-15
96
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(3) LOANS
Loans at December 31, 1997 and 1996, are summarized as follows:
1997 1996
---------- ---------
Real estate:
Construction $ 31,000 371,000
Mortgage 3,698,000 2,870,000
Installment 1,601,000 1,762,000
Commercial 133,000 80,000
Other 2,363 2,570
---------- ---------
5,465,363 5,085,570
Less unearned interest 93,288 100,391
---------- ---------
$5,372,075 4,985,179
========== =========
Loans on which the accrual of interest has been discontinued or
reduced amounted to approximately $142,870 and $24,189 at December 31,
1997 and 1996, respectively.
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
1997 1996
-------- -------
Balance, beginning of year $241,253 243,461
Loans charged off (1,177) (2,208)
-------- -------
Balance, end of year $240,076 241,253
======== =======
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1997 1996
-------- -------
Land $ 50,009 50,009
Buildings and improvements 414,954 414,954
Furniture and equipment 309,879 264,294
-------- -------
774,842 729,257
Less accumulated depreciation 415,108 376,184
-------- -------
$359,734 353,073
======== =======
F-16
97
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(6) DEPOSITS
Deposits are summarized as follows:
1997 1996
----------- ----------
Noninterest-bearing $ 2,916,713 2,274,892
Money market and NOW 3,322,268 3,936,026
Savings 2,889,392 3,285,382
Time, $100,000 and over 1,408,515 1,300,000
Time, less than $100,000 5,905,408 6,017,537
----------- ----------
$16,442,296 16,813,837
=========== ==========
At December 31, 1997, scheduled maturities of time deposits were as
follows:
1998 $6,490,954
1999 667,250
2000 100,669
2001 50,050
2002 5,000
----------
$7,313,923
==========
(7) INCOME TAXES
A reconciliation of federal income taxes in the statement of income
with the amount computed by applying the statutory federal income tax
rate to income before income taxes is as follows:
1997 1996
-------- -------
Computed "expected" tax provision $139,940 154,710
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (55,367) (54,405)
State taxes, net of federal benefit 16,956 17,917
Other, net 873 (3,414)
-------- -------
$102,402 114,808
======== =======
Applicable income taxes (benefits) consist of the following:
1997 1996
-------- -------
Current:
Federal $ 79,294 98,613
State 26,114 28,051
Deferred:
Federal (2,583) (10,013)
State (423) (1,843)
-------- -------
$102,402 114,808
======== =======
F-17
98
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(7) INCOME TAXES, (Continued)
The sources of deferred income tax expense (benefits) and the tax
effects of each are as follows:
1997 1996
------- -------
Conversion to cash basis $(4,355) (666)
Depreciation 1,959 (4,894)
Other (610) (6,296)
------- -------
$(3,006) (11,856)
======= =======
The deferred tax liability is made up of the following components:
1997 1996
--------- --------
Deferred tax asset (liability):
Allowance for loan losses $ (20,189) (20,189)
Conversion to cash basis (47,380) (51,735)
Depreciation (8,111) (6,152)
Other items 610 --
Net unrealized loss on securities
available for sale (72,531) (36,287)
--------- --------
$(147,601) (114,363)
========= ========
The net deferred tax liability is included in other liabilities in
1997 and 1996.
(8) PROFIT SHARING PLAN
The Bank has in effect a defined contribution profit sharing plan
covering substantially all employees. Contributions to the plan are
determined annually by the Board of Directors. The contribution was
$12,500 for 1997 and $13,500 for 1996.
F-18
99
FARMERS & MERCHANTS BANK
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT ACCOUNTANTS' REPORT THEREON)
F-19
100
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
FARMERS & MERCHANTS BANK:
We have audited the accompanying balance sheets of Farmers & Merchants Bank as
of December 31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Farmers & Merchants Bank as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Marlin & Edmondson, P.C.
January 10, 1997
Nashville, Tennessee
F-20
101
FARMERS & MERCHANTS BANK
Balance Sheets
December 31, 1996 and 1995
1996 1995
------------ -----------
Assets
Cash and due from banks $ 523,618 213,419
Federal funds sold 650,000 625,000
Investment securities,
available-for-sale (note 2) 13,501,700 13,215,566
Loans (notes 3 and 4) 4,985,179 4,821,856
Allowance for loan losses (241,253) (243,461)
------------ -----------
Net loans 4,743,926 4,578,395
------------ -----------
Premises and equipment (note 5) 353,073 383,946
Accrued income receivable 249,748 236,703
Other assets (note 7) 49,289 151,791
------------ -----------
Total assets $ 20,071,354 19,404,820
============ ===========
Liabilities and Stockholders' Equity
Deposits (note 6):
Noninterest-bearing accounts $ 2,274,892 2,237,676
Interest-bearing accounts 14,538,945 13,943,710
------------ -----------
Total deposits 16,813,837 16,181,386
Accrued interest 87,932 95,605
Other liabilities (note 7) 161,354 229,738
------------ -----------
Total liabilities 17,063,123 16,506,729
------------ -----------
Stockholders' equity:
Common stock, $100 par value; authorized
3,000 shares; issued 3,000 shares 300,000 300,000
Additional paid-in capital 300,000 300,000
Undivided profits 2,349,025 2,128,802
Net unrealized gain on securities
available for sale, net of tax effect 59,206 169,289
------------ -----------
Total stockholders' equity 3,008,231 2,898,091
------------ -----------
Total liabilities and stockholders'
equity $ 20,071,354 19,404,820
============ ===========
See accompanying notes to financial statement.
F-21
102
FARMERS & MERCHANTS BANK
Statements of Income
Years Ended December 31, 1996 and 1995
1996 1995
---------- ---------
Interest income:
Interest and fees on loans $ 557,065 533,847
Interest on investment securities:
Taxable 657,495 621,798
Exempt from federal taxes 160,014 157,115
Interest on federal funds sold 52,147 54,729
---------- ---------
1,426,721 1,367,489
Interest expense:
Interest on deposits 569,164 563,055
---------- ---------
Net interest income 857,557 804,434
Other income:
Service charges on deposit accounts 114,946 124,521
Gain on sale of other real estate 85,609 53,522
Miscellaneous 5,921 35,775
---------- ---------
206,476 213,818
---------- ---------
Other expenses:
Salaries and wages 288,537 285,849
Employee benefits (note 8) 72,904 69,397
Occupancy expenses 45,702 53,433
Furniture and fixture expense 33,069 37,951
Other expenses 168,790 179,526
---------- ---------
609,002 626,156
---------- ---------
Income before income taxes 455,031 392,096
Applicable income taxes (note 7) 114,808 95,001
---------- ---------
Net income $ 340,223 297,095
========== =========
Earnings per common share $ 113.41 99.03
========== =========
Weighted average common share outstanding 3,000 3,000
========== =========
See accompanying notes to financial statement.
F-22
103
FARMERS & MERCHANTS BANK
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996 and 1995
Net
Unrealized
Gain
(Loss) on
Additional Securities
Common Paid-In Undivided Available
Stock Capital Profits for Sale Total
-------- ---------- --------- ---------- ---------
Balance at
at December 31,
1994 $300,000 300,000 1,933,707 (311,682) 2,222,025
Net income -- -- 297,095 -- 297,095
Net change in
unrealized
gain on
securities
available for
sale, net of
tax effect -- -- -- 480,971 480,971
Cash dividends:
$34 per share
on common stock -- -- (102,000) -- (102,000)
-------- ------- --------- -------- ---------
Balance at
December 31,
1995 300,000 300,000 2,128,802 169,289 2,898,091
Net income -- -- 340,223 -- 340,223
Net change in
unrealized
gain on
securities
available for
sale, net of
tax effect -- -- -- (110,083) (110,083)
Cash dividends:
$40 per share
on common
stock -- -- (120,000) -- (120,000)
-------- ------- --------- -------- ---------
Balance at
December 31,
1996 $300,000 300,000 2,349,025 59,206 3,008,231
======== ======= ========= ======== =========
See accompanying notes to financial statement.
F-23
104
FARMERS & MERCHANTS BANK
Statements of Cash Flows
Years Ended December 31, 1996 and 1995
1996 1995
----------- ----------
Cash flows from operating activities:
Net income $ 340,223 297,097
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 37,706 40,903
Increase in deferred income taxes (11,828) (1,345)
Gain on sale of securities -- (27,870)
Decrease in interest receivable (13,045) (21,670)
Decrease in other assets 102,502 18,441
Increase (decrease) in interest payable (7,673) 34,556
Increase in other liabilities 10,914 100,389
----------- ----------
Net cash provided by operating activities 458,799 440,501
----------- ----------
Cash flows from investing activities:
Proceeds from sale of investments -- 521,391
Proceeds from maturities of investments 2,250,000 1,178,050
Purchases of investment securities (2,713,687) (1,917,247)
Purchase of premises and equipment (6,833) (1,623)
Net increase in loans (165,531) (226,689)
----------- ----------
Net cash used by investing
activities (636,051) (446,118)
----------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts 632,451 (508,435)
Cash dividends paid (120,000) (102,000)
----------- ----------
Net cash provided (used) by financing
activities 512,451 (610,435)
----------- ----------
Net increase (decrease) in cash and
cash equivalents 335,199 (616,052)
Cash and cash equivalents at beginning of year 838,419 1,454,471
----------- ----------
Cash and cash equivalents at end of year $ 1,173,618 838,419
=========== ==========
Cash paid during the year for:
Interest 576,837 528,499
Income taxes $ 114,190 53,444
=========== ==========
See accompanying notes to financial statement.
F-24
105
FARMERS & MERCHANTS BANK
Notes to Financial Statements
December 31, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of Farmers & Merchants Bank conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Investment Securities
The unrealized portion of the gain or loss on debt and other
securities designated as available-for-sale are reported as a separate
component of shareholders' equity.
Gain or loss on sale of investment securities is recognized at the
time of the sale. The cost of investment securities sold is based on
the identified certificate method.
Loans
Loans are stated at the principal amount outstanding, net of unearned
discount. Income on installment loans is recognized by the
sum-of-the-months digits accrual method. Income on other loans is
accrued as earned. Interest accruals are discontinued when, in the
opinion of management, it is not reasonable to expect that such
interest will be collected.
The allowance for loan losses, which is reported as a reduction of
loans, is available for future loan charge-offs. The provision for
loan losses charged to operating expenses is determined based on
management's evaluation of the loan portfolio in light of current
economic conditions and other factors.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation. Depreciation has been computed on the straight-line
method based on the estimated useful lives of the respective assets.
Costs of maintenance and repairs are charged to expense as incurred.
Costs of replacing structural parts and major units are considered
individually and are expensed or capitalized as the facts dictate.
Income Taxes
The provision for income taxes relates to items of income and expenses
after elimination of tax-free income, principally tax-exempt interest
on securities.
Deferred income taxes arise from timing differences between financial
and tax reporting, principally relating to conversion to cash basis of
accounting and depreciation.
Other
The Bank recognizes substantially all income and expense on the
accrual method of accounting.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, and federal funds sold.
F-25
106
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(2) INVESTMENT SECURITIES
Investments can be designated as either held-to-maturity, trading or
available for sale. Investments designated as held-to-maturity are
carried at amortized cost and investments designated as available for
sale are reported at fair value. The Bank has designated all of its
securities as available for sale.
The amortized cost and estimated market values of investments in debt
securities are as follows:
Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
December 31, 1996:
U.S. Treasury
securities $ 6,491,647 -- (13,834) 6,477,813
Securities of U.S.
government agencies 3,940,170 32,926 -- 3,973,096
Obligations of states
and political
subdivisions 2,974,390 76,401 -- 3,050,791
----------- ------- ------- ----------
$13,406,207 109,327 (13,834) 13,501,700
=========== ======= ======= ==========
December 31, 1995:
U.S. Treasury
securities $ 6,344,162 43,778 -- 6,387,940
Securities of U.S.
government agencies 3,740,548 129,134 -- 3,869,682
Obligations of states
and political
subdivisions 2,857,810 100,134 -- 2,957,944
----------- ------- ------- ----------
$12,942,520 273,046 -- 13,215,566
=========== ======= ======= ==========
The amortized cost and estimated market value of debt securities by contractual
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
--------- ----------
December 31, 1996:
Due in one year or less $ 2,860,552 2,861,020
Due after one year through five years 6,329,847 6,320,780
Due after five years through ten years 3,995,808 4,098,752
Due after ten years 220,000 221,148
----------- ----------
$13,406,207 13,501,700
=========== ==========
F-26
107
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(2) INVESTMENT SECURITIES, (Continued)
Investment securities carried in the balance sheets on December 31,
1996 and 1995, at approximately $300,000 for both years, were pledged
to secure public deposits and for other purposes as required or
permitted by law.
Proceeds from maturities of investment securities for 1996 amounted to
$2,250,000 and there was no related net gain.
(3) LOANS
Loans at December 31, 1996 and 1995, are summarized as follows:
1996 1995
---------- ---------
Real estate:
Construction $ 371,000 66,000
Mortgage 2,870,000 3,332,000
Installment 1,762,000 1,436,000
Commercial 80,000 114,000
Other 2,570 468
---------- ---------
5,085,570 4,948,468
Less unearned interest 100,391 126,612
---------- ---------
$4,985,179 4,821,856
========== =========
Loans on which the accrual of interest has been discontinued or
reduced amounted to approximately $24,189 and $37,313 at December 31,
1996 and 1995, respectively.
(4) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
1996 1995
--------- -------
Balance, beginning of year $ 243,461 243,527
Loans charged off (2,208) (66)
--------- -------
Balance, end of year $ 241,253 243,461
========= =======
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
1996 1995
--------- -------
Land $ 50,009 50,009
Buildings and improvements 414,954 414,954
Furniture and equipment 264,294 257,461
--------- -------
729,257 722,424
Less accumulated depreciation 376,184 338,478
--------- -------
$ 353,073 383,946
========= =======
F-27
108
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(6) DEPOSITS
Deposits are summarized as follows:
1996 1995
----------- ----------
Noninterest-bearing $ 2,274,892 2,237,676
Money market and NOW 3,936,026 3,076,621
Savings 3,285,382 3,321,759
Time, $100,000 and over 1,300,000 1,200,000
Time, less than $100,000 6,017,537 6,345,330
----------- ----------
$16,813,837 16,181,386
=========== ==========
(7) INCOME TAXES
A reconciliation of federal income taxes in the statement of income
with the amount computed by applying the statutory federal income tax
rate to income before income taxes is as follows:
1996 1995
-------- -------
Computed "expected" tax provision $154,710 133,313
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (54,405) (47,919)
State taxes, net of federal benefit 17,917 15,562
Other, net (3,414) (5,955)
-------- -------
$114,808 95,001
======== =======
Applicable income taxes (benefits) consist of the following:
1996 1995
-------- ------
Current:
Federal $ 98,613 70,077
State 28,051 23,579
Deferred:
Federal (10,013) 1,843
State (1,843) (498)
-------- ------
$114,808 95,001
======== ======
The sources of deferred income tax expense (benefits) and the tax
effects of each are as follows:
1996 1995
-------- ------
Conversion to cash basis $ (666) 3,023
Depreciation (4,894) (6,362)
Other (6,296) 4,684
-------- ------
$(11,856) 1,345
======== ======
F-28
109
FARMERS & MERCHANTS BANK
Notes to Financial Statements, Continued
(7) INCOME TAXES, (Continued)
The deferred tax liability is made up of the following components:
1996 1995
--------- --------
Deferred tax asset (liability):
Allowance for loan losses $ (20,189) (22,546)
Conversion to cash basis (51,735) (52,478)
Depreciation (6,152) (11,615)
Other items -- (3,265)
Net unrealized loss on securities
available for sale (36,287) (103,757)
--------- --------
$(114,363) (193,661)
========= ========
The net deferred tax asset is included in other assets in 1996 and the
net deferred tax liability in included in other liabilities in 1995.
(8) PROFIT SHARING PLAN
The Bank has in effect a defined contribution profit sharing plan
covering substantially all employees. Contributions to the plan are
determined annually by the Board of Directors. The contribution was
$13,500 for 1996 and $12,000 for 1995.
F-29
110
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 26, 1998, among
FIRST FARMERS AND MERCHANTS CORPORATION, a Tennessee corporation (the
"Parent"), FIRST FARMERS AND MERCHANTS NATIONAL BANK, COLUMBIA, a national
banking association and wholly owned subsidiary of Parent ("Buyer Bank") and
FARMERS & MERCHANTS BANK, a Tennessee banking corporation ("Seller Bank" and
together with Buyer Bank, the "Banks").
WHEREAS, the Boards of Directors of Parent and the Banks have
determined that it is in the best interests of their respective companies and
their shareholders to consummate the business combination transaction provided
for herein in which the Seller Bank will merge with and into Buyer Bank (the
"Merger") subject to the terms and conditions set forth herein; and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
certain conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and intending to
be legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this
Agreement, in accordance with the National Bank Act (the "NBA") and the
Tennessee Banking Act (the "TBA"), at the Effective Time (as defined in Section
1.2 hereof), Seller Bank shall merge with and into Buyer Bank. Buyer Bank shall
be the surviving banking corporation (hereinafter sometimes called the
"Surviving Bank") in the Merger, and shall continue its corporate existence
under the laws of the United States. The name of the Surviving Bank shall
continue to be First Farmers & Merchants National Bank, Columbia. Upon
consummation of the Merger, the separate corporate existence of Seller Bank
shall terminate.
1.2. Effective Time. The Merger shall become effective at 5:00 p.m. on
the Closing Date (as defined in Section 10.1) or such later time as may be
specified by applicable law (the "Effective Time").
1.3. Effects of the Merger. At and after the Effective Time, the
Merger shall have the effects set forth in the NBA and the TBA. Without
limiting the foregoing, Buyer Bank shall be liable for all liabilities of
Seller Bank from and after the Effective Time as required by 12 U.S.C.
ss.215a(a)(4).
1.4. Conversion of Seller Bank Common Stock.
(a) At the Effective Time, subject to Section 2.2(e) and
Section 9.1(g) hereof, each share of the common stock, par value $100.00, of
the Seller Bank (the "Seller Bank Common Stock") issued and outstanding
immediately prior to the Effective Time (other than Dissenting Shares (as
defined herein) and other than shares of Seller Bank Common Stock held directly
or indirectly by Parent or its Subsidiaries (as defined below) (except for
Trust Account Shares and DPC shares, as such terms are defined in Section
1.4(b) hereof)) shall, by virtue of this Agreement and without any action on
the part of the holder thereof, be converted into and exchangeable for 40
shares (the "Exchange Ratio") of the common stock, par value $10.00 per share,
of Parent ("Parent Common Stock"). All of the shares of Seller Bank Common
Stock converted into Parent Common Stock
A-1
111
pursuant to this Article I shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each certificate (each
a "Certificate") previously representing any such shares of Seller Bank Common
Stock shall thereafter only represent the right to receive (i) the number of
whole shares of Parent Common Stock and (ii) the cash in lieu of fractional
shares into which the shares of Seller Bank Common Stock represented by such
Certificate have been converted pursuant to this Section 1.4(a) and Section
2.2(e) hereof. Certificates previously representing shares of Seller Bank
Common Stock shall be exchanged for certificates representing whole shares of
Parent Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in accordance
with Section 2.2 hereof, without any interest thereon. If, between the date of
this Agreement and the Effective Time, the shares of Parent Common Stock shall
be changed into a different number or class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares
or readjustment, or a stock dividend thereon shall be declared with a record
date within said period, the Exchange Ratio shall be adjusted accordingly.
(b) At the Effective Time, all shares of Seller Bank Common
Stock that are owned directly or indirectly by Parent or Seller Bank or any of
their respective Subsidiaries (other than shares of Seller Bank Common Stock
(x) held directly or indirectly in trust accounts, managed accounts and the
like or otherwise held in a fiduciary capacity for the benefit of third parties
(any such shares, and shares of Parent Common Stock which are similarly held,
whether held directly or indirectly by Parent or Seller Bank, as the case may
be, being referred to herein as "Trust Account Shares") and (y) held by Parent
or Seller Bank or any of their respective Subsidiaries in respect of a debt
previously contracted (any such shares of Seller Bank Common Stock, and shares
of Parent Common Stock which are similarly held, whether held directly or
indirectly by Parent or Seller Bank, being referred to herein as "DPC Shares"))
shall be canceled and shall cease to exist and no stock of Parent or other
consideration shall be delivered in exchange therefor. All shares of Parent
Common Stock that are owned by Seller Bank or any of its Subsidiaries (other
than Trust Account Shares and DPC Shares) shall become treasury stock of
Parent.
(c) Notwithstanding anything in this Agreement to the
contrary, shares of Seller Bank Common Stock which are outstanding immediately
prior to the Effective Time and with respect to which dissenters' rights shall
have been properly demanded in accordance with Section 45-2-1309 of the TBA
("Dissenting Shares") shall not be converted into the right to receive, or be
exchangeable for, Parent Common Stock or cash in lieu of fractional shares but,
instead, the holders thereof shall be entitled to payment of the appraised
value of such Dissenting Shares in accordance with Chapter 23 of the Tennessee
Business Corporations Act ("Chapter 23"); provided, however, that (i) if any
holder of Dissenting Shares shall subsequently deliver a written withdrawal of
his demand for appraisal of such shares, or (ii) if any holder fails to
establish his entitlement to dissenters' rights as provided in Chapter 23, such
holder or holders (as the case may be) shall forfeit the right to appraisal of
such shares of Seller Bank Common Stock and each of such shares shall thereupon
be deemed to have been converted into the right to receive, and to have become
exchangeable for, as of the Effective Time, Parent Common Stock and/or cash in
lieu of fractional shares, without any interest thereon, as provided in Section
1.4(a) and Article II hereof.
1.5. Parent Common Stock. Shares of Parent Common Stock issued and
outstanding immediately prior to the Effective Time shall be unaffected by the
Merger and such shares shall remain issued and outstanding.
1.6. Articles. At the Effective Time, the articles of association of
Buyer Bank as in effect at the Effective Time shall be the articles of
association of the Surviving Bank until thereafter amended in accordance with
applicable law.
A-2
112
1.7. Bylaws. At the Effective Time, the bylaws of Buyer Bank as in
effect immediately prior to the Effective Time shall be the bylaws of the
Surviving Bank until thereafter amended in accordance with applicable law.
1.8. Directors and Officers. The directors and officers of Buyer Bank
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Bank, each to hold office in accordance with the articles and
bylaws of the Surviving Bank until their respective successors are duly elected
or appointed and qualified
1.9. Tax Consequences; Accounting Treatment. It is intended that the
Merger shall (i) constitute a reorganization within the meaning of Section
368(a) of the Code and that this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code, and (ii) be
accounted for as a "pooling of interests" under GAAP (as defined herein).
ARTICLE II
EXCHANGE OF SHARES
2.1. Parent to Make Shares Available. At or prior to the Effective
Time, Parent shall deposit, or shall cause to be deposited, with a bank or
trust company (the "Exchange Agent") selected by Parent (which may be the
Parent acting on its own behalf) for the benefit of the holders of
Certificates, for exchange in accordance with this Article II, certificates
representing the shares of Parent Common Stock and the cash in lieu of
fractional shares (such cash and certificates for shares of Parent Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the "Exchange Fund") to be issued pursuant to
Section 1.4 and paid pursuant to Section 2.2(a) in exchange for outstanding
shares of Seller Bank Common Stock.
2.2. Exchange of Shares.
(a) As soon as practicable after the Effective Time, and in
no event more than three business days thereafter, the Exchange Agent shall
mail to each holder of record of a Certificate or Certificates a form letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing the
shares of Parent Common Stock and the cash in lieu of fractional shares into
which the shares of Seller Bank Common Stock represented by such Certificate or
Certificates shall have been converted pursuant to this Agreement. Seller Bank
shall have the right to review both the letter of transmittal and the
instructions prior to the Effective Time and provide reasonable comments
thereon. Upon surrender of a Certificate for exchange and cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor
(x) a certificate representing that number of whole shares of Parent Common
Stock to which such holder of Seller Bank Common Stock shall have become
entitled pursuant to the provisions of Article I hereof and (y) a check
representing the amount of cash in lieu of fractional shares, if any, which
such holder has the right to receive in respect of the Certificate surrendered
pursuant to the provisions of this Article II, and the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or accrued on
the cash in lieu of fractional shares and unpaid dividends and distributions,
if any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the
Effective Time with respect to Parent Common Stock and payable to the holders
of record thereof shall be paid to the holder of any unsurrendered Certificate
until the holder thereof shall surrender such Certificate in accordance with
this Article II. After the surrender of a Certificate in accordance with this
Article II, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Parent Common Stock
represented by such Certificate.
A-3
113
(c) If any certificate representing shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it shall be a condition of the
issuance thereof that the Certificate so surrendered shall be properly endorsed
(or accompanied by an appropriate instrument of transfer) and otherwise in
proper form for transfer, and that the person requesting such exchange shall
pay to the Exchange Agent in advance any transfer or other taxes required by
reason of the issuance of a certificate representing shares of Parent Common
Stock in any name other than that of the registered holder of the Certificate
surrendered, or required for any other reason, or shall establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(d) After the Effective Time, there shall be no transfers on
the stock transfer books of Seller Bank of the shares of Seller Bank Common
Stock which were issued and outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates representing such shares are
presented for transfer to the Exchange Agent, they shall be canceled and
exchanged for certificates representing shares of Parent Common Stock as
provided in this Article II.
(e) Notwithstanding anything to the contrary contained
herein, no certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of Certificates,
no dividend or distribution with respect to Parent Common Stock shall be
payable on or with respect to any fractional share, and such fractional share
interests shall not entitle the owner thereof to vote or to any other rights of
a shareholder of Parent. In lieu of the issuance of any such fractional share,
Parent shall pay to each former shareholder of Seller Bank who otherwise would
be entitled to receive a fractional share of Parent Common Stock an amount in
cash determined by multiplying (i) $46.00 (the "Stock Price") by (ii) the
fraction of a share of Parent Common Stock which such holder would otherwise be
entitled to receive pursuant to Section 1.4 hereof.
(f) Any portion of the Exchange Fund that remains unclaimed
by the shareholders of Seller Bank for twelve months after the Effective Time
shall be paid to Parent. Any shareholders of Seller Bank who have not
theretofore complied with this Article II shall thereafter look only to Parent
for payment of their shares of Parent Common Stock, cash in lieu of fractional
shares and unpaid dividends and distributions on the Parent Common Stock
deliverable in respect of each share of Seller Bank Common Stock such
shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of Parent,
the Banks, the Exchange Agent or any other person shall be liable to any former
holder of shares of Seller Bank Common Stock for any amount properly delivered
to a public official pursuant to applicable abandoned property, escheat or
similar laws.
(g) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Parent, the posting by such person of a bond in such amount as Parent may
direct as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Parent Common Stock and cash in
lieu of fractional shares deliverable in respect thereof pursuant to this
Agreement.
ARTICLE III
DISCLOSURE SCHEDULES; STANDARDS
FOR REPRESENTATIONS AND WARRANTIES
3.1 Disclosure Schedules. Prior to the execution and delivery of this
Agreement, the Seller Bank has delivered to Parent, and Parent has delivered to
Seller Bank, a schedule (in the case of the Seller Bank, the "Seller Bank
Disclosure Schedule," and in the case of Parent, the "Parent Disclosure
Schedule") setting forth, among other things, items the disclosure of which is
necessary or
A-4
114
appropriate either in response to an express disclosure requirement contained in
a provision hereof or as an exception to one or more of such party's
representations or warranties contained in Article IV, in the case of Seller
Bank, or Article V, in the case of Parent, or to one or more of such party's
covenants contained in Article VI; provided, however, that notwithstanding
anything in this Agreement to the contrary (a) no such item is required to be
set forth in the Disclosure Schedule as an exception to a representation or
warranty if its absence would not result in the related representation or
warranty being deemed untrue or incorrect under the standard established by
Section 3.2, and (b) the mere inclusion of an item in a Disclosure Schedule as
an exception to a representation or warranty shall not be deemed an admission by
a party that such item represents a material exception or material fact, event
or circumstance or that such item has had or would have a Material Adverse
Effect (as defined herein) with respect to either Seller Bank or Parent,
respectively.
3.2. Standards.
(a) No representation or warranty of Seller Bank contained in
Article IV or of Parent contained in Article V shall be deemed untrue or
incorrect for any purpose under this Agreement, and no party hereto shall be
deemed to have breached a representation or warranty for any purpose under this
Agreement, in any case as a consequence of the existence or absence of any
fact, circumstance or event unless such fact, circumstance or event,
individually or when taken together with all other facts, circumstances or
events inconsistent with any representations or warranties contained in Article
IV, in the case of Seller Bank, or Article V, in the case of Parent, has had a
Material Adverse Effect with respect to Seller Bank or Parent, respectively.
(b) As used in this Agreement, the term "Material Adverse
Effect" means, with respect to Parent or Seller Bank, as the case may be, a
material adverse effect on (i) the business, results of operations or financial
condition of such party and its Subsidiaries taken as a whole, other than any
such effect attributable to or resulting from (w) any change in banking or
similar laws, rules or regulations of general applicability or interpretations
thereof by courts or governmental authorities, (x) any change in GAAP or
regulatory accounting principles applicable to banks, thrifts or their holding
companies generally, (y) any action or omission of Seller Bank or Parent or any
Subsidiary of either of them taken with the express prior written consent of
the other party hereto, or (z) any expenses incurred by such party which
expenses are contemplated by or reasonably incurred in connection with this
Agreement or the transactions contemplated hereby or (ii) the ability of such
party and its Subsidiaries to consummate the transactions contemplated hereby;
it being agreed that for purposes of this paragraph, any matter or circumstance
affecting Seller Bank that has had or is reasonably likely to result in a loss,
cost, liability, or expense in excess of $25,000 individually or in the
aggregate shall be considered material for purposes of this Agreement.
A-5
115
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER BANK
Subject to Article III, Seller Bank hereby represents and warrants to
Parent as follows:
4.1. Corporate Organization.
(a) Seller Bank is a Tennessee banking corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee. The deposit accounts of Seller Bank are insured by the Federal
Deposit Insurance Corporation (the "OCC") through the Bank Insurance Fund to
the fullest extent permitted by law, and all premiums and assessments required
to be paid in connection therewith have been paid when due.
(b) The minute books of Seller Bank contain true and correct
records of all meetings and other action held or taken since December 31, 1993
of their respective shareholders and Boards of Directors (including committees
of their respective Boards of Directors).
4.2. Capitalization.
(a) The authorized capital stock of Seller Bank consists of
4,000 shares of Seller Bank Common Stock, $100.00 par value, and 3000 shares of
preferred stock. There are 3,000 shares of Seller Bank Common Stock and no
shares of Seller Bank preferred stock outstanding. No Seller Bank Common Stock
is held by Seller Bank as treasury stock. There are (i) no shares of Seller
Bank Common Stock reserved for issuance upon exercise of outstanding stock
options or otherwise. All of the issued and outstanding shares of Seller Bank
Common Stock have been duly authorized and validly issued and are fully paid,
nonassessable and have been issued in compliance with or free of preemptive
rights, with no personal liability attaching to the ownership thereof. Other
than the preemptive rights contained within the Seller Bank charter, Seller
Bank does not have and is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
purchase or issuance of any shares of Seller Bank Common Stock or any other
equity security of Seller Bank or any securities representing the right to
purchase or otherwise receive any shares of Seller Bank Common Stock or any
other equity security of Seller Bank.
(b) Seller Bank does not own (other than in a bona fide
fiduciary capacity or in satisfaction of a debt previously contracted)
beneficially, directly or indirectly, any shares of any equity securities or
similar interests of any corporation, trust, limited liability company, or
similar entity, or any interest in a partnership or joint venture of any kind.
4.3. Authority; No Violation.
(a) Seller Bank has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
approved by the Board of Directors of Seller Bank. The Board of Directors of
Seller Bank has directed that this Agreement and the transactions contemplated
hereby be submitted to Seller Bank's shareholders for approval at a meeting of
such shareholders and, except for the adoption of this Agreement by the
requisite vote of Seller Bank's shareholders, no other corporate proceedings on
the part of Seller Bank are necessary to approve this Agreement and to
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by Seller Bank and (assuming due
authorization, execution and delivery by Parent) this Agreement constitutes a
valid and binding obligation of Seller Bank, enforceable against Seller Bank in
accordance with its terms, except as enforcement may be limited by general
principles of equity
A-6
116
whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(b) Except as set forth in Section 4.3(b) of the Seller Bank
Disclosure Schedule, neither the execution and delivery of this Agreement by
Seller Bank, nor the consummation by Seller Bank of the transactions
contemplated hereby, nor compliance by Seller Bank with any of the terms or
provisions hereof, will (i) violate any provision of the charter or bylaws of
Seller Bank, or (ii) assuming that the consents and approvals referred to in
Section 4.4 hereof are duly obtained, (x) violate any statute, code, ordinance,
rule, regulation, judgment, order, writ, decree or injunction applicable to
Seller Bank, or any of its properties or assets, or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Seller under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Seller Bank is a party, or by which it or any of its
respective properties or assets may be bound or affected.
4.4. Consents and Approvals. Except for (a) the filing of applications
and notices, as applicable, with the Office of the Comptroller of the Currency
(the "OCC") and the Tennessee Department of Financial Institutions (the
"TDFI"), and approval of such applications and notices, (b) the filing of such
applications, filings, authorizations, orders and approvals as may be required
under applicable state law, (c) the filing with the Securities and Exchange
Commission (the "SEC") of a proxy statement in definitive form relating to the
meeting of Seller Bank's shareholders to be held in connection with this
Agreement and the transactions contemplated hereby (the "Proxy Statement") and
the filing and declaration of effectiveness of a registration statement on Form
S-4 (the "S-4") in which the Proxy Statement will be included as a prospectus,
(d) the approval of this Agreement by the requisite vote of the shareholders of
Seller Bank, and (e) such filings, authorizations or approvals as may be set
forth in Section 4.4 of the Seller Bank Disclosure Schedule, no consents or
approvals of or filings or registrations with any court, administrative agency
or commission or other governmental authority or instrumentality (each a
"Governmental Entity") or with any third party are necessary in connection with
(1) the execution and delivery by Seller Bank of this Agreement and (2) the
consummation by Seller Bank of the Merger and the other transactions
contemplated hereby.
4.5. Reports. Seller Bank has timely filed all reports, registrations
and statements, together with any amendments required to be made with respect
thereto, that they were required to file since December 31, 1995 with (i) the
OCC, (ii) the Board of Governors of the Federal Reserve Board (the "Federal
Reserve") or any Federal Reserve Bank, (iii) the TDFI and (iv) any other
applicable regulatory organization (collectively, the "Regulatory Agencies"),
and have paid all fees and assessments due and payable in connection therewith.
Except for normal examinations conducted by a Regulatory Agency in the regular
course of the business of Seller Bank, and except as set forth in Section 4.5
of the Seller Bank Disclosure Schedule, no Regulatory Agency has initiated any
proceeding or, to the knowledge of Seller Bank, investigation into the business
or operations of Seller Bank since December 31, 1995. There is no unresolved
violation, criticism, or exception by any Regulatory Agency with respect to any
report or statement relating to any examinations of Seller Bank.
4.6. Financial Statements. Seller Bank has previously made available
to Parent copies of (a) the statements of condition of Seller Bank as of
December 31 for the fiscal years 1996 and 1997, and the related statements of
earnings and changes in shareholders' equity for the fiscal years 1996 through
1997, inclusive, in each case accompanied by the audit report of Marlin &
Edmondson, independent public accountants with respect to Seller Bank, and (b)
the unaudited statements of condition of Seller Bank as of June 30, 1998 and
the unaudited statements of earnings and cash
A-7
117
flows for the six month period ended June 30, 1998. The December 31, 1997
statement of condition of Seller Bank (including the related notes, where
applicable) fairly presents the financial position of Seller Bank as of the
date thereof, and the other financial statements referred to in this Section
4.6 (including the related notes, where applicable) fairly present the results
of the operations and financial position of Seller Bank for the respective
fiscal periods or as of the respective dates therein set forth; each of such
statements have been prepared in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except as
indicated in the notes thereto. The books and records of Seller Bank have been,
and are being, maintained in accordance with GAAP and any other applicable
legal and accounting requirements.
4.7. Broker's Fees. Neither Seller Bank nor any of their respective
officers or directors has employed any broker or finder or incurred any
liability for any broker's fees, commissions or finder's fees in connection
with any of the transactions contemplated by this Agreement.
4.8. Absence of Certain Changes or Events.
(a) Except as may be set forth in Section 4.8(a) of the
Seller Bank Disclosure Schedule, since December 31, 1997 there has been no
change or development or combination of changes or developments which,
individually or in the aggregate, has had a Material Adverse Effect on Seller
Bank.
(b) Except as set forth in Section 4.8(b) of the Seller Bank
Disclosure Schedule since December 31, 1997, Seller Bank has carried on its
business in the ordinary course consistent with its past practices.
(c) Except as set forth in Section 4.8(c) of the Seller Bank
Disclosure Schedule, since December 31, 1997, Seller Bank has not (i) increased
the wages, salaries, compensation, pension, or other fringe benefits or
perquisites payable to any executive officer, employee, or director from the
amount thereof in effect as of December 31, 1997 (which amounts have been
previously disclosed to Parent), granted any severance or termination pay,
entered into any contract to make or grant any severance or termination pay, or
paid any bonus except for salary increases and bonus payments made in the
ordinary course of business consistent with past practices, (ii) suffered any
strike, work stoppage, slow-down, or other labor disturbance, (iii) been a
party to a collective bargaining agreement, contract or other agreement or
understanding with a labor union or organization, or (iv) had any union
organizing activities.
4.9. Legal Proceedings.
(a) Except as set forth in Section 4.9 of the Seller Bank
Disclosure Schedule, Seller Bank is not a party to any, and there are no
pending or, to Seller Bank's knowledge, threatened, legal, administrative,
arbitral or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Seller Bank or challenging the validity or
propriety of the transactions contemplated by this Agreement.
(b) Except as set forth in Section 4.9(b) of the Seller Bank
Disclosure Schedule, there is no injunction, order, judgment, decree, or
regulatory restriction imposed upon Seller Bank or the assets of Seller Bank.
4.10. Taxes.
(a) Except as set forth in Section 4.10(a) of the Seller Bank
Disclosure Schedule, each of Seller Bank has (i) duly and timely filed
(including applicable extensions granted without penalty) all Tax Returns (as
hereinafter defined) required to be filed at or prior to the Effective Time,
and such Tax Returns are true and correct, and (ii) paid in full or made
adequate provision in the
A-8
118
financial statements of Seller Bank (in accordance with GAAP) for all Taxes (as
hereinafter defined) shown to be due on such Tax Returns. Except as set forth
in Section 4.10(a) of the Seller Bank Disclosure Schedule, (i) as of the date
hereof neither Seller Bank has requested any extension of time within which to
file any Tax Returns in respect of any fiscal year which have not since been
filed and no request for waivers of the time to assess any Taxes are pending or
outstanding, and (ii) as of the date hereof, with respect to each taxable
period of Seller Bank, the federal and state income Tax Returns of Seller Bank
have been audited by the Internal Revenue Service or appropriate state tax
authorities or the time for assessing and collecting income Tax with respect to
such taxable period has closed and such taxable period is not subject to
review.
(b) For the purposes of this Agreement, "Taxes" shall mean
all taxes, charges, fees, levies, penalties or other assessments imposed by any
United States federal, state, local or foreign taxing authority, including, but
not limited to income, excise, property, sales, transfer, franchise, payroll,
withholding, social security or other taxes, including any interest, penalties
or additions attributable thereto. For purposes of this Agreement, "Tax Return"
shall mean any return, report, information return or other document (including
any related or supporting information) with respect to Taxes.
4.11. Employees.
(a) Section 4.11(a) of the Seller Bank Disclosure Schedule
sets forth a true and correct list of each deferred compensation plan,
incentive compensation plan, equity compensation plan, "welfare" plan, fund or
program (within the meaning of Section 3(1) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")); "pension" plan, fund or program
(within the meaning of Section 3(2) of ERISA); each employment, termination or
severance agreement; and each other employee benefit plan, fund, program,
agreement or arrangement, in each case, that is sponsored, maintained or
contributed to or required to be contributed to (the "Plans") by Seller Bank,
any former Subsidiaries or by any trade or business, whether or not
incorporated (an "ERISA Affiliate"), all of which together with Seller Bank
would be deemed a "single employer" within the meaning of Section 4001 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
Section 414(b), (c), (m) or (o) of the Code, for the benefit of any employee or
former employee of Seller Bank, any former Subsidiary or any ERISA Affiliate.
(b) Seller Bank has heretofore made available to Parent with
respect to each of the Plans true and correct copies of each of the following
documents if applicable: (i) the Plan document; (ii) the actuarial report for
such Plan for each of the last two years, (iii) the most recent determination
letter from the Internal Revenue Service for such Plan and (iv) the most recent
summary plan description and related summaries of material modifications.
(c) Except as set forth in Section 4.11(c) of the Seller Bank
Disclosure Schedule: each of the Plans is in compliance with the applicable
provisions of the Code and ERISA; each of the Plans intended to be "qualified"
within the meaning of Section 401(a) of the Code has received a favorable
determination letter from the IRS and to the knowledge of Seller Bank, nothing
has occurred which could reasonably be expected to result in the revocation of
such letter; no Plan has an accumulated or waived funding deficiency within the
meaning of Section 412 of the Code; neither Seller Bank nor any ERISA Affiliate
has incurred, directly or indirectly, any liability to or on account of a Plan
pursuant to Title IV of ERISA (other than PBGC premiums); to the knowledge of
Seller Bank no proceedings have been instituted to terminate any Plan that is
subject to Title IV of ERISA; no "reportable event," as such term is defined in
Section 4043(c) of ERISA, has occurred with respect to any Plan (other than a
reportable event with respect to which the thirty day notice period has been
waived); no condition exists that presents a material risk to Seller Bank of
incurring a liability to or on account of a Plan pursuant to Title IV of ERISA;
no Plan is a multiemployer plan (within the meaning of Section 4001(a)(3) of
ERISA) and no Plan is a multiple employer plan as defined in Section 413 of the
Code; and there are no pending, or to the knowledge of Seller Bank, threatened
or
A-9
119
anticipated claims (other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trusts related thereto.
(d) Except as set forth in Section 4.11(d) of the Seller Bank
Disclosure Schedule or as otherwise contemplated by this Agreement or any other
agreements entered into by any party hereto in connection with the execution
hereof: neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (either alone or in
conjunction with any other event) (i) result in any payment (including, without
limitation, severance, unemployment compensation, "excess parachute payment"
within the meaning of Section 280G of the Code, forgiveness of indebtedness or
otherwise) becoming due to any officer, director or employee of Seller Bank or
any of its Subsidiaries under any Plan or otherwise, (ii) increase any benefits
payable under any Plan or (iii) result in any acceleration of the time of
payment or vesting of any such benefits.
4.12. Shareholder Reports. Seller Bank has previously made available
to Parent a true and correct copy of each prospectus, report, schedule and
definitive proxy statement, or communication sent by Seller Bank to its
shareholders since December 31, 1996, and no prospectus, report, schedule,
proxy statement or communication contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading, except that information
as of a later date shall be deemed to modify information as of an earlier date.
Seller Bank has not registered any class of securities with the SEC and is not
subject to the periodic reporting or other requirements of the SEC or any other
Regulatory Agency with respect to its securities.
4.13. Seller Bank Information. The information relating to Seller Bank
which is provided to Parent by Seller Bank or its representatives for inclusion
in the Proxy Statement and the S-4, or in any other document filed with any
other Regulatory Agency in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The Proxy Statement (except for such portions thereof that
relate only to Parent or any of its Subsidiaries) will comply with the
provisions of the Securities Act of 1933, as amended (the "Securities Act") and
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations thereunder.
4.14. Compliance with Applicable Law. Seller Bank holds, and has at
all times held, all licenses, franchises, permits and authorizations necessary
for the lawful conduct of its business under and pursuant to all, and has
complied with and is not in default in any respect under any, applicable law,
statute, order, rule, regulation, policy and/or guideline of any Governmental
Entity relating to Seller Bank, and Seller Bank has not received notice of any
violations of any of the above.
4.15. Certain Contracts.
(a) Except as set forth in Section 4.15(a) of the Seller Bank
Disclosure Schedule, Seller Bank is not a party to or bound by any contract
(whether written or oral) (i) with respect to the employment of any directors
or consultants, (ii) which, upon the consummation of the transactions
contemplated by this Agreement, will (either alone or upon the occurrence of
any additional acts or events) result in any payment or benefits (whether of
severance pay or otherwise) becoming due, or the acceleration or vesting of any
rights to any payment or benefits, from Parent, Seller Bank, Buyer Bank or any
of their respective Subsidiaries to any director or consultant thereof, (iii)
which is a material contract (as defined in Item 601(b)(10) of Regulation S-K
of the SEC) to be performed after the date of this Agreement, (iv) which is a
consulting agreement (including data processing, software programming and
licensing contracts) not terminable on 90 days or less notice involving the
payment of more than $5,000 per annum, or (v) which materially restricts the
conduct of any line of business
A-10
120
by Seller Bank. Each contract, arrangement, commitment or understanding of the
type described in this Section 4.15(a), whether or not set forth in Section
4.15(a) of the Seller Bank Disclosure Schedule, is referred to herein as a
"Seller Bank Contract". Seller Bank has previously delivered or made available
to Parent true and correct copies of each Seller Bank Contract.
(b) Except as set forth in Section 4.15(b) of the Seller Bank
Disclosure Schedule, (i) each Seller Bank Contract described in clause (iii) of
Section 4.15(a) is valid and binding and in full force and effect, (ii) Seller
Bank and each of its Subsidiaries has performed all obligations required to be
performed by it to date under each Seller Bank Contract described in clause
(iii) of Section 4.15(a), (iii) no event or condition exists which constitutes
or, after notice or lapse of time or both, would constitute, a default on the
part of Seller Bank or any of its Subsidiaries under any Seller Bank Contract
described in clause (iii) of Section 4.15(a), and (iv) no other party to any
Seller Bank Contract described in clause (iii) of Section 4.15(a) is, to the
knowledge of Seller Bank, in default in any respect thereunder.
4.16. Agreements with Regulatory Agencies. Except as set forth in
Section 4.16 of the Seller Bank Disclosure Schedule, Seller Bank is not subject
to any cease-and-desist or other order issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or is a recipient of any extraordinary supervisory letter
from, or has adopted any board resolutions at the request of (each, whether or
not set forth on Section 4.16 of the Seller Bank Disclosure Schedule, a
"Regulatory Agreement"), any Regulatory Agency or other Governmental Entity
that restricts the conduct of its business or that in any manner relates to its
capital adequacy, its credit policies, its management or its business, nor has
Seller Bank been advised by any Regulatory Agency or other Governmental Entity
that it is considering issuing or requesting any Regulatory Agreement.
4.17. No Fiduciary Accounts. Seller Bank has no persons or accounts
for which it acts as a fiduciary, including but not limited to accounts for
which it serves as a trustee, agent, custodian, personal representative,
guardian, conservator or investment advisor.
4.18. Environmental Matters. Except as set forth in Section 4.18 of
the Seller Bank Disclosure Schedule:
(a) Seller Bank, and to the knowledge of Seller Bank, each of
the Participation Facilities and the Loan Properties (each as hereinafter
defined), are in compliance with all applicable federal, state and local laws,
including common law, regulations and ordinances, and with all applicable
decrees, orders and contractual obligations relating to pollution or the
discharge of, or exposure to, Hazardous Materials (as hereinafter defined) in
the environment or workplace ("Environmental Laws");
(b) There is no suit, claim, action or proceeding, pending
or, to the knowledge of Seller Bank, threatened, before any Governmental Entity
or other forum in which Seller Bank, any Participation Facility or any Loan
Property, has been or, with respect to threatened proceedings, may be, named as
a defendant (x) for alleged noncompliance (including by any predecessor) with
any Environmental Laws, or (y) relating to the release, threatened release or
exposure to any Hazardous Material whether or not occurring at or on a site
owned, leased or operated by Seller Bank, any Participation Facility or any
Loan Property;
(c) To the knowledge of Seller Bank, during the period of (x)
Seller Bank's ownership or operation of any of their respective current or
former properties, (y) Seller Bank's participation in the management of any
Participation Facility, or (z) Seller Bank's interest in a Loan Property, there
has been no release of Hazardous Materials in, on, under or affecting any such
property. To the knowledge of Seller Bank, prior to the period of (x) Seller
Bank's ownership or
A-11
121
operation of current or former properties, (y) Seller Bank's participation in
the management of any Participation Facility, or (z) Seller Bank's interest in
a Loan Property, there was no release of Hazardous Materials in, on, under or
affecting any such property, Participation Facility or Loan Property; and
(d) The following definitions apply for purposes of this
Section 4.18: (x) "Hazardous Materials" means any chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum or other regulated substances
or materials, (y) "Loan Property" means any property in which Seller Bank holds
a security interest, and, where required by the context, said term means the
owner or operator of such property; and (z) "Participation Facility" means any
facility in which Seller Bank participates in the management and, where
required by the context, said term means the owner or operator of such
property.
4.19. Approvals. As of the date of this Agreement, Seller Bank knows
of no reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby should not be obtained.
4.20. Loan Portfolio.
(a) Except for matters to be disclosed in writing and
accepted by Parent in the course of its due diligence investigation or as set
forth in Section 4.20 of the Seller Bank Disclosure Schedule, Seller Bank is
not a party to any written or oral (i) loan agreement, note or borrowing
arrangement (including, without limitation, leases, credit enhancements,
commitments, guarantees and interest-bearing assets) (collectively, "Loans"),
under the terms of which the obligor was, as of September 30, 1998, over 90
days delinquent in payment of principal or interest or in default of any other
provision, or (ii) as of September 30, 1998, Loan with any director, executive
officer or five percent or greater shareholder of Seller Bank, or to the
knowledge of Seller Bank, any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing. Except for
matters to be disclosed in writing and accepted by Parent in the course of its
due diligence investigation, Section 4.20 of the Seller Bank Disclosure
Schedule sets forth (i) all of the Loans of Seller Bank that as of September
30, 1998, were classified by any bank examiner (whether regulatory or internal)
as "Other Loans Specially Mentioned", "Special Mention", "Substandard",
"Doubtful", "Loss", "Classified", "Criticized", "Credit Risk Assets",
"Concerned Loans", "Watch List" or words of similar import, together with the
principal amount of and accrued and unpaid interest on each such Loan and the
identity of the borrower thereunder, (ii) by category of Loan (i.e.,
commercial, consumer, etc.), all of the other Loans of Seller Bank that as of
September 30, 1998, were classified as such, together with the aggregate
principal amount of and accrued and unpaid interest on such Loans by category
and (iii) each asset of Seller Bank that as of September 30, 1998, was
classified as "Other Real Estate Owned" and the book value thereof.
(b) Each Loan (i) is evidenced by notes, agreements or other
evidences of indebtedness which are true, genuine and what they purport to be,
(ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected and (iii) to the knowledge of Seller Bank,
is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
4.21. Property. Seller Bank has good and marketable title free and
clear of all liens, encumbrances, mortgages, pledges, charges, defaults or
equitable interests to all of the properties and assets, real and personal,
tangible or intangible, which are reflected on the statement of financial
condition of Seller Bank as of December 31, 1997 or acquired after such date,
except (i) liens for taxes not yet due and payable or contested in good faith
by appropriate proceedings, (ii) pledges to secure deposits and other liens
incurred in the ordinary course of business, (iii) such imperfections
A-12
122
of title, easements and encumbrances, if any, as do not interfere with the use
of the respective property as such property is used on the date of this
Agreement or the marketability thereof, (iv) for dispositions and encumbrances
of, or on, such properties or assets in the ordinary course of business or (v)
mechanics', materialmen's, workmen's, repairmen's, warehousemen's, carrier's
and other similar liens and encumbrances arising in the ordinary course of
business. All leases pursuant to which Seller Bank as lessee leases real or
personal property are valid and enforceable in accordance with their respective
terms and Seller Bank is not, nor to the knowledge of Seller Bank, is any other
party thereto, in default thereunder.
4.22. Accounting for the Merger; Reorganization. As of the date of
this Agreement, Seller Bank has no reason to believe that the Merger will fail
to qualify (i) for pooling-of-interests treatment under GAAP or (ii) as a
reorganization under Section 368(a) of the Code.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Subject to Article III, Parent hereby represents and warrants to
Seller Bank as follows:
5.1. Corporate Organization.
(a) Parent is a corporation duly organized, validly existing
and in good standing under the laws of the State of Tennessee. Parent has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary.
Parent is duly registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). The Restated Articles of
Incorporation and Bylaws of Parent, copies of which have previously been made
available to Seller Bank, are true and correct copies of such documents as in
effect as of the date of this Agreement.
(b) Buyer Bank is a national banking association validly
existing and in good standing. The deposit accounts of Buyer Bank are insured
by the OCC through the Bank Insurance Fund and the Savings Association
Insurance Fund to the fullest extent permitted by law, and all premiums and
assessments required in connection therewith have been paid when due. Each
Subsidiary of Parent has the corporate power and authority to own or lease all
of its properties and assets and to carry on its business as it is now being
conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such licensing or qualification necessary.
(c) The minute books of Parent and each of its Subsidiaries
contain true and correct records of all meetings and other actions held or
taken since December 31, 1996 of their respective shareholders and Boards of
Directors (including committees of their respective Boards of Directors).
5.2. Capitalization.
(a) As of the date of this Agreement, the authorized capital
stock of Parent consists of 8,000,000 shares of Parent Common Stock. As of June
30, 1998, there were 2,800,000 shares of Parent Common Stock issued and
outstanding, and no shares of Parent Common Stock held in Parent's treasury. As
of the date of this Agreement, no shares of Parent Common Stock were reserved
for issuance, except as set forth in Section 5.2(a) of the Parent Disclosure
Schedule. All of the issued and outstanding shares of Parent Common Stock have
been duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights, with no personal liability
A-13
123
attaching to the ownership thereof. As of the date of this Agreement, except as
referred to above or reflected in Section 5.2(a) of the Parent Disclosure
Schedule, Parent does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Parent Common
Stock or any other equity securities of Parent or any securities representing
the right to purchase or otherwise receive any shares of Parent Common Stock.
The shares of Parent Common Stock to be issued pursuant to the Merger will be
duly authorized and validly issued and, at the Effective Time, all such shares
will be fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof.
(b) Section 5.2(b) of the Parent Disclosure Schedule sets
forth a true and correct list of all of the Parent Subsidiaries as of the date
of this Agreement. Parent owns, directly or indirectly, all of the issued and
outstanding shares of capital stock of each of the Subsidiaries of Parent, free
and clear of all liens, charges, encumbrances and security interests
whatsoever, and all of such shares are duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no personal
liability attaching to the ownership thereof. As of the date of this Agreement,
no Subsidiary of Parent has or is bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character with any
party that is not a direct or indirect Subsidiary of Parent calling for the
purchase or issuance of any shares of capital stock or any other equity
security of such Subsidiary or any securities representing the right to
purchase or otherwise receive any shares of capital stock or any other equity
security of such Subsidiary.
5.3. Authority; No Violation.
(a) Parent and Buyer Bank have full corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly and validly approved by the Board of Directors of Parent and Buyer
Bank, and no other corporate proceedings on the part of Parent or Buyer Bank
are necessary to approve this Agreement and to consummate the transactions
contemplated hereby and thereby. This Agreement has been duly and validly
executed and delivered by Parent and Buyer Bank and (assuming due
authorization, execution and delivery by Seller Bank ) this Agreement
constitutes a valid and binding obligation of Parent and Buyer Bank,
enforceable against Parent and Buyer Bank in accordance with its terms, except
as enforcement may be limited by general principles of equity whether applied
in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(b) Except as set forth in Section 5.3(b) of the Parent
Disclosure Schedule, neither the execution and delivery of this Agreement by
Parent or Buyer Bank, nor the consummation by Parent and Buyer Bank of the
transactions contemplated hereby or thereby, nor compliance by Parent and Buyer
Bank with any of the terms or provisions hereof or thereof, will (i) violate
any provision of the charter or bylaws of Parent, or the articles of
association or bylaws or similar governing documents of any of its Subsidiaries
or (ii) assuming that the consents and approvals referred to in Section 5.4 are
duly obtained, (x) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Parent or any of its
Subsidiaries or any of their respective properties or assets, or (y) violate,
conflict with, result in a breach of any provision of or the loss of any
benefit under, constitute a default (or an event which, with notice or lapse of
time, or both, would constitute a default) under, result in the termination of
or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any lien, pledge, security interest,
charge or other encumbrance upon any of the respective properties or assets of
Parent or any of its Subsidiaries under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Parent or any of
its Subsidiaries is a party, or by which they or any of their respective
properties or assets may be bound or affected.
A-14
124
5.4. Consents and Approvals. Except for (a) the filing of applications
and notices, as applicable, with the OCC and TDFI, and approval of such
applications and notices, (b) such applications, filings, authorizations,
orders and approvals as may be required under applicable state law, (c) the
filing with the SEC of the Proxy Statement and the filing and declaration of
effectiveness of the S-4, (d) such filings and approvals as are required to be
made or obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of the shares of Parent Common Stock pursuant to
this Agreement, and (e) such filings, authorizations or approvals as may be set
forth in Section 5.4 of the Parent Disclosure Schedule, no consents or
approvals of or filings or registrations with any Governmental Entity or with
any third party are necessary in connection with (1) the execution and delivery
by Parent and Buyer Bank of this Agreement and (2) the consummation by Parent
and Buyer Bank of the Merger and the other transactions contemplated hereby.
5.5. Reports. Parent and each of its Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1996 with any Regulatory Agency, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency in the regular course of the
business of Parent and its Subsidiaries, and except as set forth in Section 5.5
of Parent Disclosure Schedule, no Regulatory Agency has initiated any
proceeding or, to the knowledge of Parent, investigation into the business or
operations of Parent or any of its Subsidiaries since December 31, 1996. There
is no unresolved violation, criticism, or exception by any Regulatory Agency
with respect to any report or statement relating to any examinations of Parent
or any of its Subsidiaries.
5.6. Financial Statements. Parent has previously made available to
Seller Bank copies of (i) the consolidated balance sheets of Parent and its
Subsidiaries as of December 31 for the fiscal years 1996 and 1997 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the fiscal years 1996 through 1997, inclusive, as reported in
Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1997
filed with the SEC under the Exchange Act, in each case accompanied by the
audit report of Kraft Bros., Esstman, Patton & Harrell, PLLC, independent
public accountants with respect to Parent, and (ii) the unaudited consolidated
balance sheets of Parent and its Subsidiaries as of June 30, 1998 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the fiscal quarter ended June 30, 1998, as reported in Parent's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998 filed
with the SEC under the Exchange Act. The December 31, 1997 and June 30, 1998
consolidated balance sheet of Parent (including the related notes, where
applicable) fairly present the consolidated financial position of Parent and
its Subsidiaries as of the dates thereof, and the other financial statements
referred to in this Section 5.6 (including the related notes, where applicable)
fairly present and the financial statements to be filed with the SEC after the
date hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and changes in shareholders' equity and
consolidated financial position of Parent and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set forth; each
of such statements (including the related notes, where applicable) complies,
and the financial statements to be filed with the SEC after the date hereof
will comply, with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto; and each of such
statements (including the related notes, where applicable) has been, and the
financial statements to be filed with the SEC after the date hereof will be,
prepared in accordance with GAAP consistently applied during the periods
involved, except as indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q. The books and records of Parent and its
Subsidiaries have been, and are being, maintained in accordance with GAAP and
any other applicable legal and accounting requirements.
A-15
125
5.7. Broker's Fees. Other than the services of M&D Capital, the fees
of which shall be borne solely by Parent, neither Parent nor any Subsidiary of
Parent, nor any of their respective officers or directors, has employed any
broker or finder or incurred any liability for any broker's fees, commissions
or finder's fees in connection with any of the transactions contemplated by
this Agreement.
5.8. Absence of Certain Changes or Events.
(a) Except as may be set forth in Section 5.8 of the Parent
Disclosure Schedule, or as disclosed in any Parent Report (as defined in
Section 5.12) filed with the SEC prior to the date of this Agreement, since
December 31, 1997, there has been no change or development or combination of
changes or developments which, individually or in the aggregate, has had a
Material Adverse Effect on Parent.
(b) Except as set forth in Section 5.8(b) of the Parent
Disclosure Schedule, since December 31, 1997, Parent has carried on its
business in the ordinary course consistent with its past practices.
5.9. Legal Proceedings.
(a) Except as set forth in Section 5.9 of the Parent
Disclosure Schedule or Seller Bank's annual report on Form 10-K for the year
ended December 31, 1997, neither Parent nor any of its Subsidiaries is a party
to any and there are no pending or, to Parent's knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against Parent or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement.
(b) There is no injunction, order, judgment, decree, or
regulatory restriction imposed upon Parent, any of its Subsidiaries or the
assets of Parent or any of its Subsidiaries.
5.10. Taxes. Except as set forth in Section 5.10 of the Parent
Disclosure Schedule, each of Parent and its Subsidiaries has (i) duly and
timely filed (including applicable extensions granted without penalty) all Tax
Returns required to be filed at or prior to the Effective Time, and such Tax
Returns are true and correct, and (ii) paid in full or made adequate provision
in the financial statements of Parent (in accordance with GAAP) for all Taxes
shown to be due on such Tax Returns. Except as set forth in Section 5.10 of the
Parent Disclosure Schedule, (i) as of the date hereof, neither Parent nor any
of its Subsidiaries has requested any extension of time within which to file
any Tax Returns in respect of any fiscal year which have not since been filed
and no request for waivers of the time to assess any Taxes are pending or
outstanding, and (ii) as of the date hereof, with respect to each taxable
period of Parent and its Subsidiaries, the federal and state income Tax Returns
of Parent and its Subsidiaries have been audited by the Internal Revenue
Service or appropriate state tax authorities or the time for assessing and
collecting income Tax with respect to such taxable period has closed and such
taxable period is not subject to review.
5.11. Employees.
(a) Section 5.11(a) of the Parent Disclosure Schedule sets
forth a true and correct list of each deferred compensation plan, incentive
compensation plan, equity compensation plan, "welfare" plan, fund or program
(within the meaning of Section 3(1) of the ERISA); "pension" plan, fund or
program (within the meaning of Section 3(2) of ERISA); each employment,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to as of the date of this
Agreement (the "Parent Plans") by Parent, any of its Subsidiaries or by any
trade or business, whether or not incorporated (a "Parent ERISA Affiliate"),
all of which
A-16
126
together with Parent would be deemed a "single employer" within
the meaning of Section 4001 of ERISA, for the benefit of any employee or former
employee of Parent, any Subsidiary or any Parent ERISA Affiliate.
(b) Except as set forth in Section 5.11(b) of the Parent
Disclosure Schedule: each of the Parent Plans is in compliance with the
applicable provisions of the Code and ERISA; each of the Parent Plans intended
to be "qualified" within the meaning of Section 401(a) of the Code has received
a favorable determination letter from the IRS; no Parent Plan has an
accumulated or waived funding deficiency within the meaning of Section 412 of
the Code; neither Parent nor any Parent ERISA Affiliate has incurred, directly
or indirectly, any liability to or on account of a Parent Plan pursuant to
Title IV of ERISA (other than PBGC premiums); to the knowledge of Parent no
proceedings have been instituted to terminate any Parent Plan that is subject
to Title IV of ERISA; no "reportable event," as such term is defined in Section
4043(c) of ERISA, has occurred with respect to any Parent Plan (other than a
reportable event with respect to which the thirty day notice period has been
waived); and no condition exists that presents a material risk to Parent of
incurring a liability to or on account of a Parent Plan pursuant to Title IV of
ERISA; no Parent Plan is a multiemployer plan (within the meaning of Section
4001(a)(3) of ERISA and no Parent Plan is a multiple employer plan as defined
in Section 413 of the Code; and there are no pending, or, to the knowledge of
Parent, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Parent Plans or any trusts
related thereto.
(c) Parent has heretofore made available to Seller Bank with
respect to each of the Parent Plans true and correct copies of each of the
following documents if applicable: (i) the Parent Plan document; (ii) the
actuarial report for such Parent Plan for each of the last two years, (iii) the
most recent determination letter from the Internal Revenue Service for such
Parent Plan and (iv) the most recent summary plan description and related
summaries of material modifications.
5.12. SEC Reports. Parent has previously made available to Seller Bank
a true and correct copy of each (a) final registration statement, prospectus,
report, schedule and definitive proxy statement filed since December 31, 1996
by Parent with the SEC pursuant to the Securities Act or the Exchange Act (the
"Parent Reports") and (b) communication mailed by Parent to its shareholders
since December 31, 1996, and no such registration statement, prospectus,
report, schedule, proxy statement or communication contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading, except that
information as of a later date shall be deemed to modify information as of an
earlier date. Parent has timely filed all Parent Reports and other documents
required to be filed by it under the Securities Act and the Exchange Act, and,
as of their respective dates, all Parent Reports complied with the published
rules and regulations of the SEC with respect thereto.
5.13. Parent Information. The information relating to Parent and its
Subsidiaries to be contained in the Proxy Statement and the S-4, or in any
other document filed with any other regulatory agency in connection herewith,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. The Proxy Statement
(except for such portions thereof that relate only to Seller Bank or any of its
Subsidiaries) will comply with the provisions of the Securities Act and
Exchange Act and the rules and regulations thereunder. The S-4 will comply with
the provisions of the Securities Act and the rules and regulations thereunder.
5.14. Compliance with Applicable Law. Parent and each of its
Subsidiaries holds, and has at all times held, all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to all, and have complied with and are not in
default in any respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of
A-17
127
any Governmental Entity relating to Parent or any of its Subsidiaries and
neither Parent nor any of its Subsidiaries knows of, or has received notice of
violation of, any violations of any of the above.
5.15. Ownership of Seller Bank Common Stock; Affiliates and
Associates. As of the date hereof, neither Parent nor any of its affiliates or
associates (as such terms are defined under the Exchange Act) (i) beneficially
owns, directly or indirectly, or (ii) is a party to any agreement, arrangement
or understanding for the purpose of acquiring, holding, voting or disposing of,
any shares of capital stock of Seller Bank (other than Trust Account Shares and
DPC Shares).
5.16. Agreements with Regulatory Agencies. Except as set forth in
Section 5.16 of the Parent Disclosure Schedule or as disclosed in Parent's
Annual Report on Form 10-K for the year ended December 31, 1997, neither Parent
nor any of its Subsidiaries is subject to any cease-and-desist or other order
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of (each, whether or not set forth in Section
5.16 of the Parent Disclosure Schedule, a "Parent Regulatory Agreement"), any
Regulatory Agency or other Governmental Entity that restricts the conduct of
its business or that in any manner relates to its capital adequacy, its credit
policies, its management or its business, nor has Parent or any of its
Subsidiaries been advised by any Regulatory Agency or other Governmental Entity
that it is considering issuing or requesting any Parent Regulatory Agreement.
5.17. Environmental Matters. Except as set forth in Section 5.17 of
the Parent Disclosure Schedule:
(a) Each of Parent and its Subsidiaries and, to the knowledge
of Parent, each of the Participation Facilities and the Loan Properties (each
as hereinafter defined), are in compliance with all Environmental Laws;
(b) There is no suit, claim, action or proceeding, pending
or, to the knowledge of Parent, threatened, before any Governmental Entity or
other forum in which Parent, any of its Subsidiaries, any Participation
Facility or any Loan Property, has been or, with respect to threatened
proceedings, may be, named as a defendant (x) for alleged noncompliance
(including by any predecessor) with any Environmental Laws, or (y) relating to
the release, threatened release or exposure to any Hazardous Material whether
or not occurring at or on a site owned, leased or operated by Parent or any of
its Subsidiaries, any Participation Facility or any Loan Property;
(c) To the knowledge of Parent during the period of (x)
Parent's or any of its Subsidiaries' ownership or operation of any of their
respective current or former properties, (y) Parent's or any of its
Subsidiaries' participation in the management of any Participation Facility, or
(z) Parent's or any of its Subsidiaries' interest in a Loan Property, there has
been no release of Hazardous Materials in, on, under or affecting any such
property. To the knowledge of Parent, prior to the period of (x) Parent's or
any of its Subsidiaries' ownership or operation of any of their respective
current or former properties, (y) Parent's or any of its Subsidiaries'
participation in the management of any Participation Facility, or (z) Parent's
or any of its Subsidiaries' interest in a Loan Property, there was no release
of Hazardous Materials in, on, under or affecting any such property,
Participation Facility or Loan Property; and
(d) The following definitions apply for purposes of this
Section 5.17: (x) "Loan Property" means any property in which Parent or any of
its Subsidiaries holds a security interest, and, where required by the context,
said term means the owner or operator of such property; and (y) "Participation
Facility" means any facility in which Parent or any of its Subsidiaries
participates in the management and, where required by the context, said term
means the owner or operator of such property.
A-18
128
5.18. Approvals. As of the date of this Agreement, Parent knows of no
reason why all regulatory approvals required for the consummation of the
transactions contemplated hereby (including, without limitation, the Merger)
should not be obtained.
5.19. Accounting for the Merger; Reorganization. As of the date of
this Agreement, Parent has no reason to believe that the Merger will fail to
qualify (i) for pooling-of-interests treatment under GAAP or (ii) as a
reorganization under Section 368(a) of the Code.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1. Covenants of Seller Bank. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
permitted by this Agreement, or with the prior written consent of Parent,
Seller Bank shall carry on its business in the ordinary course consistent with
past practice. Without limiting the generality of the foregoing, and except as
set forth in Section 6.1 of the Seller Bank Disclosure Schedule or as otherwise
contemplated by this Agreement or as consented to in writing by Parent, Seller
Bank shall not:
(a) declare or pay any dividends on, or make other
distributions in respect of, any of its capital stock, other than normal
quarterly dividends for the third and fourth quarter of 1998 not in excess of
$14.00 per share of Seller Bank Common Stock;
(b) (i) repurchase, redeem or otherwise acquire any shares of
the capital stock of Seller Bank, or any securities convertible into or
exercisable for any shares of the capital stock of Seller Bank, (ii) split,
combine or reclassify any shares of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock, or (iii) issue, deliver or sell,
or authorize or propose the issuance, delivery or sale of, any shares of its
capital stock or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such shares, or enter into any
agreement with respect to any of the foregoing;
(c) amend its charter, bylaws or other similar governing
documents;
(d) authorize or permit any of its officers, directors,
employees or agents to directly or indirectly solicit, initiate, facilitate or
encourage any inquiries relating to, or the making of any proposal which
constitutes, a "takeover proposal" (as defined below), or participate in any
discussions or negotiations, or provide third parties with any nonpublic
information, relating to any such inquiry or proposal or otherwise facilitate
any effort or attempt to make a takeover proposal; provided, however, that
Seller Bank may communicate information about any such takeover proposal to its
shareholders without a favorable recommendation if, in the judgment of Seller
Bank's Board of Directors, based upon the advice of outside counsel, such
communication is required under applicable law, provided further, however, that
Seller Bank may, and may authorize and permit its officers, directors,
employees or agents to, (i) provide or cause to be provided such information,
and (ii) participate in such discussions or negotiations, if the Board of
Directors of Seller Bank, after having consulted with and considered the advice
of outside counsel, has determined that the failure to do so could cause the
members of such Board of Directors to breach their fiduciary duties under
applicable laws. Seller Bank will immediately cease and cause to be terminated
any existing activities, discussions or negotiations previously conducted with
any parties other than Parent with respect to any of the foregoing. Seller Bank
will take all actions necessary or advisable to inform the appropriate
individuals or entities referred to in the first sentence hereof of the
obligations undertaken in this Section 6.1(d). Seller Bank will notify Parent
immediately if any such inquiries or takeover proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, Seller Bank, and Seller Bank will
promptly (within 24 hours) inform Parent in writing of all of the relevant
details with respect to the
A-19
129
foregoing including the material terms and conditions of such request or
takeover proposal and the identity of the person or group making such request
or proposal. Seller Bank will keep Parent fully informed of the status and
details (including amendments or proposed amendments) of any such request or
takeover proposal. As used in this Agreement, "takeover proposal" shall mean
any tender or exchange offer, proposal for a merger, consolidation or other
business combination involving Seller Bank or any proposal or offer to acquire
in any manner a substantial equity interest in, or a substantial portion of the
assets of Seller Bank;
(e) make any capital expenditures other than those which (i)
are made in the ordinary course of business or are necessary to maintain
existing assets in good repair and (ii) in any event are in an amount of no
more than $25,000 in the aggregate;
(f) enter into any new line of business;
(g) acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof or otherwise acquire any assets, which would be material,
individually or in the aggregate, to Seller Bank, or which could reasonably be
expected to impede or delay consummation of the Merger, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings in the ordinary course of business consistent with
past practices;
(h) take any action that is intended or may reasonably be
expected to result in any of its representations and warranties set forth in
this Agreement being or becoming untrue, or in any of the conditions to the
Merger set forth in Article VIII not being satisfied;
(i) change its methods of accounting in effect at December
31, 1997, except as required by changes in GAAP or regulatory accounting
principles as concurred to by Seller Bank's independent auditors;
(j) (i) except as set forth in Section 7.7 hereof, as
required by applicable law or as required to maintain qualification pursuant to
the Code, adopt, amend, or terminate any employee benefit plan (including,
without limitation, any Plan) or any agreement, arrangement, plan or policy
between Seller Bank and one or more of its current or former directors,
officers or employees or (ii) except for normal increases in the ordinary
course of business consistent with past practice or except as required by
applicable law, increase in any manner the compensation or fringe benefits of
any director, officer or employee or pay any benefit not required by any Plan
or agreement as in effect as of the date hereof (including, without limitation,
the granting of stock options, stock appreciation rights, restricted stock,
restricted stock units or performance units or shares);
(k) take or cause to be taken any action which would
disqualify the Merger as a "pooling of interests" for accounting purposes or a
reorganization under Section 368(a) of the Code;
(l) other than activities in the ordinary course of business
consistent with past practice, sell, lease, encumber, assign or otherwise
dispose of, or agree to sell, lease, encumber, assign or otherwise dispose of,
any of its material assets, properties or other rights or agreements;
(m) other than in the ordinary course of business consistent
with past practice, incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise as an accommodation become responsible for the
obligations of any other individual, corporation or other entity;
(n) file any application to relocate or terminate the
operations of any banking office;
A-20
130
(o) create, renew, amend or terminate or give notice of a
proposed renewal, amendment or termination of, any material contract, agreement
or lease for goods, services or office space to which Seller Bank is a party or
by which Seller Bank or its properties is bound, other than the renewal in the
ordinary course of business of any lease the term of which expires prior to the
Closing Date;
(p) take any action or enter into any agreement that could
reasonably be expected to jeopardize or materially delay the receipt of any
Requisite Regulatory Approval (as defined in Section 8.1(c)); or
(q) agree or commit to do any of the foregoing.
6.2. Covenants of Parent. Except as set forth in Section 6.2 of the
Parent Disclosure Schedule or as otherwise contemplated by this Agreement or
consented to in writing by Seller Bank, Parent shall not, and shall not permit
any of its Subsidiaries to:
(a) solely in the case of Parent, declare or pay any
dividends on or make any other distributions in respect of any of its capital
stock other than its current semi-annual dividends; provided, however, that
Parent may declare and pay a special dividend not to exceed $1.00 per share to
shareholders of record prior to the Effective Time if approved by the Board of
Directors of Parent;
(b) take any action that is intended or may reasonably be
expected to result in any of its representations and warranties set forth in
this Agreement being or becoming untrue, or in any of the conditions to the
Merger set forth in Article VIII not being satisfied;
(c) take any action or enter into any agreement that could
reasonably be expected to jeopardize or materially delay the receipt of any
Requisite Regulatory Approval;
(d) change its methods of accounting in effect at December
31, 1997, except in accordance with changes in GAAP or regulatory accounting
principles as concurred to by Parent's independent auditors;
(e) take or cause to be taken any action which would
disqualify the Merger as a reorganization under Section 368(a) of the Code; or
(f) agree to do any of the foregoing.
6.3. Conduct of Parent's Business. During the period from the date of
this Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement, or with the prior written consent
of Seller Bank, Parent shall, and shall cause its Subsidiaries to, carry on
their respective businesses in the ordinary course consistent with past
practice.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Regulatory Matters.
(a) Parent and Seller Bank shall promptly prepare and file
with the SEC the Proxy Statement and Parent shall promptly prepare and file
with the SEC the S-4, in which the Proxy Statement will be included as a
prospectus. Each of Seller Bank and Parent shall use its reasonable best
efforts to have the S-4 declared effective under the Securities Act as promptly
as practicable after such filing, and each of Seller Bank and Parent shall
thereafter mail the Proxy Statement to its respective shareholders. Parent
shall also use its reasonable best efforts to obtain all necessary state
A-21
131
securities law or "Blue Sky" permits and approvals required to carry out the
transactions contemplated by this Agreement.
(b) The parties hereto shall cooperate with each other and
use their reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement (including without limitation the Merger). Seller Bank and Parent
shall have the right to review in advance, and to the extent practicable each
will consult the other on, in each case subject to applicable laws relating to
the exchange of information, all the information relating to Seller Bank or
Parent, as the case may be, and any of their respective Subsidiaries, which
appears in any filing made with, or written materials submitted to, any third
party or any Governmental Entity in connection with the transactions
contemplated by this Agreement. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable. The parties
hereto agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
apprised of the status of matters relating to completion of the transactions
contemplated herein.
(c) Parent and Seller Bank shall, upon request, furnish each
other with all information concerning themselves, their Subsidiaries,
directors, officers and shareholders and such other matters as may be
reasonably necessary or advisable in connection with the Proxy Statement, the
S-4 or any other statement, filing, notice or application made by or on behalf
of Parent, Seller Bank or any of their respective Subsidiaries to any
Governmental Entity in connection with the Merger and the other transactions
contemplated by this Agreement.
(d) Parent and Seller Bank shall promptly furnish each other
with copies of written communications received by Parent or Seller Bank, as the
case may be, or any of their respective Subsidiaries, Affiliates or Associates
(as such terms are defined in Rule 12b-2 under the Exchange Act as in effect on
the date of this Agreement) from, or delivered by any of the foregoing to, any
Governmental Entity in respect of the transactions contemplated hereby.
7.2. Access to Information.
(a) Upon reasonable notice and subject to applicable laws
relating to the exchange of information, each party shall, and shall cause each
of its Subsidiaries to, afford to the officers, employees, accountants, counsel
and other representatives of the other party, access, during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments, records, officers, employees, accountants,
counsel and other representatives and, during such period, it shall, and shall
cause its Subsidiaries to, make available to the other party all information
concerning its business, properties and personnel as the other party may
reasonably request. Neither party nor any of its Subsidiaries shall be required
to provide access to or to disclose information where such access or disclosure
would violate or prejudice the rights of its customers, jeopardize any
attorney-client privilege or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) All information furnished be subject to, and shall be
held in confidence in accordance with, the provisions of the confidentiality
agreement (the "Confidentiality Agreement"), between Parent and Seller Bank.
A-22
132
(c) No investigation by either of the parties or their
respective representatives shall affect the representations, warranties,
covenants or agreements of the other set forth herein.
7.3. Shareholder Meetings. Seller Bank shall take all steps necessary
to duly call, give notice of, convene and hold a meeting of its shareholders to
be held as soon as is reasonably practicable after the date on which the S-4
becomes effective for the purpose of voting upon the approval and adoption of
this Agreement. Seller Bank will, through its Board of Directors, recommend to
its shareholders approval of this Agreement and the transactions contemplated
hereby and such other matters as may be submitted to its shareholders in
connection with this Agreement.
7.4. Legal Conditions to Merger. Each of Parent and Seller Bank shall,
and shall cause its Subsidiaries to, use their reasonable best efforts (a) to
take, or cause to be taken, all actions necessary, proper or advisable to
comply promptly with all legal requirements which may be imposed on such party
or its Subsidiaries with respect to the Merger and, subject to the conditions
set forth in Article VIII hereof, to consummate the transactions contemplated
by this Agreement and (b) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and any other third party which is required to be
obtained by Seller Bank or Parent or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement, and to comply with the terms and conditions of such consent,
authorization, order or approval.
7.5. Affiliates.
(a) Seller Bank shall use its reasonable best efforts to
cause each director, executive officer and other 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 such
party to deliver to the other party hereto, as soon as practicable after the
date of this Agreement, a written agreement, in the form of Exhibit 7.5(a)
hereto.
(b) Parent shall publish, not later than 15 days after the
end of the first full calendar month following the month in which the Effective
Time occurs, financial results covering at least 30 days of post-Merger
combined operations as contemplated by SEC Accounting Series Release No. 135.
7.6. Stock Exchange Listing. Seller Bank acknowledges that the shares
of Parent Common Stock to be issued in the Merger are not listed or approved
for quotation on any stock exchange or market and that Parent has no obligation
to obtain such a listing or approval for quotation.
7.7. Employees; Employee Benefit Plans.
(a) Buyer Bank recognizes the valuable contributions made by
Seller Bank employees to Seller Bank and the value they could bring to Buyer
Bank operations. Seller Bank agrees that Parent and/or Buyer Bank may contact
employees of Seller Bank and review all records relating to the employment of
such persons by Seller Bank. Buyer Bank agrees to personally interview all of
Seller's employees, to consider in good faith the retention of up to all of
Seller Bank's employees, and to offer at-will employment to such of the Seller
Bank's employees as Buyer determines in its reasonable discretion are
appropriate to maintain necessary staffing levels.
(b) As of the Effective Time, the employees of Seller Bank
who are retained by Buyer Bank (the "Retained Employees") shall be eligible to
participate in Parent's employee benefit plans in which similarly situated
employees of Buyer Bank participate, to the same extent as similarly situated
employees of Buyer Bank (it being understood that inclusion of Retained
Employees in Parent's employee benefit plans may occur at different times with
respect to different plans.
A-23
133
(c) With respect to each Parent Plan that is an "employee
benefit plan," as defined in Section 3(3)of ERISA, for purposes of determining
vacation entitlement (but not profit-sharing benefits), service with Seller
Bank shall be treated as service with Parent; provided however, that such
service shall not be recognized to the extent that such recognition would
result in a duplication of benefits. Such service also shall apply for purposes
of satisfying any waiting periods, evidence of insurability requirements, or
the application of any preexisting condition limitations.
7.8. Indemnification.
(a) In the event of any threatened or actual claim, action,
suit, proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior to
the date of this Agreement, or who becomes prior to the Effective Time, a
director, officer or employee of Seller Bank or any of its Subsidiaries (the
"Indemnified Parties") is, or is threatened to be, made a party based in whole
or in part on, or arising in whole or in part out of, or pertaining to (i) the
fact that he is or was a director, officer or employee of Seller Bank, any of
the Subsidiaries of Seller Bank or any of their respective predecessors or
affiliates or (ii) this Agreement or any of the transactions contemplated
hereby, whether in any case asserted or arising before or after the Effective
Time, the parties hereto agree to cooperate and use their best efforts to
defend against and respond thereto. It is understood and agreed that after the
Effective Time, Parent shall indemnify and hold harmless, as and to the extent
permitted by law, each such Indemnified Party against any losses, claims,
damages, liabilities, costs, expenses (including reasonable attorney's fees and
expenses in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted or arising before or after the Effective Time), the Indemnified
Parties may retain counsel reasonably satisfactory to them after consultation
with Parent; provided, however, that (1) Parent shall have the right to assume
the defense thereof and upon such assumption Parent shall not be liable to any
Indemnified Party for any legal expenses of other counsel or any other expenses
subsequently incurred by any Indemnified Party in connection with the defense
thereof, except that if Parent elects not to assume such defense or counsel for
the Indemnified Parties reasonably advises that there are issues which raise
conflicts of interest between Parent and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to them after
consultation with Parent, and Parent shall pay the reasonable fees and expenses
of such counsel for the Indemnified Parties, (2) Parent shall in all cases be
obligated pursuant to this paragraph to pay for only one firm of counsel for
all Indemnified Parties, (3) Parent shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld) and (4) Parent shall have no obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
nonappealable, that indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. Any Indemnified Party
wishing to claim Indemnification under this Section 7.8, upon learning of any
such claim, action, suit, proceeding or investigation, shall promptly notify
Parent thereof, provided that the failure to so notify shall not affect the
obligations of Parent under this Section 7.8 except to the extent such failure
to notify materially prejudices Parent. Parent's obligations under this Section
7.8 shall continue in full force and effect without time limit from and after
the Effective Time.
(b) Parent shall cause the persons serving as officers and
directors of Seller Bank immediately prior to the Effective Time to be covered
for a period of three years from the Effective Time by the directors' and
officers' liability insurance policy maintained by Seller Bank (provided that
Parent may substitute therefor policies of at least the same coverage and
amounts containing terms and conditions which are not less advantageous than
such policy) with respect to acts or
A-24
134
omissions occurring prior to the Effective Time which were committed by such
officers and directors in their capacity as such; provided, however, that in no
event shall Parent be required to expend on an annual basis more than 120% of
the current amount expended by Seller Bank (the "Insurance Amount") to maintain
or procure insurance coverage, and further provided that if Parent is unable to
maintain or obtain the insurance called for by this Section 7.8(b), Parent
shall use all reasonable efforts to obtain as much comparable insurance as is
available for the Insurance Amount.
(c) In the event Parent or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of Parent
assume the obligations set forth in this Section.
(d) The provisions of this Section 7.8 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and his or
her heirs and representatives.
7.9. Additional Agreements. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary
action as may be reasonably requested by Parent.
ARTICLE VIII
CONDITIONS PRECEDENT
8.1. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) Shareholder Approvals. This Agreement shall have been
approved and adopted by the requisite vote of the shareholders of Seller Bank
under applicable law.
(b) Other Approvals. All regulatory approvals required to
consummate the transactions contemplated hereby (including the Merger) shall
have been obtained and shall remain in full force and effect and all statutory
waiting periods in respect thereof shall have expired (all such approvals and
the expiration of all such waiting periods being referred to herein as the
"Requisite Regulatory Approvals").
(c) S-4. The S-4 shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the S-4 shall
have been issued and no proceedings for that purpose shall have been initiated
or threatened by the SEC.
(d) No Injunctions or Restraints; Illegality. No order,
injunction or decree issued by any court or agency of competent jurisdiction or
other legal restraint or prohibition (an "Injunction") preventing the
consummation of the Merger shall be in effect. No statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by any Governmental Entity which prohibits, restricts or makes illegal
consummation of the Merger.
(e) Opinion. Prior to the execution of this Agreement, Seller
Bank shall have received an opinion from Mercer Capital to the effect that as
of the date thereof and based upon and subject to the matters set forth
therein, the Exchange Ratio is fair to the shareholders of Seller Bank from a
financial point of view.
A-25
135
8.2. Conditions to Obligations of Parent. The obligation of Parent to
effect the Merger is also subject to the satisfaction or waiver by Parent at or
prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (i) Subject to Section
3.2, the representations and warranties of Seller Bank set forth in this
Agreement (other than those set forth in Section 4.2) shall be true and correct
as of the date of this Agreement and (except to the extent such representations
and warranties speak only as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date; and (ii) the representations and
warranties of Seller Bank set forth in Section 4.2 of this Agreement shall be
true and correct in all material respects (without giving effect to Section 3.2
of this Agreement) as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date. Parent shall have
received a certificate signed on behalf of Seller Bank by the Chief Executive
Officer and the Chief Financial Officer of Seller Bank to the foregoing effect.
(b) Performance of Obligations of Seller Bank. Seller Bank
shall have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed on behalf of Seller Bank by the
Chief Executive Officer and the Chief Financial Officer of Seller Bank to such
effect.
(c) No Pending Governmental Actions. No proceeding initiated
by any Governmental Entity seeking an Injunction shall be pending.
(d) Pooling of Interests. Parent shall have received a letter
from its independent auditors, addressed to Parent, to the effect that the
Merger will qualify for "pooling of interests" accounting treatment.
(e) Due Diligence. Parent shall have conducted a due
diligence examination of Seller Bank covering such matters as it may determine
and shall be satisfied with the results of its investigation, including the
results of any assessment of environmental risk and compliance.
8.3. Conditions to Obligations of Seller Bank. The obligation of
Seller Bank to effect the Merger is also subject to the satisfaction or waiver
by Seller Bank at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. (i) Subject to Section
3.2, the representations and warranties of Parent set forth in this Agreement
(other than those set forth in Section 5.2) shall be true and correct as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made
on and as of the Closing Date; and (ii) the representations and warranties of
Parent set forth in Section 5.2 of this Agreement shall be true and correct in
all material respects (without giving effect to Section 3.2 of this Agreement)
as of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date. Seller Bank shall have received a
certificate signed on behalf of Parent by the Chief Executive Officer and the
principal financial officer of Parent to the foregoing effect.
(b) Performance of Obligations of Parent. Parent shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Seller Bank shall
have received a certificate signed on behalf of Parent by the Chief Executive
Officer and the principal financial officer of Parent to such effect.
(c) No Pending Governmental Actions. No proceeding initiated
by any Governmental Entity seeking an Injunction shall be pending.
A-26
136
(d) Due Diligence. Seller Bank shall have conducted a due
diligence examination of Parent and Buyer Bank covering such matters as it may
determine and shall be satisfied with the results of its investigation.
(e) Tax Matters. Seller shall have received a letter from
Kraft Bros., Esstman, Patton & Harrell, PLLC dated as of the Closing Date, in
form and substance satisfactory to Seller, stating in effect that: (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code, (ii) no gain or loss will be recognized by holders
of Seller Bank stock who exchange all of their Seller Bank stock solely for
Parent Common Stock (except for cash received in lieu of fractional shares) in
the Merger, (iii) the tax basis of the Parent Stock received by holders of
Seller Bank stock who exchange all of their Seller Bank stock solely for Parent
stock in the Merger will be the same as the tax basis of the Seller stock
surrendered in exchange for the Parent stock(reduced by an amount allocable to
a fractional share interest in Parent stock for which cash is received), and
(iv) the holding period of the Parent stock in the Merger will be the same as
the holding period of the Seller Bank stock surrendered in exchange therefor,
provided that such Seller Bank stock is held as a capital asset at the
Effective Time.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1. Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the shareholders of both Seller Bank
and Parent:
(a) By mutual consent of Seller Bank and Parent in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) By either Parent or Seller Bank upon written notice to
the other party (i) 60 days after the date on which any request or application
for a Requisite Regulatory Approval shall have been denied or withdrawn at the
request or recommendation of the Governmental Entity which must grant such
Requisite Regulatory Approval, unless within the 60-day period following such
denial or withdrawal a petition for rehearing or an amended application has
been filed with the applicable Governmental Entity, provided, however, that no
party shall have the right to terminate this Agreement pursuant to this Section
9.1(b)(i) if such denial or request or recommendation for withdrawal shall be
due to the failure of the party seeking to terminate this Agreement to perform
or observe the covenants and agreements of such party set forth herein or (ii)
if any Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the Merger;
(c) by either Parent or Seller Bank if the Merger shall not
have been consummated on or before April 30, 1999, unless the failure of the
Closing to occur by such date shall be due to the failure of the party seeking
to terminate this Agreement to perform or observe the covenants and agreements
of such party set forth herein;
(d) by either Parent or Seller Bank (provided that the
terminating party shall not be in material breach of any of its obligations
under Section 7.3) if any approval of the shareholders of either of Seller Bank
or Parent required for the consummation of the Merger shall not have been
obtained by reason of the failure to obtain the required vote at a duly held
meeting of such shareholders or at any adjournment or postponement thereof;
(e) by either Parent or Seller Bank (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have
been a material breach of any of the representations or warranties set forth in
this Agreement on the part of the other party, which breach is not cured within
thirty days
A-27
137
following written notice to the party committing such breach, or which breach,
by its nature, cannot be cured prior to the Closing; provided, however, that
neither party shall have the right to terminate this Agreement pursuant to this
Section 9.1(e) unless the breach of representation or warranty, together with
all other such breaches, would entitle the party receiving such representation
not to consummate the transactions contemplated hereby under Section 8.2(a) (in
the case of a breach of representation or warranty by Seller Bank) or Section
8.3(a) (in the case of a breach of representation or warranty by Parent);
(f) by either Parent or Seller Bank (provided that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) if there shall have
been a material breach of any of the covenants or agreements set forth in this
Agreement on the part of the other party, which breach shall not have been
cured within thirty days following receipt by the breaching party of written
notice of such breach from the other party hereto, or which breach, by its
nature, cannot be cured prior to the Closing; or
(g) by the Board of Directors of Parent, if the Board of
Directors of Seller Bank shall have failed to recommend in the Proxy Statement
that Seller Bank's shareholders approve and adopt this Agreement, or shall have
withdrawn, modified or changed in a manner adverse to Parent its approval or
recommendation of this Agreement and the transactions contemplated hereby.
9.2. Effect of Termination. In the event of termination of this
Agreement by either Parent or Seller Bank as provided in Section 9.1, this
Agreement shall forthwith become void and have no effect except (i) Sections
7.2(b), 9.2 and 10.3 shall survive any termination of this Agreement and (ii)
that notwithstanding anything to the contrary contained in this Agreement, no
party shall be relieved or released from any liabilities or damages arising out
of its breach of any provision of this Agreement.
9.3. Amendment. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized
by their respective Boards of Directors, at any time before or after approval
of the matters presented in connection with the Merger by the shareholders of
either Seller Bank or Parent; provided, however, that after any approval of the
transactions contemplated by this Agreement by Seller Bank's shareholders,
there may not be, without further approval of such shareholders, any amendment
of this Agreement which reduces the amount or changes the form of the
consideration to be delivered to Seller Bank shareholders hereunder other than
as contemplated by this Agreement. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the parties hereto.
9.4. Extension; Waiver. At any time prior to the Effective Time, each
of the parties hereto, by action taken or authorized by its Board of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other party hereto, (b) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions of the other party contained herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE X
GENERAL PROVISIONS
10.1. Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") will take place at 10:00 a.m. on the
first day which is (a) the last business day of month and (b) at least two
business days after the satisfaction or waiver (subject to applicable law)
A-28
138
of the latest to occur of the conditions set forth in Article VIII hereof
(other than those conditions which relate to actions to be taken at the
Closing)(the "Closing Date"), at such time, date and place as is agreed to by
the parties hereto.
10.2. Nonsurvival of Representations, Warranties and Agreements. None
of the representations, warranties, covenants and agreements in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for those covenants and agreements contained herein and
therein which by their terms apply in whole or in part after the Effective
Time.
10.3. Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such costs and expenses.
10.4. 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 an express courier (with confirmation) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to Parent, to:
First Farmers and Merchants Corporation
816 South Garden Street
P.O. Box 1148
Columbia, Tennessee 38402
Attention: Waymon L. Hickman
with a copy to (which shall not constitute notice):
Ralph W. Davis, Esq.
Waller Lansden Dortch & Davis
A Professional Limited Liability Company
511 Union Street, Suite 2100
Nashville, Tennessee 37219
(b) if to Seller Bank, to:
Farmers & Merchants Bank
2011 Hwy 47 North
P.O. Box 129
White Bluff, Tennessee 37187-0129
Attention: Richard C. Bibb, Chairman, Chief Executive Officer, and President
with a copy to (which shall not constitute notice):
Steven J. Eisen, Esq.
Baker Donelson Bearman & Caldwell, P.C.
511 Union Street, Suite 1700
Nashville, Tennessee 37219
10.5. Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
A-29
139
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
10.6. Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart.
10.7. Entire Agreement. This Agreement (including the documents and
the instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof, other than the
Confidentiality Agreement.
10.8. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Tennessee applicable to contracts made
and to be performed wholly within such state.
10.9. Enforcement of Agreement. The parties hereto agree that
irreparable damage would occur in the event that the provisions contained in
7.2(b) of this Agreement were 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
Section 7.2(b) of this Agreement and to enforce specifically the terms and
provisions thereof 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.
10.10. 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.
10.11. Publicity. Except as required by applicable law, neither Parent
nor Seller Bank shall, or shall permit any of its Subsidiaries to, issue or
cause the publication of any press release or other public announcement with
respect to, or otherwise make any public statement concerning, the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
10.12. Assignment; Third Party Beneficiaries. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns. Except
as otherwise expressly provided herein, this Agreement (including the documents
and instruments referred to herein) is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
A-30
140
IN WITNESS WHEREOF, Parent, Buyer Bank, and Seller Bank have caused
this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
FIRST FARMERS AND MERCHANTS CORPORATION
By: /s/ Waymon L. Hickman
---------------------------------------
Waymon L. Hickman
Chairman and Chief Executive Officer
FIRST FARMERS AND MERCHANTS NATIONAL BANK, COLUMBIA
By: /s/ Waymon L. Hickman
---------------------------------------
Waymon L. Hickman
Chairman and Chief Executive Officer
FARMERS & MERCHANTS BANK
By: /s/ Richard Bibb
---------------------------------------
Richard Bibb
Chairman, Chief Executive Officer, and President
A-31
141
AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF MERGER ("Amendment")
is dated as of December 15, 1998 by and among FIRST FARMERS AND MERCHANTS
CORPORATION, a Tennessee corporation (the "Parent"), FIRST FARMERS AND
MERCHANTS NATIONAL BANK OF COLUMBIA, a national banking association and
wholly-owned subsidiary of Parent (the "Buyer Bank") and FARMERS & MERCHANTS
BANK - WHITE BLUFF, TENN., a Tennessee banking corporation (the "Seller Bank"
and together with Buyer Bank, the "Banks").
R E C I T A L S:
WHEREAS, Parent, Buyer Bank and Seller Bank are parties to that
certain Agreement and Plan of Merger dated as of October 26, 1998 (the "Merger
Agreement");
WHEREAS, the Merger Agreement currently anticipates that the Merger
will be accounted for as a "pooling of interests" under generally accepted
accounting principles ("GAAP"); and
WHEREAS, Parent, Buyer Bank and Seller Bank desire to amend the Merger
Agreement as set forth in this Amendment to reflect that the Merger will be
accounted for as a purchase under GAAP.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions contained
herein, the sufficiency of which is hereby acknowledged, the parties hereby
agree as follows:
A G R E E M E N T:
1. Section 1.9 of the Merger Agreement is hereby amended by deleting ";
Accounting Treatment" in the heading, the subsection heading "(i)" and the
following language in the text of Section 1.9: ", and (ii) be accounted for as
a `pooling of interests' under GAAP (as defined herein)." Section 1.9 shall
read, in its entirety, as follows:
1.9. Tax Consequences. It is intended that the Merger shall
constitute a reorganization within the meaning of Section 368(a) of
the Code and that this agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code.
2. Section 4.22 of the Merger Agreement is hereby amended by deleting
"Accounting for the Merger;" in the heading and the following language in the
text of Section 4.22: "(i) for pooling-of-interests treatment under GAAP or
(ii)." Section 4.22 shall read, in its entirety, as follows:
4.22 Reorganization. As of the date of this Agreement, Seller
Bank has no reason to believe that the Merger will fail to qualify as
a reorganization under Section 368(a) of the Code.
3. Section 5.19 of the Merger Agreement is hereby amended by deleting
"Accounting for the Merger;" in the heading and the following language in the
text of Section 5.19: "(i) for pooling-of-interest treatment under GAAP or
(ii)." Section 5.19 shall read, in its entirety, as follows:
A-32
142
5.19. Reorganization. As of the date of this Agreement,
Parent has no reason to believe that the Merger will fail to qualify
as a reorganization under Section 368(a) of the Code.
4. Section 6.1(k) of the Merger Agreement is hereby amended by deleting "a
'pooling of interests' for accounting purposes or." Section 6.1(k) shall read,
in its entirety, as follows:
(k) take or cause to be taken any action which would
disqualify the Merger as a reorganization under Section 368(a) of the
Code;
5. Section 7.5 of the Merger Agreement is hereby amended by adding ", if
the Merger is accounted for as a `pooling of interests,' " in the text of
Section 7.5(a) immediately following the words "Securities Act and", and by
adding ", if the Merger is accounted for as a `pooling of interests,' " in the
text of Section 7.5(b) immediately following the words "Parent shall." Section
7.5 shall read, in its entirety, as follows:
7.5. Affiliates.
(a) Seller Bank shall use its reasonable best
efforts to cause each director, executive officer and other person who
is an "affiliate" (for purposes of Rule 145 under the Securities Act
and, if the Merger is accounted for as a "pooling of interests," for
purposes of qualifying the Merger for "pooling of interest" accounting
treatment) of such party to deliver to the other party hereto, as soon
as practicable after the date of this Agreement, a written agreement,
in the form of Exhibit 7.5(a) hereto.
(b) Parent shall, if the Merger is accounted for as
a "pooling of interests," publish, not later than 15 days after the
end of the first full calendar month following the month in which the
Effective Time occurs, financial results covering at least 30 days of
post-Merger combined operations as contemplated by SEC Accounting
Series Release No. 135.
6. Section 8.1(e) of the Merger Agreement is hereby amended by deleting
"Prior to the execution of this Agreement," in its entirety, and by deleting
"Merger Capital" and replacing it with "its financial advisor." Section 8.1(e)
shall read, in its entirety, as follows:
(e) Opinion. Seller Bank shall have received an opinion from
its financial advisor to the effect that as of the date hereof and
based upon and subject to the matters set forth therein, the Exchange
Ratio is fair to the shareholders of Seller Bank from a financial
point of view.
7. Section 8.2(d) of the Merger Agreement is hereby deleted in its
entirety. Section 8.2(d) shall read, in its entirety, as follows:
(d) [INTENTIONALLY OMITTED].
8. Section 8.3(e) of the Merger Agreement is hereby amended by deleting
"Kraft Bros., Esstman, Patton & Harrell, PLLC" and inserting "a law firm or
accounting firm reasonably acceptable to Seller Bank" in its place. Section
8.3(e) shall read, in its entirety, as follows:
(e) Tax Matters. Seller shall have received a letter from a
law firm or accounting firm reasonably acceptable to Seller Bank dated
as of the Closing Date, in form and substance satisfactory to Seller,
stating in effect that: (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code, (ii) no gain or loss will be recognized by holders of
Seller Bank stock who exchange all of their Seller Bank stock solely
for Parent Common Stock (except for cash received in lieu of
fractional shares) in the Merger, (iii) the tax basis of the Parent
Stock received by holders of Seller Bank stock who exchange all of
their Seller Bank stock solely for Parent stock in the Merger will be
the same as the tax
A-33
143
basis of the Seller stock surrendered in exchange for the Parent stock
(reduced by an amount allocable to a fractional share interest in
Parent stock for which cash is received), and (iv) the holding period
of the Parent stock in the Merger will be the same as the holding
period of the Seller Bank stock surrendered in exchange therefor,
provided that such Seller Bank stock is held as a capital asset at the
Effective Time.
9. Except as expressly set forth in this Amendment, the terms and
conditions of the Merger Agreement shall remain in place and shall not be
altered, amended or changed in any manner whatsoever, except by any further
amendment to the Merger Agreement made in accordance with the terms of the
Merger Agreement, and such terms and conditions shall be incorporated herein by
this reference.
10. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when executed
and delivered shall be effective for binding the parties hereto, but all of
which shall together constitute one and the same instrument.
[NEXT PAGE IS SIGNATURE PAGE.]
A-34
144
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be signed by an individual thereto duly authorized, all on the date first
written above.
FIRST FARMERS AND MERCHANTS CORPORATION
By: /s/ Waymon L. Hickman
----------------------------------------
Name: Waymon L. Hickman
Title: Chairman and Chief Executive Officer
FIRST FARMERS AND MERCHANTS NATIONAL BANK OF COLUMBIA
By: /s/ Waymon L. Hickman
----------------------------------------
Name: Waymon L. Hickman
Title: Chairman and Chief Executive Officer
FARMERS & MERCHANTS BANK - WHITE BLUFF,
TENN.
By: /s/ Richard Bibb
----------------------------------------
Name: Richard Bibb
Title: Chairman, Chief Executive Officer and President
A-35
145
ANNEX B
TENNESSEE BUSINESS CORPORATION ACT
CHAPTER 23
DISSENTERS' RIGHTS
PART 1--RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101. DEFINITIONS - As used in this chapter, unless the context
otherwise requires:
(1) "Beneficial shareholder" means the person who is a
beneficial owner of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under Section. 48-23-102 and who exercises that right
when and in the manner required by Part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the
corporate action that give rise to the shareholder's right to dissent until the
date of payment, at the average auction rate paid on United States treasury
bills with a maturity of six (6) months (or the closest maturity thereto) as of
the auction date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. [Acts 1986, ch. 887, ss. 13.01]
48-23-102. RIGHT TO DISSENT.-- (a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of the shareholder's shares in the
event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the
corporation is a party:
(A) If shareholder approval is required for
the merger by ss. 48-21-104 or the charter and the
shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that
is merged with its parent under ss. 48-21-105;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
B-1
146
(3) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation other than in
the usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order or a
sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders
within one (1) year after the date of sale;
(4) An amendment of the charter that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of
the shares;
(B) Creates, alters, or abolishes a right in
respect of redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of
the holder of the shares to acquire shares or other
securities;
(D) Excludes or limits the right of the shares
to vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other
securities with similar voting rights; or
(E) Reduces the number of shares owned by the
shareholder to a fraction of a share, if the fractional share
is to be acquired for cash under Section 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder
vote to the extent the charter, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect tot he shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no
shareholder may dissent as to any shares of a security which, as of the date of
the effectuation of the transaction which would otherwise give rise to
dissenters' rights, is listed on an exchange registered under Section 6 of the
Securities exchange Act of 1934, as amended, or is a "national market system
security," as defined in rules promulgated pursuant to the Securities Exchange
Act of 1934, as amended. [Acts 1986, ch. 887. ss. 13.02.]
48-23-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS.-- (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one (1) person
and notifies the corporation in writing of the name and address of each person
on whose behalf the record shareholder asserts dissenters' rights. The rights
of a partial dissenter under this subsection are determined as if the shares as
to which the partial dissenter dissents and the partial dissenter's other
shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares of any one (1) or more classes held on the beneficial shareholder's
behalf only if the beneficial shareholder:
(1) Submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
B-2
147
(2) Does so with respect to all shares of the same
class of which the person is the beneficial shareholder or over which
the person has power to direct the vote. [Acts 1986, ch. 887, ss.
13.03.]
48-23-201 NOTICE OF DISSENTERS' RIGHTS.-- (a) If proposed corporate
action creating dissenters' rights under Section 48-23-102 is submitted to a
vote at a shareholders' meeting, the meeting notice must state that
shareholders are or may be entitled to assert dissenters' rights under this
chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under Section
48-23-102 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Section
48-23-203.
(c) A corporation's failure to give notice pursuant to this
section will not invalidate the corporate action. [Acts 1986, ch. 887, ss.
13.20.]
48-23-202. NOTICE OF INTENT TO DEMAND PAYMENT.-- (a) If proposed
corporate action creating dissenters' rights under Section 48-23-102 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken,
written notice of the shareholder's intent to demand payment for the
shareholder's shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the
proposed action. No such written notice of intent to demand payment is
required of any shareholder to whom the corporation failed to provide
the notice required by Section 48-23-201.(b) A shareholder who does
not satisfy the requirements of subsection (a) is not entitled to
payment for the shareholder's shares under this chapter. [Acts 1986,
ch. 887, ss. 13.21.]
(b) The dissenters' notice must be sent no later than ten (10)
days after the corporate action was authorized by the shareholders or
effectuated, whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where
and when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted after the payment
demand is received;
(3) Supply a form for demanding payment that includes the
date of the first announcement to news media or to shareholders of the
principal terms of the proposed corporate action and requires that the
person asserting dissenters' rights certify whether or not the person
asserting dissenters' rights acquired beneficial ownership of the
shares before that date;
(4) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than one (1) nor more than
two (2) months after the date the subsection (a) notice is delivered;
and
(5) Be accompanied by a copy of this chapter if the
corporation has not previously sent a copy of this chapter to the
shareholder pursuant to Section 48-23-201. [Acts 1986, ch. 887 ss.
13.22.]
B-3
148
48-23-204. DUTY TO DEMAND PAYMENT.-- (a)A shareholder sent a dissenters'
notice described in Section 48-23-203 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date
required to be set forth in the dissenters' notice pursuant to Section
48-23-203 (b)(3), and deposit the shareholder's certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits the
shareholder's share certificates under subsection (a) retains all other rights
of a shareholder until these rights are canceled or modified by the
effectuation of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
(d) A demand for payment filed by a shareholder may not be
withdrawn unless the corporation with which it was filed, or the surviving
corporation, consents thereto. [Acts 1986, ch. 887 ss. 13.23]
48-23-205 SHARE RESTRICTIONS.-- (a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effectuated or the restrictions
released under Section 48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the effectuation of the proposed corporate
action. [Acts 1986, ch. 887, ss. 13.24.]
48-23-206. PAYMENT. -- (a) Except as provided in Section 48-23-208, as
soon as the proposed corporate action is effectuated, or upon receipt of a
payment demand, whichever is later, the corporation shall pay each dissenter
who complied with Section 48-23-204 the amount the corporation estimates to be
the fair value of each dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of the
fiscal year ending not more than sixteen (16) months before the date
of payment, an income statement for that year, a statement of changes
in shareholders' equity for that year, and the latest available
interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand
payment under Section 48-23-209; and
(5) A copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant to
Section 48-23-201 or Section 48-23-203. [Acts 1986, ch. 887, ss. 13.25.]
48-23-208. AFTER-ACQUIRED SHARES. -- (a) A corporation may elect to
withhold payment required by Section 48-23-206 from a dissenter unless the
dissenter was the beneficial owner of the shares before the date set forth in
the dissenters' notice as the date of the first announcement to news media or
to shareholders of the principal terms of the proposed corporate action.
B-4
149
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
the dissenter's demand. The corporation shall send with its offer a statement
of its estimate of the fair value of the shares, an explanation of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under Section 48-23-209. [Acts 1986, ch. 887, ss. 13.27.]
48-23-209. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
- -- (a) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of his the dissenter's shares and amount of interest
due, and demand payment of the dissenter's estimate (less any payment under
Section 48-23-206), or reject the corporation's offer under Section 48-23-208
and demand payment of the fair value of the dissenter's shares and interest
due, if:
(1) The dissenter believes that the amount paid under
Section 48-23-206 or offered under Section 48-23-208 is less than the
fair value of the dissenter's shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under Section
48-23-206 within two (2) months after the date set for demanding
payment; or
(3) The corporation, having failed to effectuate the
proposed action, does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares within two
(2) months after the date set for demanding payment.
(b) A dissenter waives the dissenter's right to demand payment
under this section unless the dissenter notifies the corporation of the
dissenter's demand in writing under subsection (a) within one (1) month after
the corporation made or offered payment for the dissenter's shares. [Acts 1986,
ch. 887, ss. 13.28.]
PART 3 - JUDICIAL APPRAISAL OF SHARES
48-23-301. COURT ACTION. - (a) If a demand for payment under Section
48-23-209 remains unsettled, the corporation shall commence a proceeding within
two (2) months after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the two-month period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of
record having equity jurisdiction in the county where the corporation's
principal office (or, if none in this state, its registered office) is located.
If the corporation is a foreign corporation without a registered office in this
state, it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not
residents of this state) whose demands remain unsettled, parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is
commenced under subsection (b) is plenary and exclusive. The court may appoint
one (1) or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
B-5
150
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the
fair value of the dissenter's shares, plus accrued interest, exceeds
the amount paid by the corporation; or
(2) For the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to
withhold payment under Section 48-23-208. [Acts 1986, ch. 887, ss.
13.30.]
48-23-302. COURT COSTS AND COUNSEL FEES. -- (a) The court in an appraisal
proceeding commenced under Section 48-23-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in
demanding payment under Section 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable
against:
(1) The corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with
the requirements of Part 2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be paid
out of the amounts awarded to the dissenters who were benefited. [Acts 1986,
ch. 887, 13.31.]
B-6
151
[LETTERHEAD OF PROFESSIONAL BANK SERVICES, INC.]
November 27, 1998
Board of Directors
Farmers & Merchants Bank
2011 Highway 47 North
P.O. Box 129
White Bluff, Tennessee 37187
Dear Members of the Board:
You have requested our opinion as investment bankers as to the fairness, from a
financial perspective, to the common shareholders of Farmers & Merchants Bank,
White Bluff, Tennessee (the "Company") of the proposed merger of Farmers &
Merchants Bank with First Farmers and Merchants Corporation and Merchants
Corporation, Columbia, Tennessee ("First Farmers and Merchants Corporation").
In the proposed merger, Company shareholders will receive an aggregate of
120,000 First Farmers and Merchants Corporation common shares for all 3,000
Company common shares outstanding as further defined in the Agreement and Plan
of Merger between First Farmers and Merchants Corporation and Farmers &
Merchants Bank (the "Agreement"). On November 20, 1998, the proposed
consideration to be received represents an aggregate value of $5,520,000 or
$1,840.00 per Company common share based on the price for First Farmers and
Merchants Corporation common stock of $46.00 as provided to PBS by First
Farmers and Merchants Corporation, based on the last trade reported on July 22,
1998.
Professional Bank Services, Inc. ("PBS") is a bank consulting firm and as part
of its investment banking business is continually engaged in reviewing the
fairness, from a financial perspective, of bank acquisition transactions and in
the valuation of banks and other businesses and their securities in connection
with mergers, acquisitions, estate settlements and other purposes. We are
independent with respect to the parties of the proposed transaction.
For purposes of this opinion, PBS performed a review and analysis of the
historic performance of Farmers & Merchants Bank: (i) September 30, 1998
Consolidated Reports of Condition and Income filed by Farmers & Merchants Bank
with the FDIC; (ii) June 30, 1998 Uniform Bank Performance Report of Farmers &
Merchants Bank; and (iii) audited financial statements for Farmers & Merchants
Bank as of December 31, 1996 and 1997. We have reviewed and tabulated
statistical data regarding the loan portfolio, securities portfolio and other
performance ratios and statistics. Financial projections were prepared and
analyzed as well as other financial studies, analyses and investigations as
deemed relevant for the purposes of this opinion. In review of the
aforementioned information, we have taken into account our assessment of
general market and financial conditions, our experience in other transactions,
and our knowledge of the banking industry generally.
C-1
152
Board of Directors
Farmers & Merchants Bank
November 27, 1998
Page 2
We have not compiled, reviewed or audited the financial statements of Farmers &
Merchants Bank or First Farmers and Merchants Corporation, nor have we
independently verified any of the information reviewed; we have relied upon
such information as being complete and accurate in all material respects. We
have not made independent evaluation of the assets of Farmers & Merchants Bank
or First Farmers and Merchants Corporation.
Based on the foregoing and all other factors deemed relevant, it is our opinion
as investment bankers, that, as of the date hereof, the consideration proposed
to be received by the shareholders of Farmers & Merchants Bank under the
Agreement is fair and equitable from a financial perspective.
Very truly yours,
Professional Bank Services, Inc.
C-2
153
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. Charter and Bylaws.
The Registrant's Charter provides that the Registrant will indemnify,
and upon request advance expenses to, any person (or his estate) who was or is
a party to any legal proceeding because he is or was a director, officer or
employee of the Registrant, or is or was serving at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, or other entity, against any liability
incurred in that proceeding (A) to the full extent permitted by the TBCA, and
(B) despite the fact that such person did not meet the standard of conduct
specified in the TBCA or would be disqualified for indemnification under the
TBCA, if a determination is made that (i) the person seeking indemnity is
fairly and reasonably entitled to indemnification in view of all of the
relevant circumstances, and (ii) his acts or omissions did not constitute gross
negligence or willful misconduct. A request for reimbursement or advancement of
expenses prior to final disposition of the proceeding must be accompanied by an
undertaking to repay the advances if it is ultimately determined that he did
not meet the requisite standard of conduct but it need not be accompanied by an
affirmation that the person seeking indemnity believed he has met the standard
of conduct.
The Registrant's Bylaws provide that it will indemnify officers and
directors who are a party to any legal proceeding because he is or was an
officer or director of the Registrant against any expenses or awards in
connection therewith if he acted in good faith and in a manner he reasonably
believed to be in the best interest of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. The Registrant also will indemnify officers and directors who are a
party to any derivative suit with respect to the Registrant because that person
is or was an officer or director of the Registrant, against expenses incurred
in connection with that action unless he is found to have acted without good
faith and without that degree of care, diligence and skill which ordinarily
prudent men would exercise in similar circumstances and in like positions,
unless, despite such finding of liability, the court determines that he is
entitled to indemnity. The Bylaws also provide that the Registrant may (i)
advance to the officer or director the expenses incurred in defending a
proceeding upon receipt of an undertaking that he will repay amounts advanced
unless it ultimately is determined that he is entitled to be indemnified, and
(ii) purchase and maintain insurance on behalf of an officer or director
against any liability arising out of his acting as such.
B. Tennessee Business Corporation Act.
In addition to the foregoing provisions of the Registrant's Charter
and Bylaws, directors, officers, employees and agents of the Registrant and its
subsidiaries may be indemnified by the Registrant pursuant to provisions of the
TBCA.
C. Insurance.
The Registrant maintains and pays premiums on an insurance policy on
behalf of its officers and directors against liability asserted against or
incurred by such persons in or arising from their capacity as such.
II-1
154
D. SEC Policy On Indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 -- Agreement and Plan of Merger, dated as of October 26, 1998 and amended as of
December 15, 1998, among the Registrant, First Farmers and Merchants National
Bank of Columbia and Farmers & Merchants Bank - White Bluff, Tenn.
3.1 -- Charter of the Registrant (1)
3.2 -- Articles of Amendment to Charter of the Registrant
5.1 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
8.1 -- Opinion of Baker Donelson Bearman & Caldwell, P.C.
10.1 -- Executive Salary Continuation Plan, dated as of December 31, 1992, between First
Farmers and Merchants National Bank and Waymon L. Hickman
10.2 -- Deferred Compensation Plan, dated April 29, 1993, of First Farmers and
Merchants National Bank
10.3 -- Officers Group National Bank Term Replacement Plan, dated December 18, 1996, of First
Farmers and Merchants
11.1 -- Statement re computation of earnings per share (2)
13.1 -- The Registrant's 1997 Annual Report to Shareholders (2)
13.2 -- The Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 (3)
23.1 -- Consent of Kraft Bros., Esstman, Patton & Harrell, PLLC
23.2 -- Consent of Marlin & Edmondson, P.C.
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company (included in opinion filed as Exhibit 5.1)
23.4 -- Consent of Professional Bank Services, Inc.
23.5 -- Consent of Baker Donelson Bearman & Caldwell, P.C. (included in opinion filed as
Exhibit 8.1)
24.1 -- Power of Attorney (included on page II-5)
99.1 -- Form of Proxy Card
----------------
(1) Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-14.
(2) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes as follows: 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
II-2
155
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.
The Registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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 SEC such indemnification
is against public policy as expressed in the Securities 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 against the
Registrant 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 Securities Act and will be
governed by the final adjudication of such issue.
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.
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
156
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 Columbia,
State of Tennessee, on December 15, 1998.
FIRST FARMERS AND MERCHANTS
CORPORATION
By: /s/ Waymon L. Hickman
-------------------------
Waymon L. Hickman
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Waymon L. Hickman and Patricia N.
McClanahan and each of them, his true and lawful attorney-in-fact, as agent and
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacity, to sign any or all amendments to this
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agents in full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as they might or be in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, and their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Waymon L. Hickman Chairman of the Board, Chief December 15, 1998
- ------------------------------------- Executive Officer, Director (principal
Waymon L. Hickman executive officer)
/s/ Patricia N. McClanahan Senior Vice President and Chief December 15, 1998
- ------------------------------------- Financial Officer (principal financial
Patricia N. McClanahan and accounting officer)
/s/ Kenneth A. Abercrombie Director December 15, 1998
- -------------------------------------
Kenneth A. Abercrombie
/s/ James L. Bailey, Jr. Director December 15, 1998
- -------------------------------------
James L. Bailey, Jr.
- ------------------------------------- Director December 15, 1998
Flavius A. Barker
/s/ Harlan D. Bowsher Director December 15, 1998
- -------------------------------------
Harlan D. Bowsher
II-4
157
/s/ Hulet M. Chaney Director December 15, 1998
- -------------------------------------
Hulet M. Chaney
/s/ H. Terry Cook, Jr. Director December 15, 1998
- -------------------------------------
H. Terry Cook, Jr.
/s/ W. J. Davis, Jr. Director December 15, 1998
- -------------------------------------
W. J. Davis, Jr.
/s/ Tom Napier Gordon Director December 15, 1998
- -------------------------------------
Tom Napier Gordon
/s/ Edwin W. Halliday Director December 15, 1998
- -------------------------------------
Edwin W. Halliday
/s/ Tillman Knox Director December 15, 1998
- -------------------------------------
Tillman Knox
/s/ Joe E. Lancaster Director December 15, 1998
- -------------------------------------
Joe E. Lancaster
/s/ Thomas Randall Stevens Director December 15, 1998
- -------------------------------------
Thomas Randall Stevens
/s/ Dan C. Wheeler Director December 15, 1998
- -------------------------------------
Dan C. Wheeler
/s/ David I. Wise Director December 15, 1998
- -------------------------------------
David I. Wise
/s/ W. Donald Wright Director December 15, 1998
- -------------------------------------
W. Donald Wright
II-5
158
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 -- Agreement and Plan of Merger, dated as of October 26, 1998 and amended as of
December 15, 1998, among the Registrant, First Farmers and Merchants National
Bank of Columbia and Farmers & Merchants Bank - White Bluff, Tenn.
3.1 -- Charter of the Registrant (1)
3.2 -- Articles of Amendment to Charter of the Registrant
5.1 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company
8.1 -- Opinion of Baker Donelson Bearman & Caldwell, P.C.
10.1 -- Executive Salary Continuation Plan, dated as of December 1, 1992, between First
Farmers and Merchants National Bank and Waymon L. Hickman
10.2 -- Deferred Compensation Plan, April 292, 1993, of First Farmers and Merchants
National Bank
10.3 -- Officers Group Term Replacement Plan, dated December 18, 1996, of First
Farmers and MerchantsNational Bank
11.1 -- Statement re computation of earnings per share (2)
13.1 -- The Registrant's 1997 Annual Report to Shareholders (2)
13.2 -- The Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998 (3)
23.1 -- Consent of Kraft Bros., Esstman, Patton & Harrell, PLLC
23.2 -- Consent of Marlin & Edmondson, P.C.
23.3 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company (included in opinion filed as Exhibit 5.1)
23.4 -- Consent of Professional Bank Services, Inc.
23.5 -- Consent of Baker Donelson Bearman & Caldwell, P.C. (included in opinion filed as
Exhibit 8.1)
24.1 -- Power of Attorney (included on page II-5)
99.1 -- Form of Proxy Card
----------------
(1) Incorporated by reference to exhibits filed with the
Registrant's Registration Statement on Form S-14.
(2) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.