<PAGE> 1
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COMMUNITY NATIONAL CORPORATION
------------------------------------------------
(Name of Registrant as Specified In its Charter)
------------------------------------------------------------
Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
- ------------
(2) Aggregate number of securities to which transaction applies:
- --------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
-------------------
(4) Proposed maximum aggregate value of transaction:
----------
(5) Total fee paid:
---------
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ______________
(2) Form, Schedule or Registration Statement No.: _____________
(3) Filing Party: ______________
(4) Date Filed: _____________
<PAGE> 2
COMMUNITY NATIONAL CORPORATION
19 Natchez Trace Drive, P.O. Box 710
Lexington, Tennessee 38351
March 8, 2000
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
of Community National Corporation (the "Company"). The special meeting will be
held at the main office of Community National Bank of Tennessee (the "Bank"), 19
Natchez Trace Drive, Lexington, Tennessee on March 8, 2000, at 2:00 p.m., local
time.
At this meeting, you will be asked to consider and vote upon a proposed
merger involving the Company and Community National Bancorp, Inc. ("Bancorp").
Bancorp was recently formed for the purpose of acquiring the Company by a group
of individuals, some of whom are shareholders of the Company. Bancorp will be
merged into the Company, and the Company will be the surviving corporation. Upon
completion of the merger, each share of your Company common stock will be
converted into the right to receive $14.75 in cash unless you are a member of
the group organized to acquire the Company (the "Investor Group"). If you are a
member of the Investor Group, each share of your Company common stock will be
retained as a share of common stock of the surviving corporation. The merger is
more fully described in the accompanying proxy statement. A copy of the
Agreement and Plan of Merger among Bancorp, the Company and the Bank dated as of
December 2, 1999 and the amendment to the merger agreement dated as of March
1, 2000 are set forth as Appendix A to the attached proxy statement.
THE BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE
BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS. THE BOARD OF DIRECTORS HAS
APPROVED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
MERGER AND THE MERGER AGREEMENT.
All shareholders are invited to attend the special meeting in person.
Approval of the merger requires the affirmative vote of a majority of the
outstanding shares of common stock. Members of the Company's board of directors
hold approximately 23.6% of Company common stock. Each of the board members has
agreed with Bancorp to vote their shares of Company common stock in favor of the
merger. Members of the Investor Group who are shareholders of the Company but
who are not directors hold approximately 26.2% of Company common stock. Each
member of the Investor Group has indicated that they intend to vote in favor of
the merger.
The proxy statement provides detailed information concerning the merger
and certain additional information. You should read and carefully consider this
information. You can also obtain information about the Company from publicly
available documents filed with the Securities and Exchange Commission.
In order that your shares may be represented at the special meeting, we
urge you promptly to complete, sign, date and return the accompanying proxy in
the enclosed envelope, whether or not you plan to attend the special meeting. If
you attend the special meeting in person, you may, if you wish, vote personally
on all matters brought before the special meeting even if you have previously
returned your proxy.
Sincerely,
Arba Taylor
Chairman
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COMMUNITY NATIONAL CORPORATION
----------
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To Be Held on March 28, 2000
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NOTICE IS HEREBY GIVEN that a special meeting of shareholders of
Community National Corporation (the "Company") will be held on March 28, 2000 at
Community National Bank of Tennessee (the "Bank"), 19 Natchez Trace Drive,
Lexington, Tennessee at 2:00 p.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of December 2, 1999, among Community
National Bancorp, Inc. ("Bancorp"), the Company and the Bank, as amended by the
amendment dated March 1, 2000 and the transactions contemplated by the merger
agreement. Pursuant to the merger agreement, Bancorp will be merged with and
into the Company with the Company to be the surviving corporation in the merger.
A copy of the merger agreement and the amendment to the agreement are set forth
as Appendix A to the attached proxy statement.
2. To transact such other business as may properly come before the
special meeting.
The foregoing items of business are more fully described in the proxy
statement accompanying this notice.
Only shareholders of record at the close of business on March 8, 2000,
are entitled to notice of, and to vote at, the special meeting and any
adjournments thereof.
Approval of the merger and the merger agreement requires the
affirmative vote of a majority of the outstanding shares of Company common
stock.
Under Tennessee law, shareholders who do not vote in favor of the
merger and who file a written notice of intent to demand payment prior to the
shareholder vote on the merger and the merger agreement, have the right to seek,
upon completion of the merger, an appraisal of the fair value of their common
stock by the Chancery Court of Henderson County, Tennessee. In order to exercise
this right, a shareholder must comply with all the procedural requirements of
sections 48-23-101 through 48-23-302 of the Tennessee Business Corporation Act,
a description of which is provided in "The Merger - Appraisal Rights" section of
the attached proxy statement and the full text of which is attached to the proxy
statement as Appendix B.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE
THE MERGER AND THE MERGER AGREEMENT.
By order of the Board of Directors
---------------------------------------------
Arba Taylor, Chairman
Lexington, Tennessee
Dated: March 8, 2000
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PROXY STATEMENT
Community National Corporation
19 Natchez Trace Drive
P.O. Box 710
Lexington, Tennessee 38351
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 28, 2000
THE FOLLOWING TERMS ARE USED THROUGHOUT THIS PROXY STATEMENT:
"COMPANY" means Community National Corporation.
"BANK" means Community National Bank of Tennessee.
"BANCORP" means Community National Bancorp, Inc.
"INVESTOR GROUP" means the group of individuals who will be the shareholders of
the Company after the merger is completed. A list of the members of the Investor
Group is attached to this proxy statement as Appendix C.
QUESTIONS AND ANSWERS ABOUT THE MEETING
Q: What am I being asked to vote upon?
A: You are being asked to approve the merger agreement which provides for
the merger of Bancorp into the Company. Upon the effectiveness of the
merger, the Company will be the surviving corporation. Unless you are a
member of the Investor Group, the merger will convert each share of
your Company common stock into the right to receive $14.75 in cash,
without interest. If you are a member of the Investor Group, each share
of your Company common stock will be retained as a share of common
stock in the surviving corporation.
Q: What should I do now?
A: Indicate on the enclosed proxy card how you want to vote. Sign and mail
the proxy card in the enclosed envelope so that we will receive it
before the time of the special meeting. If you sign and send in your
proxy card and do not indicate how you want to vote, we will vote your
proxy in favor of the merger and the merger agreement. If you do not
sign and send in your proxy card, it will have the effect of a vote
against the merger and the merger agreement.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares of common stock only if you provide
instructions on how to vote. You should instruct your broker how to
vote your shares, following the directions your broker provides. If you
do not provide instructions to your broker, your shares will not be
voted.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, we will send you written
instructions for exchanging your stock certificates for the cash
payment.
Q: Who can answer any questions I may have?
A: You should contact Betty Threadgill
Community National Corporation
19 Natchez Trace Drive
Lexington, Tennessee 38351
(901)968-6624
The date of this Proxy Statement is March 8, 2000. There may be
changes in the affairs of the Company, the Bank, or Bancorp since that date
which are not reflected in this document.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY ....................................................................................................... 1
Business of the Company and the Bank................................................................... 1
Bancorp .............................................................................................. 1
The Merger............................................................................................. 1
Merger Consideration................................................................................... 1
Source of Funding...................................................................................... 1
Reasons for the Merger; Recommendation of the Board of Directors....................................... 2
The Special Meeting ................................................................................... 2
Record Date; Vote Required............................................................................. 2
Appraisal Rights....................................................................................... 2
Required Regulatory Approvals.......................................................................... 2
Conditions to the Merger............................................................................... 2
Termination and Expenses............................................................................... 3
Present Management and Management After the Merger..................................................... 3
Certain Federal Income Tax Consequences................................................................ 3
Interests of Certain Persons in the Merger............................................................. 3
Market Price of Common Stock........................................................................... 3
THE SPECIAL MEETING AND REQUIRED VOTE........................................................................... 4
Meeting of Shareholders................................................................................ 4
Purpose of Meeting..................................................................................... 4
Voting Requirements at Meeting......................................................................... 4
Proxies .............................................................................................. 4
Independent Public Accountants......................................................................... 5
Shareholder Proposals.................................................................................. 5
Other Matters.......................................................................................... 5
Solicitation of Proxies and Cost Thereof .............................................................. 5
THE MERGER...................................................................................................... 6
General .............................................................................................. 6
Background of the Merger............................................................................... 6
Reasons for the Merger; Recommendation of the Board.................................................... 7
Director Conflict of Interest.......................................................................... 8
Effective Date......................................................................................... 8
Terms of The Merger.................................................................................... 8
Merger Consideration and Source of Funds .............................................................. 9
Present Management and Management After the Merger..................................................... 9
Payment Procedures .................................................................................... 9
Representations and Warranties........................................................................ 10
Covenants............................................................................................. 11
Conditions to the Merger.............................................................................. 12
Termination and Expenses.............................................................................. 13
Interests of Certain Members of Management in the Merger.............................................. 13
Accounting Treatment.................................................................................. 14
Appraisal Rights...................................................................................... 14
MARKET PRICES AND DIVIDENDS.................................................................................... 17
CERTAIN FEDERAL INCOME TAX CONSEQUENCES........................................................................ 18
COMPANY SELECTED FINANCIAL DATA................................................................................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................... 20
General ............................................................................................. 20
Financial Condition September 30, 1999 compared to December 31, 1998.................................. 20
Results of Operations September 30, 1999 compared to September 30, 1998............................... 21
</TABLE>
i
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<TABLE>
<S> <C>
Provisions for Loan Losses September 30, 1999 compared to September 30, 1998.......................... 21
Non-performing Assets September 30, 1999 compared to December 31, 1998................................ 21
Regulatory Capital September 30, 1999................................................................. 22
Liquidity September 30, 1999 ......................................................................... 22
Financial Condition December 31, 1998 compared to December 31, 1997................................... 23
Results of Operations December 31, 1998 compared to December 31, 1997................................. 23
Provisions For Loan Losses December 31, 1998 compared to December 31, 1997............................ 23
Non-performing Assets December 31, 1998 compared to December 31, 1997..................................24
Liquidity December 31, 1998 .......................................................................... 24
Recent Accounting Pronouncements...................................................................... 25
BUSINESS OF THE COMPANY AND THE BANK........................................................................... 26
General ............................................................................................. 26
Market Area........................................................................................... 26
Lending Activities.................................................................................... 27
Analysis of Loan Portfolio............................................................................ 27
Deposit Activities and Other Sources of Funds......................................................... 38
Subsidiary Activities................................................................................. 41
Competition........................................................................................... 41
Personnel............................................................................................. 41
Properties............................................................................................ 42
Legal Proceedings..................................................................................... 42
SUPERVISION AND REGULATION..................................................................................... 43
Regulation of the Company............................................................................. 43
Regulation of the Bank................................................................................ 44
Recent Developments................................................................................... 48
OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT............................................. 49
ADDITIONAL INFORMATION......................................................................................... 50
INDEX TO FINANCIAL STATEMENTS.................................................................................. 51
</TABLE>
APPENDICES
APPENDIX A - Merger Agreement
APPENDIX B - Sections 48-23-101 through 48-23-302 of the Tennessee Business
Corporation Act
APPENDIX C - List of Members of the Investor Group
APPENDIX D - Form of Proxy
ii
<PAGE> 7
SUMMARY
This summary highlights certain information contained elsewhere in this
proxy statement. It does not contain all of the information that is important to
you. We urge you to carefully read the entire proxy statement and the other
documents to which this document refers to fully understand the merger. See
"Additional Information" (page 50).
BUSINESS OF THE COMPANY AND THE BANK (page 26)
The Company was incorporated in 1997 under the laws of the State of
Tennessee. The Company owns 100% of the outstanding shares of the Bank. The
Company is registered with and subject to the regulation and supervision of the
Board of Governors of the Federal Reserve System as a bank holding company. The
Company's principal business is overseeing the business of the Bank. As of
September 30, 1999, the Company had no significant assets other than its
investment in the Bank, and four loans totaling $772,000 and certain cash and
cash equivalents. At September 30, 1999, the Company had consolidated total
assets of $39.8 million, deposits of $30.3 million and stockholders' equity of
$8.6 million. The Company's principal executive office is located at 19 Natchez
Trace Drive, Lexington, Tennessee 38351, and its telephone number is
(901)968-6624.
The Bank is a national bank operating through its main office and a
branch banking office in Lexington, Tennessee, serving Henderson County in
western Tennessee. The Bank is the successor to Lexington First Federal, a
federal savings association. The Bank is regulated and supervised by the Office
of the Comptroller of the Currency. The Bank's principal executive office is
located at 19 Natchez Trace Drive, Lexington, Tennessee 38351, and its telephone
number is (901)968-6624.
BANCORP (page 6)
Bancorp is a newly organized entity. The Investor Group formed Bancorp
to facilitate the acquisition of the Company. Some of the members of the
Investor Group are shareholders of the Company. One of the members of the
Investor Group is Company director Pat Carnal. Members of the Investor Group are
listed on Appendix C of this proxy statement.
THE MERGER (page 6)
Bancorp will merge into the Company, with the Company being the
surviving corporation. At the time the merger is completed, members of the
Investor Group will own all of the outstanding shares of the Company's stock. We
have attached the merger agreement, as amended to this document as Appendix A.
Please read the merger agreement. It is the legal document that governs this
merger.
MERGER CONSIDERATION (page 9)
At the time the merger is completed, each share of the Company's common
stock outstanding prior to the merger (other than 252,773 shares owned by
members of the Investor Group) will be converted into a right to receive from
the surviving corporation $14.75 in cash. This cash payment is referred to as
the Merger Consideration in this proxy statement. The aggregate Merger
Consideration will be approximately $6.8 million. Shares of the Company stock in
which the holders have elected to exercise appraisal rights under the Tennessee
Business Corporation Act will not be converted into the right to receive the
Merger Consideration. Members of the Investor Group who are shareholders of the
Company will retain their shares in Company stock as shares of the surviving
corporation.
SOURCE OF FUNDING (page 9)
Members of the Investor Group who are not shareholders of the Company
will purchase a total of 121,960 shares of Bancorp stock at $14.75 per share,
for an aggregate price of approximately $1.8 million. At the time of the merger,
each share of Bancorp stock will be exchanged for one share of the surviving
corporation's stock. Bancorp will use the cash received from the sale of its
stock, along with a draw against a line of credit from First Tennessee Bank
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<PAGE> 8
National Association of approximately $5 million, to pay the Merger
Consideration to the Company's shareholders who are not members of the Investor
Group.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS (page 7)
The board of directors believes that the merger will better position
the Company in the competitive financial marketplace and will provide
significant value to its shareholders. The board of directors believes that the
merger is fair to, and in the best interests of, the Company and its
shareholders. The board has approved the merger and the merger agreement and
recommends that the shareholders of the Company vote FOR approval of the merger
and the merger agreement.
THE SPECIAL MEETING (page 4)
The special meeting will be held on March 28, 2000, at Community
National Bank of Tennessee, 19 Natchez Trace Drive, Lexington, Tennessee at 2:00
p.m., local time. At the special meeting, you will be asked to approve and adopt
the merger agreement, and to act on any other matters as may properly be brought
before the special meeting.
RECORD DATE; VOTE REQUIRED (page 4)
You can vote at the special meeting if you owned Company common stock
at the close of business on March 8, 2000. A majority of the outstanding shares
of Company common stock is required to approve the merger and the merger
agreement. If you do not vote or if you abstain, you are effectively voting
against the merger and the merger agreement.
As of March 8, 2000, Company directors owned an aggregate of 168,534
shares of the Company's common stock, or approximately 23.6% of the shares of
common stock outstanding on that date. Each director has agreed to vote all of
his shares in favor of the merger and the merger agreement. As of March 8, 2000,
members of the Investor Group who are shareholders of the Company but who are
not directors owned an aggregate of 186,961 shares of common stock, or
approximately 26.2% of the shares of common stock outstanding on that date. Each
member of the Investor Group intends to vote in favor of the merger and the
merger agreement.
APPRAISAL RIGHTS (page 14)
Under Tennessee law, shareholders who do not vote in favor of the
merger and who file demands for an appraisal prior to the shareholder vote on
the merger and the merger agreement have the right to seek, upon completion of
the merger, an appraisal of the fair value of their common stock by the Chancery
Court in Henderson County, Tennessee. In order to exercise this right, a
shareholder must comply with all the procedural requirements of sections
48-23-101 through 48-23-302 of the Tennessee Business Corporation Act. These
statutory provisions are attached to this proxy statement as Appendix B. Fair
value will be determined in judicial proceedings, the result of which cannot be
predicted. Failure to take any of the steps required under the Tennessee
Business Corporation Act may result in a loss of these appraisal rights.
REQUIRED REGULATORY APPROVALS (page 12)
The merger may not be completed until we receive approval from the
Board of Governors of the Federal Reserve System. Once the Federal Reserve Board
approves the merger, we will be required to wait between 15 to 30 days before we
can complete the merger.
CONDITIONS TO THE MERGER (page 12)
In addition to obtaining shareholder and regulatory approvals, the
obligations of the Company, the Bank, and Bancorp to complete the merger are
subject to the satisfaction or waiver of various conditions, including, among
other
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things, the obtaining of required third party consents, the receipt of customary
legal opinions, the truth and correctness of representations and warranties and
the absence of certain material adverse changes with respect to the Company and
the Bank.
TERMINATION AND EXPENSES (page 13)
The merger agreement may be terminated by either Company or Bancorp if
the merger is not completed by March 31, 2000. In addition, the Company and
Bancorp can agree to terminate the merger agreement at any time. The Company can
terminate the merger agreement if the Company does not receive shareholder
approval for the merger. The merger agreement may be terminated prior to
completion of the merger by the Company or Bancorp if the other party materially
breaches a representation, warranty or covenant contained in the merger
agreement and fails to cure the breach within 30 days following notice of the
breach.
The Company will be liable to Bancorp for a termination fee of $250,000
if the Company enters into an agreement with another party to acquire the
Company or the Bank or a third party acquires more than 25% of the outstanding
shares of the Company prior to the termination of the merger agreement. Bancorp
may be liable to the Company for a termination fee of $100,000 if it fails to
fulfill its obligations to complete the merger. Unless the Company or Bancorp
breaches the merger agreement, other than any applicable termination fees, the
termination of the merger agreement will be without any liability on the part of
either party or its directors, officers, or shareholders.
PRESENT MANAGEMENT AND MANAGEMENT AFTER THE MERGER (page 9)
Howard Tignor resigned as a director and as President and Chief
Executive Officer of the Company, effective February 12, 2000. The Board has
elected Betty Threadgill as President. After the completion of the merger, the
Investor Group intends to elect Billy Max Woods as chairman of the surviving
corporation and Phillip Renfroe as president. Except for director Pat Carnal,
none of the existing directors of the Company will be directors of the surviving
corporation. The directors of the surviving corporation will be Pat Carnal,
Kevin Carter, Chris Holmes, Richard Odle, Phillip Renfroe and Billy Max Woods.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (page 18)
Unless you are a member of the Investor Group, the merger will be a
taxable transaction to you for federal income tax purposes. You will recognize
gain or loss in the merger in an amount determined by the difference between the
Merger Consideration you receive and your tax basis in the Company's common
stock. We urge you to consult your own tax advisors as to the specific
consequences to you of the merger under federal, state, local or any other
applicable tax laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (page 13)
Some of the Company's and the Bank's directors and executive officers
have interests in the merger that are different from, or in addition to, your
interests as shareholders of the Company. Director Pat Carnal is a member of the
Investor Group and will retain his shares of Company common stock after the
completion of the merger. Mr. Carnal will be a director of the surviving
corporation. In addition, the Company and the Bank have entered into an
agreement with Howard Tignor, President of the Bank, which provides that if the
merger is completed, the Company will pay Mr. Tignor $25,000 within two business
days after the completion date of the merger. Also, employees who are terminated
in connection with the merger will be entitled to receive severance benefits.
Following the merger, the Company will continue to indemnify the officers and
directors of the Company to the fullest extent permitted by the Tennessee
Business Corporation Act.
MARKET PRICE OF COMMON STOCK (page 17)
The asked price per share of Common Stock as of December 7, 1999, the
last business day preceding public announcement of the merger agreement, was
$12.25. The Merger Agreement provides that Company shareholders of record on
March 10, 2000 will be paid in dividend of $.10 per share of Company stock on
March 31, 2000.
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THE SPECIAL MEETING AND REQUIRED VOTE
MEETING OF SHAREHOLDERS
This proxy statement is being furnished to the holders of Company
common stock in connection with the solicitation of proxies by and on behalf of
the board for use at the special meeting to be held at 2:00 p.m., local time, on
March 28, 2000, at the Bank, 19 Natchez Trace Drive, Lexington, Tennessee. The
board has fixed the close of business on March 8, 2000, as the record date for
determining the shareholders of the Company entitled to notice of and to vote at
the special meeting (the "Record Date"). This proxy statement and the enclosed
proxy are first being sent to holders of Company common stock on or about March
8, 2000.
PURPOSE OF MEETING
At the special meeting, the Company's shareholders will consider and
vote upon (i) the approval and adoption of the merger and the merger agreement,
and (ii) such other business as may properly come before the special meeting.
VOTING REQUIREMENTS AT MEETING
At the special meeting, approval and adoption of the merger and the
merger agreement require the affirmative vote of the holders of a majority of
the outstanding shares of Company common stock. The presence at the special
meeting, in person or by proxy, of the holders of a majority of the total number
of shares of common stock outstanding on the Record Date will constitute a
quorum for the transaction of business by these holders at the special meeting.
On the Record Date, there were 712,877 outstanding shares of Company common
stock, each holder of which is entitled to one vote per share with respect to
each matter to be voted on at the special meeting. The Company has no class or
series of stock outstanding other than common stock entitled to vote at the
special meeting or otherwise entitled to vote with respect to the merger and the
merger agreement.
An "abstention" (including broker "non-votes") will be considered
present for quorum purposes, but will have the same effect as a vote "against"
the proposal to approve the merger and the merger agreement. A "broker non-vote"
refers to shares represented at the special meeting in person or by proxy by a
broker or nominee where the broker or nominee (i) has not received voting
instructions on a particular matter from the beneficial owners or persons
entitled to vote or (ii) the broker or nominee does not have the discretionary
voting power on that matter.
As of the Record Date, directors and executive officers of the Company
owned beneficially an aggregate of 168,534 shares of Company common stock, or
approximately 23.6% of the shares of common stock outstanding on that date.
These directors and executive officers intend to vote all these shares in favor
of the merger and the merger agreement. As of the Record Date, members of the
Investor Group who are shareholders of the Company but who not directors owned
beneficially an aggregate of 186,961 shares of common stock, or approximately
26.2% of the shares of common stock outstanding on that date. Each of the
members of the Investor Group has indicated that they intend to vote for the
merger.
PROXIES
All proxies that are properly executed by holders of Company common
stock and received by the Company prior to the special meeting will be voted in
accordance with instructions noted on the proxy. Any proxy that does not specify
to the contrary will be voted in favor of approval and adoption of the merger
and the merger agreement. Any holder of common stock who submits a proxy will
have the right to revoke it, at any time before it is voted, by filing with the
secretary of the Company written notice of revocation or a duly executed
later-dated proxy, or by attending the special meeting and voting the common
stock in person.
It is important that proxies be returned promptly. Shareholders who do
not expect to attend the special meeting in person are urged to mark, sign and
date the accompanying proxy and mail it in the enclosed return envelope, which
requires no postage if mailed in the United States, so that their votes can be
recorded.
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INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Arnold, Spain, Truett & Hewitt, P.L.L.C., the
Company's certified public accountants, is expected to be present at the special
meeting, will have an opportunity to make a statement if he desires to do so and
is expected to be available to respond to all appropriate questions relating to
the financial statements.
SHAREHOLDER PROPOSALS
If the merger is not consummated, the Company anticipates that its
annual meeting for the fiscal year ended December 31, 1999 will occur on April
1, 2000. Consequently, a proposal submitted by a shareholder for action at this
meeting, if held, should be received at the Company's principal executive office
prior to April 1, 2000 in order to be eligible for inclusion in the Company's
proxy statement related to this meeting.
OTHER MATTERS
As of the date of this proxy statement, the board knows of no matters
which will be presented for consideration at the special meeting other than the
proposal set forth in this proxy statement. If any other matters properly come
before the special meeting, it is intended that the persons named in the proxy
will act in respect thereof in accordance with their best judgment.
SOLICITATION OF PROXIES AND COST THEREOF
The cost of solicitation, which will be undertaken by mail, telephone,
telegraph, and personal contact, will be borne by the Company. Solicitation of
proxies may be undertaken by directors, officers and employees of the Company,
none of whom will be additionally compensated therefor, but who will be
reimbursed for out-of-pocket expenses.
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THE MERGER
GENERAL
This section of the proxy statement describes certain aspects of the
merger, the merger agreement and other related matters. The following
description is qualified in its entirety by reference to the merger agreement,
which is attached as Appendix A to this proxy statement and is incorporated
herein by reference. All shareholders are urged to read the merger agreement in
its entirety. All material aspects of the merger, the merger agreement and other
related matters are summarized in this proxy statement.
The merger agreement provides that, subject to the satisfaction or
waiver of certain conditions, Bancorp will be merged with and into the Company.
The Company will survive the merger and will be owned by the members of the
Investor Group. As a result of the merger, each share of common stock
outstanding prior to the merger will be converted, except for those shares held
by the Investor Group and those shares as to which appraisal rights are
exercised, into the right to receive $14.75 in cash.
BACKGROUND OF THE MERGER
Prior to 1997, the Bank operated as a mutual federal savings
association. As a mutual federal savings association, the Bank's primary
business was the origination and holding of mortgage loans secured by
single-family residential real estate located primarily in Henderson County,
Tennessee, with funds obtained primarily through the attraction of savings
deposits, certificate accounts with terms of 18 months or less, and Federal Home
Loan Bank advances. Beginning in 1997, the Bank began the conversion process to
a full stock company and simultaneously to a national bank charter. In
conjunction with this conversion process, the Bank shifted its business focus to
full service banking, diversification of its loan portfolio, and offering a
greater variety of transaction accounts.
In January 1998, a representative of the Investor Group approached
certain members of the board regarding the possibility of a sale of the Company.
Because of regulatory restrictions in connection with conversion process, the
Company could not be sold to a third party prior to December 1998. The board
responded to the Investor Group that the Company was not for sale at that time.
However, with the conversion completed and initial interest expressed by a
prospective buyer, the Company's board began to assess whether a sale of the
Company in the future might be in the best interests of the Company's
shareholders in light of the Company's future prospects for growth and
profitability.
During 1998, the Company's board began to investigate whether it would
be in the shareholders' best interests to sell the Company after the regulatory
restrictions with respect to the conversion had expired. President Tignor began
contacting prospective buyers in July, 1998. The board discussed the possibility
of a sale with several financial institutions in the West Tennessee area as well
as certain individuals during 1998. During this time the highest expression of
interest by prospective buyers was in the price range of $12.00 - $12.50.
On January 16, 1999, the board met and discussed inquiries from four
parties interested in buying the Company. The board directed President Tignor to
investigate the expense of having a third party perform a valuation of the
Company in order to evaluate these offers and any other subsequent offers
received by the Company.
In late January 1999, a representative of the Investor Group again
contacted President Tignor regarding the possibility of a sale of the Company.
As a result of this contact, on February 4, 1999, a representative of the
Investor Group submitted an expression of interest to the board for the sale of
the Company, at a price of $15.50 per share of stock to each shareholder who was
not a member of the Investor Group.
On February 13, 1999, the board met and appointed a special board
committee consisting of Howard Tignor, Pope Thomas and Arba Taylor to
investigate the possibility of selling the Company. This committee contacted
both a bank consulting firm and an investment banking firm to give bids for
preparing an analysis of the value of the Company based upon prior sales of
comparable banks, the Company's financial performance and condition, and other
relevant factors.
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On March 13, 1999, the board approved an investment banking firm to
conduct a comparison of the Company with comparable companies and other relevant
factors. On March 23, 1999, the investment banking firm provided a current
analysis of thrift sales and compared the Company to thrifts being sold and
analyzed the Company's likely value based upon other relevant factors. Based
upon this report, the board believed that a price range of $15.50 per share of
stock would be a fair value for the Company.
The committee of the board contacted each of the prospective buyers
after receiving the analysis from the investment banking firm. One prospective
buyer indicated interest in buying the Company for a price range of $12.00 to
$12.50. Other prospective buyers indicated that they were no longer interested
in purchasing the Company.
After considering that the Investor Group's offer of $15.50 was
substantially higher than the other prospective buyer and also higher than the
indicated value derived from the analysis performed by the investment banking
group, at a board meeting on May 22, 1999 the board determined to proceed with
discussions with members of the Investor Group.
On May 29, 1999, a member of the Investor Group met with the board to
discuss the terms of the sale of the Company to the Investor Group. The
representative of the Investor Group stated that the Investor Group would
provide a letter of intent to set forth the details of the proposed transaction.
In June and July 1999, the board met several times to discuss the
proposed transaction with the Investor Group. In June 1999, the board engaged
Baker, Donelson, Bearman, & Caldwell as special counsel to advise the board
concerning a possible sale. The board met with attorneys of Baker, Donelson,
Bearman & Caldwell on July 9, 1999 regarding the transaction.
Beginning in July 1999, and continuing to the date of this proxy
statement, Director Pat Carnal, a member of the Investor Group, did not
participate in any of the board discussions concerning the proposed transaction
and did not vote on the merger or on any matters concerning the merger.
In August, 1999, the board met and considered the proposed price and
terms of an acquisition of the Company by the Investor Group, as outlined in a
term sheet dated August 5, 1999. The board approved the transaction as set forth
in the term sheet, which established a price of $15.50 per share of stock to
each shareholder who was not a member of the Investor Group.
In August, 1999, the Investor Group began conducting due diligence with
respect to the Company and the Bank. A representative of the Investor Group
contacted Chairman Taylor, and indicated that the Investor Group would only be
willing to pursue the proposed transaction if the price paid to the Company's
shareholders was reduced to $14.50 per share of stock. On August 31,1999, the
board met to discuss the Investor Group's new offer. The board determined that
the transaction based upon a price per share of $14.50 for the Company's stock
was not acceptable, but that $14.75 would be a fair price for the Company. The
board instructed Chairman Taylor to communicate its proposal to the Investor
Group. In September, 1999, Chairman Taylor met with a member of the Investor
Group to discuss the purchase price of the proposed transaction. The Investor
Group agreed upon a price of $14.75 per share of Company common stock for
shareholders who were not members of the Investor Group.
On September 18, 1999, the board approved the Investor Group's revised
offer of purchasing the Company for a price of $14.75 per share of Company
common stock for shareholders who were not members of the Investor Group.
During October and November, 1999, the parties worked to draft and
finalize a definitive agreement. On November 17, 1999, the board met and
approved the merger agreement. On December 2, 1999, the parties executed the
merger agreement.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD
The board of directors believes that the terms of the merger are fair
to, and in the best interest of the Company and its shareholders and recommends
that the Company's shareholders vote FOR approval of the merger and the merger
agreement. The board considered the following factors in reaching its
conclusion:
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(i) The consideration to be received by the Company's shareholders in
the merger, and the premium over the market price represented by the
Merger Consideration. Shareholders will receive $14.75 in cash per
share as a result of the merger, which represents a premium over the
$12.25 per share price of the Company's common stock at December 7,
1999, the last business day prior to the announcement of the merger
agreement.
(ii) The strategic alternatives available to the Company, including the
continued implementation of its business plan.
(iii) The uncertainty of conducting a public auction and sale of the
Company. In light of the uncertainty as to the terms of any subsequent
transaction other than the merger, the board believes that the merger
provides the best opportunity for maximizing value to the Company's
shareholders.
(iv) The certainty of value provided by the cash consideration.
Shareholders of the Company (other than members of the Investor Group)
will receive $14.75 per share in cash in the merger.
(v) The high level of competition in the market, resulting in lower
profitability from the continued operation of the Bank. The Bank
actively competes with four other banks in the local area, resulting in
low net interest margins.
(vi) The limited ability of a community bank to provide the varied
products and services offered by larger banks, and thus compete as
effectively in today's marketplace.
(vii) The continued high interest rate risk experienced by the Bank due
to its former status as a savings association. This risk is due to the
continued presence of long term fixed rate real estate loans, funded
principally through short term certificates of deposit.
(viii) The Company's high level of equity, which it has not been able
to deploy to provide an appropriate return to the Company's
shareholders.
In view of the wide variety of factors considered by the board, the
board did not quantify or otherwise attempt to assign relative weights to the
specific factors considered in making its determination.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER AND THE MERGER AGREEMENT.
DIRECTOR CONFLICT OF INTEREST
Director Pat Carnal is a member of the Investor Group and will be a
director of the surviving corporation. Former Director Howard Tignor will
receive a cash payment of $25,000 upon consummation of the merger in connection
with the termination of his employment agreement. The interests of Mr. Carnal
and Mr. Tignor were considered by the board, but these interests did not have
any effect upon the board's reaching its determination that the merger is fair
to, and in the best interests of, the Company's shareholders. See "The Merger -
Interest of Certain Persons in the Merger."
EFFECTIVE DATE
The merger agreement provides that unless the parties agree upon
another date, the effective date of the merger will be the tenth business day
after fulfilling or waiving each condition contained in the merger agreement and
the expiration of any waiting period required by the banking regulators.
TERMS OF THE MERGER
On the effective date, Bancorp will be merged with and into the
Company, at which time the separate corporate existence of Bancorp will cease
and the Company will be the surviving corporation. All outstanding shares of the
surviving corporation will be held by members of the Investor Group. From and
after the effective date, the surviving corporation will possess all the assets,
rights, privileges, powers and franchises and be subject to all of the
liabilities,
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restrictions, disabilities and duties of the Company and Bancorp, as provided
under Tennessee law. The charter and bylaws of the Company will be the charter
and bylaws of the surviving corporation.
MERGER CONSIDERATION AND SOURCE OF FUNDS
The merger agreement provides that each share of the Company's common
stock issued and outstanding prior to the completion of the merger (other than
shares held by members of the Investor Group and shares as to which appraisal
rights are exercised) will be converted as a result of the merger into the right
to receive $14.75 in cash.
Members of the Investor Group who are not shareholders of the Company
will purchase an aggregate of 121,960 shares of Bancorp stock for $14.75 per
share, totaling $1,798,910 in subscription proceeds. Bancorp has obtained a
commitment from First Tennessee Bank National Association to lend up to
$6,600,000 to Bancorp in connection with the merger. Bancorp will use the
proceeds from the sale of its stock, along with the loan proceeds, to pay the
Merger Consideration, which is anticipated to be approximately $6.9 million.
PRESENT MANAGEMENT AND MANAGEMENT AFTER THE MERGER
Howard Tignor resigned as a Director and as President and Chief
Executive Officer of the Company, effective February 12, 2000. The Board has
elected Betty Threadgill as President. The Investor Group anticipates that Billy
Max Woods will be elected as chairman of the board of the surviving corporation
and Phillip Renfroe will be elected as president. None of the existing directors
of the Company, other than Director Pat Carnal, will be directors of the
surviving corporation. The directors of the surviving corporation will be Pat
Carnal, Kevin Carter, Chris Holmes, Richard Odle, Phillip Renfroe, and Billy Max
Woods.
PAYMENT PROCEDURES
From and after the effective date, each holder of a Company stock
certificate (other than members of the Investor Group) shall be entitled to
receive in exchange, upon surrender to the Company and subject to applicable
withholding taxes, the Merger Consideration represented by the certificates.
Promptly after the effective date, the Company will mail to each holder of
record of a Company stock certificate (other than members of the Investor
Group), a letter of transmittal and instructions for use in effecting the
surrender of the certificates in exchange for the Merger Consideration. Upon
surrender to the Company of the certificate, together with the letter of
transmittal duly executed, and any other required documents, the holder of the
stock certificate will be entitled to receive the Merger Consideration
multiplied by the number of shares of Company stock represented by the
certificate, and the certificate shall be canceled. The Company will send the
total Merger Consideration to the holder within five business days of (i)
receipt of the certificates and (ii) after all other conditions to delivery of
the Merger Consideration have been satisfied.
SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES REPRESENTING
COMMON STOCK UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS
FROM THE COMPANY.
After the effective date, there will be no transfers on the Company's
stock transfer books of common stock issued and outstanding immediately prior to
the effective date (other than the shares retained by members of the Investor
Group). Until surrendered to the Company, each certificate previously
representing common stock (other than the shares retained by members of the
Investor Group) shall be deemed at any time after the effective date to
represent only the right to receive the Merger Consideration upon surrender. No
interest will be paid or accrued on the Merger Consideration, nor will any
dividends be paid to, or accrued for the benefit of, former holders of common
stock (other than members of the Investor Group) after the effective date.
None of the Company, Bancorp, nor the surviving corporation, will be
liable to any former holder of common stock for any amount properly delivered to
a public official pursuant to applicable abandoned property, escheat or similar
laws. In addition, any portion of the Merger Consideration which remains
unclaimed after 180 days after the effective date will be delivered to the
surviving corporation, and any former shareholders of the Company may look only
to the surviving corporation for payment of the Merger Consideration.
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If a certificate for common stock has been lost, stolen or destroyed,
the Company will issue the Merger Consideration properly payable in accordance
with the merger agreement upon receipt of appropriate evidence as to loss, theft
or destruction, and appropriate evidence as to the ownership of such certificate
by the claimant. When authorizing payment in exchange for any lost certificate,
the person to whom the Merger Consideration is to be issued must give the
surviving corporation a bond or otherwise indemnify the surviving corporation in
a manner satisfactory to the surviving corporation against any claim that may be
made against the surviving corporation with respect to the certificate alleged
to have been lost, stolen, or destroyed.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties by
each of Bancorp, the Company and the Bank relating to, among other things:
(a) corporate organization;
(b) existence and good standing;
(c) capitalization;
(d) corporate power and authority to enter into and perform the merger
agreement;
(e) government authorizations;
(f) the validity and binding effect of the merger agreement;
(g) insurance;
(h) compliance with applicable laws; and
(i) absence of brokers fees in connection with the transaction.
The Company makes representations and warranties related to:
(a) its capital structure;
(b) its subsidiaries;
(c) accuracy of documents filed with the Securities and Exchange
Commission;
(d) accuracy of financial statements;
(e) absence of undisclosed liabilities;
(f) absence of certain events;
(g) owned and leased real property and other assets;
(h) litigation and regulatory action;
(i) material contracts;
(j) employee benefit plans;
(k) labor agreements;
(l) asset classification;
(m) allowance for possible loan losses;
(n) affiliates;
(o) no further action required;
(p) environmental matters;
(q) tax reports;
(r) accuracy of information;
(s) derivative contracts;
(t) accounting controls;
(u) commitments and contracts; and
(v) Year 2000 compliance.
Bancorp makes representations and warranties related to:
(a) absence of events;
(b) accuracy of information;
(c) financial commitment;
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<PAGE> 17
(d) new subscriptions and stock exchange; and
(e) no further action required.
COVENANTS
Each of the Company and the Bank has agreed to use its reasonable
efforts to consummate the transactions contemplated by the merger agreement by
March 31, 2000, and cooperate to take all actions necessary to consummate the
transactions contemplated by the merger agreement.
The Company has also agreed that it will 1) promptly prepare a proxy
statement, in connection with the merger, to be delivered to its shareholders
and the Securities and Exchange Commission, 2) call a special meeting for the
purpose of voting upon the transactions contemplated by the merger agreement, 3)
use its best efforts to solicit and obtain shareholder votes in favor of the
transactions contemplated by the merger agreement, and 4) subject to its
fiduciary duties, the Company's board of directors will recommend approval of
the transactions to the Company's shareholders.
Bancorp has agreed to prepare an offering document to be delivered to
the Investor Group, including both individuals who will purchase stock in
Bancorp and shareholders who will retain their shares of Company's stock as
stock in the surviving corporation.
The Company and Bancorp have agreed that no press releases or written
statements for general circulation relating to the transactions contemplated by
the merger agreement will be issued without the prior approval of both parties.
Each of the Company, the Bank and Bancorp has agreed that, until the
merger is completed, it will provide each other and each other's
representatives, upon reasonable notice, access to their respective properties,
books, contracts, commitments and records. The Company and Bancorp have also
agreed that they will not use any information obtained pursuant to this covenant
for any purpose unrelated to the consummation of the transactions contemplated
by the merger agreement, and if the merger agreement is terminated, each will
hold all confidential information in confidence until and if the information
becomes publicly available by other means. Each of the Company and Bancorp has
also agreed that if the merger agreement is terminated, upon request by the
other, it will deliver all documents obtained by it or destroy the documents.
The Company has agreed that, without the prior written consent of
Bancorp, it will not, and it will not permit its subsidiaries to solicit,
initiate or encourage inquiries or proposals with regard to furnishing any
nonpublic information relating to, or participate in, any negotiations or
discussions concerning, the acquisition or merger, consolidation or other
business combination of the Company and its subsidiaries in any manner other
than as contemplated by the merger agreement.
Each of the Company, Bank and Bancorp has agreed that it will promptly
prepare and submit applications to the appropriate regulatory authorities for
approval of the merger and acquisition of control of the Bank and promptly make
all other appropriate filings to secure all other approvals and consents
necessary for the consummation of the merger and the new stock issuance by
Bancorp.
Each of the Company, Bank and Bancorp has agreed that it will use its
best efforts to obtain, prior to delivering the offering document, any necessary
state securities laws or "blue sky" permits and approvals, provided that neither
Bancorp nor the surviving corporation are required to submit to general
jurisdiction in any state.
The Company has agreed that will not take any action that would cause
the transactions contemplated by the merger agreement to be subject to any state
takeover statute and it will take the necessary steps to exempt and ensure the
continued exemption of the transactions contemplated by the merger agreement and
if necessary, challenge the validity or applicability of any applicable state
takeover law.
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The Company has also agreed that, except for those consents of third
parties previously disclosed in the merger agreement, it will take all necessary
steps to ensure that the entering into the merger agreement and the consummation
of the transactions contemplated by the merger agreement do not and will not (a)
result in the grant of any rights to any person under the governing documents of
the Company or under any agreement to which the Company or any of its
subsidiaries is a party, and (b) restrict or impair the ability of Bancorp to
exercise the rights granted under the merger agreement.
The Company has agreed that it will indemnify, defend and hold harmless
any person who is or was at any time prior to the date of the merger agreement,
or who becomes prior to the effective date of the merger, a director, officer,
or employee of the Company or the Bank made a party based in whole or in part
because of the merger, or any of the transactions contemplated by the merger
agreement, from and against all losses, claims, damages, liabilities, costs,
expenses, judgments, fines and settlement amounts paid or incurred in connection
with any claim, action, suit, proceeding or investigation that is based in whole
or in part or arises out of the merger or any of the transactions contemplated
by the merger agreement.
Each of the Company and Bancorp has agreed that from the date of the
merger agreement to the effective date, it will (a) cause its representatives to
confer regularly with representatives of the other, (b) notify the other party
of any material change in the business or operation if it or its subsidiaries,
(c) notify the other party of any material complaints, investigations or
hearings, and (d) notify the other party of the initiation or threat of material
litigation involving or relating to it or its subsidiaries, or any other event
or condition that might reasonably be expected to cause any of its
representations or warranties set forth in the merger agreement not to be true
and correct in all material respects.
Bancorp also agreed that it will use its best efforts to (1) ensure the
fulfillment of the cash commitments of members of the Investor Group, and (2)
complete the financing pursuant to the commitment letter of First Tennessee Bank
National Association as set forth in the merger agreement.
CONDITIONS TO THE MERGER
The obligations of each of the Company, the Bank and Bancorp to
consummate the merger are subject to the satisfaction of certain conditions
including without limitation:
(a) approval and adoption of the merger agreement by the requisite vote
of the shareholders of the Company;
(b) the receipt of all necessary authorizations and consents by the
appropriate regulatory authorities and the expiration of any applicable
waiting period;
(c) the absence of any order, decree or injunction that would enjoin or
prohibit consummation of any of the transactions contemplated by the
merger agreement; and
(d) receipt by Bancorp of financing from First Tennessee Bank National
Association in substantially the same manner and on terms and
conditions substantially similar to those set forth in the commitment
letter included in the merger agreement.
The obligation of Bancorp to consummate the merger is subject to
certain conditions including, without limitation:
(a) receipt of an opinion from counsel to the Company and the Bank;
(b) the truth and correctness, in all material respects, of the
representations and warranties of the Company and the Bank contained in
the merger agreement;
(c) the Company's and the Bank's performance of or compliance, in all
material respects, with their obligations under the merger agreement;
(d) receipt of an officer's certificate from the Company and the Bank
certifying the fulfillment of the agreements and covenants made in the
merger agreement;
(e) the absence of any material adverse change in the financial
position or results of operation of the Company or the Bank and the
absence of any loss or damage to properties of the Company or the Bank
that materially affects their ability to conduct their businesses;
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(f) receipt of an officer's certificate from the Company and the Bank
certifying the fulfillment of (e) above;
(g) the Company's capital of at least $8.0 million on the effective
date of the merger;
(h) the Bank's allowance for possible loan and lease losses will not be
less than 1.25% of the Bank's total outstanding loans on the effective
date of the merger; and
(i) receipt of agreements from certain directors of the Company and the
Bank to refrain from competing against the Company for a period of 18
months after the effective date of the merger.
The obligation of the Company and the Bank to consummate the merger is
subject to certain conditions including, without limitation:
(a) receipt of an opinion from counsel to Bancorp;
(b) the truth and correctness, in all material respects, of the
representations and warranties of Bancorp contained in the merger
agreement;
(c) Bancorp's performance of or compliance, in all material respects,
with its obligations under the merger agreement;
(d) receipt of an officer's certificate from Bancorp certifying the
fulfillment of the agreements and covenants made in the merger
agreement; and
(e) the absence of any material adverse change in the financial
position or results of operations of Bancorp and the absence of any
loss of damage to its properties that materially affects its ability to
conduct its business; and
(f) receipt of an officer's certificate from Bancorp certifying the
fulfillment of (e) above.
TERMINATION AND EXPENSES
Prior to the effective date, the merger agreement may be terminated by
(a) mutual consent, (b) either Bancorp or the Company if the other party
materially breaches a representation, warranty, covenant or agreement contained
in the merger agreement and fails to cure such breach within thirty (30) days
after receipt of written notice of the breach, or (c) if the merger has not been
consummated by March 31, 2000. The merger agreement may also be terminated by
the Company if the requisite vote of its shareholders is not obtained at the
special meeting.
Bancorp will be liable to the Company for a termination fee in the
amount of $100,000 if Bancorp fails to fulfill its obligations to consummate the
transactions contemplated by the merger agreement for any reason other than a
termination of the merger agreement for any of the reasons listed above or the
failure by the Company to fulfill any of the conditions in the merger agreement.
This termination fee is due and payable to the Company fifteen (15) days after
the fulfillment or written waiver of each of the conditions set forth in the
merger agreement.
The Company will be liable to Bancorp for a termination fee of $250,000
if the Company enters into an agreement with another party to acquire the
Company or the Bank or a third party acquires more than 25% of the outstanding
shares of the Company prior to the termination of the merger agreement.
Subject to the termination fees described above, if the merger
agreement is terminated, it will become void and have no effect, without
liability on the part of any parties or their respective directors, officers or
shareholders, other than any liability for damages due to a breach of any
representation, warranty, covenant or agreement.
INTERESTS OF CERTAIN MEMBERS OF MANAGEMENT IN THE MERGER
In considering the merger, the Company's shareholders should be aware
that two members of the board and management of the Company have interests that
are in addition to the interests of the Company's shareholders generally and may
cause them to have potential conflicts of interest.
Interests of Director Pat Carnal
Director Pat Carnal is a member of the Investor Group. As a member of
the Investor Group, Mr. Carnal's shares of Company common stock will be retained
as shares of the surviving corporation. In addition, the Investor
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<PAGE> 20
Group anticipates that Mr. Carnal will serve as a director of the surviving
corporation. None of the other Company directors will serve as directors of the
surviving corporation.
Interests of Former Director Howard Tignor
The Company and the Bank have entered into an agreement with former
Director Howard Tignor which terminates Mr. Tignor's employment agreement with
the Company in consideration of a cash payment. The agreement provides that Mr.
Tignor will receive a cash payment of $25,000 in the event the merger is
completed, payable within two business days after the effective date.
Severance Arrangements
The Company has established a severance arrangement for employees of
the Company. Under this arrangement, any Company or Bank employee terminated as
a result of the merger will be granted a severance payment of one week of base
pay for each year the employee has been employed by the Company or the Bank up
to a maximum of eight weeks of severance pay.
Indemnification
Bancorp has agreed that the Company, as the surviving corporation, to
the full extent permitted by the Tennessee Business Corporation Act as in effect
from time to time, will indemnify the present and former officers and directors
of Company from any loss, claim, damage, cost or expense suffered due to the
fact that such person was an officer or director of the Company prior to the
completion of the merger.
ACCOUNTING TREATMENT
The Company, as the surviving corporation, intends to treat the merger
as a purchase for accounting purposes.
APPRAISAL RIGHTS
The following summary of applicable provisions of Tennessee state law
governing the rights of Company shareholders is qualified in its entirety by
reference to Appendix B. Any shareholder entitled to vote on the merger
agreement has the right to receive payment of the fair value of their shares of
Company common stock upon compliance with Sections 48-23-202 and 48-23-204 of
the Tennessee Business Corporation Act (the "TBCA").
Filing Written Objection and Vote Against the Merger
A shareholder may not dissent as to less than all of the shares that
the shareholder beneficially owns. A nominee or fiduciary may not dissent on
behalf of any beneficial owner as to less than all of the shares of such
beneficial owner held of record by such nominee or fiduciary. A beneficial owner
asserting dissenters' rights to shares held on such owner's behalf must submit
to the Company written consent of the record shareholder of the Company to the
dissent not later than the time the beneficial shareholder asserts dissenters'
rights. Any shareholder intending to enforce this right must not vote in favor
of the merger and the merger agreement and must file written notice of the
shareholder's intent to demand payment for the shareholder's shares (the
"Objection Notice") with the secretary of the Company either before the special
meeting or before the vote is taken at the special meeting. The Objection Notice
must state that the shareholder intends to demand payment for the shareholder's
shares of common stock if the merger is effected. A vote against approval of the
merger and the merger agreement will not, in and of itself, constitute an
Objection Notice satisfying the requirements of Section 48-23-202 of the TBCA. A
failure to vote will not constitute a waiver of dissenters' rights as long as
the requirements of Sections 48-23-101 through 48-23-302 of the TBCA are
complied with. HOWEVER, ANY SHAREHOLDER WHO EXECUTES A PROXY AND WHO DESIRES TO
PURSUE HIS OR HER DISSENTERS' RIGHTS MUST MARK THE PROXY "AGAINST" THE PROPOSAL
RELATING TO THE MERGER BECAUSE IF THE PROXY IS LEFT BLANK, IT WILL BE VOTED
"FOR" THE PROPOSAL RELATING TO THE MERGER.
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Notice of the Effective Date
If the merger agreement is approved, each shareholder who has filed an
Objection Notice will be notified by the Company of the approval within ten days
of the special meeting (the "Dissenters' Notice"). The Dissenters' Notice will
(i) state where dissenting shareholders must (a) send the Payment Demand (as
defined below) and where and when they must (b) deposit their common stock
certificates, (ii) inform holders of uncertificated shares of the extent of any
restrictions on the transferability of such shares, (iii) be accompanied by a
form for demanding payment that includes the date of the first announcement to
the news media or to the Company's shareholders of the terms of the proposed
merger, (iv) set a date by which the Company must receive the Payment Demand,
which may not be fewer than one month or more than two months after the date the
Dissenters' Notice is delivered, and (v) be accompanied by a copy of Sections
48-23-101 through 48-23-302 of the TBCA.
Written Demand
Within the time prescribed in the Dissenters' Notice, a shareholder
electing to dissent must make a demand for payment (the "Payment Demand"),
certify whether the shareholder acquired beneficial ownership of the shares
before December 8, 1999 (the date of the first public announcement of the
principal terms of the merger agreement), and deposit the shareholder's common
stock certificates in accordance with the terms of the Dissenters' Notice. Upon
filing the Payment Demand and depositing the common stock certificates, the
shareholder will retain all other rights of a shareholder until these rights are
canceled or modified by consummation of the merger. A Payment Demand may not be
withdrawn unless the Company consents to the withdrawal. Failure to comply with
these procedures will cause the shareholder to lose his or her dissenters'
rights to payment for the shares. Consequently, any shareholder who desires to
exercise such shareholder's rights to payment for the shareholder's shares is
urged to consult such shareholder's legal advisor before attempting to exercise
these rights.
As soon as the merger is completed, or upon receipt of a Payment
Demand, the Company shall, pursuant to Section 48-23-206, pay to each dissenting
shareholder who has complied with the requirements of Section 48-23-204 of the
TBCA, the amount that the Company estimates to be the fair value of the shares
of common stock, plus accrued interest. Section 48-23-206 of the TBCA requires
the payment to be accompanied by (i) certain financial statements of the
Company, (ii) a statement of the Company's estimate of fair value of the shares
and explanation of how the interest was calculated, (iii) notification of rights
to demand payment and (iv) a copy of Sections 48-23-101 through 48-23-302 of the
TBCA. As authorized by Section 48-23-208, the Company intends to delay any
payments with respect to any shares (the "after-acquired shares") held by a
dissenting shareholder which were not held by such shareholder on December 8,
1999, the date of the first public announcement of the terms of the merger
agreement. When payments are withheld, Sections 48-23-208(b) and 48-23-209(a)
requires the Company, after the merger, to send to the holder of the
after-acquired shares an offer to pay the holder an amount equal to the
Company's estimate of their fair value plus accrued interest, together with an
explanation of the calculation of interest and a statement of the holder's right
to demand payment under Section 48-23-209.
If the merger is not consummated within two months after the date set
for demanding payment and depositing the common stock certificates, the Company
shall return the deposited common stock certificates and release the transfer
restrictions imposed on uncertificated shares. If, after returning the deposited
common stock certificates and releasing transfer restrictions, the merger is
consummated, the Company must send a new Dissenters' Notice and repeat the
procedure set forth above.
If the dissenting shareholder believes that the amount paid by the
Company pursuant to Section 48-23-206 or offered under Section 48-23-208 is less
than the fair value of his or her shares or that the interest due is calculated
incorrectly, or if the Company fails to make payment (or, if the merger has not
consummated, Company does not return the deposited common stock certificates or
release the transfer restrictions imposed on uncertificated shares) within two
months after the date set in the Dissenters' Notice, then the dissenting
shareholder may, within one month after (i) the Company made or offered payment
for the shares or failed to pay for the shares or (ii) the Company failed to
return deposited common stock certificates or release restrictions on
uncertificated shares timely, notify the Company in writing of the dissenting
shareholder's own estimate of the fair value of such shares (including interest
due) and demand payment of the estimate (less any payment previously received).
Failure to notify the Company in writing of a demand
- 15 -
<PAGE> 22
for payment within one month after the Company made or offered payment for the
shares will constitute a waiver of the right to demand payment.
Appraisal
If the Company and the dissenting shareholder cannot agree on a fair
price two months after the Company receives the a demand for payment, the
statute provides that the Company will institute judicial proceedings in a court
of record with equity jurisdiction in Henderson County, Tennessee (the "Court")
to fix (i) the fair value of the shares immediately before consummation of the
merger, excluding any appreciation or depreciation in anticipation of the
merger, and (ii) the accrued interest. The fair value of the common stock could
be more than, the same as, or less than the $14.75 per share value as described
in this proxy statement. The Company must make all dissenters whose demands
remain unsettled parties to the proceeding and all the parties must be served
with a copy of the petition. The Court may, in its discretion, appoint an
appraiser to receive evidence and recommend a decision on the question of fair
value. The Court is required to issue a judgment for the amount, if any, by
which the fair value of the shares, as determined by the Court, plus interest,
exceeds the amount paid by the Company or for the fair value, plus accrued
interest, of such shareholder's after-acquired shares for which the Company
elected to withhold payment. If the Company does not institute the proceeding
within such two month period, the Company shall pay each dissenting shareholder
whose demand remains unsettled the respective amount demanded by each
shareholder.
Payment and Costs
The Court will assess the costs and expenses of such proceeding
(including reasonable compensation for and the expenses of the appraiser by
excluding fees and expenses of counsel and experts) against the Company, except
that the Court may assess such costs and expenses as it deems appropriate
against any or all of the dissenting shareholders if it finds that their demand
for additional payment was arbitrary, vexatious or otherwise not in good faith.
The Court may assess fees and expenses of counsel and experts in amounts the
Court finds equitable: (i) against the Company, if the Court finds that the
Company did not substantially comply with the relevant requirements of the TBCA
or (ii) against either the Company or any dissenting shareholder, if the Court
finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith. If the Court finds that the
services of counsel for any dissenter were of substantial benefit to other
dissenters and that the fees of counsel should be assessed against the Company,
the Court may award reasonable fees to such counsel to be paid out of amounts
awarded to benefitted dissenters.
The foregoing is a summary of all applicable provisions of the TBCA
which shareholders must comply with to exercise their dissenters' rights. This
summary is not intended to be a complete statement of such provisions, and is
qualified in its entirety by reference to such sections, which are included as
Appendix B hereof.
Notices
Dissenting shareholders of the Company should send any communications
regarding their rights to 19 Natchez Trace Drive, P.O. Box 710 Lexington,
Tennessee 38351, Attention: Secretary. All communications should be signed by or
on behalf of the dissenting shareholder in the form in which the shares are
registered on the books of the Company.
ANY SHAREHOLDER WHO DESIRES TO EXERCISE DISSENTERS' RIGHTS SHOULD CAREFULLY
REVIEW THE TBCA AND IS URGED TO CONSULT HIS OR HER LEGAL ADVISOR BEFORE
EXERCISING OR ATTEMPTING TO EXERCISE THESE RIGHTS.
- 16 -
<PAGE> 23
MARKET PRICES AND DIVIDENDS
An established public trading market does not exist for the Company's
common stock, but a few brokers make a market from time to time over the
counter. The following table sets forth the high and low bid quotations for the
Company's common stock in the over the counter market for fiscal years 1998 and
1999. The following quotations were taken from the National Quotation Bureau
Report with quotes supplied by the National Association of Securities Dealers,
Inc. through the NASD OTC Bulletin Board. They represent interdealer prices
without retail markup, markdown or commission and may not necessarily represent
actual transactions. On the Record Date, the Company had 152 shareholders of
record and based on information available to it, the Company believes it has
over 250 beneficial owners of its Common Stock.
<TABLE>
<CAPTION>
High Low Dividends Paid
---- --- --------------
<S> <C> <C> <C>
1998
First quarter................ $ 12.00 $11.00 $.05
Second quarter............... 13.00 11.75 .05
Third quarter................ 13.375 9.00 .05
Fourth quarter............... 11.25 8.25 .05
1999
First quarter................ 11.25 10.25 .10
Second quarter............... 14.00 10.50 .10
Third quarter................ 14.00 12.00 .10
Fourth quarter............... 13.50 12.25 .10
</TABLE>
No dividends on the Common Stock were paid during fiscal years 1996 or
1997. The Merger Agreement provides that Company shareholders of record on March
10, 2000 will be paid a dividend of $.10 per share of Company stock on March 31,
2000. On December 7, 1999, the last business day prior to the announcement of
the merger agreement, the ask price of a share of Company common stock was
$12.25.
- 17 -
<PAGE> 24
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax
consequences of the merger is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations thereunder, judicial
authority, administrative rulings and practice as of the date hereof. The
following discussion does not address the federal income tax consequences to
special classes of taxpayers, including, without limitation, foreign
corporations, tax exempt entities and persons who acquired their shares of
common stock pursuant to the exercise of an employee option or otherwise as
compensation.
Shareholders are encouraged to consult their tax advisors concerning
the federal income tax consequences in their particular circumstances, as well
as any tax consequences arising under foreign, state or local law.
The cancellation of shares of common stock in exchange for cash
pursuant to the merger will be a taxable transaction to the holders of the
shares for federal income tax purposes and may also be a taxable transaction
under applicable state, local and other tax laws. The merger will not be a
taxable transaction for federal income tax purposes to shareholders who are
members of the Investor Group.
In general, a shareholder who receives the merger consideration will
recognize gain or loss equal to the difference between the adjusted tax basis of
his shares of common stock and the amount of cash received in exchange for the
shares. The gain or loss will be capital gain or loss if, as should be the case
for most holders of common stock, the shares are capital assets in the hands of
the shareholder and will be long-term capital gain or loss if the holding period
for the common stock is more than one year. The foregoing discussion may not
apply to shareholders who acquired their common stock pursuant to the exercise
of stock options or other compensation arrangements with Company, who are not
citizens or residents of the United States or who are otherwise subject to
special tax treatment under the Code. In addition, a shareholder may be required
to allocate the adjusted tax basis of his shares of common stock to the receipt
of the Merger Consideration to determine the actual gain or loss with respect to
the receipt of the consideration.
Each holder of common stock who receives the merger consideration will,
in general, be required to provide to the Company a social security or other
taxpayer identification number, or in certain instances other information, in
order to avoid "back-up withholding" requirements which might otherwise apply
under the Code. Any person who does not furnish this information may be subject
to a penalty imposed by the Internal Revenue Service.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT NECESSARILY
SET FORTH ALL OF THE TAX CONSEQUENCES OF THE MERGER THAT MAY BE RELEVANT TO ALL
SHAREHOLDERS IN ALL CIRCUMSTANCES. SHAREHOLDERS SHOULD THEREFORE CONSULT THEIR
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS.
- 18 -
<PAGE> 25
COMPANY SELECTED FINANCIAL DATA
The following table presents for the Company, on a historical basis,
selected financial data and ratios. This information is based on the
consolidated financial statements of the Company, included herein, and should be
read in conjunction with the financial statements and the notes included with
the financial statements.
<TABLE>
<CAPTION>
Nine Months ended Years ended
September 30, December 31,
---------------------- ---------------------
1999 1998 1998 1997
-------- -------- -------- -------
(unaudited)
(Dollars in thousands except per share data)
<S> <C> <C> <C> <C>
SUMMARY INCOME STATEMENTS:
Interest income ........................ $ 2,124 $ 1,864 $ 2,541 $ 2,046
Less interest expense .................. 1,029 910 1,257 1,124
-------- -------- -------- -------
Net interest income .................... 1,095 953 1,284 922
Provision for loan losses .............. 68 96 231 54
-------- -------- -------- -------
Net interest income after provision for
loan losses .......................... 1,027 859 1,053 868
Noninterest income ..................... 143 117 161 104
Noninterest expense .................... 741 674 871 646
-------- -------- -------- -------
Income before income taxes ............. 429 302 343 326
Applicable income taxes ................ 149 96 130 102
-------- -------- -------- -------
Net income .................... $ 280 $ 206 $ 213 $ 224
======== ======== ======== =======
COMMON STOCK DATA:
Net income per common share ............ $ 0.39 $ 0.29 $ 0.30 $ 0.59
Cash dividends declared per common share 0.30 0.15 0.20 0.14
Shares outstanding at end of period .... 712,877 712,877 712,877 712,877
SELECTED PERIOD-END BALANCES:
Total assets ........................... $ 39,806 $ 35,641 $ 38,688 $31,216
Total loans (net of unearned income) ... 29,192 28,843 26,403 19,544
Investment Securities .................. 4,835 6,486 5,369 7,694
Earning assets ......................... 37,412 33,764 36,818 29,768
Deposits ............................... 30,260 25,937 28,994 21,416
Stockholders' equity ................... $ 8,605 $ 8,675 $ 8,647 $ 8,568
SELECTED RATIOS:
Return on average equity ............... 4.34% 3.17% 3.43% 5.17%
Return on average assets ............... .94 .77 .56 .82
Net interest margin .................... 2.93 3.76 3.65 3.59
Average equity to average assets ....... 21.62 24.34 16.31 15.85
Leverage ratio ......................... 17.50 18.20 17.30 21.10
Tier 1 capital ratio ................... 29.30 35.80 31.00 28.80
Total risk-based capital ratio ......... 30.50% 37.15% 32.20% 29.75%
Book value per share ................... $ 12.08 $ 12.17 $ 12.13 $ 12.02
</TABLE>
- 19 -
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated under the laws of the State of Tennessee
for the purpose of holding all of the capital stock of Lexington First Federal
Savings Bank ("Lexington First Federal") following the second step conversion of
its former mutual holding company (the "Conversion and Reorganization"), which
was completed on December 11, 1997. The Company's principal business is that of
directing, planning and coordinating the business activities of the Bank.
Immediately following the Conversion and Reorganization, Lexington First Federal
converted to a national bank with the name Community National Bank of Tennessee
and remained a wholly-owned subsidiary of the Company (the "Bank Conversion").
Upon the completion of the Bank Conversion, the Company became a bank holding
company. The Company has no significant assets other than its investment in the
Bank, four commercial loans totaling $772,000 as of September 30, 1999, and
certain cash and cash equivalents. At September 30, 1999, on a consolidated
basis, the Company had total assets of $39.8 million, net loans receivable of
$29.2 million, cash and investment securities of $6.7 million, mortgage-backed
securities of $2.2 million, total deposits of $30.3 million and stockholders'
equity of $8.6 million.
The Bank is a national bank operating through two offices in Lexington,
Tennessee, serving Henderson County in southwestern Tennessee. The Bank is the
successor to Lexington First Federal, and all references to the Bank also
include its predecessor, Lexington First Federal. Until February 1997, the
Bank's primary business, as conducted through its office located in Lexington,
Tennessee, was the origination and holding of mortgage loans secured by
single-family residential real estate located primarily in Henderson County,
Tennessee, with funds obtained primarily through the attraction of savings
deposits, certificate accounts with terms of 18 months or less, and Federal Home
Loan Bank ("FHLB") advances. The Bank also made some construction loans on
single-family residences, savings account loans, and second mortgage consumer
loans. The Bank purchased mortgage-backed securities and invested in other
liquid investment securities.
Beginning in February 1997, the Bank's emphasis shifted to full service
banking, diversification of the loan portfolio, the origination of long term
fixed rate mortgage loans solely for sale in the secondary market, and the
offering of a greater variety of transaction accounts. Current Bank policy
restricts fixed rate loans to five years with limited exceptions. The reduction
and control of interest rate risk, and the origination of variable rate loans,
short term loans and balloon loans of one, two, three and five years are
emphasized. The Bank's emphasis is the diversification in the portfolio with
quality consumer and commercial loans in order to both reduce and control
interest rate risk, and to increase the interest rate spread.
The Bank is primarily engaged in attracting deposits from the general
public and using those and other available sources of funds to originate loans
secured by single-family residences located in Henderson County and surrounding
counties in West Tennessee. To a lesser extent, Lexington also originates
construction loans, land loans and consumer loans. It also has a significant
amount of investments in mortgage-backed securities, United States Government
and federal agency obligations, and tax exempt securities.
The profitability of the Bank depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing deposits and
borrowings. The Bank's net income also is dependent, to a lesser extent, on the
level of its noninterest income and its non-interest expenses, such as
compensation and benefits, occupancy and equipment, insurance premiums, and
miscellaneous other expenses, as well as federal income tax expense.
FINANCIAL CONDITION - SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998
Consolidated assets of Community National were $39,805,978 as of
September 30, 1999, compared to $38,687,888 on December 31, 1998, an increase of
$1,118,090. This increase was composed of an increase in net loans receivable of
$2,788,617 and an increase in investment securities of $377,194. These increases
were offset by decreases
- 20 -
<PAGE> 27
in mortgage backed securities of $912,245, a decrease in time deposits of
$1,125,000, a decrease in premises and equipment of $60,060, and a decrease in
cash of $8,629.
Loans receivable, net, increased to $29,191,649 on September 30, 1999
from $26,403,032 on December 31, 1998, an increase of $2,788,617.
Mortgage-backed securities decreased $912,245 to $2,224,185 at September 30,
1999 from $3,136,430 on December 31, 1998. The increase in loans is attributable
to increased advertising and more competitive loan products. The decrease in
mortgage backed securities is primarily caused by principal payments.
Deposits totaled $30,259,566 on September 30, 1999, an increase of
$1,265,758 from $28,993,808 on December 31, 1998. The increase in deposits is
primarily due to increased advertising and was primarily used to fund the
increase in loans receivable.
Stockholders' equity was $8,646,825 on December 31, 1998, compared to
$8,604,668 on September 30, 1999, a decrease of $42,157. This decrease was due
to earnings for the year of $279,836, offset by the Company's quarterly cash
dividends of $213,863 and an increase in unrealized loss on available-for-sale
securities of $108,130.
RESULTS OF OPERATIONS - SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Net income for the nine months ended September 30, 1999 was $279,836,
an increase of $73,760 compared to $206,076 for the nine months ended September
30, 1998. The increase was primarily due to an increase in net interest income
of $141,240 offset by an increase in non-interest expense of $66,963.
Earnings per share for the nine months ended September 30, 1999, were
$0.39 per share based on an average of 712,877 shares outstanding compared to
$0.29 per share for the comparable nine months ended in 1998 based on an average
of 712,877 shares outstanding.
Net interest income after provision for loan losses for the nine months
ended September 30, 1999 was $1,027,051 compared to $858,730 for the nine months
ended September 30, 1998, an increase of $168,321. This increase was a result of
interest income increasing $260,074, from $1,863,738 for the 1998 nine-month
period to $2,123,812 for the 1999 nine-month period, while interest expense
increased $118,834 from $910,427 in 1998 to $1,029,261 in 1999. The increases in
interest income and interest expense are both due to increases in the average
balance of interest-earning assets and interest-earning liabilities.
Non-interest income increased from $117,241 for the nine months ended
September 30, 1998 to $143,025 for the nine months ended September 30, 1999. The
increase of $25,784 was due to higher service charge income.
Non-interest expense for the nine months ended September 30, 1999 was
$741,090, an increase of $66,963 compared to $674,127 for the nine months ended
for September 30, 1998. The increase was due to higher compensation and benefits
expense and higher other operating expenses, which were caused by additional
personnel hired, and an increase in data processing expense.
PROVISIONS FOR LOAN LOSSES - SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
The provision for loan losses is based on the periodic analysis of the
loan portfolio by management. In establishing the provision, management
considers numerous factors including general economic conditions, loan portfolio
condition, prior loss experience and independent analysis. The provision for
loan loss for the nine months ended September 30, 1999 and 1998 are $67,500 and
$94,581 respectively. Based upon the analysis of the addition to established
allowances and the composition of the loan portfolio, management concluded that
the allowance is adequate. While current economic conditions in the Bank's
market are stable, future conditions will dictate the level of future allowances
for losses on loans.
The allowance for loan losses was 1.49% of total loans as of September
30, 1999, compared to 1.40% at December 31, 1998.
- 21 -
<PAGE> 28
NON-PERFORMING ASSETS - SEPTEMBER 30, 1999 COMPARED TO DECEMBER 31, 1998
On September 30, 1999, non-performing assets were $186,073 compared to
$430,000 on December 31, 1998. At September 30, 1999, the Bank's allowance for
loan losses was $435,999 compared to $368,375 at December 31, 1998. Loans are
considered non-performing when the collection of principal and/or interest is
not expected, or in the event payments are more than 90 days delinquent.
REGULATORY CAPITAL - SEPTEMBER 30, 1999
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios on total
risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations) and Tier 1 capital to adjusted total assets (as defined).
<TABLE>
<CAPTION>
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999
Total Risk-Based Capital
(To Risk-Weighted Assets) $7,108 30.5% $1,864 8.0% $2,330 10.0%
Tier 1 Capital
(To Risk-Weighted Assets) $6,815 29.3% $ 932 4.0% $1,398 6.0%
Tier 1 Capital
(To Adjusted Total Assets) $6,815 17.5% $1,556 4.0% $1,944 5.0%
</TABLE>
LIQUIDITY - SEPTEMBER 30, 1999
The Bank's principal sources of funds for investments and operations
are net earnings, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities. Deposits were $30.3 million at September 30, 1999.
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations. The required percentage is currently five percent of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less. The Bank maintained a liquidity ratio of 20.31% at September 30, 1999.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amounts due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash equivalents totaled $4.14
- 22 -
<PAGE> 29
million at September 30, 1999. The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated future deposit
flows.
Net cash provided by operating activities increased from $216,516 for
nine months ended September 30, 1998 to $404,973 for nine months ended September
30, 1999. The increase was due to the retirement of Federal Reserve Bank stock
of $81,050 and adjustments to accrued income and expense items.
FINANCIAL CONDITION - DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
Consolidated assets of the Bank were $38,687,889 as of December 31,
1998, compared to $31,215,702 on December 31, 1997, an increase of $7,472,187.
This increase was composed of an increase in net loans receivable of $6,858,810,
an increase in premises and equipment of $218,832, and an increase in cash of
$2,531,027. These increases were offset by decreases in mortgage backed
securities of $881,932 and in investment securities of $1,442,269. The 24%
annualized growth rate of assets is in accordance with the Company's growth
objectives.
Loans receivable, net increased to $26,403,032 on December 31, 1998
from $19,544,222 on December 31, 1997, an increase of $6,858,810.
Mortgage-backed securities decreased $881,932 to $3,136,430 at December 31, 1998
from $4,018,362 on December 31, 1997. The increase in loans is attributable to
increased advertising and more competitive loan products. The decrease in
mortgage backed securities is primarily caused by principal payments.
Deposits totaled $28,993,808 on December 31, 1998, an increase of
$7,577,761 from $21,416,047 on December 31, 1997. The increase in deposits is
primarily due to increased advertising and was primarily used to fund the
increase in loans receivable.
Stockholders' equity was $8,567,973 on December 31, 1997, compared to
$8,646,826 on December 31, 1998, an increase of $78,853. The increase was due to
reductions in unrealized loss on available-for-sale securities of $7,944,
earnings for the year of $213,485, off-set by the Company's quarterly cash
dividends of $142,576.
RESULTS OF OPERATIONS - DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
Net earnings for the year ended December 31, 1998 were $213,485, a
decrease of $10,492 compared to $223,977 for the year ended December 31, 1997.
The decrease was primarily due to an increase in non-interest expense of
$224,899 offset by an increase in net interest income of $362,430.
Earnings per share for the year ended December 31, 1998, were $0.30 per
share based on an average of 712,877 shares outstanding compared to $0.59 per
share for the year ended 1997 based on an average of 381,349 shares outstanding.
Net interest income after provision for loan losses for the year ended
December 31, 1998 was $1,053,285 compared to $868,147 for the year ended
December 31, 1997, an increase of $185,138. This increase was a result of
interest income increasing $495,578, from $2,045,888 in 1997 to $2,541,446 in
1998, while interest expense increased $133,148 from $1,123,939 in 1997 to
$1,257,087 in 1998. The increase in interest income and interest expense are
both due to increases in the average balance of interest-earning assets and
interest-earning liabilities.
Non-interest income increased from $103,692 for the year ended December
31, 1997 to $161,256 for the year ended December 31, 1998. The increase of
$57,564 was due to higher service charge income.
Non-interest expense for the year ended December 31, 1998 was $871,211,
an increase of $224,899 compared to $646,312 for the year ended December 31,
1997. The increase was due to higher compensation and benefits expense, higher
occupancy and equipment expense and higher other operating expenses which were
caused by additional personnel hired, and computer system upgrades in hardware
and software.
- 23 -
<PAGE> 30
PROVISIONS FOR LOAN LOSSES - DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
The provision for loan losses is based on the periodic analysis of the
loan portfolio by management. In establishing the provision, management
considers numerous factors including general economic conditions, loan portfolio
condition, prior loss experience and independent analysis. The provision for
loan loss for the year ended December 31, 1998 and 1997 are $231,094 and
$53,802, respectively. Based upon the analysis of the addition to established
allowances and the composition of the loan portfolio, management concluded that
the allowance is adequate. While current economic conditions in the Bank's
market are stable, future conditions will dictate the level of future allowances
for losses on loans.
NON-PERFORMING ASSETS - DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
On December 31, 1998, non-performing assets were $430,000 compared to
$248,000 on December 31, 1997. At December 31, 1998, the Bank's allowance for
loan losses was $368,375 or 85% of non-performing assets compared to $195,239 or
79% at December 31, 1997. Loans are considered non-performing when the
collection of principal and/or interest is not expected, or in the event
payments are more than 90 days delinquent. The allowance for loan losses was
1.38% of total loans as of December 31, 1998, compared to .99% at December 31,
1997.
REGULATORY CAPITAL - DECEMBER 31, 1998
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios on total
risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations) and Tier 1 capital to adjusted total assets (as defined).
<TABLE>
<CAPTION>
To Be Well Capitalized
Under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Risk-Based Capital
(To Risk-Weighted Assets) $6,783 32.1% $1,682 8.0% $2,102 10.0%
Tier 1 Capital
(To Risk-Weighted Assets) $6,519 31.0% $ 841 4.0% $1,261 6.0%
Tier 1 Capital ........... $6,519 17.3% $1,503 4.0% $1,878 5.0%
(To Adjusted Total Assets)
</TABLE>
LIQUIDITY - DECEMBER 31, 1998
The Bank's principal sources of funds for investments and operations
are net earnings, deposits from its primary market area, principal and interest
payments on loans and mortgage-backed securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment
- 24 -
<PAGE> 31
of maturing deposits. Deposits are considered a primary source of funds
supporting the Bank's lending and investment activities. Deposits were $29
million at December 31, 1998.
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations. The required percentage is currently five percent of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less. The Bank maintained a liquidity ratio of 23.3% at December 31, 1998.
The Bank's most liquid assets are cash and cash equivalents, which are
cash on hand, amount due from financial institutions, federal funds sold,
certificates of deposit with other financial institutions that have an original
maturity of three months or less and money market mutual funds. The levels of
such assets are dependent on the Bank's operating, financing and investment
activities at any given time. The Bank's cash and cash equivalents totaled $5.27
million at December 31, 1998. The variations in levels of cash and cash
equivalents are influenced by deposit flows and anticipated future deposit
flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 1998, the Financial Accounting Standards Board issued SFAS
No. 133. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those at fair value. If certain conditions are
met, a derivative may be specifically designated (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, and unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction.
This statement is not expected to have any significant effect on the
financial position of the Bank. In addition no other recent accounting
pronouncements have been issued that are expected to have any significant effect
on the financial position of the Bank that have not already been adopted by the
Bank.
- 25 -
<PAGE> 32
BUSINESS OF THE COMPANY AND THE BANK
GENERAL
THE COMPANY. The Company was organized under the laws of the State of
Tennessee in July 1997 at the direction of the board of directors of Lexington
First Federal Savings Bank ("Lexington First") in connection with the second
step conversion of Lexington First Federal Mutual Holding Company and the
reorganization of Lexington First as a subsidiary of the Company (the "Stock
Conversion"). On December 11, 1997, the Stock Conversion was consummated and the
Company completed its initial public offering of its common stock. A total of
485,759 shares were sold at $10.00 per share. Net proceeds from the offering
amounted to approximately $4.5 million. Immediately following the Stock
Conversion, Lexington First converted from a federal stock savings bank to a
national bank (the "Bank Conversion") known as Community National Bank of
Tennessee. Unless otherwise stated herein, references to the Bank refer to the
Bank and its predecessor, Lexington First. The Company is registered with and
subject to the regulation and supervision of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHCA").
The Company's principal business is overseeing the business of the Bank
and investing the portion of the net proceeds from its initial public offering
retained by it. The Company has no significant assets other than the outstanding
capital stock of the Bank, four commercial loans totaling $772,000 as of
September 30, 1999, and certain cash and cash equivalents. The Company has no
significant liabilities. Accordingly, the information set forth herein relates
primarily to the Bank. At September 30, 1999, the Company had consolidated total
assets of $39.8 million, deposits of $30.3 million and stockholders' equity of
$8.6 million.
The Company's principal executive office is located at the home office
of the Bank at 19 Natchez Trace Drive, Lexington, Tennessee 38351, and its
telephone number is (901) 968-6624. The Bank's branch building is located at 435
West Church Street, Lexington, Tennessee, and its telephone number is (901)
968-9599.
THE BANK. Until February 1997, the Bank's primary business, as
conducted through its office located in Lexington, Tennessee, was the
origination and holding of mortgage loans secured by single-family residential
real estate located primarily in Henderson County, Tennessee, with funds
obtained primarily through the attraction of savings deposits, certificate
accounts with terms of 18 months or less, and Federal Home Loan Bank ("FHLB")
advances. The Bank historically made long-term fixed rate loans, fixed-rate
balloon loans and a limited amount of adjustable-rate loans. The Bank also made
some construction loans on single-family residences, savings account loans, and
second mortgage consumer loans. The Bank purchased mortgage-backed securities,
and invested in other liquid investment securities.
Beginning in February 1997, the Bank's emphasis shifted to full service
banking, diversification of the loan portfolio, the origination of long term
fixed rate mortgage loans solely for sale in the secondary market, and the
offering of a greater variety of transaction accounts. Current Bank policy
restricts fixed rate loans to five years with limited exceptions. To reduce and
control interest rate risk, the Bank has emphasized the origination of variable
rate loans, short term loans and balloon loans of one, two, three and five
years. The business emphasis of the Bank is the diversification in the portfolio
with the origination of quality consumer and commercial business and commercial
real estate loans in order to both reduce and control interest rate risk, and to
increase the interest rate spread.
COMMUNITY NATIONAL BANK BRANCH. In the spring of 1998, a new full
service, high visibility branch office opened at 435 West Church Street,
Lexington, Tennessee. The branch has two drive-up windows, three inside teller
stations, two offices and desk in the lobby. The branch is equipped for full
service banking.
MARKET AREA
The Bank's market area comprises all of Henderson County and portions
of the neighboring counties of Decatur, Carroll, Madison and Chester in western
Tennessee. The market area is rural with the principal segment of the work force
employed in semi-skilled and unskilled jobs. Employment in these rural
communities or areas is largely in manufacturing, with significant employment
also coming from services, retail sales, transportation, utility and
- 26 -
<PAGE> 33
construction industries. A significant number of people are employed in Madison
County (sometimes referred to as the hub of West Tennessee), which is in the
western part of the Bank's market area. Major employers in the area include
Magnetek, Johnson Controls, Dayco/Mark IV Automotive, Columbus-McKinnon and Auto
Zone.
Tennessee's largest park, Natchez Trace State Park, with over 43,000
acres, has its headquarters in Henderson County. The Park is located in parts of
four counties. The Park, along with the Beech River Watershed Development
Authority, which operates seven lakes, provides Henderson County with numerous
jobs and is an attraction for tourists in the use of facilities for boating,
hunting, fishing, camping and the activities associated with open space and
water.
LENDING ACTIVITIES
GENERAL. The Bank, through its office in Lexington, Tennessee, had
primarily originated single-family residential real estate loans up to February
1, 1997. In the past the Bank had made fixed rate mortgage loans of ten,
fifteen, twenty and thirty years, resulting in above average interest rate risk.
Current Bank policy restricts fixed rate real estate loans to one year with
limited exceptions. The reduction and control of interest rate risk, and the
origination of variable rate loans and short term and balloon loans are
emphasized. Diversification of the portfolio with emphasis on consumer and
commercial lending began in 1997, and will continue in order to both reduce and
control interest rate risk and to increase the interest rate spread. In 1997 the
Bank prepared to originate long-term fixed rate mortgage loans to be sold in the
secondary market. The Bank does not originate these loans without a forward
commitment in place for sale, and these loans are not held in the Bank's loan
portfolio. The Bank also makes construction loans on residential and commercial
properties. The Bank is offering full lending services covering the lending
needs of the community with emphasis on, and soliciting of, loans of average to
above average quality in both the consumer and commercial sector. Consumer and
commercial real estate and commercial business loans totaling $8.6 million were
originated during the year ended December 31, 1998. At December 31, 1998, $17.5
million or 64.49% of the Bank's gross loan portfolio consisted of single-family
residential mortgage loans, as compared to 82.85% of the gross loan portfolio at
December 31, 1997. In 1998 the Bank added personal loans of $439,000,
agricultural loans of $204,000, mobile home loans of $146,000 and increased
commercial business loans to $1.6 million and commercial real estate loans to
$4.9 million, for a total of $6.5 million or 23.88% of the gross loan portfolio.
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the
Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1998 1997
----------------- ------------------
AMOUNT % AMOUNT %
--------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
One- to four-family.............................. $ 17,548 64.49% $ 16,599 82.85%
Commercial loans................................. 4,856 17.85 26 0.13
Construction loans:
One- to four-family.............................. 433 1.59 282 1.41
Consumer loans:
Savings account.................................. 377 1.39 561 2.80
Other consumer................................... 2,355 8.65 866 4.93
Commercial business................................. 1,641 6.03 1,700 8.48
--------- ------ ---------- ------
27,210 100.00% 20,034 100.00%
====== ======
Less:
Loans in process................................. 426 272
Deferred loan fees and discounts................. 13 23
Allowance for loan losses........................ 368 195
--------- ----------
Total......................................... $ 26,403 $ 19,544
========= ==========
</TABLE>
- 27 -
<PAGE> 34
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
DUE AFTER DUE AFTER DUE AFTER DUE AFTER
DUE DURING THE 1 THROUGH 3 THROUGH 5 THROUGH 10 THROUGH DUE AFTER 20
YEAR ENDING 3 YEARS AFTER 5 YEARS AFTER 10 YEARS AFTER 20 YEARS AFTER YEARS AFTER
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1998 1998 1998 1998 TOTAL
------ ------ ------ ------ ------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One- to four-family .... $3,690 $2,890 $3,116 $3,755 $3,089 $1,008 $17,548
Commercial ............. 1,084 396 2,309 818 249 -- 4,856
Construction loans:
One- to four-family .... 433 -- -- -- -- -- 433
Consumer loans:
Savings account ........ 354 23 -- -- -- -- 377
Other consumer ......... 1,085 324 790 100 56 -- 2,355
Commercial business .... 405 384 319 281 252 -- 1,641
------ ------ ------ ------ ------ ------ -------
Total .............. $7,051 $4,017 $6,534 $4,954 $3,646 $1,008 $27,210
====== ====== ====== ====== ====== ====== =======
</TABLE>
The next table sets forth at December 31, 1998, the dollar amount of
all loans due one year or more after December 31, 1998 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FIXED RATE ADJUSTABLE RATE
---------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Real estate loans:
One- to four-family $12,738 $1,120
Commercial ......... 3,772 --
Construction:
One- to four-family -- --
Consumer loans:
Savings accounts ... 23 --
Other consumer loans 1,270 --
Commercial business 1,236 --
------- ------
Total ............ $19,039 $1,120
======= ======
</TABLE>
- 28 -
<PAGE> 35
ONE TO FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. The mortgage loans
originated by the Bank are primarily conventional mortgage loans, originated in
amounts of less than $100,000, secured by single-family properties located in
the Bank's market area. Loans on single-family residential properties accounted
for approximately 64.49% of the Bank's loan portfolio as of December 31, 1998
and 58.85% as of September 30, 1999.
The Bank's mortgage loan originations had previously been for terms of
10, 15 and 20 years, amortized on a monthly basis with interest and principal
due each month. Beginning in 1998, the Bank has emphasized the origination of
balloon loans with one, three and five year terms, as well as other short-term
and variable rate loans. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by the Bank contain "due-on-sale" clauses
which permit the Bank to accelerate the indebtedness of the loan upon transfer
of ownership of the mortgaged property. The Bank's lending policies generally
limit the maximum loan-to-value ratio on mortgage loans secured by
owner-occupied properties to 90% of the lesser of the appraised value or
purchase price of the property.
The Bank historically had retained all adjustable rate mortgages it
originated, which are designed to reduce the Bank's exposure to changes in
interest rates. The Bank's adjustable rate mortgages include caps on increases
or decreases of 2% per year, based on an index tied to the prime rate as
published in the Wall Street Journal. The Bank will make only variable rate or
one year balloon real estate loans.
The Bank also originates conventional fixed rate long-term mortgages
for sale in the secondary market. Although the Bank had, in past years, retained
these loans for its own portfolio, the Bank plans to sell all future
conventional long-term fixed rate mortgages in the secondary market. During the
years ended December 31, 1998 and 1997, the Bank originated $4.6 million and
$4.5 million in fixed rate mortgages, respectively, while $4.5 million and
$800,000 in mortgage loans during such periods, respectively, were paid off, due
to loans which were refinanced during those periods.
CONSTRUCTION LENDING. The Bank engages in a limited amount of
construction lending, involving loans to qualified borrowers for construction of
single-family residential properties. These properties are primarily located in
the Bank's market area. As of December 31, 1998, the Bank's loan portfolio
included 27 construction loans, totaling $433,000, all of which were to convert
to permanent loans. As of September 30, 1999, construction loans totalled
$270,000. All construction loans are secured by a first lien on the property
under construction. Loan proceeds are disbursed in increments as construction
progresses and as inspection warrants. Construction loans can have either fixed
or adjustable interest rates, and as permanent loans, have a maximum
loan-to-value ratio of 80%. Borrowers must satisfy all credit requirements that
apply to permanent mortgage loan refinancing.
Loans involving construction financing present a greater level of risk
than loans for the purchase of existing homes, since collateral value and
construction costs can only be estimated at the time the loan is approved, and
actual costs may exceed these estimates. The Bank has sought to minimize this
risk by limiting construction lending to qualified borrowers in the Bank's
market area and by limiting the number of construction loans outstanding at any
time.
COMMERCIAL BUSINESS AND COMMERCIAL AND MULTI-FAMILY REAL ESTATE
LENDING. Historically, the Bank has engaged in very little commercial real
estate lending, except to facilitate the sale of real estate owned. This changed
in 1997 and 1998, as the Bank originated a significant amount of commercial
business and commercial real estate loans. At December 31, 1998, the Bank had in
its portfolio commercial real estate loans totaling $4.9 million. The Bank will
consider making any such loans that meet the Bank's underwriting standards, in
keeping with its goals of meeting the credit needs of the community by seeking
high quality business and commercial and multi-family real estate loans. The
Bank has no multi-family real estate loans at this time. Two commercial real
estate loans totaling $284,000 were placed on non-accrual status as of December
31, 1998. As of September 30, 1999, no commercial real estate loans were on
nonaccrual status.
As part of its strategy to become more active in commercial banking
activities, the Bank expects that it will become significantly more involved in
commercial real estate and commercial business lending in its market area.
- 29 -
<PAGE> 36
Subject to market conditions and demand, the Bank expects to originate loans to
small retail, commercial, agricultural and manufacturing businesses in Henderson
County, Tennessee. Since President Tignor joined the Bank, the Bank has
originated or agreed to loan commitments for various commercial business and
commercial real estate loans in the local market area. Total commercial business
loans outstanding as of December 31, 1998 were $1.6 million, the largest of
which was for $515,000. The Bank plans to continue solicitation of commercial
loans.
Multi-family residential and commercial real estate lending, as well as
commercial business lending, entail significant additional risks as compared
with single-family residential property lending. Multi-family residential and
commercial real estate loans, as well as commercial business lending, typically
involve larger loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project, retail establishment or business. These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, or the profitability of the
business and, as such, may be subject to a greater extent to adverse conditions
in the economy generally. To minimize these risks, the Bank generally limits
itself to its market area or to borrowers with which it has prior experience or
who are otherwise known to the Bank. In addition, in the case of commercial
mortgage loans or commercial business loans made to a partnership or a
corporation, the Bank seeks, whenever possible, to obtain personal guarantees
and annual financial statements of the principals of the partnership or
corporation.
CONSUMER LENDING. The Bank makes savings account loans in amounts which
may not exceed the account balance (plus accrued interest) at the due date. The
interest rate is set 2% above the rate being paid on the savings account, and
the account must be pledged as collateral to secure the loan.
The Bank also makes second mortgage loans and home equity lines of
credit on residential properties. Second mortgages may be made at the prevailing
interest rate at the time the loan is granted or may be structured as a variable
rate line of credit. The total outstanding indebtedness of the first and second
mortgages cannot exceed 90% of the appraised value of the property.
The Bank intends to significantly expand its consumer lending to
include automobile loans and personal loans. Consumer lending affords the Bank
the opportunity to earn yields higher than those obtainable on single-family
residential lending. However, consumer loans entail greater risk than do
residential mortgage loans, particularly in the case of loans which are
unsecured or secured by rapidly depreciable assets such as automobiles.
Repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness or personal bankruptcy. Further, the
application of various state and federal laws, including federal and state
bankruptcy and insolvency law, may limit the amount which may be recovered. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income and ability to repay the loan, and the
value of the collateral.
LOAN ORIGINATIONS, SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources. Residential mortgage loan originations
primarily come from walk-in customers and referrals by realtors, depositors and
borrowers. In addition, the Bank is aggressive in its loan advertising. Real
estate loans are originated by the Bank's staff of salaried loan officers.
Applications are processed in the Bank's office, and submitted for approval, as
noted below.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by a Bank appraiser or a fee appraiser approved by the Bank. The Board of
Directors of the Bank has the responsibility and authority for general
supervision over the lending policies of the Bank. The Board has established
written lending policies for the Bank and individual loan officers of the Bank
have been granted authority to approve loans up to varying specified dollar
amounts, depending upon the type of loan. In addition, the Officer's Loan
Committee, currently comprised of three loan officers, has the authority to
approve loans of up to $200,000. All loans in excess of $200,000 are approved by
the Loan Committee
- 30 -
<PAGE> 37
consisting of Pat Carnal, Stephen Milam, Stephen Lowry, Robert Thomas and Howard
Tignor. Loan applicants are promptly notified of the decision of the Bank.
It is the Bank's policy to record a lien on the real estate securing a
loan and to obtain a title opinion that the property is free of prior
encumbrances and other possible title defects. Borrowers must also obtain hazard
insurance policies prior to closing and, when the property is in a flood plain
as designated by the Department of Housing and Urban Development, pay flood
insurance policy premiums.
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a national bank to a person outstanding at one time
shall not exceed 15% of the institution's unimpaired capital and surplus. Loans
and extensions of credit fully secured by readily marketable collateral may
comprise an additional 10% of unimpaired capital and surplus. Under these
limits, the Bank's loans to one borrower were limited to $2.2 million at
December 31, 1998. At that date, the Bank had no lending relationships in excess
of the loans-to-one-borrower limit.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Set forth below is a table showing the Bank's loan origination and loan
sales activity for the periods indicated. The Bank purchased $49,000 in one- to
four-family loans during 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Loans originated:
Real estate loans:
One- to four-family .......... $ 4,640 $4,473
Multi-family ................. -- --
Commercial ................... 5,289 31
Construction loans:
One- to four-family .......... 983 755
Consumer loans:
Savings account .............. 261 417
Other consumer ............... 2,844 1,404
Commercial business loans ....... 228 1,796
------- ------
Total loans originated .. $14,245 $8,876
======= ======
Loans purchased:
Real estate loans:
One-to four-family residential $ 49 $ --
======= ======
Loans sold ......................... $ 1,384 $ 390
======= ======
</TABLE>
INTEREST RATES AND LOAN FEES. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan interest rates reflect factors such as general market
interest rate levels, the supply of money available to the financial
institutions industry and the demand for such loans. These factors are in turn
affected by general economic conditions, the monetary policies of the Federal
government, including the Federal Reserve Board, and general supply of money in
the economy.
In addition to interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and for miscellaneous services related to its loans. Income from these
activities varies from period to period with the volume and type of loans
originated, which in turn is dependent on prevailing mortgage interest rates and
their effect on the demand for loans in the markets served by the Bank. The Bank
hopes to increase its loan fee income by emphasizing the origination and
immediate sale of fixed-rate loans in the secondary mortgage market.
- 31 -
<PAGE> 38
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS. Management reviews the
Bank's portfolio on a regular basis. The Bank's collection procedures provide
that when a loan becomes past due 30 days, the borrower is contacted in person,
by telephone, or mail and payment is requested. If payment is not promptly
received, the borrower is contacted again, and efforts are made to formulate an
affirmative plan to cure the delinquency. After a loan becomes past due 90 days,
the Bank generally initiates legal proceedings. After residential mortgage loans
become past due more than 90 days, the Bank generally establishes an allowance
for uncollectible interest for the amount which the principal balance and
uncollected interest exceeds 90% of the appraised value of the property. Loans
are charged off when management concludes that they are uncollectible.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of its unpaid principal
balance or fair value. Any required write-down of the loan to its fair value
upon foreclosure is charged against the allowance for loan losses.
The following table sets forth information with respect to the Bank's
non-performing loans and other problem assets at the dates indicated. No loans
were recorded as restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15, at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a nonaccrual basis: (1)
Real estate:
One- to four-family ....................................... $ 67 $248
Commercial loans .......................................... 284 --
Consumer loans ............................................... 13 --
---- ----
Total .................................................. $364 $248
==== ====
Accruing loans which are contractually past due 90 days or more:
Real estate loans:
One- to four-family ........................................ $ 66 $ --
Consumer loans ............................................... -- --
---- ----
Total .................................................. $ 66 $ --
==== ====
Total non-performing loans ............................. $430 $248
==== ====
Percentage of total loans ...................................... 1.60% 1.26%
==== ====
Other non-performing assets .................................... $ -- $ --
==== ====
Loans modified in troubled debt restructurings ................. $ -- $ --
==== ====
</TABLE>
- -----------------
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely. Payments
received on a nonaccrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on
management's assessment of the collectibility of the loan.
At December 31, 1998, the Bank did not have any loans which were not
currently classified as non-accrual, 90 days past due or restructured but where
known information about possible credit problems of borrowers caused management
to have serious concerns as to the ability of the borrowers to comply with
present loan repayment terms and would result in disclosure as non-accrual, 90
days past due or restructured.
At December 31, 1998, the Bank's non-accruing loans totaled $67,000 of
residential loans with balances outstanding ranging from $10,000 to $30,000 and
$284,000 of commercial business loans with balances of $125,000 and $159,000 and
$13,000 of consumer loans with balances outstanding ranging from $1,500 to
$4,700. As of September 30, 1999, the Bank's non-accruing loans totaled $28,000
of residential loans.
- 32 -
<PAGE> 39
ASSET CLASSIFICATION AND ALLOWANCE FOR LOSSES. Federal regulations
require national banks to classify their assets on the basis of quality on a
regular basis. An asset is classified as "substandard" if it is determined to be
inadequately protected by the current retained earnings and paying capacity of
the obligor or of the collateral pledged, if any. An asset is classified as
"doubtful" if full collection is highly questionable or improbable. An asset is
classified as "loss" if it is considered uncollectible, even if a partial
recovery could be expected in the future. The regulations also provide for a
"special mention" designation, described as assets which do not currently expose
a national bank to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require a national bank
to establish general allowances for loan losses. If an asset or portion thereof
is classified loss, a national bank must either establish a specific allowance
for loss in the amount of the portion of the asset classified loss, or charge
off such amount. Federal examiners may disagree with a bank's classifications.
If a bank does not agree with an examiner's classification of an asset, it may
appeal this determination to the District Manager of the OCC. The Bank regularly
reviews its assets to determine whether any assets require classification or
re-classification. At December 31, 1998, the Bank had $714,000 in classified
assets, which consisted of $693,000 in assets classified as substandard, $0 in
assets classified as doubtful and $0 in assets classified as loss and $21,000 in
assets classified as special mention. At September 30, 1999, the Bank had
$173,000 in classified assets, which consisted of $173,000 in assets classified
as substandard, $0 in assets classified as doubtful and $0 in assets classified
as loss. As of September 30, 1999, the Bank had $104,000 in assets classified as
special mention.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. General allowances are made pursuant to
management's assessment of the risk in the Bank's loan portfolio as a whole.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the status of loans
which are contractually past due and considering the net realizable value of the
security for the loan. Management continues to actively monitor the Bank's asset
quality and to charge off loans against the allowance for loan losses when
appropriate, or to provide specific loss reserves when necessary. In addition,
following the Bank Conversion, the Bank has increased its portfolio of consumer
and commercial loans which carry a higher risk of default than mortgage loans.
The Bank performs a quarterly analysis of the loans originated, its loan
portfolio and the characteristics of that portfolio in order to determine the
proper amount to add to its loan loss provisions. Based on these factors, the
Bank contributed to its general loan loss reserve by adding an allowance of
$231,000 for the year ended December 31, 1998, to the loan loss reserve account.
The Bank contributed an additional $68,000 to its general loan loss reserve for
the nine months ended September 30, 1999. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions vary from the assumptions used in making the initial determinations.
OCC policy requires maintenance of an adequate allowance for loan and
lease losses and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an institution's allowance
for loan loss estimate compared to the average loss experience of the industry
as a whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) up to 60% of the portfolio that is classified
doubtful; (ii) up to 25% of the portfolio that is classified as substandard; and
(iii) for the portions of the portfolio that have not been classified (including
those loans designated as special mention), estimated credit losses over the
upcoming 12 months given the facts and circumstances as of the evaluation date.
This amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
- 33 -
<PAGE> 40
The following table sets forth an analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period........................... $ 195 $ 141
Loans charged off:
Real estate mortgage:
One- to four-family............................... 50 --
Multi-family...................................... -- --
Consumer.............................................. 8 --
------- -------
Total charge-offs........................................ $ 58 $ --
------- -------
Recoveries:
Real estate mortgage:
One- to four-family................................ $ -- $ --
Multi-family....................................... -- --
Commercial......................................... -- --
Consumer............................................... -- --
Commercial business loans ............................. -- --
------- -------
Total recoveries......................................... $ -- $ --
------- -------
Net loans charged off.................................... $ 58 $ --
------- -------
Provision for loan losses................................ 231 54
------- -------
Balance at end of period................................. $ 368 $ 195
======= =======
Ratio of net charge-offs to average
loans outstanding during the period................... 0.2245% 0.0000%
======= =======
</TABLE>
In originating loans, the Bank recognizes that credit losses will occur
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. It is management's policy to maintain a general
allowance for loan losses based on, among other things, regular reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's historical and projected loss experience and current and forecasted
economic conditions. The Bank increases its allowance for loan losses by
charging provisions for possible losses against the Bank's income. Federal
examiners may disagree with the savings institution as to the appropriate level
of the institution's allowance for loan losses.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
Management also reviews individual loans for which full collectibility may not
be reasonably assured and evaluates among other things the net realizable value
of the underlying collateral. Management continues to actively monitor the
Bank's asset quality and to charge off loans against the allowance for loan
losses when appropriate or provide specific loan losses when necessary. As of
December 31, 1998 and September 30, 1999, the Bank's allowance for loan losses
did not include any specific loss reserves. Although management
- 34 -
<PAGE> 41
believes it uses the best information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The following table allocates the Bank's allowance for loan losses by
loan category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------
1998 1997
--------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family $ 188 64.49% $ 106 82.85%
Commercial ........ 65 17.85 6 0.13
Construction ...... 6 1.59 3 1.41
Consumer loans:
Savings account ...... -- -- -- 2.80
Other consumer ....... 37 8.65 20 4.33
Commercial business ..... 22 6.03 10 8.48
Unallocated ............. 50 -- 50 --
------ ------ ------ ------
Total .............. $ 368 100.00% $ 195 100.00%
====== ====== ====== ======
</TABLE>
INVESTMENT ACTIVITIES. The general objectives of the Bank's investment
policy are to (i) maintain liquidity levels sufficient to meet the operating
needs of the Bank and applicable regulatory requirements, (ii) minimize interest
rate risk by managing the repricing characteristics of the Bank's assets and
liabilities, (iii) reduce credit risk by maintaining a balance of high quality
diverse investments, (iv) absorb excess liquidity when loan demand is low and/or
deposit growth is high, (v) maximize returns without compromising liquidity or
creating undue credit or interest rate risk and (vi) provide collateral for
pledging requirements. The Bank's investment activities are conducted by senior
management and supervised by the Board of Directors. Investments are governed by
an investment policy adopted by the Board, which currently provides for
maintenance of an investment portfolio for the purposes of providing earnings,
ensuring a minimum liquidity reserve and facilitating the Bank's asset/liability
management objectives (e.g., limiting the weighted average terms to maturity or
repricing of the Bank's interest-earning assets). In accordance with the policy,
management has primarily invested in government and agency securities backed by
the full faith and credit of the United States, mortgage-backed securities and
participation certificates issued by the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Bank ("FNMA") or Government National
Mortgage Bank ("GNMA"), federal funds sold and, to a lesser extent, federally
insured interest-bearing deposits in other banks.
The Bank holds some of its securities to maturity and others are
available for sale. Securities held to maturity are accounted for at cost as
adjusted for unamortized discounts and premiums, while securities available for
sale are carried at fair value. At December 31, 1998, the fair value of such
securities, including mortgage-backed securities was greater than the carrying
value by $26,400. The amortized cost of the available-for-sale securities held
by the Bank exceeded the market value of such securities by $23,900 at December
31, 1998. The Bank does not currently foresee any conditions that would require
any sales of its investments. For additional information, see Notes 3 and 4 of
the Notes to Consolidated Financial Statements for December 31, 1998 and 1997
included in this proxy statement.
- 35 -
<PAGE> 42
The following table sets forth the carrying value of the Bank's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1998 1997
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Securities available-for-sale:
U.S. government agencies.............................. $ 1,575 $ 2,328
Obligations of state and political subdivisions....... -- 190
Mortgage-backed securities............................ 2,756 3,462
--------- --------
Total investment securities........................ 4,331 5,980
--------- --------
Securities held-to-maturity:
U.S. government agencies.............................. -- 500
Obligations of state and political subdivisions....... 657 657
Mortgage-backed securities............................ 380 557
--------- --------
1,037 1,714
--------- --------
Cash and time deposits - interest bearing................ 4,526 2,530
--------- --------
FHLB stock and FRB stock................................. 520 501
--------- --------
Total.............................................. $ 10,414 $ 10,725
========= ========
</TABLE>
- 36 -
<PAGE> 43
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
December 31, 1998. The yields on tax-exempt securities have been computed on a
fully-taxable equivalent basis.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
------------------- ------------------- ------------------ --------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government agencies $ 500 5.87% $ 300 3.57% $ 701 5.36% $ 85 6.32%
Obligations of states and
political subdivisions -- -- -- --
Mortgage-backed
securities............ 66 5.03% 217 4.77% 343 5.29% 2,118 6.02%
-------- -------- --------- --------
566 517 1,044 2,203
-------- -------- --------- --------
Securities held-to-maturity:
U.S. government agencies $ -- $ -- $ -- $ --
Obligations of states and
political subdivisions -- -- 397 5.49% 260 5.90%
Mortgage-backed
securities............ -- -- -- 380 6.11%
-------- -------- --------- --------
-- -- 397 640
-------- -------- --------- --------
$ 566 $ 517 $ 1,441 $ 2,843
======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL INVESTMENT PORTFOLIO
-------------------------------
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale:
U.S. government agencies $ 1,586 $ 1,575 4.52%
Obligations of states and
political subdivisions -- --
Mortgage-backed
securities............ 2,744 2,756 5.30%
------- -------
4,330 4,331
------- -------
Securities held-to-maturity:
U.S. government agencies $ -- --
Obligations of states and
political subdivisions 657 693 3.02%
Mortgage-backed
securities............ 380 380 6.08%
------- -------
1,037 1,073
------- -------
$ 5,367 $ 5,404
======= =======
</TABLE>
For further information regarding the Bank's investment securities and
mortgage-backed securities, see Notes 1, 3 and 4 of Notes to Consolidated
Financial Statements for December 31, 1998 and 1997 in this proxy statement.
- 37 -
<PAGE> 44
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are a significant source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments and interest payments and maturing
investment securities. Loan repayments and interest payments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings may
be used on a short-term basis to compensate for reductions in the availability
of funds from other sources, or on a longer term basis for general business
purposes. Following the Bank Conversion, the Bank retained access to borrow from
the FHLB of Cincinnati.
DEPOSITS. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit ranging in
term from 31 days to 24 months. Deposit account terms vary, principally on the
basis of the minimum balance required, the time periods the funds must remain on
deposit and the interest rate. The Bank also offers individual retirement
accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents. The Bank does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by the Bank on a
periodic basis. Determination of rates and terms are predicated upon funds
acquisition and liquidity requirements, rates paid by competitors, growth goals
and federal regulations. The Bank has recently paid rates slightly above
prevailing market rates in order to attract deposits.
Savings deposits in the Bank at December 31, 1998 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
INTEREST MINIMUM MINIMUM PERCENTAGE OF
RATE TERM CATEGORY AMOUNT BALANCES TOTAL SAVINGS
---- ---- -------- ------ -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
3.00% None Passbook accounts $ 25 $ 1,469 5.07%
4.12 None Super savings 10,000 1,380 4.76
2.00 None NOW accounts 200 1,103 3.80
3.05 None Super NOW accounts 1,500 860 2.97
0.00 None Noninterest-bearing checking
accounts 100 705 2.43
Certificates of Deposit
* 3.62% 1 month or less Fixed-term, fixed-rate 500 58 0.20
* 4.49 3 months Fixed-term, fixed-rate 500 1,977 6.82
* 5.09 6 months Fixed-term, fixed-rate 500 10,692 36.88
* 5.38 12 months Fixed-term, fixed-rate 500 5,394 18.60
* 5.56 18 months Fixed-term, fixed-rate 500 3,628 12.51
* 5.35 18 months - IRA Fixed-term, fixed-rate 500 1,202 4.15
5.54 24 months Fixed-term, fixed-rate 500 526 1.81
--------- --------
$ 28,994 100.00%
========= ======
</TABLE>
- ---------------
* Represents weighted average interest rate.
- 38 -
<PAGE> 45
The following table sets forth the change in dollar amount of deposits
in the various types of accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
INCREASE
BALANCE AT (DECREASE) FROM BALANCE AT
DECEMBER 31, % OF DECEMBER 31, DECEMBER 31, % OF
1998 DEPOSITS 1997 1997 DEPOSITS
------- ------ ------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook and regular savings $ 1,469 5.07% $ (445) $ 1,914 8.94%
Super savings .............. 1,380 4.76 1,380 -- --
NOW Accounts ............... 1,103 3.80 397 706 3.30
Super NOW .................. 860 2.97 509 351 1.64
Certificates of deposit .... 15,162 52.29 2,358 12,804 59.77
IRA ........................ 1,203 4.15 9 1,194 5.58
Jumbo certificates ......... 7,112 24.53 3,043 4,069 19.00
Other ...................... 705 2.43 327 378 1.77
------- ------ ------- ------- ------
Total ................. $28,994 100.00% $ 7,578 $21,416 100.00%
======= ====== ======= ======= ======
</TABLE>
The following tables set forth the average balances and interest rates
based on month-end balances for interest-bearing demand deposits and time
deposits as of the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997
--------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Savings deposits.............................. $ 1,475 3.00% $ 1,946 2.83%
Super savings deposit......................... 1,276 4.12 -- --
Interest-bearing demand deposits.............. 3,599 2.24 1,539 2.01
Noninterest-bearing demand deposits........... 726 -- 217 --
Certificates of deposit....................... 23,300 5.20 18,380 5.28
--------- ---------
Total.................................... $ 30,376 $ 22,082
========= =========
</TABLE>
Time Deposits by Rates. The following table sets forth the time
deposits in the Bank classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
2.00 - 3.99% $ -- $ --
4.00 - 5.99% 23,476 18,067
6.00 - 7.99% -- --
8.00 - 9.99% -- --
------- -------
$23,476 $18,067
======= =======
</TABLE>
- 39 -
<PAGE> 46
Time Deposit Maturity Schedule. The following table sets forth the
amount and maturities of time deposits at December 31, 1998.
<TABLE>
<CAPTION>
AMOUNT DUE
--------------------------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ---- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.00 - 3.99% $ -- $ -- $ -- $ -- $ --
4.00 - 5.99% 20,982 2,494 -- -- 23,476
6.00 - 7.99% -- -- -- -- --
8.00 - 9.99% -- -- -- -- --
---------- ---------- ---------- ---------- ----------
$ 20,982 $ 2,494 $ -- $ -- $ 23,476
========== ========== ========== ========== ==========
</TABLE>
Maturity of Jumbo Certificates. The following table indicates the
amount as of December 31, 1998 of the Bank's certificates of deposit of $100,000
or more by time remaining until maturity.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
--------------- -----------
(IN THOUSANDS)
<S> <C>
Three months or less....................... $ 3,142
Over three through six months.............. 2,124
Over six through 12 months................. 1,346
Over 12 months............................. 711
----------
Total.................................. $ 7,323
==========
</TABLE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deposits less withdrawals................................ $ 6,452 $ (80)
Interest credited........................................ 1,126 858
---------- --------
Net increase (decrease) in savings deposits........ $ 7,578 $ 778
========== ========
</TABLE>
Management attributes the changes in deposits for the years ended
December 31, 1998 and 1997 to management's deposit pricing strategies.
BORROWINGS. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically would be
secured by the Bank's stock in the FHLB and a portion of the Bank's mortgage
loans. The Bank has not obtained any borrowings other than FHLB advances in
recent years. At December 31, 1998, the Bank had $693,000 in FHLB advances
outstanding with a weighted average interest rate of 7.76%, which mature in
years ranging from 1999 to 2026.
- 40 -
<PAGE> 47
The FHLB of Cincinnati functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
SUBSIDIARY ACTIVITIES
The Bank previously had one wholly owned subsidiary service
corporation, Lexington First Federal Service Corporation (the "Service
Corporation"). The stock in the subsidiary was transferred to the Bank and the
subsidiary was liquidated in March 1998.
COMPETITION
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans. Direct
competition for savings deposits comes from other savings institutions, credit
unions, regional bank holding companies and commercial banks located in its
primary market area. Significant competition for the Bank's other deposit
products and services comes from money market mutual funds, brokerage firms,
insurance companies and retail stores. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions, commercial banks, mortgage bankers,
mortgage brokers and insurance companies.
The Bank's primary competition comes from 16 commercial banks, four of
which have branch offices located in Henderson County, Tennessee. The branches
of the four commercial banks located in Henderson County had gross deposits of
approximately $276 million at December 31, 1998, the most recent date for which
such information is available. The Bank had approximately $29 million in
deposits as of December 31, 1998.
The Bank is able to compete effectively in its primary market area by
offering competitive interest rates and loan fees, and a wide variety of deposit
products and by emphasizing personal customer service and cultivating
relationships with the local businesses. Management believes that, as a result
of the Bank's commitment to competitive pricing, varied products and personal
service, the Bank has developed a solid base of core deposits and the Bank's
loan origination activities are an asset to the community.
PERSONNEL
As of September 30, 1999, the Company and its subsidiaries had 14
full-time employees and no part-time employees. The employees are not
represented by a collective bargaining unit. Management believes that the
Company and its subsidiaries enjoy good relations with its personnel.
- 41 -
<PAGE> 48
PROPERTIES
The following table sets forth the location and certain additional
information regarding the Bank's offices at December 31, 1998.
<TABLE>
<CAPTION>
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR DECEMBER 31, APPROXIMATE DECEMBER 31,
OPENED LEASED 1998 SQUARE FOOTAGE 1998
------ ------ ---- -------------- ----
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE:
19 NATCHEZ TRACE DRIVE 1961 OWNED $216 6,800 $27,900
LEXINGTON, TENNESSEE 38351
BRANCH OFFICE:
435 WEST CHURCH STREET 1998 OWNED 378 1,450 1,100
LEXINGTON, TENNESSEE
38351
</TABLE>
The Bank owns three parcels of land. One parcel, the office building in
which the office of the Bank is located, is at 19 Natchez Trace Drive, and
another parcel adjoins the office building, and was purchased in 1976 for
expansion purposes. In the spring of 1997, the bank purchased property for
$127,500 for its branch which opened in the spring of 1998. The Bank remodeled
the building and installed a drive-up window facilities for a full service
branch. The cost of these improvements was $270,000 with furniture, fixtures and
equipment costing $129,000 for a total cost of $526,500.
Intrieve, Cincinnati, Ohio, performs data processing and record keeping
for the Bank. The Bank's fixtures and equipment include a network of teller
terminals, personal computers, miscellaneous office equipment and satellite
communications equipment.
As of September 30, 1999, the net book value of the Bank's premises,
furniture, fixtures and equipment was $739,000.
LEGAL PROCEEDINGS
From time to time, the Bank is a party to various legal proceedings
incident to its business. At September 30, 1999, there were no other legal
proceedings to which the Company or the Bank was a party, or to which any of
their property was subject, which were expected by management to result in a
material loss to the Company or the Bank.
- 42 -
<PAGE> 49
SUPERVISION AND REGULATION
REGULATION OF THE COMPANY
GENERAL. The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company is
registered with the Federal Reserve Board and subject to Federal Reserve Board
regulation, examination, supervision and reporting requirements. As a bank
holding company, the Company is required to furnish to the Federal Reserve Board
annual and quarterly reports of its operations at the end of each period and to
furnish such additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Company is also subject to regular examination by the
Federal Reserve Board.
Under the BHCA, a bank holding company must obtain the prior approval
of the Federal Reserve Board before (1) acquiring direct or indirect ownership
or control of any voting shares of any bank or bank holding company if, after
such acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") allows the Federal Reserve Board to approve an application of
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than such holding company's home state, without regard to
whether the transaction is prohibited by the laws of any state. The Federal
Reserve Board may not approve the acquisition of a bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Riegle-Neal Act also prohibits the
Federal Reserve Board from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in the
target bank's home state or in any state in which the target bank maintains a
branch. The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state which may be held or
controlled by a bank or bank holding company to the extent such limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit
contained in the Riegle-Neal Act.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
has opted out of the Riegle-Neal Act by adopting a law after the date of
enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally
to all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
Interstate mergers and branch acquisitions are also subject to the nationwide
and statewide insured deposit concentration amounts described above.
The Riegle-Neal Act authorizes the OCC and FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. The Riegle-Neal Act also requires
the appropriate federal banking agencies to prescribe regulations which prohibit
any out-of-state bank from using the interstate branching authority primarily
for the purpose of deposit production.
The BHCA also prohibits, with certain exceptions, a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The activities of the Company are
subject to these legal and regulatory limitations under the BHCA and the Federal
Reserve Board's regulations thereunder. Notwithstanding the Federal Reserve
Board's prior approval of specific nonbanking activities, the Federal Reserve
Board has the power to
- 43 -
<PAGE> 50
order a holding company or its subsidiaries to terminate any activity, or to
terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that the continuation of such activity or such ownership or
control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that holding company.
CAPITAL ADEQUACY. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "-- Regulation of the Bank --
Regulatory Capital Requirements."
DIVIDENDS AND DISTRIBUTIONS. The Federal Reserve Board has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
Bank holding companies are required to give the Federal Reserve Board
notice of any purchase or redemption of their outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve Board order, directive, or any condition imposed by,
or written agreement with, the Federal Reserve Board. Bank holding companies
whose capital ratios exceed the thresholds for "well capitalized" banks on a
consolidated basis are exempt from the foregoing requirement if they were rated
composite 1 or 2 in their most recent inspection and are not the subject of any
unresolved supervisory issues.
REGULATION OF THE BANK
GENERAL. As a national bank, the Bank is subject to the primary
supervision of the OCC under the National Bank Act. The OCC regularly examines
the operations of the Bank, including but not limited to capital adequacy,
reserves, loans, investments and management practices. These examinations are
for the protection of the Bank's depositors and not its shareholders. In
addition, the Bank is required to furnish quarterly and annual reports to the
OCC. The OCC's enforcement authority includes the power to remove officers and
directors and the authority to issue cease-and-desist orders to prevent a bank
from engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
The Bank's deposits are insured by the FDIC to the legal maximum of
$100,000 for each insured depositor. Some of the aspects of the lending and
deposit business of the Bank that are subject to regulation by the Federal
Reserve Board and the FDIC include reserve requirements and disclosure
requirements in connection with personal and mortgage loans and savings deposit
accounts. In addition, the Bank is subject to numerous federal and state laws
and regulations which set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve Board and the OCC
have established guidelines with respect to the maintenance of appropriate
levels of capital by bank holding companies and national banks, respectively.
The regulations impose two sets of capital adequacy requirements: minimum
leverage rules, which require bank holding companies and banks to maintain a
specified minimum ratio of capital to total assets, and risk-based capital
rules, which require the maintenance of specified minimum ratios of capital to
"risk-weighted" assets.
The regulations of the Federal Reserve Board and the OCC require bank
holding companies and national banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the
- 44 -
<PAGE> 51
capital regulations state that only the strongest bank holding companies and
banks, with composite examination ratings of 1 under the rating system used by
the federal bank regulators, would be permitted to operate at or near such
minimum level of capital. All other bank holding companies and banks are
expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. Any bank or bank holding company experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. In addition, the Federal Reserve Board has indicated
that whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, it will consider, on a case-by-case basis, the level
of an organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve Board and the OCC
require bank holding companies and state member banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-
balance sheet obligations according to risk. The risk-based capital rules have
two basic components: a core capital (Tier 1) requirement and a supplementary
capital (Tier 2) requirement. Core capital consists primarily of common
stockholders' equity, certain perpetual preferred stock (which must be
noncumulative with respect to banks), and minority interests in the equity
accounts of consolidated subsidiaries; less all intangible assets, except for
certain purchased mortgage servicing rights and purchased credit card
relationships. Supplementary capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify as Tier 1 capital and long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock.
The risk-based capital regulations assign balance sheet assets and
credit equivalent amounts of off-balance sheet obligations to one of four broad
risk categories based principally on the degree of credit risk associated with
the obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total capital to total
risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of
calculating these ratios: (i) supplementary capital will be limited to no more
than 100% of core capital; and (ii) the aggregate amount of certain types of
supplementary capital will be limited. In addition, the risk-based capital
regulations limit the allowance for loan losses includable as capital to 1.25%
of total risk-weighted assets.
OCC regulations and guidelines additionally specify that national banks
with significant exposure to declines in the economic value of their capital due
to changes in interest rates may be required to maintain higher risk-based
capital ratios. The federal banking agencies, including the OCC, have proposed a
system for measuring and assessing the exposure of a bank's net economic value
to changes in interest rates. The federal banking agencies, including the OCC,
have stated their intention to propose a rule establishing an explicit capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk exposure after more experience has been gained with the proposed
measurement process. Federal Reserve Board regulations do not specifically take
into account interest rate risk in measuring the capital adequacy of bank
holding companies.
The OCC has issued final regulations which classify national banks by
capital levels and which provide for the OCC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a
total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%,
and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically undercapitalized
depending on the extent to which the bank's capital levels are below these
standards. A national bank that falls within any of the three undercapitalized
categories established by the prompt
- 45 -
<PAGE> 52
corrective action regulation will be subject to severe regulatory sanctions. As
of September 30, 1999, the Bank was well-capitalized as defined by the OCC's
regulations.
For information regarding the Bank's compliance with its regulatory
capital requirements, see Note 16 of Notes to Consolidated Financial Statements
for December 31, 1998 and 1997 included in this proxy statement.
BRANCHING. Under the McFadden Act of 1927, national banks may only
establish branches to the extent specifically authorized by statute for banks
chartered by the state in which the national bank is located and subject to the
restrictions as to location imposed by state law on state banks. The Riegle-Neal
Act authorizes the OCC and FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching.
DIVIDEND LIMITATIONS. Pursuant to the National Bank Act, no national
bank may pay dividends from its paid-in capital. All dividends must be paid out
of current or retained net profits, after deducting reserves for losses and bad
debts. The National Bank Act further restricts the payment of dividends out of
net profits by prohibiting a national bank from declaring a dividend on its
shares of common stock until the surplus fund equals the amount of capital stock
or, if the surplus fund does not equal the amount of capital stock, until
one-tenth of a bank's net profits for the preceding half year in the case of
quarterly or semi-annual dividends, or the preceding two half-year periods in
the case of annual dividends, are transferred to the surplus fund. Prior OCC
approval is required for the payment of a dividend if the total of all dividends
declared by a national bank in any calendar year would exceed the total of its
net profits for that year combined with its net profits for the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock. In addition, the Bank is prohibited by federal statute from
paying dividends or making any other capital distribution that would cause the
Bank to fail to meet its regulatory capital requirements. Further, the OCC also
has authority to prohibit the payment of dividends by a national bank when it
determines such payment to be an unsafe and unsound banking practice.
DEPOSIT INSURANCE. Because the Bank was a savings bank prior to the
Bank Conversion, its deposits continue to be insured by the SAIF rather than by
the Bank Insurance Fund ("BIF") which generally insures the deposits of national
banks. The Bank is required to pay semi-annual assessments based on a percentage
of its insured deposits to the FDIC for insurance of its deposits by the SAIF.
Under the Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- "well capitalized," "adequately
capitalized" or "undercapitalized." Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
Over the past several years, institutions with SAIF-assessable
deposits, like the Bank, were required to pay higher deposit insurance premiums
than institutions with deposits insured by the BIF. In order to recapitalize the
SAIF and address the premium disparity, in November 1996 the FDIC imposed a
one-time special assessment on institutions with SAIF-assessable deposits based
on the amount determined by the FDIC to be necessary to increase the reserve
levels of the SAIF to the designated reserve ratio of 1.25% of insured deposits.
Institutions were assessed at the rate of 65.7 basis points based on the amount
of their SAIF-assessable deposits as of March 31, 1995. As a result of the
special assessment the Bank incurred an expense of $128,000 during the quarter
ended September 30, 1996.
- 46 -
<PAGE> 53
The FDIC has adopted a new assessment schedule for SAIF deposit
insurance pursuant to which the assessment rate for well-capitalized
institutions with the highest supervisory ratings would be reduced to zero and
institutions in the lowest risk assessment classification will be assessed at
the rate of 0.27% of insured deposits. Until December 31, 1999, however,
SAIF-insured institutions, will be required to pay assessments to the FDIC at
the rate of 6.5 basis points to help fund interest payments on certain bonds
issued by the Financing Corporation ("FICO") an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for these obligations at the rate of 1.3 basis points.
After December 31, 1999, both BIF and SAIF members will be assessed at the same
rate for FICO payments.
TRANSACTIONS WITH AFFILIATES. Transactions between a national bank and
any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act.
An affiliate of a national bank is any company or entity which controls, is
controlled by or is under common control with the national bank. In a holding
company context, the parent holding company of a national bank (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the national bank. Generally, Sections 23A and 23B (i) limit
the extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no national bank may (i) loan or otherwise extend credit
to an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the national bank. The BHCA further
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS.
National banks are also subject to the restrictions contained in Section 22(h)
and 22(g) of the Federal Reserve Act on loans to executive officers, directors
and principal stockholders. Under Section 22(h), loans to a director, executive
officer or greater than 10% stockholder of a national bank and certain
affiliated interests of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the bank's loans to
one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus) and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
national bank, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve Board
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval if required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loan is made pursuant to a benefit or compensation plan that is
widely available to other employees and does not give preference to insiders.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
be approved by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the BHCA prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
- 47 -
<PAGE> 54
RECENT DEVELOPMENTS
The Gramm-Leach-Bliley Financial Modernization Act of 1999 was enacted
on November 12, 1999. The Act permits bank holding companies meeting certain
management, capital, and community reinvestment act standards to engage in a
substantially broader range of non-banking activities than permitted previously,
including insurance underwriting and merchant banking activities. The Act
repeals sections 20 and 32 of the Glass Steagall Act, permitting affiliations of
banks with securities firms and registered investment companies. The Act
authorizes financial holding companies, permitting banks to be owned by security
firms, insurance companies and merchant banking companies and visa-versa. Some
of these affiliations are also permissible for bank subsidiaries. The Act gives
the Federal Reserve Board authority to regulate financial holding companies, but
provides for functional regulation of subsidiary activities.
The Act also modifies financial privacy and community reinvestment
laws. The new financial privacy provisions generally prohibit financial
institutions such as the Company from disclosing non-public personal financial
information to third parties unless customers have the opportunity to opt out of
the disclosure. The Act also magnifies the consequences of a bank receiving a
less than a satisfactory community reinvestment act rating, by freezing new
activities until the institution achieves a better community reinvestment act
rating.
- 48 -
<PAGE> 55
OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS AND MANAGEMENT
To the Company's knowledge, based on information filed with the
Securities and Exchange Commission and the Company's stock records, the
following table sets forth, as of December 31, 1999, the number of shares of
Common Stock beneficially owned by (i) directors and executive officers, (ii)
directors and executive officers as a group, and (iii) each person who
beneficially owns more than 5% of the Common Stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS (2)
- ------------------------ ----------------------- --------------------
<S> <C> <C>
Pat Carnal 65,812 9.2%
230 Beasley Drive
P.O. Box 680
Lexington, TN 38351-0680
Stephen M. Lowry 5,748 --
312 Elizabeth Circle
Lexington, 38351-6536
Vincent Marzella 41,200 5.8%
One Metrotech Center North
4th Floor
Brooklyn, NY 11201-3062
Stephen M. Milam 7,039 -
P.O. Box 121
Lexington, TN 38351-0121
Arba Milam Taylor 23,923 3.4%
P.O. Box 121
Lexington, TN 38351-0121
Pope Thomas 8,809 1.2%
700 Thomas Road
Lexington, TN 38351-6287
Robert C. Thomas 4,167 -
720 Thomas Road
Lexington, TN 38351-6287
Howard W. Tignor(3) 27,125 3.8%
P.O. Box 710
Lexington, TN 38351-0710
Charlie H. Walker 18,872 2.6%
P.O. Box 530
Lexington, TN 38351-0530
Richard Walker 7,039 --
P.O. Box 530
Lexington, TN 38351-0530
All Directors and Executive
Officers As a Group (9 persons)(3) 168,534 23.6%
</TABLE>
- ----------------
(1) The nature of the beneficial ownership of all shares is sole voting and
investment power.
(2) Percentages less than 1% are not reflected.
(3) Mr. Tignor resigned as President and a Director of the Company,
effective February 12, 2000.
- 49 -
<PAGE> 56
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports and other information
with the Securities and Exchange Commission (the "SEC"). Reports and other
information filed by the Company can be inspected and copied at the public
reference facilities at the SEC's office at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the SEC's Regional Offices at Seven World Trade Center, New
York, New York 10048 and Citicorp Center, 500 W. Madison Street, Chicago,
Illinois 60621-2511. Copies of the material can be obtained from the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Such material may also be accessed electronically by means
of the SEC's home page on the Internet at http://www.sec.gov.
All documents filed by the Company pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this proxy statement and prior
to the date of the special meeting shall be deemed to be incorporated by
reference into this proxy statement and to be a part hereof from the date of
filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part hereof except
as so modified or superseded.
This proxy statement incorporates documents by reference which are not
presented herein or delivered herewith. These documents (other than exhibits to
these documents unless such exhibits are specifically incorporated by reference
herein) are available, without charge, upon oral or written request by any
person to whom this proxy statement has been delivered. Shareholders who wish to
receive copies of such documents may call the Company at (901) 968-6624 or write
to the Company at Community National Corporation, 19 Natchez Trace Drive, P.O.
Box 710, Lexington, Tennessee 38351 Attention: Chairman.
By Order of the Board of Directors
Arba Taylor, Chairman
March 8, 2000
- 50 -
<PAGE> 57
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
Consolidated Balance Sheet at September 30, 1999 (unaudited)...........................................F-1
Consolidated Statements of Income for the nine months ended
September 30, 1999 and 1998 (unaudited).......................................................F-2
Consolidated Statements of Comprehensive Income for the nine months ended
September 30, 1999 and 1998 (unaudited).......................................................F-4
Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 1999 (unaudited)................................................................F-5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited).......................................................F-6
Notes to Consolidated Financial Statements for September 30, 1999 and 1998 (unaudited).................F-8
Independent Auditor's Report...........................................................................F-9
Consolidated Statements of Financial Condition at December 31, 1998 and 1997..........................F-10
Consolidated Statements of Income for the years ended December 31, 1998 and 1997......................F-12
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998 and 1997...................................................................F-14
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997...................................................................F-15
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997...................................................................F-16
Notes to Consolidated Financial Statements for December 31, 1998 and 1997.............................F-18
</TABLE>
- 51 -
<PAGE> 58
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Cash & cash equivalents:
Non-interest bearing $ 754,183
Interest bearing 3,384,998
Time deposits 0
Investment securities:
Securities held-to-maturity (fair value of $678,720) 657,979
Securities available-for-sale, at fair value 1,952,457
Mortgage-backed and related securities:
Securities held-to-maturity (fair value of $301,419) 303,632
Securities available-for-sale, at fair value 1,920,553
Loans receivable, net 29,191,649
Accrued interest receivable 238,053
Premises and equipment 737,920
Stock investments:
Stock in Federal Home Loan Bank, at cost 298,300
Stock in Federal Reserve Bank, at cost 156,100
Stock in Savings and Loan Data Corporation, at cost 15,000
Other assets 195,154
------------
Total Assets $ 39,805,978
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 30,259,566
Advances from FHLB 526,794
Advances from borrowers for taxes and insurance 3,550
Accrued interest payable 182,106
Income taxes payable:
Current 161,263
Deferred (104,417)
Accrued expenses and other liabilities 172,448
------------
Total Liabilities 31,201,310
------------
Stockholders' Equity:
Preferred stock, 2,000,000 shares authorized,
none issued or outstanding
Common stock, $1.00 par value; 8,000,000 shares
authorized, 712,866 shares issued and outstanding 712,866
Additional paid-in capital 4,489,512
Retained earnings -- substantially restricted 3,508,745
Accumulated other comprehensive income, net of taxes (106,455)
------------
Total Stockholders' Equity 8,604,668
------------
Total Liabilities and Stockholders' Equity $ 39,805,978
============
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-1
<PAGE> 59
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
September 30, September 30,
1999 1998
---------- ----------
<S> <C> <C>
INTEREST INCOME
First mortgage loans $1,094,074 $1,090,002
Consumer and other loans 666,463 319,858
Interest and dividends on investments:
Taxable 90,947 126,200
Tax-exempt 27,705 37,287
Dividends 22,464 21,683
Interest on deposits with banks 107,057 88,200
Interest on mortgage-backed securities 115,102 180,508
---------- ----------
Total interest income $2,123,812 $1,863,738
---------- ----------
INTEREST EXPENSE
Interest on deposits $ 996,158 $ 865,186
Interest on advances from FHLB 33,103 45,241
---------- ----------
Total interest expense $1,029,261 $ 910,427
---------- ----------
Net interest income $1,094,551 $ 953,311
---------- ----------
Provision for loan losses 67,500 94,581
---------- ----------
Net interest income after provision for loan losses $1,027,051 $ 858,730
---------- ----------
NON-INTEREST INCOME
Income from real estate held for investment $ 4,050 $ 7,075
Service charges 124,973 97,404
Other operating income 14,002 12,762
---------- ----------
Total non-interest income $ 143,025 $ 117,241
---------- ----------
NON-INTEREST EXPENSE
Compensation and benefits $ 359,226 $ 335,427
Occupancy and equipment 105,049 115,074
Federal deposit insurance premiums 13,325 9,699
Data processing fees 64,386 59,545
Other operating expenses 199,104 154,382
---------- ----------
Total non-interest expense $ 741,090 $ 674,127
---------- ----------
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-2
<PAGE> 60
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME (continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
-----------------------------
September 30, September 30,
1999 1998
---------- ----------
<S> <C> <C>
Income before income taxes $ 428,986 $ 301,844
Income tax expense 149,150 95,768
---------- ----------
Net income $ 279,836 $ 206,076
========== ==========
Earnings per common share $ 0.39 $ 0.29
========== ==========
Diluted earnings per share $ 0.39 $ 0.29
========== ==========
Dividends paid per share $ 0.30 $ 0.15
========== ==========
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-3
<PAGE> 61
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
--------- --------
<S> <C> <C>
Net income $ 279,836 $206,076
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities held as
available-for-sale, net of applicable deferred income taxes
of $27,436 (1999) and $4,634 (1998) (108,130) 8,254
--------- --------
Total Comprehensive Income $ 171,706 $214,330
========= ========
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-4
<PAGE> 62
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
---------------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
------- -------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 712,866 $712,866 $4,489,512 $3,442,772 $ 1,675 $8,646,825
Comprehensive income:
Net income 279,836 279,836
Change in unrealized gain (loss) on
securities available-for-sale, net of
applicable deferred income taxes of $27,436 (108,130) (108,130)
Dividends paid -- -- -- (213,863) -- (213,863)
------- -------- ---------- ---------- --------- ----------
Balance at September 30, 1999 712,866 $712,866 $4,489,512 $3,508,745 $(106,455) $8,604,668
======= ======== ========== ========== ========= ==========
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-5
<PAGE> 63
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 279,836 $ 206,076
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 67,500 94,581
Provision for depreciation 76,963 89,667
Amortization of investment securities premiums and discounts (net) 6,166 10,422
Stock in FHLB received as dividends (15,100) (14,400)
Retirement of stock in Federal Reserve Bank 81,050 --
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable 899 (68,096)
(Increase) decrease in other assets (125,062) (15,684)
Increase (decrease) in interest payable (29,155) 14,246
Increase (decrease) in income taxes 5,833 (52,787)
Increase (decrease) in other liabilities 56,043 (47,509)
----------- -----------
Net Cash Provided by (Used In) Operating Activities $ 404,973 $ 216,516
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans receivable $(2,788,617) $(4,299,273)
Net (increase) decrease in time deposits 1,125,000 --
Additions to premises and equipment (16,904) (378,638)
Purchases of mortgage-backed securities -- (495,000)
Principal payments on mortgage-backed securities 832,140 910,433
Purchase of investment securities (1,497,969) (700,000)
Proceeds from maturities of investment securities 1,046,521 1,449,407
----------- -----------
Net Cash Provided by (Used In) Investing Activities $(1,299,829) $(3,513,071)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 1,265,758 $ 4,520,886
Repayments of FHLB advances (166,054) (124,067)
Net increase in advances from borrowers for taxes and insurance 386 2,946
Payment of dividends (213,863) (106,932)
----------- -----------
Net Cash Provided by Financing Activities $ 886,227 $ 4,292,833
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents $ (8,629) $ 996,278
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 4,147,810 $ 2,741,783
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,139,181 $ 3,738,061
=========== ===========
</TABLE>
F-6
<PAGE> 64
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information: Cash paid for:
Interest $ 1,029,261 $ 910,427
Income taxes, net of refunds 184,973 128,766
Noncash investing and financing:
Stock dividends received from Federal Home Loan Bank 15,100 14,400
Total net increase (decrease) in unrealized loss on securities
available-for-sale (108,130) (8,254)
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-7
<PAGE> 65
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Community
National Corporation and subsidiary have been prepared in accordance with
instructions for Form 10-QSB. To the extent that information and footnotes
required by generally accepted accounting principles for complete financial
statements are contained in the audited financial statements included in this
proxy statement, such information and footnotes have not been duplicated in the
information presented for September 30, 1999. In the opinion of management, all
adjustments, consisting only of normal recurring accruals, which are necessary
for the fair presentation of the interim financial statements, have been
included. The statements of earnings for the nine months ended September 30,
1999, are not necessarily indicative of the results which may be expected for
the entire year.
(2) EARNINGS PER SHARE
Net earnings per share of common stock for the nine months ended September 30,
1999 and 1998 of $0.29 and $0.39 were computed by dividing the net income by the
weighted average number of shares outstanding for such periods.
(3) NEW ACCOUNTING STANDARDS
The Company adopted FASB Statement No. 130, Reporting Comprehensive Income in
1998. All periods presented are in accordance with SAFS 130. Statement No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. This
comprehensive income consists of securities classified as available-for-sale by
the Company.
The accompanying unaudited notes are an integral part of the financial
statements.
F-8
<PAGE> 66
ARNOLD, SPAIN, TRUETT & HEWITT, P.L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
914 NORTH HIGHLAND AVENUE
JACKSON, TENNESSEE 38301
_____________
901-427-8571
FAX 901-424-5701
MEMBERS:
AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS Offices:
Jackson, Tennessee
TENNESSEE SOCIETY OF Union City, Tennessee
CERTIFIED PUBLIC ACCOUNTANTS McKenzie, Tennessee
Paris, Tennessee
AICPA DIVISION OF FIRMS: Trenton, Tennessee
PRIVATE COMPANIES PRACTICE SECTION Dyersburg, Tennessee
SEC PRACTICE SECTION Fulton, Kentucky
Independent Auditor's Report
Board of Directors
Community National Corporation
Lexington, Tennessee
We have audited the accompanying consolidated statements of financial condition
of Community National Corporation and subsidiary (the Company) as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Certified Public Accountants
Jackson, Tennessee
February 16, 1999
F-9
<PAGE> 67
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents:
Non-interest bearing $ 746,912 $ 211,969
Interest bearing 3,400,898 2,529,814
Time deposits 1,125,000 --
Investment securities:
Securities held-to-maturity (fair value of $693,136 (1998) and $1,189,106 (1997) 657,770 1,157,492
Securities available-for-sale, at fair value 1,575,472 2,518,019
Mortgage backed and related securities:
Securities held-to-maturity (fair value of $379,661 (1998) and $563,295 (1997) 380,098 556,783
Securities available-for-sale, at fair value 2,756,332 3,461,579
Loans receivable, net 26,403,032 19,544,222
Accrued interest receivable 238,952 138,047
Premises and equipment 797,980 579,148
Real estate held for investment -- 336
Stock investments:
Stock in Federal Home Loan Bank, at cost 283,200 263,900
Stock in Federal Reserve Bank, at cost 237,150 237,150
Stock in Savings and Loan Data Corporation, at cost 15,000 15,000
Other assets 70,093 2,243
----------- -----------
Total Assets $38,687,889 $31,215,702
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 68
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Cont.)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deposits $28,993,808 $21,416,047
Advances from Federal Home Loan Bank 692,848 821,777
Advances from borrowers for taxes and insurance 3,164 454
Accrued interest payable 211,261 169,954
Income taxes:
Current 70,825 83,507
Deferred (47,248) 4,935
Other liabilities 116,405 151,055
----------- -----------
Total Liabilities $30,041,063 $22,647,729
----------- -----------
Preferred stock, 2,000,000 shares authorized, - 0 - issued $ -- $ --
Common stock of $1.00 par value, authorized 8,000,000 shares, 712,866
(1998) and 712,866 (1997) issued and outstanding 712,866 712,866
Additional paid-in-capital 4,489,512 4,489,512
Retained earnings - substantially restricted 3,442,773 3,371,864
Other accumulated comprehensive income 1,675 (6,269)
----------- -----------
Total Stockholders' Equity $ 8,646,826 $ 8,567,973
----------- -----------
Total Liabilities and Stockholders Equity $38,687,889 $31,215,702
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE> 69
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
INTEREST INCOME
First mortgage loans $1,474,548 $1,434,631
Consumer and other loans 470,216 100,595
Interest and dividends on investments:
Taxable 163,102 149,070
Tax-exempt 48,040 69,827
Dividends 33,708 18,919
Interest on deposits with banks 122,876 48,505
Interest on mortgage-backed securities 228,976 224,341
---------- ----------
Total Interest Income $2,541,466 $2,045,888
---------- ----------
INTEREST EXPENSE
Interest on deposits $1,197,981 $1,053,415
Interest on advances from Federal Home Loan Bank 59,106 70,524
---------- ----------
Total Interest Expense $1,257,087 $1,123,939
---------- ----------
Net Interest Income 1,284,379 921,949
---------- ----------
Provision for loan losses 231,094 53,802
---------- ----------
Net Interest Income After Provision for Loan Losses $1,053,285 $ 868,147
---------- ----------
NONINTEREST INCOME
Income from real estate held for investment $ 8,089 $ 9,865
Service charges 140,517 85,096
Other operating income 12,650 8,731
---------- ----------
Total Noninterest Income $ 161,256 $ 103,692
---------- ----------
NONINTEREST EXPENSE
Compensation and benefits $ 450,938 $ 410,284
Occupancy and equipment 149,991 60,852
Federal deposit insurance premiums 15,082 14,631
Data processing fees 69,539 42,653
Other operating expenses 185,661 117,892
---------- ----------
Total Noninterest Expense $ 871,211 $ 646,312
---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 70
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF INCOME (CONT.)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997
-------- ----------
<S> <C> <C>
Income before income taxes $343,330 $ 325,527
Income tax expense 129,845 101,550
-------- ----------
Net Income $213,485 $ 223,977
======== ==========
Basic earnings per share $ 0.30 $ 0.59
======== ==========
Weighted average shares outstanding 712,866 381,349
======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE> 71
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Net income $ 213,485 $223,977
Other comprehensive income, net of tax:
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) arising during the period 12,329
Less reclassification adjustment for losses included in net income (4,385)
Net realized gains (losses) 7,944 39,113
--------- --------
Total comprehensive income $ 221,429 $263,090
========= ========
</TABLE>
Required disclosure of related tax effects allocated to each component of other
comprehensive income
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------
Tax
Before-tax (Expense) Net-of-tax
Amount or Benefit Amount
-------- ------- --------
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses) arising during the period $ 18,680 $(6,351) $ 12,329
Less reclassification adjustment for losses included in net income (6,644) 2,259 (4,385)
-------- ------- --------
Net unrealized gains (losses) $ 12,036 $(4,092) $ 7,944
======== ======= ========
</TABLE>
The accompanying unaudited notes are an integral part of the financial
statements.
F-14
<PAGE> 72
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Common Stock Additional Securities Total
-------------------- Paid-in Retained Available Stockholders'
Shares Amount Capital Earnings for Sale Equity
-------- --------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 222,993 $ 222,993 $ 483,106 $ 3,200,683 $(45,382) $ 3,861,400
Proceeds from issuance of 485,759 shares of
Community National Corporation common stock
on December 11, 1997, net of 240 fractional
shares acquired, and net of offering expense of
$361,071 485,759 485,759 4,010,520 -- -- 4,496,279
Cancellation of shares held by Lexington First
Federal Mutual Holding Company (135,000) (135,000) 135,000 -- -- --
Conversion of 87,993 shares common stock in
Lexington First Federal Savings Bank to 227,107
shares common stock in Community National
Corporation 139,114 139,114 (139,114) --
Comprehensive Income:
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable deferred
income taxes of $20,149 -- -- -- -- 39,113 39,113
Net income for the period ended December 31, 1997 -- -- -- 223,977 -- 223,977
Cash dividends, $.05 per share, per quarter, for the
first three quarters of the year -- -- -- (52,796) -- (52,796)
-------- --------- ----------- ----------- -------- -----------
BALANCE AT DECEMBER 31, 1997 712,866 $ 712,866 $ 4,489,512 $ 3,371,864 $ (6,269) $ 8,567,973
Comprehensive Income:
Change in unrealized gain (loss) on securities
available-for-sale, net of applicable deferred
income taxes of $4,092 -- -- -- -- 7,944 7,944
Net income for the period ended December 31, 1998 -- -- -- 213,485 -- 213,485
Cash dividends, $.05 per share, per quarter -- -- -- (142,576) -- (142,576)
-------- --------- ----------- ----------- -------- -----------
BALANCE AT DECEMBER 31, 1998 712,866 $ 712,866 $ 4,489,512 $ 3,442,773 $ 1,675 $ 8,646,826
======== ========= =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE> 73
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 213,485 $ 223,977
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 231,094 53,802
Provision for depreciation 113,962 27,779
Amortizations of investment securities
premiums and discounts (net) 16,034 1,847
Stock in FHLB received as dividends (19,300) (18,000)
Stock in FRB received as dividends -- (765)
Sale (purchase) of stock in FRB -- (236,385)
Changes in operating assets and liabilities:
(Increase) decrease in interest receivable (100,905) (32,682)
(Increase) decrease in other assets (67,852) 736
Increase (decrease) in interest payable 41,307 14,189
Increase (decrease) in income taxes (67,689) 77,041
Increase (decrease) in other liabilities (34,650) 128,971
----------- -----------
Net Cash Provided by Operating Activities $ 325,486 $ 240,510
----------- -----------
INVESTING ACTIVITIES
Net (increase) decrease in time deposits $(1,125,000) $ 850,000
Net (increase) decrease in loans (7,024,947) (3,389,799)
Additions to premises and equipment (397,458) (351,806)
Purchases of mortgage-backed securities (495,000) (1,497,017)
Proceeds from collection of mortgage-backed securities 1,358,107 836,457
Purchases of investment securities (700,000) (1,500,000)
Proceeds from maturities of investment securities 2,155,873 1,925,318
----------- -----------
Net Cash Used in Investing Activities $(6,228,425) $(3,126,847)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE> 74
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
accounts, passbook savings accounts, and
certificates of deposits $ 7,577,761 $ 778,083
Payments on advances from Federal Home Loan Bank (128,929) (133,616)
Net increase (decrease) in mortgage escrow funds 2,710 (2,175)
Net proceeds received from the issuance of common stock -- 4,496,579
Dividends paid (142,576) (52,796)
----------- -----------
Net Cash Provided by Financing Activities $ 7,308,966 $ 5,086,075
----------- -----------
Increase in Cash and Cash Equivalents 1,406,027 2,199,738
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,741,783 542,045
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,147,810 $ 2,741,783
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ 1,215,780 $ 1,109,750
Taxes paid 196,628 11,400
Non-cash investing and financing activities consisted of the following:
Loans transferred to real estate owned during the year 120,204 --
Stock dividends received from Federal Home Loan Bank 19,300 18,000
Total net increase (decrease) in unrealized loss on securities
available-for-sale $ 7,944 $ 39,113
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 75
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Lexington First Federal Savings and Loan Association (the Association) commenced
operations in 1961 as a federally chartered mutual savings association. Its
deposits have been federally insured up to applicable limits, and it has been a
member of the Federal Home Loan Bank (FHLB) system since that time.
On December 14, 1992, the Association completed its reorganization to a mutual
holding company known as Lexington First Federal Mutual Holding Company (the
Mutual Holding Company). On that date, Lexington First Federal Savings Bank (the
Savings Bank) completed its organization through the sale of a total of 215,000
shares of common stock, of which 135,000 shares were sold to the Mutual Holding
Company in exchange for the transfer to the Savings Bank of all but $100,000 of
the assets and liabilities of the Association, and 80,000 shares were sold to
persons other than the Mutual Holding Company at a price of $10.00 per share for
gross proceeds of $800,000, and net proceeds of $626,193, after deducting
expenses of $173,807.
Community National Corporation (the Company) was incorporated under the laws of
the State of Tennessee for the purpose of holding all of the capital stock of
Lexington First Federal Savings Bank following the second step conversion of its
former mutual holding company, which was completed on December 11, 1997. On that
date, pursuant to the plan of conversion: (i) the Mutual Holding Company
converted to an interim federal stock savings bank and simultaneously merged
with and into the Bank; (ii) the Mutual Holding Company ceased to exist and the
135,000 shares of the outstanding Bank Common Stock held by the Mutual Holding
Company were canceled; (iii) a second interim savings association (Interim) was
formed by the Company solely for the purpose of merging with and into the Bank.
As a result of the merger of Interim with and into the Bank, the Bank became a
wholly owned subsidiary of the Company operating under the name "Lexington First
Federal Savings Bank" and the outstanding Public Bank Shares, which amounted to
87,993 shares were converted into Exchange Shares pursuant to a ratio of
2.581243 for each Public Bank Share. At the conclusion of the Stock Conversion
and Reorganization Lexington First Federal Savings Bank converted to a national
bank known as "Community National Bank of Tennessee," the present wholly owned
subsidiary of Community National Corporation.
The Company's principal business is that of directing, planning and coordinating
the business activities of the Bank. These activities primarily consist of
accepting deposits from the general public and investing these funds in loans in
the Bank's market area and in investment securities and mortgage-backed
securities.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company (prior
to December 11, 1997 Lexington First Federal Mutual Holding Company) and its
wholly owned subsidiary, Community National Bank of Tennessee (prior to December
11, 1997 Lexington First Federal Savings Bank).
All significant inter-company accounts are eliminated in consolidation.
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE> 76
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
CASH AND CASH EQUIVALENTS
Cash consists of currency on hand and demand deposits with other financial
institutions. Cash equivalents are short-term, highly liquid investments both
readily convertible to known amounts of cash and so near maturity that there is
insignificant risk of changes in value because of changes in interest rate. Only
investments with maturities of less than three months at the time of purchase
are considered as cash equivalents.
SECURITIES - INVESTMENT SECURITIES ARE CLASSIFIED AS FOLLOWS:
Held-to-maturity, which includes those securities which the Company has
the intent and the ability to hold to maturity; Trading securities,
which includes those investment securities which are held for
short-term resale; and Available-for-sale, which includes all other
investment securities.
Securities, which are held-to-maturity, are reflected at cost, adjusted for
amortization of premiums and accretion of discounts under methods which
approximated the interest method. Securities which are available-for-sale are
carried at fair value, and unrealized gains and losses are recognized as direct
increases or decreases in stockholders' equity. Trading securities, where
applicable, are carried at fair value, and unrealized gains and losses on these
securities are included in net income.
Realized gains and losses on investment securities transactions are determined
based on the specific identification method and are included in net income.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
possible loan losses, and net of deferred loan- origination fees. Interest on
loans is accrued and credited to operations based upon the principal amount
outstanding.
ALLOWANCE FOR LOAN LOSSES
Provision for losses on loans receivable and foreclosed real estate are charged
to operations when the loss becomes probable based on management's judgement.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral, and current economic
conditions.
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 77
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
ALLOWANCE FOR LOAN LOSSES (CONT.)
Various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for possible losses. Such agencies
may require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Uncollectible interest on loans is charged off, or an allowance is established,
when management is uncertain of the collectibility of the loan. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent that payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case the
loan is returned to accrual status. At December 31, 1998 and 1997, $1,895 and
$4,743 respectively, of interest had been charged to the allowance for
uncollectible interest per management's evaluation.
LOAN ORIGINATION FEES AND RELATED COSTS
Loan fees are accounted for in accordance with FASB Statement No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases. Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for estimated prepayments based on the Company's
historical prepayment experience. The amount of the fees deferred at December
31, 1998 and 1997 were $13,429 and $22,679.
REAL ESTATE HELD FOR INVESTMENT AND FORECLOSURE REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure. Real estate
properties held for investment are carried at the lower of cost, including cost
of improvements and amenities incurred subsequent to acquisition, or net
realizable value. Costs relating to development and improvement of property are
capitalized, whereas costs relating to the holding of property are expenses.
INCOME TAXES
The Company uses the accrual method of accounting for federal income tax
reporting. Deferred tax assets or liabilities are computed for significant
differences in financial statement and tax basis of assets and liabilities,
which result from temporary differences in financial statement and tax
accounting.
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE> 78
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
PREMISES AND EQUIPMENT
Land is carried at cost. Buildings and furniture, fixtures and equipment are
carried at cost, less accumulated depreciation and amortization. Buildings and
furniture, fixtures and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financing Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE> 79
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement
of financial condition for cash and cash equivalents approximate those
assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Investment securities (including trading account securities and
mortgage-backed securities): Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of
comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate
commercial real estate and rental property mortgage loans and commercial
and industrial loans) are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates
include judgments regarding future expected loss experience and risk
characteristics. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair value for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits. The
carrying amount of accrued interest payable approximates fair value.
Long-term borrowings: Rates currently available to the Bank for
borrowings with similar terms and remaining maturities are used to
estimate fair value of existing borrowings.
RECLASSIFICATION.
Certain prior year amounts have been reclassified to conform to the current year
financial statement presentation.
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 80
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1998 and 1997, are summarized below:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash on hand $ 65,633 $ 36,150
Demand deposits 4,082,177 2,705,633
---------- ----------
$4,147,810 2,741,783
========== ==========
</TABLE>
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market value of investments and mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1998
-----------------
Securities held-to-maturity consist of the following:
Obligations of states & political subdivisions $ 657,770 $ 35,366 $ -- $ 693,136
========== ======== =========== ==========
Securities available-for-sale consist of the following:
U.S. government and federal agencies $1,585,174 $ 5,835 $ (15,537) $1,575,472
========== ======== =========== ==========
Total $2,242,944 $ 41,201 $ (15,537) $2,268,608
========== ======== =========== ==========
December 31, 1997
-----------------
Securities held-to-maturity consist of the following:
U.S. government and federal agencies $ 500,000 $ -- $ (705) $ 499,295
Obligations of states & political subdivisions 657,492 32,319 -- 689,811
---------- -------- ----------- ----------
Total $1,157,492 $ 32,319 $ (705) $1,189,106
========== ======== =========== ==========
Securities available-for-sale consist of the following:
U.S. government and federal agencies $2,355,373 $ 3,115 $ (30,956) $2,327,532
Obligations of states & political subdivisions 189,833 654 -- 190,487
---------- -------- ----------- ----------
$2,545,206 $ 3,769 $ (30,956) $2,518,019
========== ======== =========== ==========
Total $3,702,698 $ 36,088 $ (31,661) $3,707,125
========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 81
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 3 - INVESTMENT SECURITIES (CONT.)
The following is a summary of securities held-to-maturity and available-for-sale
as of December 31, 1998:
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ -- $ -- $ 500,000 $ 503,567
After one year through five years -- -- 300,000 284,463
After five years through ten years 397,770 409,052 701,267 702,711
After ten years 260,000 284,084 83,907 84,731
-------- ---------- ---------- ----------
$657,770 $ 693,136 $1,585,174 $1,575,472
======== ========== ========== ==========
</TABLE>
During 1998 and 1997, the Bank did not sell any investment securities.
Investment securities with a carrying amount of approximately $2,050,000 and
$1,300,000 at December 31, 1998 and December 31, 1997, respectively, were
pledged to secure deposits as required or permitted by law.
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed securities are
as follows:
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
GNMA $ 380,098 $ -- $ (437) $ 379,661
========== ======== =========== ==========
Securities available-for-sale consist of the following:
FNMA $ 189,514 $ 36 $ (1,615) $ 187,935
GNMA 2,118,141 15,050 (5,531) 2,127,660
FHLMC 436,437 5,517 (1,217) 440,737
---------- -------- ----------- ----------
$2,744,092 $ 20,603 $ (8,363) $2,756,332
========== ======== =========== ==========
$3,142,190 $ 20,603 $ (8,800) $3,135,993
========== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 82
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 4 - MORTGAGE-BACKED SECURITIES (CONT.)
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ------ ----------- ----------
<S> <C> <C> <C> <C>
Securities held-to-maturity consist of the following:
GNMA $ 556,783 $ 6,512 $ $ 563,295
========== ======== =========== ==========
Securities available-for-sale consist of the following:
FNMA $ 472,780 $ 1,024 $ (5,225) $ 468,579
GNMA 2,122,884 20,798 (2,348) 2,141,334
FHLMC 848,226 9,091 (5,651) 851,666
---------- -------- ----------- ----------
$3,443,890 $ 30,913 $ (13,224) $3,461,579
========== ======== =========== ==========
$4,000,673 $ 37,425 $ (13,224) $4,024,874
========== ======== =========== ==========
</TABLE>
The following is a summary of securities held-to-maturity and available-for-sale
as of December 31, 1998:
<TABLE>
<CAPTION>
Securities Held to Maturity Securities Available-for-Sale
---------------------------- -----------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ -- $ -- $ 65,768 $ 65,834
After one year through five years -- -- 216,962 214,130
After five years through ten years -- -- 343,220 348,707
After ten years 380,098 379,661 2,118,142 2,127,661
-------- ---------- ---------- ----------
$380,098 $ 379,661 $2,744,092 $2,756,332
======== ========== ========== ==========
</TABLE>
During 1998 and 1997, the Bank sold no mortgage-backed securities.
The average yield for all mortgage-backed securities at December 31, 1998 and
1997 was 5.87% and 5.70%, respectively.
Mortgage-backed securities with a carrying amount of $500,000 at December 31,
1998 were pledged to secure deposits as required or permitted by law.
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 83
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 5 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
First mortgage loans (principally conventional):
Principal balances:
Secured by one-to-four-family residences $16,448,517 $16,275,163
Secured by other properties 1,534,013 631,487
----------- -----------
$17,982,530 $16,906,650
Less - Net deferred loan origination fees 13,429 22,679
Construction loans-in-process 427,978 271,688
----------- -----------
$17,541,123 $16,612,283
----------- -----------
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
Consumer and other loans:
Principal balances:
Secured by certificates of deposit $ 377,076 $ 561,626
Automobile 744,953 301,961
Recreational vehicle 52,195 503
Other personal 438,920 160,379
Agricultural 203,560 148,323
Commercial 6,498,947 1,699,603
Mobile homes 145,671 40,124
Fixed term rate 768,962 214,659
----------- -----------
$ 9,230,284 $ 3,127,178
----------- -----------
Total first mortgage and consumer loans 26,771,407 19,739,461
Less - allowance for loan losses 368,375 195,239
----------- -----------
$26,403,032 $19,544,222
=========== ===========
Average Yield 8.32% 8.78%
=========== ===========
</TABLE>
In conformity with Statement No. 114 of the Financial Accounting Standards
Board, the Company has recognized loans with carrying values of approximately
$430,000 at December 31, 1998 and $248,000 at December 31, 1997, as being
impaired. None of the balance in the Allowance for Loan Losses is directly
related to these loans as the Company feels they will be collected.
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 84
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Balance at beginning of year $ 195,239 $141,438
Provisions charged to income 231,094 53,801
Charge-offs and recoveries, net (57,958) --
--------- --------
Balance at end of year $ 368,375 $195,239
========= ========
</TABLE>
The Company's lending efforts have historically focused on residential real
estate loans, which comprised approximately $18.0 million or 68% of the total
loan portfolio at December 31, 1998. At December 31, 1997, residential real
estate loans comprised $16.0 million or 80% of the total loan portfolio.
Generally the loan-to-value ratio does not exceed 80%. This has provided the
Company with an adequate collateral coverage in the event of default.
Nevertheless, the Company, as with any lending institution, is subject to the
risk that the values of real estate could deteriorate in its primary lending
area. For the Company this area consists of Henderson County and surrounding
counties in the West Tennessee area. Management of the Company believes that the
real estate values in the its primary lending area are stable and such stability
will continue in the foreseeable future.
NOTE 7 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company makes loans to officers,
directors and employees and their related business interests. Such loans are
made on the same terms as those prevailing at the time for unrelated third
parties and did not involve more than the normal risk of collectibility or
present other unfavorable features. At December 31, 1998 and 1997, the amounts
of such loans were $1,171,819 and $832,875, respectively.
<TABLE>
<CAPTION>
Additions Deductions Balance at 12/31/98
--------- ----------------------- ---------------------------
Amounts
Balance at Amounts -----------------------
12/31/97 Borrowed Collected Written Off Current Non-Current
-------- -------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$832,875 $840,892 $501,948 $ -- $1,171,819 $ --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 85
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 8 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Investment securities $ 74,668 $ 58,925
Mortgage-backed securities 16,315 17,286
Loans receivable 147,969 61,836
-------- --------
$238,952 $138,047
======== ========
</TABLE>
NOTE 9 - REAL ESTATE HELD FOR INVESTMENT
The Bank has invested in an adjacent commercial building, which is being held
for rental purposes. The real estate held for investment is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Office building $ 39,443 $ 39,443
Less accumulated depreciation (39,443) (39,107)
-------- --------
$ -- $ 336
======== ========
</TABLE>
Income from real estate operations is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Rental income $ 8,425 $ 10,200
Depreciation expense (336) (335)
------- --------
$ 8,089 $ 9,865
======= ========
</TABLE>
NOTE 10 - FORECLOSED REAL ESTATE, NET OF ALLOWANCE FOR LOSSES
For the years ended December 31, 1998 and 1997, there were no allowances for
losses for real estate foreclosed.
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 86
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 11 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- ---------
<S> <C> <C>
Cost:
Land $ 104,122 $ 169,122
Buildings 675,926 396,545
Furniture, fixtures and equipment 418,570 300,494
----------- ---------
$ 1,198,618 $ 866,161
Less accumulated depreciation (400,638) (287,013)
----------- ---------
$ 797,980 $ 579,148
=========== =========
</TABLE>
Depreciation expense for the periods ended December 31, 1998 and 1997 totaled
$113,626 and $27,444, respectively.
NOTE 12 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1998 1997
---------------------------- ---------------------------
Amount Percent Amount Percent
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NOW accounts at 2.00% in 1998
and in 1997 $ 1,103,114 3.80 $ 706,409 12.73
Senior citizens checking 65,446 0.23 78,697 0.33
Student checking 5,499 0.02 2,039 0.01
Free checking 309,684 1.07 121,838 0.51
Super NOW accounts, 3.05% in
1998 and 1997 859,546 2.96 351,214 1.48
Commercial checking 324,620 1.12 174,899 0.74
Passbook savings at 3.0% in
1998 and 1997 1,469,347 5.07 1,913,689 8.07
Super passbook savings at 4.0% in 1998 1,380,416 4.76 -- --
----------- ----------- ----------- -----------
$ 5,517,672 19.03 $ 3,348,785 23.87
----------- ----------- ----------- -----------
Certificates of deposit:
3% to 4% $ 57,684 0.20 $ --
4% to 5% 1,976,286 6.82 513,004 2.16
5% to 6% 21,442,166 73.95 17,554,258 73.97
----------- ----------- ----------- -----------
$23,476,136 80.97 $18,067,262 76.13
----------- ----------- ----------- -----------
$28,993,808 100.00 $21,416,047 100.00
=========== =========== =========== ===========
Weighted average cost of deposits 5.20% 5.03%
===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-29
<PAGE> 87
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 12 - DEPOSITS (CONT.)
The amount of certificates of deposit with a minimum denomination of $100,000
was $7,322,929 and $4,069,367, respectively, at December 31, 1998 and 1997.
The Company routinely enters into deposit relationships with its directors,
officers and employees in the normal course of business. These deposits bear the
same terms and conditions as those prevailing at the time for comparable
transactions with unrelated parties. Balances of executive officers and
directors on deposit as of December 31, 1998 and 1997,were $1,235,383 and
$1,152,757 respectively.
Maturities of outstanding certificates of deposit are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Time to Maturity
----------------
0 to 1 year $20,982,190 $16,612,431
1 to 2 years 2,493,946 1,454,831
----------- -----------
$23,476,136 $18,067,262
=========== ===========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
NOW $ 68,951 $ 20,631
Super NOW 21,573 6,323
Passbook 47,354 55,265
Super passbook 31,394 --
Certificates of Deposit 1,074,609 971,196
---------- ----------
$1,243,881 $1,053,415
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE> 88
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 13 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank had outstanding advances from the FHLB at December 31, of $692,848
(1998) and $821,777 (1997). The Bank has executed a blanket mortgage collateral
agreement with the FHLB, which pledges mortgage loans equal to 1.5 times the
amount of advance outstanding or $1,039,272 at December 31, 1998 and $1,232,666
at December 31, 1997.
The amounts due on advances excluding interest of $835,726 are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Amount
------------ ------
<S> <C>
1999 $ 20,183
2000 21,770
2001 23,483
2002 25,331
2003 27,326
2004-2008 75,752
2009-2013 95,867
2014-2018 141,175
2019-2023 208,253
2024-2026 53,708
--------
$692,848
========
</TABLE>
The weighted average cost of advances at December 31, 1998 and 1997 was 7.76%
and 7.88%, respectively.
NOTE 14 - INCOME TAXES
A reconciliation of income taxes at the federal statutory rates to the income
tax expense in the financial statements is as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1998 1997
--------------------------- -------------------------
% of Pretax % of Pretax
Amount Income Amount Income
--------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Expected income tax expense at federal tax rates $ 116,732 34.0 $ 110,679 34.0
Increase (reductions) in taxes resulting from:
Non-taxable income:
Municipal bonds (14,280) (4.2) (20,789) (6.4)
State income tax, net of federal income tax effect 27,744 8.1 24,673 7.6
Other (351) (0.1) (13,013) (4.0)
--------- ---- --------- ----
$ 129,845 37.8 $ 101,550 31.2
========= ==== ========= ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 89
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 14 - INCOME TAXES (CONT.)
Deferred tax assets have been provided for taxable temporary differences related
to unrealized gains on available-for-sale securities, uncollected interest,
deferred compensation, bad debts, and deferred loan fees. Deferred tax
liabilities have been provided for temporary differences related to Federal Home
Loan Bank Stock dividends.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Liabilities (Net)
Stock dividends $ 60,656 $ 54,094
Bad debts (72,686) (18,293)
Loan fees reported in different periods for
tax and financial statement purposes (4,566) (7,711)
Deferred compensation (30,871) (18,314)
Uncollected interest - deferred on books but
reported as income on tax return (644) (1,612)
Deferred tax valuation for unrealized
losses on available-for-sale securities 863 (3,229)
-------- --------
$(47,248) $ 4,935
======== ========
</TABLE>
NOTE 15 - BENEFIT PLANS
DEFERRED COMPENSATION PLAN
The Company's Board of Directors has established a Deferred Compensation Plan
for its directors, including the President of the Company. Before each calendar
year begins, each non-employee director may elect to defer receipt of all or
part of the fees that the Bank or the Company would otherwise have provided, and
the President may elect to defer receipt of up to 25% of his future
compensation. In addition, the Company made a one-time credit of $207,730 to the
President's account. Of this amount, $100,000 will vest pro-rata over ten years
of the President's future service, and $107,730 will be 50% vested immediately
and vest 25% per year over the following two years of the President's future
service. For the $107,730 portion of the credit only, vesting accelerates to
100% if the President is terminated without "just cause" and not in connection
with a "change in control" (as these terms are defined in his employment
agreement).
PENSION PLAN
The Company annually contributes an amount to the Financial Institutions
Retirement Fund as necessary to fund the actuarially determined minimum funding
requirements in accordance with the Employee Retirement Income Security Act of
1974, as amended (ERISA). For the year ended September 30, 1991, the Retirement
Plan was completely funded. Pension expense amounted to $0 and $300 for the
years ended December 31, 1998 and 1997, respectively. Upon the normal retirement
age, at or after age 65, a participant is entitled to an annual retirement
benefit in the amount equal to 1.5% of the participant's average annual
compensation (as defined in the Retirement Plan) multiplied by the participant's
years of benefit service at normal retirement. Under the Retirement Plan,
employees may participate in the Retirement Plan after one year of employment
with the Company. Benefits are also payable under the Retirement Plan for
termination due to disability, early retirement and upon death. Benefits become
vested after a participant completes five years of service.
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE> 90
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 16 - REGULATORY CAPITAL
Community National Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total capital and
Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier
1 capital to adjusted total assets (as defined). Management believes, as of
December 31, 1998, that the Bank meets all the capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the FDIC, the Bank
was categorized as well capitalized under the regulatory framework for prompt
corrective action. To remain categorized as "well capitalized", the Bank will
have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the following table. There are no conditions or
events since the most recent notification that management believes have changed
the Bank's prompt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
under the Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
-------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ---- ------ --- ------ ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital
(to Risk-Weighted Assets) $ 6,783 32.2% $1,682 8.0% $2,102 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 6,519 31.0% 841 4.0% 1,261 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 6,519 17.3% 1,503 4.0% 1,878 5.0%
As of December 31, 1997
Total Capital
(to Risk Weighted Assets) 6,540 29.7% 1,760 8.0% 2,200 10.0%
Tier 1 Capital
(to Risk-Weighted Assets) 6,345 28.8% 880 4.0% 1,320 6.0%
Tier 1 Capital
(to Adjusted Total Assets) 6,345 21.1% 1,203 4.0% 1,504 5.0%
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE> 91
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 17 - CONCENTRATION OF CREDIT RISK
Most of the Bank's business activity is with customers located within Henderson
and surrounding counties in Tennessee. The loan portfolio is comprised of
first-mortgage loans to residential and commercial customers and consumer loans.
NOTE 18 -FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the financial statements. The contractual amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as they
do for on-balance-sheet instruments. Unless noted otherwise, the Company
generally requires collateral to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the majority of the commitments are expected to
be funded, the total commitment amounts represent future expected cash
requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The Amount of collateral obtained if deemed necessary by the
Company upon extension of credit is based in part on management's credit
evaluation of the counter-part. Collateral held varies, but consists principally
of residential real estate and deposits.
The Company had outstanding firm commitments to originate loans as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
------- -------
<S> <C> <C>
First-mortgage loans $ -- $52,371
======= =======
</TABLE>
NOTE 19 - STOCKHOLDERS' EQUITY
The Mutual Holding Company had requested and received approval from the Office
of Thrift Supervision to waive receipt of dividends on its shares through
September 30, 1997. Dividends declared by the Association on Mutual Holding
Company shares cumulatively total $1,944,000 at December 31, 1997. Since the
Mutual Holding Company ceased to exist effective December 11, 1997, this amount
remains restricted for the payment of dividends to Company stockholders.
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE> 92
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 20 - EARNINGS PER SHARE
Net income per share of common stock for the years ended December 31, 1998 and
1997 of $0.30 and $0.59 was computed by dividing the net income by the weighted
average number of shares outstanding for the year. All per share amounts prior
to December 11, 1997, the date of reorganization, have been adjusted for the
exchange rate of 2.581243. Diluted earnings per share has not been presented
because the Company has a simple capital structure.
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION
Financial information of the Company (parent company only) is as follows:
<TABLE>
<CAPTION>
BALANCE SHEET
ASSETS
December 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash in bank $1,676,903 $2,315,038
Loans receivable 442,482 --
Accrued interest receivable 5,043 --
Investment in subsidiary 6,522,677 6,317,050
---------- ----------
Total Assets $8,647,105 $8,632,088
========== ==========
LIABILITIES AND CAPITAL
LIABILITIES
Accounts payable and accrued expenses $ 113 $ 62,820
Taxes payable 166 1,295
---------- ----------
Total Liabilities $ 279 $ 64,115
STOCKHOLDERS' EQUITY 8,646,826 $8,567,973
---------- ----------
Total Liabilities and Stockholders' Equity $8,647,105 $8,632,088
========== ==========
INCOME STATEMENT
<CAPTION>
December 31,
-------------------------
1998 1997
---------- ----------
INCOME
Interest income $ 50,943 $ 3,700
Equity in net income of subsidiary 205,625 84,321
---------- ----------
$ 256,568 $ 88,021
========== ==========
EXPENSES
Operating expenses 32,849 --
---------- ----------
Income Before Taxes $ 223,179 $ 88,021
---------- ----------
Income taxes 2,290 $ 1,295
---------- ----------
Net Income $ 221,429 $ 86,726
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 93
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION (CONT.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 221,429 $ 86,726
Adjustments to reconcile net income to net cash and cash equivalents:
Equity in net income of subsidiary (205,625) (84,321)
Changes in operating assets and liabilities:
(Increase) in interest receivable (5,045) --
Increase in accounts payable 113 --
(Increase) decrease in taxes payable (1,129) 1,295
----------- -----------
Net Cash Provided by Operating Activities $ 9,743 $ 3,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) in loans $ (442,482) $ --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of stock $ -- $ 4,496,518
Purchase of stock in subsidiary -- (2,248,000)
Increase in accounts payable - stock conversion cost (62,820) 62,820
Dividends paid (142,576) --
----------- -----------
Net Cash Provided by (Used in) Financing Activities $ (205,396) $ 2,311,338
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (638,135) 2,315,038
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 2,315,038 --
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING OF PERIOD $ 1,676,903 $ 2,315,038
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 94
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 22 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 4,147,810 $ 4,147,810 $ 2,741,783 $ 2,741,783
Time deposits 1,125,000 1,125,000 -- --
Investment securities 2,233,242 2,268,608 3,702,698 3,707,125
Mortgage-backed securities 3,136,430 3,135,993 4,000,673 4,024,874
Loans, net of allowance 26,408,075 26,607,706 19,544,222 20,018,796
Accrued interest receivable 238,952 238,952 138,047 138,047
Financial liabilities:
Deposits 28,993,808 29,010,690 21,416,047 21,218,087
Advances from FHLB 692,848 731,330 821,777 867,419
Accrued interest payable 211,261 211,261 169,954 169,954
Unrecognized Financial Instruments:
Commitments to extend credit 52,371 52,371
</TABLE>
NOTE 23 - THE CONVERSION
On April 12, 1997, the Board of Directors of the Savings Bank and the Mutual
Holding Company adopted a Plan of Conversion and Agreement and Plan of
Reorganization (Plan). Pursuant to the Plan, (1) the Mutual Holding Company
converted to an interim federal stock savings bank and simultaneously merged
into the Savings Bank, the Mutual Holding Company ceased to exist and the
135,000 shares or 60.5% of the outstanding shares of the Savings Bank's common
stock held by the Mutual Holding Company were canceled, and (2) the Savings Bank
merged into an interim institution (Interim) to be formed as a wholly-owned
subsidiary of Lexington First Federal Mutual Holding Company (the Company), a
newly formed Tennessee corporation formed in connection with the reorganization,
with the Bank being the surviving entity; and (3) the outstanding shares of the
Bank's common stock (other than those held by the Mutual Holding Company, which
were canceled) were converted into shares of common stock of the Company
pursuant to a ratio that will result in the holders of such shares owning in the
aggregate approximately the same percentage of the Company as they owned of the
Bank. The Company then offered for sale pursuant to the Plan additional shares
equal to 60.5% of the common shares of the Company. Consummation of the Plan was
subject to (i) the approval of the members of the Mutual Holding Company, (ii)
the stockholders of the Bank, and (iii) various regulatory agencies. Pursuant to
the Plan, shares of the Company's common stock were offered initially for
subscription by eligible members of the Company, eligible employee benefit plans
of the Company and the Bank, and certain other persons, including stockholders
of the Bank, as of specified dates subject to various subscription priorities as
provided in the Plan. The common stock was offered at a price determined by the
Board of Directors based upon an appraisal made by an independent appraisal
firm. The exact number of shares offered was
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 95
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 23 - THE CONVERSION (CONT.)
determined by the Board of Directors in conjunction with the determination of
the price at which the shares were sold. Any stock not purchased in the
subscription offering was sold in a community offering that commenced
simultaneously with the subscription offering.
The Plan provided that when the conversion was completed, a "Liquidation
Account" was established in an amount equal to the amount of any dividends
waived by the Mutual Holding Company plus the greater of (1) the retained
earnings of the Bank as of March 31, 1992, the date of the latest Statement of
Financial Condition contained in the final offering circular utilized in the
formation of the Mutual Holding Company or (2) 60.5% of the Bank's total
stockholders' equity as reflected in its latest statement of financial condition
in the final prospectus utilized in the conversion. The Liquidation Account is
established to provide a limited priority claim to the assets of the Bank to
qualifying depositors as of specified dates (Eligible Account Holders and
Supplemental Eligible Account Holders) who continue to maintain deposits in the
Bank after the conversion. In the unlikely event of a complete liquidation of
the Bank, and only in such an event, Eligible Account Holders and Supplemental
Account Holders would receive from the Liquidation Account a liquidation
distribution based on their proportionate share of the then total remaining
qualifying deposits.
Current regulations allow the Bank to pay dividends on its stock after the
conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned Liquidation Account. Also, capital
distribution regulations limit the Bank's ability to make capital distribution
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt, and other transactions charged to
the capital account based on their capital level and supervisory condition.
Federal regulations also preclude (i) any repurchases of the stock of the
Company for one year after the conversion, and (ii) any repurchase of the stock
of the Company, in the second or third year after the conversion unless such
repurchase is pursuant to an offer made on a pro rata basis to all stockholders
and with prior approval of the Office of Thrift Supervision or pursuant to an
open-market stock repurchase program that complies with certain regulatory
criteria including such purchases to not more than 5% of the stock of the
Company unless otherwise approved by the Office of Thrift Supervision.
NOTE 24 - YEAR 2000 COMPLIANCE
The year 2000 poses many challenges for the banking industry. Many automated
applications may cease to properly function as a result of how date fields have
historically been programmed. Many programs were designed and developed without
considering the impact of the upcoming change in the century. Failure to address
this issue in a timely manner may cause banking institutions to experience
operational problems and could cause disruption of financial markets. Many
experts believe that even the most prepared organizations may encounter some
implementation problems. As a result, the Bank has developed a Year 2000
Strategic Plan (the Plan) to take the necessary steps to insure that problems
and disruptions are minimized.
The Bank's data processing system is outsourced to Intrieve, a service bureau
that services the majority of all thrifts and savings and loans throughout the
nation. All systems including all Bank PC's are integrated with the service
bureau applications. Over $200,000 has been spent on upgrading all equipment,
software and systems. This was done principally to modernize operations, but a
substantial portion of this investment would have been required for Year 2000
compliance alone. Final testing for Year 2000 compliance has been completed with
all applications performing with Year 2000 dates. Successful tests have been
completed with all vendors and correspondents with which the Bank directly
interfaces. The Bank is Year 2000 compliant at this point. Additional testing
will be made during 1999 to check and reinforce compliance
The accompanying notes are an integral part of the financial statements.
F-38
<PAGE> 96
COMMUNITY NATIONAL CORPORATION
(AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
DECEMBER 31, 1998 AND 1997
NOTE 24 - YEAR 2000 COMPLIANCE (CONT.)
readiness. Should any unforeseen glitches arise the Bank has a contingency plan
with several alternatives to meet the worst case scenario.
The Bank's customers have been notified and counseled. All commercial customers
with Year 2000 requirements have been counseled one on one with compliance
assured to the Bank's satisfaction.
The cost of addressing the Year 2000 issue has had no material impact on
earnings since the expenditures meeting Year 2000 requirements were required and
planned for modernization alone. With testing reflecting compliance to date,
there are no indications of material impact on earnings or uncertainty of future
operation results or financial condition.
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 97
APPENDIX A
=====================================================
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNITY NATIONAL BANCORP, INC.
AND
COMMUNITY NATIONAL CORPORATION
COMMUNITY NATIONAL BANK OF TENNESSEE
====================================================
DATED AS OF DECEMBER 2, 1999
<PAGE> 98
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS........................................................................1
DEFINITIONS.....................................................................2
ARTICLE I. MERGER...............................................................5
1.1 THE MERGER.............................................................5
1.2 THE EFFECTIVE DATE.....................................................6
ARTICLE II. CONSIDERATION.......................................................6
2.1 EFFECT ON COMPANY COMMON STOCK.........................................6
2.2 EXCHANGE PROCEDURES....................................................6
2.3 EFFECT ON NEWCO COMMON STOCK...........................................7
ARTICLE III. ACTIONS PENDING CONSUMMATION.......................................7
3.1 CAPITAL STOCK..........................................................7
3.2 DIVIDENDS, ETC.........................................................7
3.3 INDEBTEDNESS; LIABILITIES; ETC.........................................7
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC............................7
3.5 LIENS AND ENCUMBRANCES.................................................7
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC...............................8
3.7 BENEFIT PLANS..........................................................8
3.8 CONTINUANCE OF BUSINESS................................................8
3.9 AMENDMENTS.............................................................8
3.10 CLAIMS.................................................................8
3.11 CONTRACTS..............................................................8
3.12 LOANS..................................................................8
3.13 TRANSACTION EXPENSES...................................................8
ARTICLE IV. REPRESENTATIONS AND WARRANTIES......................................8
4.1 THE COMPANY AND THE BANK REPRESENTATIONS AND WARRANTIES................8
4.2 NEWCO REPRESENTATIONS AND WARRANTIES..................................17
ARTICLE V. COVENANTS...........................................................18
5.1 BEST EFFORTS..........................................................18
5.2 THE PROXY.............................................................18
5.3 OFFERING DOCUMENT.....................................................18
5.4 PRESS RELEASES........................................................19
5.5 ACCESS; INFORMATION...................................................19
5.6 TERMINATION FEE.......................................................19
5.7 REGULATORY APPLICATIONS...............................................21
5.8 BLUE-SKY FILINGS......................................................21
5.9 [RESERVED]............................................................21
5.10 STATE TAKEOVER LAW....................................................21
</TABLE>
A-i
<PAGE> 99
<TABLE>
<S> <C>
5.11 NO RIGHTS TRIGGERED.................................................21
5.12 INDEMNIFICATION.....................................................21
5.13 CURRENT INFORMATION.................................................23
5.14 FINANCIAL COMMITMENT................................................23
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER.........................23
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS..............................23
6.2 CONDITIONS TO OBLIGATIONS OF NEWCO..................................23
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND THE BANK...................24
ARTICLE VII. TERMINATION.....................................................25
7.1 GROUNDS FOR TERMINATION.............................................25
7.2 CONSEQUENCES OF TERMINATION.........................................25
ARTICLE VIII. OTHER MATTERS..................................................25
8.1 SURVIVAL............................................................25
8.2 WAIVER; AMENDMENT...................................................26
8.3 COUNTERPARTS........................................................26
8.4 GOVERNING LAW.......................................................26
8.5 EXPENSES............................................................26
8.6 CONFIDENTIALITY.....................................................26
8.7 NOTICES.............................................................26
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES..................27
8.9 HEADINGS............................................................27
</TABLE>
EXHIBITS
Exhibit A Approval by Directors of Community National Corporation
Exhibit B Director's Agreement
Exhibit C [Reserved]
Exhibit D Legal Opinion of Baker, Donelson, Bearman & Caldwell
Exhibit E [Reserved]
Exhibit F Legal Opinion of Gerrish & McCreary, P.C.
A-ii
<PAGE> 100
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 2nd day of December, 1999
(the "Plan" or "Agreement"), between COMMUNITY NATIONAL CORPORATION (the
"Company"), COMMUNITY NATIONAL BANK OF TENNESSEE (the "Bank"), and COMMUNITY
NATIONAL BANCORP, INC. ("NEWCO").
RECITALS
(A) THE COMPANY. The Company is a company duly organized, existing, and
in good standing under the laws of the State of Tennessee, with its principal
executive offices located in Lexington, Tennessee. The Company is a registered
bank holding company under the Bank Holding Company Act of 1956, as amended. As
of the date of this Plan, the Company has 8,000,000 authorized shares of common
stock, $1.00 par value per share ("Company Common Stock"), of which 712,877
shares of Company Common Stock are issued and outstanding; and 2,000,000
authorized shares of preferred stock none of which are outstanding. There are no
director or employee stock options outstanding.
(B) THE BANK. The Bank is a national banking association duly organized
and existing under the laws of the United States of America, with its principal
executive offices located in Lexington, Tennessee. As of the date of this Plan,
the Bank has 100,000 authorized shares of common stock, $1.00 par value per
share ("Bank Common Stock") (no other class of capital stock being authorized),
of which 100,000 shares of Bank Common Stock are issued and outstanding. All of
the issued and outstanding shares of Bank Common Stock are owned by the Company,
the sole shareholder of the Bank.
(C) NEWCO. NEWCO is a corporation duly organized, existing and in good
standing under the laws of the State of Tennessee, with its principal executive
offices located in Lexington, Tennessee. As of the date of this Plan, NEWCO has
1,000,000 authorized shares of common stock, $1.00 par value per share ("NEWCO
Common Stock"), of which no shares are issued and outstanding. It is expected
that NEWCO will have 123,500 shares of stock outstanding on the date of
consummation of the transaction.
(D) VOTING AGREEMENT. As a condition and an inducement to NEWCO's
willingness to enter into this Plan, the directors of the Bank and the Company
have entered into an agreement in the form attached to this Plan as Exhibit A,
pursuant to which, among other things, each such individual has agreed to vote
his or her shares of Company Common Stock in favor of approval of the actions
contemplated by this Plan at the Meeting (as defined below). Additionally, the
directors listed in Schedule 6.2(F) have agreed to refrain from competing with
the Continuing Corporation (as defined below) and its Subsidiaries as outlined
in Exhibit B.
(E) RIGHTS, ETC. Except as Previously Disclosed (as defined below) in
Schedule 4.1(C) or paragraph (A) of the Recitals to this Plan, or as authorized
by this Plan, there are no shares of capital stock of the Company or the Bank
authorized and reserved for issuance; neither the Company nor the Bank has any
Rights (as defined below) issued or outstanding; and neither the Company nor the
Bank has any commitment to authorize, issue or sell any such shares or any
Rights. The term "Rights" means securities or obligations convertible into or
exchangeable for, or giving any Person any right to subscribe for or acquire, or
any options, calls or commitments relating to, shares of capital stock. There
are no preemptive rights with respect to the Company Common Stock.
(F) APPROVALS. At meetings of the respective Boards of Directors of the
Company, the Bank, and NEWCO, each such Board has approved and authorized the
execution of this Plan in counterparts.
A-2
<PAGE> 101
In consideration of their mutual promises and obligations, the Parties
further agree as follows:
DEFINITIONS
(A) DEFINITIONS. Capitalized terms used in this Plan have the following
meanings:
"Appraisal Laws" has the meaning assigned to such term in Section
1.1(E).
"Asset Classification" has the meaning assigned to such term in Section
4.1(T).
"Bank" has the meaning assigned to such term in the first paragraph of
this Plan.
"Bank Common Stock" has the meaning assigned to such term in paragraph
(B) of the Recitals.
"Capital" means capital stock, surplus and retained earnings determined
in accordance with GAAP.
"Code" has the meaning assigned to such term in Section 4.1(Q)(2).
"Company" has the meaning assigned to such term in the first paragraph
of this Plan.
"Company Common Stock" has the meaning assigned to such term in
paragraph (A) of the Recitals.
"Company Shareholders" means holders of Company Common Stock.
"Compensation and Benefit Plans" has the meaning assigned to such term
in Section 4.1(Q)(1).
"Continuing Corporation" has the meaning assigned to such term in
Section 1.1(A).
"Derivatives Contract" means an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial contract or any
other contract that (1) is not included on the balance sheets of the Company
contained in its Regulatory Filings or the NEWCO financial reports, as the case
may be, and (2) is a derivative contract (including various combinations of the
foregoing).
"Dissenting Shares" means the shares of Company Common Stock held by
those shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the Appraisal Laws.
"Effective Date" has the meaning assigned to such term in Section 1.2.
"Environmental Law" means (1) any federal, state, and/or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, legal doctrine, order, judgment, decree, injunction,
requirement or agreement with any governmental entity, relating to (a) the
protection, preservation or restoration of the environment (including air, water
vapor, surface water, groundwater, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource) or to
human health or safety, or (b) the exposure to, or the use, storage, recycling,
treatment, generation, transportation, processing, handling, labeling,
production, release or disposal of Hazardous Material, in each case as amended
and as now in effect, including the Federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic
Substances Control Act, and the Federal Insecticide, Fungicide and Rodenticide
Act, the Federal Occupational Safety and Health Act of 1970, and (2) any common
law or equitable doctrine (including injunctive relief and tort doctrines such
as negligence, nuisance, trespass and strict liability) that may impose
A-3
<PAGE> 102
liability or obligations for injuries or damages due to, or threatened as a
result of, the presence of or exposure to any Hazardous Material.
"ERISA" has the meaning assigned to such term in Section 4.1(Q)(2).
"ERISA Affiliate" has the meaning assigned to such term in Section
4.1(Q)(3).
"ERISA Plans" has the meaning assigned to such term in Section
4.1(Q)(2).
"Exception Shares" means shares held by certain identified Company
Shareholders and listed on Schedule 2.1(A), that will retain their shares of
Company Common Stock as described in Section 2.1 rather than exchanging such
shares for the Merger Consideration.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated under such statute.
"FDIC" means the Federal Deposit Insurance Corporation.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"GAAP" means generally accepted accounting principles.
"Hazardous Material" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law, whether by type or quantity,
including any oil or other petroleum product, toxic waste, pollutant
contaminant, hazardous substance, toxic substance, hazardous waste, special
waste or petroleum or any derivative or by-product thereof, radon, radioactive
material, asbestos, asbestos containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"Loan/Fiduciary Property" means any property owned or controlled by the
Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries holds a security or other interest, and where required by the
context, includes any such property where the Company or any of its Subsidiaries
constitutes the owner or operator of such property, but only with respect to
such property.
"Material Adverse Effect" means, with respect to any Party, an event,
occurrence or circumstance (including (i) the making of any provisions for
possible loan and lease losses, write-downs or other real estate owned and
taxes, and (ii) any breach of a representation or warranty contained in this
Plan by such Party) that (a) has or is reasonably likely to have a material
adverse effect on the financial condition, results of operations, business or
prospects of such Party and its Subsidiaries, taken as a whole, or (b) would
materially impair such Party's ability to perform its obligations under this
Plan or the consummation of any of the transactions contemplated by this Plan.
"Meeting" has the meaning assigned to such term in Section 5.2.
"Merger" has the meaning assigned to such term in Section 1.1(A).
"Merger Consideration" means the aggregate of the cash paid for the
Company shares, other than Exception Shares which shall be retained and not
exchanged for cash.
"Multiemployer Plans" has the meaning assigned to such term in Section
4.1(Q)(2).
"NEWCO" has the meaning assigned to such term in the first paragraph of
the Plan.
A-4
<PAGE> 103
"NEWCO Common Stock" has the meaning assigned to such term in paragraph
(c) of the Recitals.
"Offering Document" has the meaning assigned to such term in Section
5.3.
"OCC" means the Office of the Comptroller of the Currency.
"OTS" means the Office of Thrift Supervision.
"Participation Facility" means any facility in which the Company or any
of its Subsidiaries participates in the management and, where required by the
context, includes the owner or operator of such facility.
"Party" means a party to this Plan.
"Pension Plan" has the meaning assigned to such term in Section
4.1(Q)(2).
"Person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, governmental
body, or other entity.
"Plan" means this Agreement and Plan of Merger.
"Previously Disclosed" with respect to information, means that the
information is provided by a Party in a Schedule that is delivered
contemporaneously with the execution of this Plan.
"Proxy Statement" has the meaning assigned to such term in Section 5.2.
"Regulatory Authorities" means federal or state governmental agencies,
authorities or departments charged with the supervision or regulation of
depository institutions or engaged in the insurance of deposits.
"Regulatory Filings" has the meaning assigned to such term in Section
4.1(H).
"Rights" has the meaning assigned to such term in paragraph (E) of the
Recitals.
"Securities Act" means the Securities Act of 1933, as amended, together
with the rules and regulations promulgated under such statute.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means, with respect to any entity, each partnership,
limited liability company, or corporation the majority of the outstanding
partnership interests, membership interests, capital stock or voting power of
which is (or upon the exercise of all outstanding warrants, options and other
rights would be) owned, directly or indirectly, at the time in question by such
entity.
"Tax Returns" has the meaning assigned to such term in Section 4.1(AA).
"Taxes" means federal, state, local or foreign income, gross receipts,
windfall profits, severance, property, production, sales, use, license, excise,
franchise, employment, withholding or similar taxes imposed on the income,
properties or operations of the respective Party or its Subsidiaries, together
with any interest, additions, or penalties relating to such taxes and any
interest charged on those additions or penalties.
"TBCA" means the Tennessee Business Corporation Act, as amended.
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"Third Party" means a person within the meaning of Section 3(a)(9) and
13(d)(3) of the Exchange Act, excluding (1) the Company or any Subsidiary of the
Company, and (2) NEWCO or any Subsidiary of NEWCO.
(B) GENERAL INTERPRETATION. Except as otherwise expressly provided in
this Plan or unless the context clearly requires otherwise, the terms defined in
this Plan include the plural as well as the singular; the words "hereof",
"herein", "hereunder", "in this Plan" and other words of similar import refer to
this Plan as a whole and not to any particular Article, Section or other
subdivision; and references in this Plan to Articles, Sections, Schedules, and
Exhibits refer to Articles and Sections of and Schedules and Exhibits to this
Plan. Whenever the words "include", "includes", or "including" are used in this
Plan, they shall be deemed to be followed by the words "without limitation".
Unless otherwise stated, references to Subsections refer to the Subsections of
the Section in which the reference appears. All pronouns used in this Plan
include the masculine, feminine and neuter gender, as the context requires. All
accounting terms used in this Plan that are not expressly defined in this Plan
have the respective meanings given to them in accordance with GAAP.
ARTICLE I. MERGER
1.1 THE MERGER. Subject to the provisions of this Plan, on the
Effective Date:
(A) THE CONTINUING CORPORATION. In accordance with the terms of
TBCA 48-21-108, NEWCO shall merge into the Company (the "Merger"), the separate
existence of NEWCO shall cease and the Company (the "Continuing Corporation")
shall survive, and the name of the Continuing Corporation shall be "Community
National Corporation".
(B) RIGHTS, ETC. Upon consummation of the Merger, the Continuing
Corporation shall possess all of the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of the merging
corporations; and all property, real, personal and mixed, and all debts due on
whatever account, and all other choses in action, and all and every other
interest, of or belonging to or due to each of the corporations so merged, shall
be deemed to be vested in the Continuing Corporation without further act or
deed; and the title to any real estate or any interest therein, vested in each
of such corporations, shall not revert or be in any way impaired by reason of
the Merger.
(C) LIABILITIES. The Continuing Corporation shall be responsible
and liable for all the liabilities, obligations and penalties of each of the
corporations so merged.
(D) CHARTER; BYLAWS; DIRECTORS; OFFICERS. The Charter and Bylaws of
the Continuing Corporation shall be those of the Company, as in effect
immediately prior to the Merger becoming effective. The directors and officers
of NEWCO in office immediately prior to the Merger becoming effective are
expected to be the directors and officers of the Continuing Corporation, who
shall hold office until such time as their successors are elected and qualified.
(E) DISSENTING SHARES. Notwithstanding anything to the contrary in
this Plan, each Dissenting Shareholder who, as of the Effective Date of the
Merger, has not effectively withdrawn or lost his dissenters' rights under TBCA
48-23-101 et seq (the "Appraisal Laws") shall not be converted into or represent
a right to receive any of the Merger Consideration, but each holder of such
Dissenting Shares shall be entitled only to such rights as are granted by the
Appraisal Laws, unless and until such holder shall have failed to perfect or
shall have effectively withdrawn or lost the right to payment under the
Appraisal Laws, in which case each such share shall be deemed to have been
converted at the Effective Date into his or her portion of the Merger
Consideration. Each holder of Dissenting Shares who becomes entitled to payment
for his Company
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Common Stock pursuant to the provisions of the Appraisal laws shall receive
payment for such Dissenting Shares from the Company (but only after the amount
thereof shall have been agreed upon or finally determined pursuant to the
Appraisal Laws).
1.2 EFFECTIVE DATE. Unless the Parties agree upon another date, the
"Effective Date" of the Merger will be the tenth business day after the
fulfillment or waiver of each condition precedent set forth in, and the granting
of each approval (and expiration of any waiting period) required by, Article VI.
A business day is any day other than a Saturday, Sunday or legal holiday in the
State of Tennessee. If the Merger is not consummated in accordance with this
Plan on or prior to March 31, 2000, the Company or NEWCO may terminate this Plan
in accordance with Article VII. On or prior to the Effective Date, NEWCO and the
Company shall execute and deliver to the Secretary of State of the State of
Tennessee articles of merger in accordance with applicable law.
ARTICLE II. CONSIDERATION
2.1 EFFECT ON COMPANY COMMON STOCK. Subject to the provisions of this
Plan, on the Effective Date, by virtue of the Merger:
(A) MERGER CONSIDERATION. The redemption price paid by the
Continuing Corporation to the holders of Company Common Stock ("Company
Shareholders") shall be cash of $14.75 for each share of Company Common Stock
(the "Merger Consideration"), except for (i) Exception Shares listed on Schedule
2.1(A) which shall be retained by such Shareholders or (ii) Dissenting Shares
which shall be entitled to payment under the Appraisal Laws.
All of the issued and outstanding shares of Company Common Stock, other than
Dissenting Shares and Exception Shares, shall be converted into the right to
receive the Merger Consideration based upon each Company Shareholder's ownership
of the total number of issued and outstanding shares of Company Common Stock
immediately prior to the Effective Date. It is expected that approximately
471,173 shares of Company will be acquired for cash as part of this transaction
at $14.75 per share, representing aggregate consideration of $6,949,802, and
that approximately 241,704 shares of Company, the Exception Shares, will be
retained by the shareholders who shall continue as shareholders of the
Continuing Corporation.
(B) [RESERVED]
(C) CANCELLATION OF COMPANY COMMON STOCK. All shares of Company
Common Stock issued and outstanding immediately prior to the Effective Date
other than Exception Shares shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist as of the
Effective Date, and each holder of a certificate or other documentation
representing any such shares of Company Common Stock shall cease to have any
rights with respect thereto, except the right to receive (i) the portion of the
cash Merger Consideration applicable to such shares in consideration therefor
upon surrender of such certificate or other documentation in accordance with the
Plan, without interest, or, (ii) if applicable, cash in accordance with the
Appraisal Laws for Dissenting shares. After the Effective Date, there shall be
no transfers on the stock transfer books of the Company or the Continuing
Corporation of the shares of Company Common Stock that were issued and
outstanding immediately prior to the Effective Date.
(D) ANTI-DILUTION. If prior to the Effective Date, shares of
Company Common Stock shall be changed into a different number of shares by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares, readjustment or similar transactions, or if a stock dividend
shall be declared, appropriate and proportionate adjustment or adjustments will
be made in the Merger Consideration.
2.2 EXCHANGE PROCEDURES. As promptly as practicable after the Effective
Date, Continuing Corporation shall send or cause to be sent to each former
Company Shareholder of record immediately prior to the Effective Date, other
than Exception Shares, transmittal materials for use in
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exchanging such shareholder's certificates for the Merger Consideration set
forth in this Article II. The Merger Consideration to be paid by the Continuing
Corporation, any check that a shareholder shall be entitled to receive, and any
dividends paid on such shares of Company Common Stock for which the record date
for determination of shareholders entitled to such dividends is on or before the
Effective Date, will be delivered to such shareholder only upon delivery to the
Continuing Corporation of the certificates representing all of such shares of
Company Common Stock (or indemnity satisfactory to the Continuing Corporation,
in its judgment, if any of such certificates are lost, stolen or destroyed) and
documentary evidence satisfactory to the Continuing Corporation of the otherwise
valid holding of such shares. No interest will be paid on the Merger
Consideration or dividends to which the holder of such shares shall be entitled
to receive upon such delivery. The procedures described herein shall not prevent
the use of other means of transfer of shareholder certificates including
physical delivery of such certificates to the Company's offices, which
procedures the parties intend to utilize.
2.3 EFFECT ON NEWCO COMMON STOCK. Subject to the provisions of this
Plan, on the Effective Date, by virtue of the Merger, each of the 123,500 issued
and outstanding NEWCO shares shall be exchanged, on a one-for-one share basis,
for shares of Company Common Stock.
ARTICLE III. ACTIONS PENDING CONSUMMATION
Unless otherwise agreed to in writing by NEWCO, each of the Company and
the Bank shall conduct its business in the ordinary and usual course consistent
with past practice and shall use its best efforts to maintain and preserve its
business organization, employees and advantageous business relationships and
retain the services of its officers and key employees identified by NEWCO, and
neither the Company nor the Bank, without the prior written consent of NEWCO,
will (or cause or allow any of its Subsidiaries to):
3.1 CAPITAL STOCK. Except for or as otherwise expressly permitted by
this Plan or as Previously Disclosed in Schedule 4.1(C), issue, sell or
otherwise permit to become outstanding any additional shares of capital stock of
the Company, the Bank or any of their Subsidiaries, or any Rights with respect
thereto, or enter into any agreement with respect to the foregoing, or permit
any additional shares of Company Common Stock to become subject to grants of
options, stock appreciation rights or similar stock-based employee or director
compensation rights.
3.2 DIVIDENDS, ETC. Except as set forth on Schedule 3.2, make, declare
or pay any dividend on or in respect of, or declare or make any distribution on,
or directly or indirectly combine, redeem, reclassify, purchase or otherwise
acquire, any shares of its capital stock or, other than as permitted in or
contemplated by this Plan, authorize the creation or issuance of, or issue, any
additional shares of its capital stock or any Rights with respect thereto.
3.3 INDEBTEDNESS; LIABILITIES; ETC. Except as set forth on Schedule
3.3, other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money, assume, guarantee, endorse
or otherwise as an accommodation become responsible or liable for the
obligations of any other individual, corporation or other entity; provided,
however, the Company shall incur no indebtedness for borrowed money or engage in
any of the actions described in this Section 3.3.
3.4 LINE OF BUSINESS; OPERATING PROCEDURES; ETC. Except as may be
directed by any regulatory agency, (A) change its lending, investment, liability
management or other material banking policies in any material respect, except
such changes as are in accordance and in an effort to comply with Section 5.9,
or (B) commit to incur any further capital expenditures beyond those Previously
Disclosed in Schedule 3.4 other than in the ordinary course of business and not
exceeding $25,000 individually or $100,000 in the aggregate prior to the
Effective Date.
3.5 LIENS AND ENCUMBRANCES. Impose, or suffer the imposition, on any
shares of stock of any of its Subsidiaries, any lien, charge or encumbrance, or
permit any such lien, charge or encumbrance to exist.
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exist.
3.6 COMPENSATION; EMPLOYMENT AGREEMENTS; ETC. Except as Previously
Disclosed in Schedule 3.6, enter into or amend any employment, severance or
similar agreement or arrangement with any of its directors, officers or
employees, or grant any salary or wage increase, amend the terms of any employee
benefit (including incentive or bonus payments), except normal individual
increases (not exceeding 5% for any employee of Company or Bank whose salary is
$25,000 or more) in regular compensation to employees in the ordinary course of
business consistent with past practice.
3.7 BENEFIT PLANS. Except as Previously Disclosed in Schedule 3.7,
enter into or modify (except as may be required by applicable law) any pension,
retirement, stock option, stock purchase, savings, profit sharing, deferred
compensation, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or other
employees, including taking any action that accelerates the vesting or exercise
of any benefits payable thereunder.
3.8 CONTINUANCE OF BUSINESS. Dispose of or discontinue any portion of
its assets, business or properties, that is material to the Company and its
Subsidiaries taken as a whole, or merge or consolidate with, or acquire all or
any portion of, the business or property of any other entity that is material to
the Company and its Subsidiaries taken as a whole (except foreclosures or
acquisitions by the Bank in its fiduciary capacity, in each case in the ordinary
course of business consistent with past practice).
3.9 AMENDMENTS. Amend its articles of incorporation or bylaws.
3.10 CLAIMS. Settle any claim, litigation, action or proceeding
involving any liability for money damages or restrictions upon the operations of
the Company or the Bank.
3.11 CONTRACTS. Except as Previously Disclosed on Schedule 3.11, enter
into, renew, terminate or make any change in any material contract, agreement or
lease, except in the ordinary course of business consistent with past practice
with respect to contracts, agreements and leases that are terminable by it
without penalty on no more than 60 days prior written notice.
3.12 LOANS. Extend credit or account for loans and leases other than in
accordance with existing lending policies and accounting practices, except that
the Bank shall not, without the prior consent of NEWCO's Board of Directors,
make any new loan or modify, restructure or renew any existing nonperforming
loan (defined as on non-accrual status, or 90 days or more past due) to any
borrower if the amount of the resulting loan, when aggregated with all other
loans or extension of credit to such Person (or which would be required to be
aggregated for loans-to-one-borrower limitations), would be in excess of $75,000
for any new or existing customer as of the date of this Plan, except that (i)
single-family residential loans may be made in amounts that would not exceed
applicable FHLMC and FNMA limits, and (ii) such limits shall not apply to SBA,
FmHA, USDA Rural Development or other governmental or governmental agency
guaranteed amounts.
3.13 TRANSACTION EXPENSES. Incur expenses in connection with the
transactions contemplated by this Plan that exceed the amounts set forth in
Schedule 3.13.
ARTICLE IV. REPRESENTATIONS AND WARRANTIES
4.1 THE COMPANY AND THE BANK REPRESENTATIONS AND WARRANTIES. Each of
the Company and the Bank hereby represents and warrants to NEWCO as follows:
(A) RECITALS. The facts set forth in Recitals (A), (B), and (E) of
this Plan with respect to the Company and its Subsidiaries are true and correct.
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(B) ORGANIZATION, STANDING AND AUTHORITY. The Company is duly
qualified to do business and is in good standing in the State of Tennessee which
is the only state where the failure to be duly qualified, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it. The
Bank is duly qualified to do business and validly existing under the laws of the
United States and in the State of Tennessee which are the only jurisdictions
where the failure to be duly qualified, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on it. Each of the Company
and its Subsidiaries has in effect all federal, state, local and foreign
government authorizations necessary for it to own or lease its properties and
assets and to carry on its business as it is now conducted, the absence of
which, individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on it. The Bank is an "insured depository institution" as defined
in the Federal Deposit Insurance Act, as amended, and applicable regulations
under such statute, and its deposits are insured by the Savings Association
Insurance Fund of the FDIC.
(C) SHARES. The outstanding shares of the Company and its
Subsidiaries' capital stock are validly issued and outstanding, fully paid and
nonassessable (except for the application of 12 U.S.C. ss.55 to the shares of
Bank Common Stock), and subject to no preemptive rights. Except as Previously
Disclosed in Schedule 4.1(C) and paragraph (A) of the Recitals, there are no
shares of capital stock or other equity securities of the Company or its
Subsidiaries outstanding and no outstanding Rights with respect thereto. There
are no options of any kind that exist with regard to Company Common Stock.
(D) THE COMPANY SUBSIDIARIES. The Company's sole subsidiary is the
Bank. The Bank is duly qualified to do business and validly existing under the
laws of the United States and in the State of Tennessee which are the only
jurisdictions where the failure to be duly qualified, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on it. No
equity securities of any of its Subsidiaries are or may become required to be
issued (other than to the Company or one of its Subsidiaries) by reason of any
Rights with respect thereto. There are no contracts, commitments, understandings
or arrangements by which any of its Subsidiaries is or may be bound to sell or
otherwise issue any shares of such Subsidiary's capital stock, and there are no
contracts, commitments, understandings or arrangements relating to the rights of
the Company or its Subsidiaries, as applicable, to vote or to dispose of such
shares. All of the shares of capital stock of each of its Subsidiaries held by
the Company or one of its Subsidiaries are fully paid and nonassessable and are
owned by the Company or one of its Subsidiaries free and clear of any charge,
mortgage, pledge, security interest, restriction, claim, lien or encumbrance.
Except as Previously Disclosed in Schedule 4.1(D), the Bank does not own
beneficially, directly or indirectly, any shares of any equity securities or
similar interests of any corporation, bank, partnership, joint venture, business
trust, association or other organization.
(E) CORPORATE POWER. Each of the Company and its Subsidiaries has
the corporate power and authority to carry on its business as it is now being
conducted and to own all its material properties and assets.
(F) CORPORATE AUTHORITY. Subject to the receipt of approval by its
shareholders referred to in Section 6.1, this Plan has been authorized by all
necessary corporate action of the Company and each of its Subsidiaries that is a
Party, and is a valid and binding agreement of the Company and such
Subsidiaries, enforceable against the Company and such Subsidiaries in
accordance with its terms, subject to bankruptcy, insolvency and other laws of
general applicability relating to or affecting creditors' rights and to general
equity principles.
(G) NO DEFAULTS. Subject to the approval by its shareholders
referred to in Section 6.1, the required regulatory approvals referred to in
Section 6.1, and the required filings under federal and state securities laws,
and except as Previously Disclosed in Schedule 4.1(G), the execution, delivery
and performance of this Plan and the consummation by the Company and each of its
Subsidiaries that is a Party to the transactions contemplated by this Plan do
not and will not (1) constitute a breach or violation of, or a default under,
any law, rule or regulation or any judgment, decree, order, governmental permit
or license, or
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agreement, indenture or instrument of the Company or of any of its Subsidiaries
or to which the Company or any of its Subsidiaries or its or their properties is
subject or bound, which breach, violation or default is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it, (2)
constitute a breach or violation of, or a default under, the articles of
incorporation, charter or bylaws of it or any of its Subsidiaries, or (3)
require any consent or approval under any such law, rule, regulation, judgment,
decree, order, governmental permit or license or the consent or approval of any
other party to any such agreement, indenture or instrument, other than any such
consent or approval that, if not obtained, would not be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on it.
(H) FINANCIAL REPORTS. The Company's Annual Reports on Form 10-K
for the fiscal years ended December 31, 1998 and 1997, and all other reports,
registration statements, definitive proxy statements or information statements
filed by it or any of its Subsidiaries subsequent to becoming registered as a
reporting company with the SEC pursuant to the Company's Form 8-A filed as of
November 21, 1997 under the Securities Act, or under Section 13(a), 13 (c), 14
or 15(d) of the Exchange Act or under the securities regulations of the SEC, in
the form filed (collectively, its "Regulatory Filings") with the SEC as of the
date filed, (A) complied in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may be,
and (B) did not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and each of the balance sheets contained in or
incorporated by reference into any such Regulatory Filing (including the related
notes and schedules thereto) fairly presented in all material respects its
financial position and that of its Subsidiaries as of its date, and each of the
statements of income and changes in shareholders' equity and cash flows or
equivalent statements in such Regulatory Filings (including any related notes
and schedules thereto) fairly presented in all material respects, the results of
operations, changes in shareholders' equity and changes in cash flows, as the
case may be, of it and its Subsidiaries for the periods to which they relate, in
each case in accordance with GAAP consistently applied during the periods
involved, except in any case as may be noted therein, subject to normal year-end
audit adjustments in the case of unaudited statements.
(I) ABSENCE OF UNDISCLOSED LIABILITIES. Except as Previously
Disclosed on Schedule 4.1(I), neither the Company nor any of its Subsidiaries
has any obligation or liability (contingent or otherwise) that, individually or
in the aggregate, is reasonably likely to have a Material Adverse Effect on it,
except (1) as reflected in its Regulatory Filings prior to the date of this
Plan, and (2) for commitments and obligations made, or liabilities incurred, in
the ordinary course of business consistent with past practice since December 31,
1998. Except as Previously Disclosed on Schedule 4.1(I), since December 31,
1998, neither the Company nor any of its Subsidiaries has incurred or paid any
obligation or liability (including any obligation or liability incurred in
connection with any acquisitions in which any form of direct financial
assistance of the federal government or any agency thereof has been provided to
any Subsidiary) that, individually or in the aggregate, is reasonably likely to
have a Material Adverse Effect on it.
(J) NO EVENTS. Except as Previously Disclosed on Schedule 4.1(J),
since December 31, 1998, no event has occurred that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on Company or
the Bank.
(K) PROPERTIES. Except as reserved against in its Regulatory
Filings, the Company and each of its Subsidiaries have good and marketable
title, free and clear of all liens, encumbrances, charges, defaults, or equities
of any character, to all of the properties and assets, tangible and intangible,
reflected in its Regulatory Filings as being owned by the Company or its
Subsidiaries as of the dates thereof other than those that, individually or in
the aggregate, are not reasonably likely to have a Material Adverse Effect on
it, except those sold or otherwise disposed of in the ordinary course of
business. All buildings and all material fixtures, equipment, and other property
and assets that are held under leases or subleases by the Company or any of its
Subsidiaries are held under valid leases or subleases enforceable in accordance
with their respective terms, other than any such exceptions to validity or
enforceability that, individually or in the aggregate, are not reasonably likely
to have a Material Adverse Effect on it.
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(L) LITIGATION; REGULATORY ACTION. Except as Previously Disclosed
in Schedule 4.1(L), no litigation, proceeding or controversy before any court or
governmental agency is pending that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or any of its
Subsidiaries or that alleges claims under any fair lending law or other law
relating to discrimination, including the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act and the Home Mortgage Disclosure
Act, and, to the best of its knowledge, no such litigation, proceeding or
controversy has been threatened; and except as Previously Disclosed in Schedule
4.1(L), neither the Company nor any of its Subsidiaries or any of its or their
material properties or their officers, directors or controlling persons is a
party to or is subject to any order, decree, agreement, board resolution,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, any Regulatory Authority, and neither the Company nor
any of its Subsidiaries has been advised by any of such Regulatory Authorities
that such authority is contemplating issuing or requesting (or is considering
the appropriateness of issuing or requesting) any such order, decree, agreement,
board resolution, memorandum or understanding, commitment letter or similar
submission.
(M) COMPLIANCE WITH LAWS. Except as Previously Disclosed in
Schedule 4.1(M), each of the Company and its Subsidiaries:
(1) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with, all
Regulatory Authorities that are required in order to permit it to own its
businesses presently conducted and that are material to the business of it and
its Subsidiaries taken as a whole; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to its best
knowledge, no suspension or cancellation of any of them is threatened; and all
such filings, applications and registrations are current;
(2) has received no notification or communication from any
Regulatory Authority or the staff thereof (a) asserting that the Company or any
of its Subsidiaries is not in compliance with any of the statutes, regulations
or ordinances which such Regulatory Authority enforces, which, as a result of
such noncompliance in any such instance, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company or its
Subsidiaries, (b) threatening to revoke any license, franchise, permit or
governmental authorization, which revocation, individually or in the aggregate,
is reasonably likely to have a Material Adverse Effect on the Company or its
Subsidiaries, or (c) requiring any of the Company or its Subsidiaries (or any of
its or their officers, directors or controlling persons) to enter into a cease
and desist order, agreement or memorandum of understanding (or requiring the
board of directors thereof to adopt any resolution or policy);
(3) is not required to give prior notice to any federal banking
or thrift agency of the proposed addition of an individual to its board of
directors or the employment of an individual as a senior executive; and
(4) is in compliance in all material respects with all fair
lending laws or other laws relating to discrimination, including the Equal
Credit Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and
the Home Mortgage Disclosure Act.
(N) MATERIAL CONTRACTS. Except as Previously Disclosed in Schedule
4.1(N), none of the Company or its Subsidiaries, nor any of their respective
assets, businesses or operations, is a party to, or is bound or affected by, or
receives benefits under, any contract or agreement which is a "material
contract" within the meaning of Item 601(b)(10) of Regulation S-K promulgated by
the SEC. Neither the Company nor any of its Subsidiaries is in default under any
contract, agreement, commitment, arrangement, lease, insurance policy or other
instrument to which it is a party, by which its respective assets, business or
operations may be bound or affected or under which it or any of its respective
assets, business or operations receives benefits, which default individually or
in the aggregate, is reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries, and there has not occurred any event in connection
with any material
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contract, agreement or amendment thereto, that with the lapse of time or the
giving notice or both, would constitute such a default. Except as Previously
Disclosed in Schedule 4.1(N), neither the Company nor any of its Subsidiaries is
subject to or bound by any contract containing covenants that limit the ability
of the Company or any of its Subsidiaries to compete in any line of business or
with any Person or that involve any restriction of geographical area in which,
or method by which, the Company or any of its subsidiaries may carry on its
business (other than as may be required by law or any applicable Regulatory
Authority).
(O) REPORTS. Since January 1, 1997, each of the Company and its
Subsidiaries has filed all reports and statements, together with any amendments
required to be made with respect thereto; that it was required to file with (1)
the Department, (2) the OCC, (3) the Federal Reserve Board, and (4) any other
Regulatory Authorities having jurisdiction with respect to the Company and its
Subsidiaries. As of their respective dates (and without giving effect to any
amendments or modifications filed after the date of this Plan with respect to
reports and documents filed before the date of this Plan), each of such reports
and documents, including the financial statements, exhibits and schedules
thereto, complied in all material respects with all of the statutes, rules and
regulations enforced or promulgated by the Regulatory Authority with which they
were filed and did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(P) NO BROKERS. All negotiation relative to this Plan and the
transactions contemplated by this Plan have been carried on by it directly with
NEWCO and no action has been taken by it that would give rise to any valid claim
against any Party for a brokerage commission, finder's fee or other like
payment.
(Q) EMPLOYEE BENEFIT PLANS.
(1) Schedule 4.1(Q)(1) contains a complete list of all bonus,
deferred compensation, pension, retirement, profit-sharing, thrift savings,
employee stock ownership, stock bonus, stock purchase, restricted stock and
stock option plans, all employment or severance contracts, all medical, dental,
health and life insurance plans, all other employee benefit plans, contracts or
arrangements and any applicable "change of control" or similar provisions in any
plan, contract or arrangement maintained or contributed to by the Company or any
of its Subsidiaries for the benefit of employees, former employees, directors,
former directors or their beneficiaries (the "Compensation and Benefit Plans").
True and complete copies of all Compensation and Benefit Plans of the Company
and its Subsidiaries, including any trust instruments and/or insurance
contracts, if any, forming a part thereof, and all amendments thereto, have been
supplied to NEWCO.
(2) All "employee benefit plans" within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), other than "multiemployer plans" within the meaning of Section 3(37)
of ERISA ("Multiemployer Plans"), covering employees or former employees of the
Company and it Subsidiaries (the "ERISA Plans"), to the extent subject to ERISA,
are in substantial compliance with ERISA. Except as Previously Disclosed in
Schedule 4.1(Q)(2), each ERISA Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA ("Pension Plan") and which is
intended to be qualified under Section 401(a) of the Internal Revenue Code of
1986 (as amended, the "Code") has received a favorable determination letter from
the Internal Revenue Service, and it is not aware of any circumstances
reasonably likely to result in the revocation or denial of any such favorable
determination letter or the inability to receive such a favorable determination
letter. There is no material pending or, to its knowledge, threatened litigation
relating to the ERISA Plans. Neither the Company nor any of its Subsidiaries has
engaged in a transaction with respect to any ERISA Plan that could subject the
Company or any of its Subsidiaries to a tax or penalty imposed by either Section
4975 of the Code or Section 502(i) of ERISA in an amount which would be
material.
(3) No liability under Subtitle C or D of Title IV of ERISA has
been or is expected to be incurred by the Company or any of its Subsidiaries
with respect to any ongoing, frozen or
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terminated "single-employer plan," within the meaning of Section 4001(a)(15) of
ERISA, currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with the Company under
Section 4001(a)(15) of ERISA or Section 414 of the Code (an "ERISA Affiliate").
Neither the Company nor any of its Subsidiaries presently contributes to a
Multiemployer Plan, nor have they contributed to such a plan within the past
five calendar years. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not been
waived, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the past 12-month period.
(4) All contributions required to be made under the terms of
any ERISA Plan have been timely made. Neither any Pension Plan nor any
single-employer plan of an ERISA Affiliate has an "accumulated funding
deficiency" (whether or not waived) within the meaning of Section 412 of the
Code or Section 302 of ERISA. Neither the Company nor any of its Subsidiaries
has provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Code.
(5) Under each Pension Plan which is a single-employer plan, as
of the last day of the most recent plan year, the actuarially determined present
value of all "benefit liability," within the meaning of Section 4001(1)(16) of
ERISA (as determined on the basis of the actuarial assumptions contained in the
plan's most recent actuarial valuation) did not exceed the then current value of
the assets of such plan, and there has been no material change in the financial
condition of such plan since the last day of the most recent plan year.
(6) Neither the Company nor any of its subsidiaries has any
obligations for retiree health and life benefits under any plan, except as set
forth in Schedule 4.1(Q)(6). There are no restrictions on the rights of the
Company or any of its Subsidiaries to amend or terminate any such plan without
incurring any liability thereunder.
(7) Except as Previously Disclosed in Schedule 4.1(Q)(7),
neither the execution and delivery of this Plan nor the consummation of the
transactions contemplated by this Plan will (a) result in any payment (including
severance, unemployment compensation, golden parachute or otherwise) becoming
due to any director or any employee of the Company or any of its Subsidiaries
under any Compensation and Benefit Plan or otherwise from the Company or any of
its Subsidiaries, (b) increase any benefits otherwise payable under any
Compensation and Benefit Plan, or (c) result in any acceleration of the time of
payment or vesting of any such benefit.
(R) NO KNOWLEDGE. The Company and its Subsidiaries know of no
reason why the regulatory approvals referred to in Section 6.1 should not be
obtained.
(S) LABOR AGREEMENTS. Neither the Company nor any of its
Subsidiaries is a party to or is bound by any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor is the Company or any of its Subsidiaries the subject of a
proceeding asserting that it or any such Subsidiary has committed an unfair
labor practice (within the meaning of the National Labor Relations Act) or
seeking to compel it or such Subsidiary to bargain with any labor organization
as to wages and conditions of employment, nor is there any strike or other labor
dispute involving it or any of its Subsidiaries pending or, to the best of its
knowledge, threatened, nor is it aware of any activity involving its or any of
the Subsidiaries' employees seeking to certify a collective bargaining unit or
engaging in any other organization activity.
(T) ASSET CLASSIFICATION. The Company and its Subsidiaries have
Previously Disclosed in Schedule 4.1(T) a list, accurate and complete in all
material respects, of the aggregate amounts of loans, extensions of credit or
other assets of the Company and its Subsidiaries that have been classified by it
as of September 30, 1999 (the "Asset Classification"); and no amounts of loans,
extensions of credit or other assets that have been classified as of September
30, 1999 by any regulatory examiner as "Other Loans Specially
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Mentioned," "Substandard," "Doubtful," "Loss," or words of similar import are
excluded from the amounts disclosed in the Asset Classification, other than
amounts of loans, extensions of credit or other assets that were charged off,
paid, or in the reasonable judgment of management no longer warrant
classification by the Company or any Subsidiary prior to September 30, 1999 and
which have been Previously Disclosed to NEWCO.
(U) ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible
loan losses shown on the balance sheet in the June 30, 1999 Bank Financial
Reports was, and the allowance for possible loan losses to be shown on
subsequent Regulatory Filings and Bank Financial Reports was and will be,
adequate in the opinion of the Board of Directors of the Company to provide for
possible losses, net of recoveries relating to loans previously charged off, on
loans outstanding (including accrued interest receivable) as of the date
thereof.
(V) INSURANCE. Each of the Company and its Subsidiaries has taken
all requisite action (including the making of claims and the giving of notices)
pursuant to its directors' and officers' liability insurance policy or policies
in order to preserve all rights thereunder with respect to all matters that are
known to the Company, except for such matters that, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect on the
Company or its Subsidiaries. Set forth in Schedule 4.1(V) is a list of all
insurance policies maintained by or for the benefit of the Company or its
Subsidiaries or their respective directors, officers, employees or agents.
(W) AFFILIATES. Except as Previously Disclosed in Schedule 4.1(W),
to the best of the Company's knowledge, there is no person who, as of the date
of this Plan, may be deemed to be an "affiliate" of the Company as that term is
used in Rule 144 under the Securities Act.
(X) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. The Company and
its Subsidiaries have taken all necessary action to exempt this Plan and the
transactions contemplated by this Plan from, and this Plan and such transactions
are exempt from (1) any applicable state takeover laws and (2) any
takeover-related provisions of the Company's and the Bank's articles of
association or bylaws.
(Y) NO FURTHER ACTION. The Company and its Subsidiaries have taken
all action so that the entering into of this Plan and the consummation of the
transactions contemplated by this Plan (including the Merger) or any other
action or combination of actions, or any other transaction, contemplated by this
Plan do not and will not (1) require a vote of shareholders (other than as set
forth in Section 6.1), or (2) result in the grant of any rights to any Person
under the articles of incorporation, charter or bylaws of the Company or any of
its Subsidiaries or under any agreement to which the Company or any such
Subsidiaries is a party, or (3) restrict or impair in any way the ability of the
other Parties to exercise the rights granted under this Plan.
(Z) ENVIRONMENTAL MATTERS.
(1) To the Company's and Bank's knowledge, the Participation
Facilities and the Loan/Fiduciary Properties are, and have been, in compliance
with all Environmental laws, except for instances of noncompliance that are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on the Company or its Subsidiaries.
(2) There is no proceeding pending or, to the Company's
knowledge, threatened before any court, governmental agency or board or other
forum in which the Company or any of its Subsidiaries or any Participation
Facility has been, or with respect to threatened proceedings, reasonably would
be expected to be, named as a defendant or potentially responsible party (a) for
alleged noncompliance (including by any predecessor) with any Environmental law,
or (b) relating to the release or threatened release into the environment of any
Hazardous Material, whether or not occurring at or on a site owned, leased or
operated by the Company or any of its Subsidiaries or any Participation
Facility, except for such proceedings
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pending or threatened that are not reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the Company or its Subsidiaries
or have been Previously Disclosed in Schedule 4.1(Z)(2).
(3) There is no proceeding pending or, to the Company's
knowledge, threatened before any court, governmental agency or board or other
forum in which any Loan/Fiduciary Property (or the Company or any of its
Subsidiaries in respect of any Loan/Fiduciary Property) has been, or with
respect to threatened proceedings, reasonably would be expected to be, named as
a defendant or potentially responsible party (a) for alleged noncompliance
(including by any predecessor) with any Environmental Law, or (b) relating to
the release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a Loan/Fiduciary Property, except
for such proceedings pending or threatened that are not reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the
Company or have been Previously Disclosed in Schedule 4.1(Z)(3).
(4) To the Company's knowledge, there is no reasonable basis
for any proceeding of a type described in subparagraph (2) or (3) of this
paragraph (Z), except as has been Previously Disclosed in Schedule 4.1(Z)(4).
(5) To the Company's knowledge, during the period of (a)
ownership or operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Company or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Company or
any of its Subsidiaries, there have been no releases of Hazardous Material in,
on, under or affecting any such property, Participation Facility or
Loan/Fiduciary Property, except for such releases that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
the Company or its Subsidiaries or have been Previously Disclosed in Schedule
4.1(Z)(5).
(6) To the Company's knowledge, prior to the period of (a)
ownership or operation by the Company or any of its Subsidiaries of any of their
respective current properties, (b) participation in the management of any
Participation Facility by the Company or any of its Subsidiaries, or (c) holding
of a security or other interest in a Loan/Fiduciary Property by the Company or
any of its Subsidiaries, there were no releases of Hazardous Material in, on,
under or affecting any such property, Participation Facility or Loan/Fiduciary
Property, except for such releases that are not reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on the Company or its
Subsidiaries or have been Previously Disclosed in Schedule 4.1(Z)(6).
(AA) TAX REPORTS. Except as Previously Disclosed in Schedule
4.1(AA), (1) all reports and returns with respect to Taxes that are required to
be filed by or with respect to the Company or its Subsidiaries, including
consolidated federal income tax returns of the Company and its Subsidiaries
(collectively, the "Tax Returns"), have been duly filed or requests for
extensions have been timely filed and have not expired, for periods ended on or
prior to the most recent fiscal year-end, except to the extent all such failures
to file, taken together, are not reasonably likely to have a Material Adverse
Effect on the Company or its Subsidiaries, and to the Company's knowledge, such
Tax Returns were true, complete and accurate in all material respects, (2) all
Taxes shown to be due on the Tax Returns have been paid in full, (3) the Tax
Returns have been examined by the Internal Revenue Service or the appropriate
state, local or foreign taxing authority, or the period for assessment of the
Taxes in respect of which such Tax Returns were required to be filed has
expired, (4) all Taxes due with respect to completed and settled examinations
have been paid in full, (5) no issues have been raised by the relevant taxing
authority in connection with the examination of any of the Tax Returns which are
reasonably likely, individually or in the aggregate, to result in a
determination that would have a Material Adverse Effect on the Company or its
Subsidiaries, except as reserved against in the Regulatory Filings of the
Company, and (6) no waivers of statutes of limitations (excluding such statutes
that relate to years under examination by the Internal Revenue Service) have
been given by or requested with respect to any Taxes of the Company or its
Subsidiaries.
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(BB) ACCURACY OF INFORMATION. The statements with respect to the
Company and its Subsidiaries contained in this Plan and the Schedules delivered
by or on behalf of the Company or any other Party pursuant to the terms of or
relating to this Plan are true and correct in all material respects, and such
statements and documents do not omit any material fact necessary to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading.
(CC) DERIVATIVES CONTRACTS. None of the Company or its Subsidiaries
is a party to or has agreed to enter into a Derivatives Contract or owns
securities that are referred to as "structured notes" except for those
Derivatives Contracts and structured notes Previously Disclosed in Schedule
4.1(CC). Schedule 4.1(CC) includes a list of any assets of the Company or its
Subsidiaries that are pledged as security for each such Derivatives Contract.
(DD) ACCOUNTING CONTROLS. Each of the Company and its subsidiaries
has devised and maintained systems of internal controls sufficient to provide
reasonable assurances that (1) all material transactions are executed in
accordance with management's general or specific authorization, (2) all material
transactions are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP, and to maintain proper accountability for
items, (3) access to the material property and assets of the Company and its
Subsidiaries is permitted only in accordance with management's general or
specific authorization, and (4) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
(EE) COMMITMENTS AND CONTRACTS. Neither the Company nor any of its
Subsidiaries is a party or subject to any of the following (whether written or
oral, express or implied):
(1) except as Previously Disclosed in Schedule 4.1(EE)(1), any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or fringe
benefits) with any present or former officer, director or employee (other than
those which are terminable at will by the Company or any such Subsidiary without
any obligation on the part of the Company or any such Subsidiary to make any
payment in connection with such termination);
(2) except as Previously Disclosed in Schedule 4.1(EE)(2), any
real or personal property lease with annual rental payments aggregating $10,000
or more; or
(3) except as Previously Disclosed in Schedule 4.1(EE)(3), any
material contract with any affiliate.
(FF) YEAR 2000 COMPLIANCE. To the Company's knowledge, the mission
critical computer software operated by it and/or any of its Subsidiaries is
currently capable of providing, or is being adapted to provide, uninterrupted
millennium functionality to record, store, process and present calendar dates
falling on or after January 1, 2000 in substantially the same manner and with
substantially the same functionality as such mission critical software records,
stores, processes and presents such calendar dates falling on or before December
31, 1999. To the Company's knowledge, the costs of adaptations referred to in
this clause will not have a Material Adverse Effect with respect to it. Neither
the Company nor any of its Subsidiaries has received, nor to its knowledge are
there facts that would reasonably be expected to form the basis for the issuance
of, a "Year 2000 Deficiency Notification Letter" (as such term is employed in
the Federal Reserve Supervision and Regulatory Letter No. SR 98-3 (SUP), dated
March 4, 1998) or similar notice from any state banking authority. The Company
has made available to NEWCO a complete and accurate copy of its and its
Subsidiaries' plan, including an estimate of anticipated associated costs, for
addressing the issues set forth in the Year 2000 guidance papers issued by the
Federal Financial Institutions Examination Council, including the statements
dated May 5, 1997, entitled "Year 2000 Project Management Awareness," December
17, 1997, entitled "Safety and Soundness Guidelines Concerning the Year 2000
Business Risk," and October 14, 1998, entitled "Interagency Guidelines
Establishing Year 2000 Standards for Safety and Soundness," as
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such issues affect any of it or its Subsidiaries. Between the date of this Plan
and the Effective Date, it shall use commercially reasonable and practicable
efforts to implement such Plan.
4.2 NEWCO REPRESENTATIONS AND WARRANTIES. NEWCO hereby represents and
warrants to the Company and the Bank as follows:
(A) RECITALS. The facts set forth in the Recitals of the Plan with
respect to NEWCO are true and correct.
(B) ORGANIZATION, STANDING AND AUTHORITY. NEWCO is duly qualified
to do business and is in good standing in the States of the United States and
foreign jurisdictions where the failure to be duly qualified, individually or in
the aggregate, is reasonably likely to have a Material Adverse Effect on it.
NEWCO has in effect all federal state, local, and foreign governmental
authorizations necessary for it to own or lease its properties and assets and to
carry on its business as it is now conducted, the absence of which, individually
or in the aggregate, is reasonably likely to have a Material Adverse Effect on
NEWCO.
(C) SHARES. The outstanding shares of the NEWCO's capital stock on
the date of consummation will be validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights. Except as Previously
Disclosed in Schedule 4.2(C), there are no shares of capital stock or other
equity securities of it outstanding and there are no outstanding Rights with
respect thereto. It is expected that 123,500 shares of NEWCO Common Stock will
be outstanding at the time of consummation of the transaction.
(D) CORPORATE POWER. NEWCO has the corporate power and authority to
carry on its business as it is now being conducted and to own all its material
properties and assets.
(E) CORPORATE AUTHORITY. This Plan has been authorized by all
necessary corporate action of NEWCO, and the Plan is a valid and binding
agreement of NEWCO, enforceable against NEWCO in accordance with its terms,
subject to bankruptcy, insolvency and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
(F) NO DEFAULTS. Subject to the receipt of approval by its
shareholders and the receipt of the required regulatory approvals referred to in
Section 6.1, and the required filings under federal and state securities laws,
and except as Previously Disclosed in Schedule 4.2(F), the execution, delivery
and performance of this Plan and the consummation by NEWCO of the transactions
contemplated by this Plan do not and will not (1) constitute a breach or
violation of, or a default under, any law, rule or regulation or any judgment,
decree, order, governmental permit or license, or agreement, indenture or
instrument of NEWCO or to which NEWCO or its properties is subject or bound,
which breach, violation or default is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on NEWCO, (2) constitute a breach
or violation of, or a default under, the articles of incorporation, charter or
bylaws of it, or (3) require any consent or approval under any such law, rule,
regulation, judgment, decree, order, governmental permit or license or the
consent or approval of any other party to any such agreement, indenture or
instrument, other than any such consent or approval that, if not obtained, would
not be reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on NEWCO.
(G) NO EVENTS. Except as Previously Disclosed on Schedule 4.2(G),
since December 31, 1998, no event has occurred which is reasonably likely to
have a Material Adverse Effect on it.
(H) ACCURACY OF INFORMATION. The statements with respect to NEWCO
contained in this Plan, the Schedules and any other written documents executed
and delivered by or on behalf of NEWCO or any other Party pursuant to the terms
of this Plan are true and correct in all material respects, and such statements
and documents do not omit any material fact necessary to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.
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(I) FINANCIAL COMMITMENT. NEWCO has received a financial commitment
from First Tennessee Bank, National Association, in the form set forth in
Schedule 4.2(I), in the amount of up to $6,600,000 to allow the Continuing
Corporation to acquire the stock of Company, other than Exception Shares, as
contemplated by this Agreement.
(J) NEW SUBSCRIPTIONS, STOCK EXCHANGE. NEWCO has received cash
commitments from certain investors to subscribe for an aggregate of 123,500
shares of NEWCO at $14.75 per share representing aggregate consideration of
$1,821,625. All 123,500 NEWCO shares will be exchanged for a like number of
Company shares upon consummation of the Merger, except for any dissenting
shares.
(K) NO BROKERS. All negotiation relative to this Plan and the
transactions contemplated by this Plan have been carried on by it directly with
Company and Bank and no action has been taken by NEWCO that would give rise to
any valid claim against any Party for a brokerage commission, finder's fee or
other like payment.
(L) NO KNOWLEDGE. NEWCO knows of no reason why the regulatory
approvals referred to in Section 6.1 should not be obtained.
(M) STATE TAKEOVER LAWS, ARTICLES OF INCORPORATION. NEWCO has taken
all necessary action to exempt this Plan and the transactions contemplated by
this Plan from, and this Plan and such transactions are exempt from (1) any
applicable state takeover laws and (2) any takeover-related provisions of
NEWCO's charter or bylaws.
(N) NO FURTHER ACTION. NEWCO has taken all action so that the
entering into of this Plan and the consummation of the transactions contemplated
by this Plan (including the Merger) or any other action or combination of
actions, or any other transaction, contemplated by this Plan do not and will not
(1) require a vote of shareholders (other than as set forth in Section 6.1), or
(2) result in the grant of any rights to any Person under the articles of
incorporation, charter or bylaws of NEWCO or under any agreement to which NEWCO
is a party, or (3) restrict or impair in any way the ability of the other
Parties to exercise the rights granted under this Plan.
ARTICLE V. COVENANTS
Each of the Company and the Bank hereby covenants to NEWCO, and NEWCO
hereby covenants to the Company and the Bank, that:
5.1 BEST EFFORTS. Subject to the terms and conditions of this Plan and,
in the case of the Company and the Bank, to the exercise by their respective
Boards of Directors of such Boards' fiduciary duties, each party shall use its
best efforts in good faith to take, or cause to be taken, all actions, and to
do, or cause to be done, all things necessary, proper or desirable, or advisable
under applicable laws, so as to permit consummation of the Merger by March 31,
2000, and to otherwise enable consummation of the transactions contemplated by
this Plan, and shall cooperate fully with the other Parties to that end.
5.2 THE PROXY. In the case of the Company, it shall promptly prepare a
proxy statement (the "Proxy Statement") to be mailed to the holders of the
Company Common Stock in connection with the transactions contemplated by this
Plan and to be filed with the SEC, which shall conform to all applicable legal
requirements. The Company shall call a special meeting (the "Meeting") of the
holders of Company Common Stock to be held as soon as practicable for purposes
of voting upon the transactions contemplated by this Plan, and the Company shall
use its best efforts to solicit and obtain shareholder votes in favor of the
transactions contemplated by this Plan and, subject to the exercise of their
fiduciary duties, the Board of Directors of the Company shall recommend approval
of such transactions to the Company's Shareholders.
5.3 OFFERING DOCUMENT. NEWCO and the Company will jointly prepare an
offering
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document (the "Offering Document") to be sent to a group of identified investors
who have made cash commitments to purchase stock in NEWCO and subsequently
exchange the NEWCO stock for stock of the Company, in order to provide full and
adequate disclosure of the business of NEWCO, the Company and/or the Continuing
Corporation to such investors. It is expected that the NEWCO stock issuance will
occur immediately prior to consummation of the Merger transaction.
5.4 PRESS RELEASES. The Company and the Bank will not, without the
prior approval of NEWCO, and NEWCO will not, without the prior approval of the
Company, issue any press release or written statement for general circulation
relating to the transactions contemplated by this Plan, except as otherwise
required by law.
5.5 ACCESS; INFORMATION.
(A) Upon reasonable notice, the Company and the Bank shall afford
NEWCO and NEWCO shall afford the Company and NEWCO's and the Company's
respective officers, employees, counsel, accountants and other authorized
representatives, access, during normal business hours throughout the period up
to the Effective Date, to all of their respective properties, books, contracts,
commitments and records. During such period, the Company and the Bank shall
furnish promptly to NEWCO and NEWCO shall furnish promptly to the Company (and
cause their respective accountants and other agents to furnish promptly) (1) a
copy of each material report, schedule and other document filed by the Company
and its Subsidiaries with any Regulatory Authority, and (2) all other
information concerning the business, properties and personnel as Company or
NEWCO, respectively, may reasonably request, provided that no investigation
pursuant to this Section 5.5 shall affect or be deemed to modify or waive any
representation or warranty made by the Company or the Bank or NEWCO in this Plan
or the conditions to the obligations of the Company and the Bank or NEWCO to
consummate the transactions contemplated by this Plan; and
(B) The Company and NEWCO will not use any information obtained
pursuant to this Section 5.5 for any purpose unrelated to the consummation of
the transactions contemplated by this Plan and, if this Plan is terminated, will
hold all confidential information and documents obtained pursuant to this
paragraph in confidence (as provided in Section 8.6) unless and until such time
as such information or documents become publicly available other than by reason
of any action or failure to act by Company or NEWCO or as it is advised by
counsel that any such information or document is required by law or applicable
stock exchange rule to be disclosed, and in the event of the termination of this
Plan, Company and NEWCO will, upon request by the other, deliver to the other
all documents so obtained by it or destroy such documents and, in the case of
destruction, will certify such fact to the other.
5.6 TERMINATION FEE.
(A) Without the prior written consent of NEWCO, the Company shall
not, and it shall cause its Subsidiaries not to, solicit, initiate or encourage
inquiries or proposals with respect to, or, except to the extent that the Board
of Directors of the Company determines in its good faith judgment after receipt
of advice in writing of counsel that such response is reasonably required in
order to discharge its fiduciary duties, furnish any nonpublic information
relating to or participate in any negotiations or discussions concerning, any
acquisition or purchase of all or a substantial portion of the assets of, or a
substantial equity interest in, the Company or any of its Subsidiaries or any
merger or other business combination with the Company or any of its Subsidiaries
other than as contemplated by this Plan; it shall instruct its and its
Subsidiaries' officers, directors, agents, advisors and affiliates to refrain
from doing any of the foregoing; and it shall notify NEWCO immediately if any
such inquiries or proposals are received by, or any such negotiations or
discussions are sought to be initiated with, the Company or any of its
Subsidiaries.
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(B) Subject to appropriate fiduciary standards, Company and Bank
agree not to initiate, solicit, entertain or encourage acquisition proposals
from any third party. To protect the proposed transaction from uninvited third
parties and compensate NEWCO for expenses incurred in pursuing the transaction,
Company and Bank agree that, upon the occurrence of a Subsequent Triggering
Event (as described in this section) that occurs prior to a Termination Event
(as described in this section) and notwithstanding any other provision in this
Agreement to the contrary, Company and Bank will pay to NEWCO liquidated damages
in the amount of $250,000 upon the occurrence of a Subsequent Triggering Event
that occurs prior to a Termination Event. For purposes of this section the
following terms have the indicated meaning.
(a) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(1) Company or Bank shall have entered into an agreement to
engage in an Acquisition Transaction (as hereinafter defined) with any person
(other than NEWCO or a subsidiary of NEWCO), or the Board of Directors of
Company or Bank shall have recommended that the stockholders of Company approve
or accept any Acquisition Transaction (other than that contemplated by this
Agreement). The term "Acquisition Transaction" shall mean (i) a merger or
consolidation, or any similar transaction, involving Company or Bank, (ii) a
purchase, lease or other acquisition of all or any substantial part of the
assets of Company or Bank or (iii) a purchase or other acquisition (including by
way of merger, consolidation, share exchange, tender offer or otherwise) of
securities representing 25% or more of the voting power of Company or Bank. The
term "person" for purposes of this paragraph shall have the meaning assigned
thereto in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and the rules and regulations thereunder;
(2) Any person (other than NEWCO, a subsidiary of NEWCO or
any subsidiary acting under any employee benefit plan for NEWCO or any of its
subsidiaries) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 25% or more of the outstanding shares of the Company
Common Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act, and
the rules and regulations thereunder);
(3) Any person (other than NEWCO or a subsidiary of NEWCO)
shall have made a proposal (in writing or orally) to Company or Bank or any one
or more of its shareholders owning twenty-five percent (25%) or more (singularly
or in the aggregate) of the outstanding shares of Company Common Stock that
results in or is a part of an Acquisition Transaction;
(4) After a proposal is made by any person (other than
NEWCO or a subsidiary of NEWCO) to Company or Bank or its stockholders to engage
in an Acquisition Transaction, Company and Bank shall have breached any covenant
or obligation contained in this Agreement and such breach would entitle NEWCO to
terminate
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the Agreement; and such breach shall not have been cured within seven (7) days;
or
(5) Any person (other than the Company, NEWCO or a
subsidiary of NEWCO), shall have filed an application or notice with the Federal
Reserve Board, or other federal or state bank regulatory authority, which
application or notice has been accepted for processing, for approval to engage
in an Acquisition Transaction.
(b) "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(1) The acquisition by any person of beneficial ownership
of 25% or more of the then outstanding Company Common Stock; or
(2) The occurrence of the Initial Triggering Event
described in clause (1) of the definition of "Initial Triggering Event" of this
paragraph.
(c) "Termination Event" shall mean each of the following:
(1) the Effective Date of the Merger;
(2) termination of this Agreement in accordance with the
provisions hereof if such termination occurs prior to the occurrence of an
Initial Triggering Event; or
(3) the passage of March 31, 2000 after termination of this
Agreement if such termination follows the occurrence of an Initial Triggering
Event. Company and Bank shall notify NEWCO promptly in writing of the occurrence
of any Initial Triggering Event and of any Subsequent Triggering Event.
5.7 REGULATORY APPLICATIONS. The parties to this Plan, as appropriate,
shall (A) promptly prepare and submit applications to the appropriate Regulatory
Authorities for approval of the Merger and acquisition of control of the Bank,
and (B) promptly make all other appropriate filings to secure all other
approvals, consents and rulings that are necessary for the consummation of the
Merger and the new stock issuance by NEWCO.
5.8 BLUE-SKY FILINGS. The parties to this Plan, as appropriate, shall
use their best efforts to obtain, prior to the mailing of the Offering Document,
any necessary state securities laws or "blue sky" permits and approvals,
provided that neither NEWCO, the Company nor the Continuing Corporation shall be
required by virtue thereof to submit to general jurisdiction in any state.
5.9 [RESERVED]
5.10 STATE TAKEOVER LAW. The Company shall not take any action that
would cause the transactions contemplated by this Plan to be subject to any
applicable state takeover statute, and the Company shall take all necessary
steps to exempt (or ensure the continued exemption of) the transactions
contemplated by this Plan from, or, if necessary, challenge the validity or
applicability of, any applicable state takeover law.
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5.11 NO RIGHTS TRIGGERED. Except for those consents of Third Parties
Previously Disclosed on Schedule 4.1(G), the Company shall take all necessary
steps to ensure that the entering into of this Plan and the consummation of the
transactions contemplated by this Plan (including the Merger) and any other
action or combination of actions, or any other transactions contemplated by this
Plan, do not and will not (A) result in the grant of any rights to any Person
under the articles of incorporation or bylaws of the Company or under any
agreement to which the Company or any of its Subsidiaries is a party, or (B)
restrict or impair in any way the ability of NEWCO to exercise the rights
granted under this Plan.
5.12 INDEMNIFICATION.
(A) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil 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 hereof, or who
becomes prior to the Effective Date, a director, officer, or employee of the
Company or the Bank (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, this Agreement, or any of the transactions contemplated hereby or
thereby, whether in any case asserted or arising before or after the Effective
Date, the parties hereto agree to cooperate and use their best efforts to defend
against and respond thereto.
(B) It is understood and agreed that the Continuing Corporation
shall indemnify and hold harmless, as and to the fullest extent permitted by
applicable law, each such Indemnified Party against any losses, claims, damages,
liabilities, costs, expenses (including attorneys' fees and expenses),
judgments, fines and amounts paid in settlement in connection with any such
threatened or actual claim, action, suit, proceeding or investigation. In the
event of any such threatened or actual claim, action, suit, proceeding or
investigation (whether asserted or arising before or after the Effective Date):
(1) the Continuing Corporation shall pay 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,
(2) the Indemnified Parties may retain one firm of counsel
satisfactory to them, and the Continuing Corporation shall pay all fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, however, that in the event that the defendants
in, or targets of, any such threatened or actual claim, action, suit, proceeding
or investigation include more than one Indemnified Party, and any Indemnified
Party shall have reasonably concluded based on the opinion of its own counsel,
that there may be one or more legal defenses available to it or to another
Indemnified Party which are in conflict with those available to the Continuing
Corporation or any other Indemnified Party, then such Indemnified Party may
employ separate counsel to represent or defend it or any other person entitled
to indemnification and reimbursement hereunder with respect to any such claim,
action, suit, proceeding or investigation in which it or such other person may
become involved or is named as defendant and the Continuing Corporation shall
pay the reasonable fees and disbursements of such counsel and
(3) the Continuing Corporation will use its best efforts to
assist in the vigorous defense of any such matter, provided that the Continuing
Corporation shall not be liable for any settlement effected without its prior
written consent (which consent shall not be unreasonably withheld), and provided
further that the Continuing Corporation 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
non-appealable, that indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law.
(C) Any Indemnified Party wishing to claim indemnification under
this Paragraph upon learning of any such claim, action, suit, proceeding or
investigation, shall notify the Continuing Corporation thereof, provided that
the failure to so notify shall not affect the obligations of the Continuing
Corporation
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under this Paragraph hereof except to the extent such failure to notify
materially prejudices the Continuing Corporation. Notwithstanding the foregoing,
no indemnification shall be provided the Indemnified Parties hereunder if:
(1) the claim, action, suit, proceeding or investigation
arises, in whole or in part, out of the willful misrepresentation contained in
this Agreement or willful breach of covenants, representations, warranties or
agreements contained in this Agreement by the Indemnified Parties or
(2) the Indemnified Party does not meet the requirements of
Section 48-18- 502(a) of the TBCA, which compliance shall be interpreted in
accordance with the provisions of Section 48-18- 502(d) of the TBCA;
(D) The Parties agree that all rights to indemnification and all
limitations of liability existing in favor of the Indemnified Parties as
provided in the Company's articles of incorporation or bylaws in effect as of
the date hereof with respect to matters occurring prior to the Effective Date
shall survive the Merger and shall continue in full force and effect, without
any amendment thereto, for a period of not less than three (3) years from the
Effective Date, provided, however, that all rights to indemnification in respect
of any claim (a "claim") asserted or made within such period shall continue
until the final disposition of such Claim;
(E) This Paragraph is intended to benefit the Indemnified Parties
and shall be binding on all successors and assigns of the Continuing
Corporation. In the event the Continuing Corporation or any of its successors or
assigns 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 transfers or conveys all or substantially all of its properties and assets to
any person, then, and in each such case, proper provision shall be made so that
the successors and assigns of the Continuing Corporation assume the obligations
set forth in this Paragraph.
5.13 CURRENT INFORMATION.
(A) During the period from the date of this Plan to the Effective
Date, each of the Company and NEWCO shall, and shall cause its representatives
to, confer on a regular and frequent basis with representatives of the other.
(B) Each of the Company and NEWCO shall promptly notify the other
of (1) any material change in the business or operations of it or its
Subsidiaries, (2) any material complaints, investigations or hearings (or
communications indicating that the same may be contemplated) of any Regulatory
Authority relating to it or its Subsidiaries, (3) the initiation or threat of
material litigation involving or relating to it or its Subsidiaries, or (4) any
event or condition that might reasonably be expected to cause any of its
representations or warranties set forth in this Plan not to be true and correct
in all material respects as of the Effective Date or prevent it or its
Subsidiaries from fulfilling its or their obligations under this Plan.
5.14 FINANCIAL COMMITMENT. NEWCO shall use its best efforts to insure
the fulfillment of the cash commitments of certain investors to acquire stock of
NEWCO and NEWCO shall use its best efforts to complete the financing pursuant to
the commitment letter of First Tennessee National Association set forth in
Schedule 4.2(I). The investor subscriptions are subject to the receipt of an
appropriate Offering Document for shares of NEWCO and for the conversion of
NEWCO shares into shares of the Continuing Corporation.
ARTICLE VI. CONDITIONS TO CONSUMMATION OF THE MERGER
6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations
of each Party to consummate the transactions contemplated by this Plan are
subject to the written waiver by such Party or the fulfillment on or prior to
the Effective Date of each of the following conditions:
(A) SHAREHOLDER VOTES. This Plan shall have been duly approved by
the
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requisite votes of the Company Shareholders.
(B) REGULATORY APPROVALS. The Parties shall have procured all
necessary regulatory consents and approvals by the appropriate Regulatory
Authorities, and any waiting periods relating thereto shall have expired;
provided, however, that no such approval or consent shall have imposed any
condition or requirement not normally imposed in such transactions that, in the
opinion of NEWCO, would deprive the investors and the Continuing Corporation of
the material economic or business benefits of the transactions contemplated by
this Plan.
(C) NO INJUNCTION. There shall not be in effect any order, decree
or injunction of any court or agency of competent jurisdiction that enjoins or
prohibits consummation of any of the transactions contemplated by this Plan.
(D) [RESERVED]
(E) [RESERVED]
(F) NEWCO, on behalf of and for the benefit of the Continuing
Corporation, shall have received financing from First Tennessee in substantially
the same manner and on terms and conditions substantially similar to those set
forth in the commitment letter included as Schedule 4.2(I).
6.2 CONDITIONS TO OBLIGATIONS OF NEWCO. The obligations of NEWCO to
consummate the transactions contemplated by this Plan also are subject to the
written waiver by NEWCO or the fulfillment on or prior to the Effective Date of
each of the following conditions:
(A) LEGAL OPINION. NEWCO shall have received an opinion, dated the
Effective Date, of Baker, Donelson, Bearman & Caldwell, counsel for the Company
and the Bank, in the form of Exhibit D.
(B) OFFICERS' CERTIFICATE. (1) Each of the representations and
warranties contained in this Plan of the Company and the Bank shall be true and
correct in all material respects (except the representations and warranties in
Section 4.1(C) and those representations and warranties that are qualified by
reference to "Material Adverse Effect" or any other materiality caveat, which
shall be true and correct in all respects) as of the date of this Plan and upon
the Effective Date with the same effect as though all such representations and
warranties had been made on the Effective Date, except for any such
representations and warranties that specifically relate to an earlier date,
which shall be true and correct as of such earlier date, and (2) each and all of
the agreements and covenants of the Company and the Bank to be performed and
complied with pursuant to this Plan on or prior to the Effective Date shall have
been duly performed and complied with in all material respects, and NEWCO shall
have received a certificate signed by an executive officer of the Company and
the Bank dated the Effective Date, to such effect.
(C) ADVERSE CHANGE. During the period from December 31, 1998 to the
Effective Date, there shall not have been any material adverse change in the
financial position or results of operations of the Company or the Bank, nor
shall the Company or the Bank have sustained any loss or damage to its
properties, whether or not insured, that materially affects its ability to
conduct its business; and NEWCO shall have received a certificate dated the
Effective Date signed by an executive officer of the Company and the Bank to
such effect.
(D) CAPITAL. The Company's Capital shall not be less than $8.0
million on the Effective Date.
(E) ALLOWANCE FOR LOAN AND LEASE LOSSES. As of the Effective Date,
the Bank's allowance for possible loan and lease losses shall not be less than
1.25% of the Bank's total outstanding
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loans and leases and in all cases will be adequate to absorb the Bank's
anticipated loan and lease losses.
(F) DIRECTOR'S AGREEMENTS. NEWCO shall have received from the
directors identified in Schedule 6.2(F) of Company and the Bank the Director's
Agreement attached as Exhibit B.
6.3 CONDITIONS TO OBLIGATIONS OF COMPANY AND THE BANK. The obligations
of the Company and the Bank to consummate the transactions contemplated by this
Plan also are subject to the written waiver by the Company and the Bank or the
fulfillment on or prior to the Effective Date of each of the following
conditions:
(A) LEGAL OPINION. The Company and the Bank shall have received an
opinion, dated the Effective Date, of Gerrish & McCreary, P.C., special counsel
for NEWCO, in the form of Exhibit F.
(B) OFFICER'S CERTIFICATE. (1) Each of the representations and
warranties of NEWCO contained in this Plan shall be true and correct in all
material respects (except the representations and warranties in Section 4.2(C)
and those representations and warranties that are qualified by reference to
"Material Adverse Effect" or any other materiality caveat, which shall be true
and correct in all respects) as of the date of this Plan and upon the Effective
Date with the same effect as though all such representations and warranties had
been made on the Effective Date, except for any such representations and
warranties that specifically relate to an earlier date, which shall be true and
correct as of such earlier date, and (2) each and all of the agreements and
covenants of NEWCO to be performed and complied with pursuant to this Plan on or
prior to the Effective Date shall have been duly performed and complied with in
all material respects, and the Company and the Bank shall have received a
certificate signed by an executive officer of NEWCO dated the Effective Date, to
such effect.
(C) ADVERSE CHANGE. During the period from the date of NEWCO's
incorporation to the Effective Date, there shall not have been any material
adverse change in the financial position or results of operations of NEWCO, nor
shall NEWCO have sustained any loss or damage to its properties, whether or not
insured, that materially affects its ability to conduct its business; and the
Company shall have received a certificate dated the Effective Date signed by an
executive officer of NEWCO to such effect.
ARTICLE VII. TERMINATION
7.1 GROUNDS FOR TERMINATION. This Plan may be terminated prior to the
Effective Date, either before or after receipt of required shareholder
approvals:
(A) MUTUAL CONSENT. By the mutual consent of NEWCO and the Company,
if the Board of Directors of each so determines by vote of a majority of the
members of its entire board.
(B) BREACH. By NEWCO or the Company, if its Board of Directors so
determines by vote of a majority of the members of its entire Board, in the
event of (A) a material breach by the other party of any representation or
warranty contained in this Agreement, which breach cannot or has not been cured
within 30 days after the giving of written notice to the breaching party of such
breach, or (B) a material breach by the other party of any of the covenants or
agreements contained in this Agreement, which breach cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
of such breach.
(C) DELAY. By NEWCO or the Company, if its Board of Directors so
determines by vote of a majority of the members of the entire Board, in the
event that the Merger is not consummated by March 31, 2000; provided, however,
that a Party that is in material breach of any of the provisions of this Plan
shall not be entitled to terminate the Plan pursuant to this Section 7.1(C).
(D) NO SHAREHOLDER APPROVAL. By the Company, in the event that the
shareholder approvals contemplated by Section 6.1 is not obtained at the
Meetings, including any adjournment
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or adjournments of the Meetings.
7.2 CONSEQUENCES OF TERMINATION.
(A) GENERAL CONSEQUENCES. Subject to Section 5.6 (Termination Fee)
and Section 7.2(c), in the event of the termination or abandonment of this Plan
pursuant to the provisions of Section 7.1, this Plan shall become void and have
no force or effect, without any liability on the part of the Parties or any of
their respective directors or officers or shareholders with respect to this
Plan.
(B) OTHER CONSEQUENCES. Notwithstanding anything in this Plan to
the contrary, no termination of this Plan will relieve any Party of any
liability for breach of this Plan or for any misrepresentation under this Plan
or be deemed to constitute a waiver of any remedy available for such breach or
misrepresentation. In any action or proceeding in connection with such breach or
misrepresentation, the prevailing party will be entitled to reasonable
attorney's fees and expenses.
(C) NEWCO TERMINATION FEE. In the event NEWCO fails to fulfill its
obligation to consummate the transactions contemplated by this Plan for any
reason other than (i) termination of the Plan pursuant to Section 7.1 or (ii)
failure of the fulfillment or written waiver of any of the conditions set forth
in Sections 6.1 and 6.2, Newco shall pay a termination fee to the Company of
$100,000. Such termination fee shall be due and payable fifteen (15) business
days after the fulfillment or written waiver of each of the conditions set forth
in Sections 6.1 and 6.2.
ARTICLE VIII. OTHER MATTERS
8.1 SURVIVAL. Only those agreements and covenants in the Plan that by
their express terms apply in whole or in part after the Effective Date shall
survive the Effective Date. All other representations, warranties, and covenants
shall be deemed only to be conditions of the Merger and shall not survive the
Effective Date. If the Merger is abandoned and this Plan is terminated, the
provisions of Article VII shall apply and the agreements of the Parties in
Sections 5.5(B), 8.5 and 8.6 shall survive such abandonment and termination.
8.2 WAIVER; AMENDMENT. Prior to the Effective Date, any provision of
this Plan may be (A) waived in writing by the Party benefited by the provision,
or (B) amended or modified at any time (including the structure of the
transactions contemplated by this Plan) by agreement in writing among the
Parties approved by their respective Boards of Directors and executed in the
same manner as this Plan, except that, after the vote by the shareholders of the
Company, the consideration to be received by the shareholders of the Company for
each share of Company Common Stock shall not thereby be altered.
8.3 COUNTERPARTS. This Plan may be executed in one or more
counterparts, including facsimile counterparts, each of which shall be deemed to
constitute an original. This Plan shall become effective when one counterpart
has been signed by each Party.
8.4 GOVERNING LAW. This Plan shall be governed by, and interpreted in
accordance with, the laws of the State of Tennessee, except as federal law may
be applicable.
8.5 EXPENSES. Each Party will bear all expenses incurred by it in
connection with this Plan and the transactions contemplated by this Plan, except
printing expenses which shall be shared equally between the Company and NEWCO.
8.6 CONFIDENTIALITY. Except as otherwise provided in Section 5.5(B),
each of the Parties and their respective agents, attorneys and accountants will
maintain the confidentiality of all information provided in connection herewith
which has not been publicly disclosed.
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8.7 NOTICES. All notices, requests and other communications hereunder
to a "Party" shall be in writing and shall be deemed to have been duly given
when delivered by hand, telegram, certified or registered mail, overnight
courier, telecopy or telex (confirmed in writing) to such party at its address
set forth below or such other address as such party may specify by notice to the
Parties.
If to NEWCO to: Chris Holmes
959 Lycomedes Cove
Cordova, TN 38018
901-523-3288
Copies to: Philip K. Smith
Gerrish & McCreary, P.C.
700 Colonial Road, Suite 200
Memphis, TN 38117
Telephone: 901/767-0900
Telecopy: 901/684-2339
If to the Company or the Bank, to: Arba Taylor, Chairman
19 Natchez Trace Drive
Lexington, TN 38351-1837
Telephone: 901/968-6624
Telecopy: 901/968-7481
Copies to: Robert Walker
Baker, Donelson, Bearman & Caldwell
165 Madison Avenue, Suite 2000
Memphis, TN 38103
Telephone: 901/526-2000
Telecopy: 901/577-2303
8.8 ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES. This Plan
represents the entire understanding of the Parties with reference to
transactions contemplated by this Plan, and supersedes any and all other oral or
written agreements previously made. Nothing in this Plan, expressed or implied,
is intended to confer upon any Person, other than the Parties or their
respective successors, any rights, remedies, obligations or liabilities under or
by reason of this Plan.
8.9 HEADINGS. The headings contained in this Plan are for reference
purposes only and are not part of this Plan.
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IN WITNESS WHEREOF, the Parties have caused this instrument to be
executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
COMMUNITY NATIONAL BANCORP, INC.
"NEWCO"
By: /s/ Chris Holmes
---------------------------------
NAME: CHRIS HOLMES
TITLE: PRESIDENT
COMMUNITY NATIONAL CORPORATION
By: /s/ Arba Taylor
---------------------------------
NAME: ARBA TAYLOR
TITLE: CHAIRMAN
COMMUNITY NATIONAL BANK
BY: /s/ Arba Taylor
---------------------------------
NAME: ARBA TAYLOR
TITLE: CHAIRMAN
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<PAGE> 129
FIRST AMENDMENT
TO THE
AGREEMENT AND PLAN OF MERGER
BETWEEN
COMMUNITY NATIONAL BANCORP, INC.
AND
COMMUNITY NATIONAL CORPORATION
AND
COMMUNITY NATIONAL BANK OF TENNESSEE
THIS FIRST AMENDMENT to that certain Agreement and Plan of Merger dated
as of December 2, 1999 (the "Agreement") is made and entered into as of March 1,
2000, by Community National Bancorp, Inc. ("NEWCO"), Community National
Corporation (the "Company"), and Community National Bank of Tennessee (the
"Bank"), hereafter collectively referred to as the "Parties."
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon change in the total number of shares of NEWCO expected to
be outstanding on the date of consummation of the transaction to 121,960 NEWCO
shares;
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon change in the total aggregate consideration paid by
subscribers for NEWCO shares to $1,798,910;
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon change in the total number of Company shares to be retained
as shares of the continuing corporation to 252,773 Company shares;
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon change in the total number of Company shares to be
exchanged for cash to 460,104 shares;
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon change in the total aggregate consideration for Company
shares which are to be exchanged for cash to $6,786,534;
WHEREAS, the Parties desire to amend the Agreement to reflect a
mutually agreed upon payment of a dividend by the Company on March 31, 2000 to
shareholders of record on March 10, 2000; and
WHEREAS, the Parties desire that all terms, representations,
warranties, covenants, and conditions contained within the Agreement remain in
full force and effect except as expressly amended herein.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Parties agree that the Agreement shall be amended as follows:
1. The last sentence of paragraph (C) of the Recitals shall be deleted and
replaced with the following sentence: "It is expected that NEWCO will have
121,960 shares of stock outstanding on the date of consummation of the
transaction."
2. Section1.1(C) of the Agreement shall be deleted and replaced with the
following: " LIABILITIES. The Continuing Corporation shall be responsible and
liable for all the liabilities, obligations and penalties of each of the
corporations so merged, including, without limitation, the $.10 dividend payable
on each share of the Company's stock on March 31, 2000 to shareholders of record
on March 10, 2000."
3. The last sentence of Section 2.1(A) of the Agreement shall be deleted and
replaced with the following sentence: "It is expected that approximately 460,104
shares of Company will be acquired for cash as part of this
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transaction at $14.75 per share, representing aggregate consideration of
$6,786,543, and that approximately 252,773 shares of Company, the Exception
Shares, will be retained by the shareholders who shall continue as shareholders
of the Continuing Corporation."
4. Section 2.3 of the Agreement shall be deleted and replaced as follows: "2.3
EFFECT ON NEWCO COMMON STOCK. Subject to the provisions of this Plan, on the
Effective Date, by virtue of the Merger, each of the 121,960 issued and
outstanding NEWCO shares shall be exchanged, on a one-for-one basis, for shares
of Company Common Stock."
5. The last sentence of Section 4.2(C) of the Agreement shall be deleted and
replaced with the following sentence: "It is expected that 121,960 shares of
NEWCO Common Stock will be outstanding at the time of consummation of the
transaction."
6. Section 4.2(J) of the Agreement shall be deleted and replaced in its entirety
as follows: "(J) NEW SUBSCRIPTIONS, STOCK EXCHANGE. NEWCO has received cash
commitments from certain investors to subscribe for an aggregate of 121,960
shares of NEWCO at $14.75 per share representing aggregate consideration of
$1,798,910. All 121,960 NEWCO shares will be exchanged for a like number of
Company shares upon consummation of the Merger, except for any dissenting
shares."
7. Schedule 2.1(A) of NEWCO's disclosure schedule shall be deleted and replaced
in its entirety with the Schedule 2.1(A) attached to this First Amendment.
8. The third sentence in Section 1.2 of the Agreement shall be deleted and
replaced in its entirety with the following sentence: "If the Merger is not
consummated in accordance with this Plan on or prior to May 31, 2000, the
Company or NEWCO may terminate this Plan in accordance with Article VII."
9. Section 7.1(C)of the Agreement shall be deleted and replaced in its entirety
as follows: "((C) DELAY. By NEWCO or the Company, if its Board of Directors so
determines by vote of a majority of the members of the entire Board, in the
event that the Merger is not consummated by May 31, 2000; provided however, that
a Party that is in material breach of any of the provisions of this Plan shall
not be entitled to terminate the Plan pursuant to this Section 7.1(C)."
10. Except as specifically amended hereby, the Parties ratify and confirm the
Agreement.
IN WITNESS WHEREOF, each of the Parties has caused this First Amendment
to be executed on its behalf as of the day and year first written above.
COMMUNITY NATIONAL BANCORP, INC.
By: /s/ Phillip Renfroe
---------------------------------------
Phillip Renfroe, President
COMMUNITY NATIONAL CORPORATION
By: /s/ Arba Taylor
---------------------------------------
Arba Taylor, Chairman
COMMUNITY NATIONAL BANK OF TENNESSEE
By: /s/ Arba Taylor
---------------------------------------
Arba Taylor, Chairman
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APPENDIX B
SECTIONS 48-23-101 THROUGH 48-23-302 OF THE TENNESSEE BUSINESS CORPORATION ACT
SS. 48-23-101. DEFINITIONS
As used in this chapter, unless the context otherwise requires:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 48-23-102 and who exercises that right when and in
the manner required by part 2 of this chapter;
(4) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 48-23-102. SHAREHOLDERS RIGHTS
(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. 48-21-103
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. 48-21-104;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
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(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 ss.
48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the charter, bylaws, or a resolution of the board of directors provides
that voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(b) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter may not challenge the corporate action
creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder
may dissent as to any shares of a security which, as of the date of the
effectuation of the transaction which would otherwise give rise to dissenters'
rights, is listed on an exchange registered under ss. 6 of the Securities
Exchange Act of 1934, as amended, or is a "national market system security," as
defined in rules promulgated pursuant to the Securities Exchange Act of 1934, as
amended.
SS. 48-23-103. PARTIAL DISSENTERS; BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
(1) person and notifies the corporation in writing of the name and address of
each person on whose behalf the record shareholder asserts dissenters' rights.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the partial dissenter dissents and the partial dissenter's
other shares were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
of any one (1) or more classes held on the beneficial shareholder's behalf only
if the beneficial shareholder:
(1) Submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(2) Does so with respect to all shares of the same class of which the
person is the beneficial shareholder or over which the person has power to
direct the vote.
SS. 48-23-201. NOTICE OF SHAREHOLDERS RIGHT TO DISSENT
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters' rights
under this chapter and be accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under ss. 48-23-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the
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action was taken and send them the dissenters' notice described in ss.
48-23-203.
(c) A corporation's failure to give notice pursuant to this section
will not invalidate the corporate action.
SS. 48-23-202. DISSENTING SHAREHOLDERS DUTIES
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights must:
(1) Deliver to the corporation, before the vote is taken, written
notice of the shareholder's intent to demand payment for the shareholder's
shares if the proposed action is effectuated; and
(2) Not vote the shareholder's shares in favor of the proposed action.
No such written notice of intent to demand payment is required of any
shareholder to whom the corporation failed to provide the notice required by ss.
48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection
(a) is not entitled to payment for the shareholder's shares under this chapter.
SS. 48-23-203. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under ss.
48-23-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of ss. 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days
after the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not the person asserting dissenters' rights acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2) months
after the date the subsection (a) notice is delivered; and
(5) Be accompanied by a copy of this chapter if the corporation has not
previously sent a copy of this chapter to the shareholder pursuant to ss.
48-23-201.
SS. 48-23-204. SHAREHOLDER DEMANDING PAYMENT AND DEPOSITING SHARE CERTIFICATES
(a) A shareholder sent a dissenters' notice described in ss. 48-23-203
must demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to ss. 48-23-203(b)(3), and deposit the
shareholder's certificates in accordance with the terms of the notice.
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(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 cancelled or modified by the effectuation of
the proposed corporate action.
(c) A shareholder who does not demand payment or deposit the
shareholder's share certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for the shareholder's shares
under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn
unless the corporation with which it was filed, or the surviving corporation,
consents thereto.
SS. 48-23-205. RESTRICTING TRANSFER OF UNCERTIFICATED SHARES
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is effectuated or the restrictions released under ss.
48-23-207.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
SS. 48-23-206. PAYMENTS TO DISSENTERS
(a) Except as provided in ss. 48-23-208, as soon as the proposed
corporate action is effectuated, or upon receipt of a payment demand, whichever
is later, the corporation shall pay each dissenter who complied with ss.
48-23-204 the amount the corporation estimates to be the fair value of each
dissenter's shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under ss.
48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent a
copy of this chapter to the shareholder pursuant to ss. 48-23-201 or ss.
48-23-203.
SS. 48-23-207. CORPORATIONS FAILURE TO EFFECTUATE PROPOSED ACTION
(a) If the corporation does not effectuate the proposed action that
gave rise to the dissenters' rights within two (2) months after the date set for
demanding payment and depositing share certificates, the corporation shall
return the deposited certificates and release the transfer restrictions imposed
on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under ss. 48-23-203 and repeat the payment demand
procedure.
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SS. 48-23-208. AFTER-ACQUIRED SHARES; WITHHOLDING PAYMENT
(a) A corporation may elect to withhold payment required by ss.
48-23-206 from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the principal terms of
the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of the
dissenter's demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under ss.
48-23-209.
SS. 48-23-209. DISAGREEMENT BETWEEN DISSENTER AND CORPORATION REGARDING FAIR
VALUE
(a) A dissenter may notify the corporation in writing of the
dissenter's own estimate of the fair value of the dissenter's shares and amount
of interest due, and demand payment of the dissenter's estimate (less any
payment under ss. 48-23-206), or reject the corporation's offer under ss.
48-23-208 and demand payment of the fair value of the dissenter's shares and
interest due, if:
(1) The dissenter believes that the amount paid under ss. 48-23-206 or
offered under ss. 48-23-208 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under ss. 48-23-206 within
two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action,
does not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within two (2) months after the date set for
demanding payment.
(b) A dissenter waives the dissenter's right to demand payment under
this section unless the dissenter notifies the corporation of the dissenter's
demand in writing under subsection (a) within one (1) month after the
corporation made or offered payment for the dissenter's shares.
SS. 48-23-301. COMMENCEMENT OF PROCEEDING; PARTIES; JURISDICTION; JUDGMENT
(a) If a demand for payment under ss. 48-23-209 remains unsettled, the
corporation shall commence a proceeding within two (2) months after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the two-month period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) 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
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and exclusive. The court may appoint one (1) or more persons as appraisers to
receive evidence and recommend decision on the question of fair value. The
appraisers have the powers described in the order appointing them, or in any
amendment to it. The dissenters are entitled to the same discovery rights as
parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to
judgment:
(1) For the amount, if any, by which the court finds the fair value of
the dissenter's shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ss. 48-23-208.
SS. 48-23-302. COSTS AND ATTORNEY FEES
(a) The court in an appraisal proceeding commenced under ss. 48-23-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under ss. 48-23-209.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable
against:
(1) The corporation and in favor of any or all dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this chapter; or
(2) Either the corporation or a dissenter, in favor of any other party,
if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefitted.
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APPENDIX C
MEMBERS OF THE INVESTOR GROUP WHO ARE SHAREHOLDERS OF THE COMPANY
Mike Blankenship
Pat Carnal
Kevin Carter
Keith Carver
Steve Dodds
Robert J. Erisman
Family Physicians Trust
Margaret Grice
Cary Holmes
Chris Holmes
Holmes Family Trust
Kevin Holmes
Leroy Holmes
Tommy & Carolyn Holmes
Charles Medearis
Homer Pritchard
Jeff Reeves
Tim Roberts
Tim Roberts, Deborah Roberts, JTTEN
Beverly Stanfill
Charles White, Sr
Charles White, Jr
MEMBERS OF THE INVESTOR GROUP WHO ARE NOT SHAREHOLDERS OF THE COMPANY
Olice and Ann Burdette
Paul Hayes
Randy Helms
Steve Helms
Gary Jones
Richard Odle
G.L. Teague
Billy Max Woods
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APPENDIX D
COMMUNITY NATIONAL CORPORATION FORM OF PROXY
REVOCABLE PROXY
(SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
COMMUNITY NATIONAL CORPORATION FOR A SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD ON MARCH 28, 2000)
The undersigned hereby appoints Arba Taylor and Betty Threadgill, and
either of them with full powers of substitution, as attorneys and proxies for
the undersigned, to represent and vote shares of Common Stock of Community
National Corporation ("CNC") standing in my name on the books and records of CNC
at the close of business on March 8, 2000, which the undersigned is entitled to
cast at the Special Meeting of Shareholders to be held at the main office of
Community National Bank of Tennessee, 19 Natchez Trace Drive, Lexington,
Tennessee on March 28, 2000 at 2:00 p.m., local time, and at any and all
adjournments as follows:
Approval of the Agreement and Plan of Merger dated as of December 2,
1999 and amended as of March 1,2000 (the "Merger Agreement") among CNC,
Community National Bank of Tennessee, and Community National Bancorp, Inc.
("Bancorp"); which Merger Agreement provides for, among other things the
proposed merger of Bancorp with and into CNC with CNC to be the surviving
corporation in the Merger.
For Against Abstain
- ------------ ------------- ----------
NOTE: The Board of Directors is not aware of any other business that may come
before the meeting.
THIS PROXY WILL BE VOTED FOR THE PROPOSITION STATED IF NO CHOICE IS MADE HEREON.
Any holder of CNC Common Stock who has delivered a proxy may revoke it
any time before it is voted by attending the Special Meeting and voting in
person at the meeting or by giving notice of revocation in writing or submitting
a signed proxy card bearing either the same date but delivered at a later time
or a later date to CNC at 19 Natchez Trace Drive, P.O. Box 710, Lexington,
Tennessee 38351, Attention: Secretary, provided such notice or proxy is actually
received by CNC before the vote of shareholders. Should the undersigned be
present and elect to vote at the Special Meeting or at any adjournment thereof
and, after notification to the Secretary of CNC at the Special Meeting of the
shareholder's decision to terminate this Proxy, then the power of said attorneys
and proxies shall be deemed terminated and of no further force and effect.
The undersigned acknowledges receipt of a Notice of Special Meeting
called for the 28th day of March, 2000 and the Proxy Statement
dated March 8, 2000 prior to the execution of this Proxy.
-------------------------------
Print Name of Shareholder
-------------------------------
Signature of Shareholder
-------------------------------
Print Name of Shareholder
Date:
----------------- -------------------------------
Signature of Shareholder
(Please sign exactly as your name appears above. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
more than one trustee, all should sign. If shares are held jointly, each holder
should sign.)
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