<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1995
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
FIRST AMERICAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
TENNESSEE 6712 62-0799975
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
CODE NUMBER)
</TABLE>
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0700
(615) 748-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARTIN E. SIMMONS, ESQ.
EXECUTIVE VICE PRESIDENT -- ADMINISTRATION, GENERAL COUNSEL, SECRETARY,
AND PRINCIPAL FINANCIAL OFFICER
FIRST AMERICAN CORPORATION
FIRST AMERICAN CENTER
NASHVILLE, TENNESSEE 37237-0606
(615) 748-2049
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------------
Copies to:
<TABLE>
<S> <C>
CATHERINE COLLINS MCCOY, ESQ. GARY R. BRONSTEIN, ESQ.
ARNOLD & PORTER HOUSLEY GOLDBERG KANTARIAN &
555 12TH STREET, N.W. BRONSTEIN, P.C.
WASHINGTON, DC 20004-1202 1220 19TH STREET, N.W., SUITE 700
(202) 942-5000 WASHINGTON, DC 20036
(202) 822-9611
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
AMOUNT PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $5.00 par value................... 4,026,274 $38.81 $115,507,854 39,831
(including rights to purchase shares of common
stock or Series A Junior Preferred Stock)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the maximum number of shares of common stock, par value $5.00 per
share ("FAC Common Stock"), of First American Corporation ("First American")
issuable upon consummation of the merger of Heritage Federal Bancshares,
Inc. ("Heritage") with and into First American, including shares of FAC
Common Stock issuable to holders of options exercisable for the purchase of
shares of the common stock, par value $1.00 per share ("HFB Common Stock")
of Heritage upon consummation of the merger.
(2) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rules 457(f)(l) and 457(c)
under the Securities Act of 1933, as amended, based on the average of high
and low prices of shares of HFB Common Stock on The Nasdaq Stock Market on
September 22, 1995. The proposed maximum aggregate offering price per share
has been determined by dividing the proposed maximum aggregate offering
price by 2,976,070, the number of shares of FAC Common Stock which would be
issued in the Merger if the Exchange Ratio were the minimum ratio of 0.8116.
(3) Total fees of $23,350 have previously been paid, on August 11, 1995 and
September 22, 1995, in connection with the filing of preliminary proxy
materials by Heritage with respect to this transaction.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FIRST AMERICAN CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM OF FORM S-4 HEADING IN PROSPECTUS/PROXY STATEMENT
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Introduction
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Table of Contents; Available Information;
Incorporation of Certain Documents by
Reference
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............ Introduction; Summary; Proposal I -- The
Merger
4. Terms of the Transaction................... Introduction; Summary; Proposal I -- The
Merger
5. Pro Forma Financial Information............ Fully Pro Forma Combined Condensed
Financial Statements
6. Material Contacts with the Company Being
Acquired................................. Proposal I -- The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel..... Experts; Legal Opinion
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Undertakings
10. Information with Respect to S-3
Registrants.............................. Introduction; Available
Information; Proposal I -- The Merger
11. Incorporation of Certain Information by
Reference................................ Available Information; Incorporation of
Certain Documents By Reference
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants........ Not Applicable
15. Information with Respect to S-3
Companies................................ Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................ Information About Heritage Federal
Bancshares, Inc.
17. Information with Respect to Companies Other
Than S-2 or S-3 Companies................ Not Applicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Introduction; Available Information;
Summary; Meeting Information; Proposal
I -- The Merger
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer..................... Not Applicable
</TABLE>
<PAGE> 3
LOGO
September 29, 1995
Dear Shareholder:
We are pleased to enclose your Notice of Special Meeting and
Prospectus/Proxy Statement for the Special Meeting of Shareholders (the
"Meeting") of Heritage Federal Bancshares, Inc. ("Heritage") to be held on
October 30, 1995, at 1:00 p.m., local time, in the Training Room of the Heritage
Federal Bank Building, 220 Broad Street, Kingsport, Tennessee.
At the Meeting, you will be asked to consider and vote on an Agreement and
Plan of Merger, as amended (the "Agreement"), between Heritage and First
American Corporation ("First American"), a corporation organized under the laws
of the State of Tennessee and a registered bank holding company, pursuant to
which Heritage will be acquired by First American. The acquisition will be
accomplished by the merger ("Merger") of Heritage with and into First American,
with First American as the surviving entity. Immediately following the Merger,
Heritage Federal Bank for Savings, Kingsport, Tennessee, a wholly owned
subsidiary of Heritage, will be merged with and into First American National
Bank, Nashville, Tennessee, a wholly owned subsidiary of First American, with
First American National Bank as the survivor.
The Agreement provides for a tax-free exchange in which Heritage
stockholders will receive shares of common stock of First American ("FAC Common
Stock") for their shares of common stock of Heritage ("HFB Common Stock"). Based
on the recent trading prices for FAC Common Stock, Heritage stockholders would
receive 0.8116 shares of FAC Common Stock for each share of HFB Common Stock
held. The Merger is subject to various conditions and the final exchange ratio
(the "Exchange Ratio") is subject to adjustment depending on the average closing
sale price (the "Average Closing Price") of FAC Common Stock on The Nasdaq Stock
Market (as reported in The Wall Street Journal) for the twenty (20) consecutive
trading days ending on and including the third day immediately preceding, but
not including the Effective Time of the Merger. If the Average Closing Price is
above $34.50 per share, the Exchange Ratio will be 0.8116 shares of FAC Common
Stock for each share of HFB Common Stock; if the Average Closing Price is below
$25.50 per share of FAC Common Stock, the Exchange Ratio will be 1.098. If the
Average Closing Price is between $25.50 and $34.50 per share, the Exchange Ratio
will be adjusted so that each share of the HFB Common Stock will be exchanged
for a number of shares of FAC Common Stock having an aggregate value of $28.00.
First American may terminate the Agreement if the Average Closing Price of the
FAC Common Stock is above $36.50 per share, and Heritage may terminate the
Agreement if such Average Closing Price is below $23.50 per share.
The FAC Common Stock is traded on The Nasdaq Stock Market under the symbol
"FATN". The closing price of FAC Common Stock in composite trading on September
25, 1995, was $43.56 per share, as reported in The Wall Street Journal.
Consummation of the Merger is subject to certain conditions, including the
approval of the Agreement by the affirmative vote of the holders of a majority
of the outstanding shares of HFB Common Stock entitled to vote thereon, and the
approval of the Merger by various regulatory agencies.
In addition, at the Meeting you will be asked (i) to approve an amendment
to the charter of Heritage (the "Charter Amendment") which will amend the
current restrictions on acquisition of more than 10% of the stock of Heritage to
permit the Merger to occur, and (ii) to approve the adjournment of the Special
Meeting to a later date, if necessary, to solicit additional proxies in the
event insufficient shares are present in person or by proxy to approve the
Agreement. Shareholders should be aware that even if the Merger and the
Agreement receive shareholder approval, Heritage will be unable to consummate
the Merger unless shareholders also approve the Charter Amendment.
<PAGE> 4
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, WE URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU PLAN TO ATTEND THE MEETING.
This will not prevent you from voting in person but will assure that your vote
is counted if you are unable to attend the Meeting. Please note that, because
approval of the Merger, the Agreement and the Charter Amendment requires the
affirmative vote of a majority of the outstanding shares of HFB Common Stock,
failure to vote will have the same effect as voting against the Merger, the
Agreement and the Charter Amendment.
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR approval of the Merger and the Agreement, FOR approval of the
Charter Amendment, and FOR approval of the adjournment of the Meeting under the
circumstances specified above.
Sincerely,
/s/ Sam H. Anderson, Jr.
- ----------------------------------
SAM H. ANDERSON, JR.
Chairman of the Board of Directors
/s/ William E. Kreis
- -------------------------------------
WILLIAM E. KREIS
President and Chief Executive Officer
<PAGE> 5
HERITAGE FEDERAL BANCSHARES, INC.
110 EAST CENTER STREET
KINGSPORT, TENNESSEE 37660
(615) 378-8000
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1995
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Meeting") of Heritage Federal Bancshares, Inc. ("Heritage") will be held in the
Training Room of the Heritage Federal Bank Building, 220 Broad Street,
Kingsport, Tennessee, on Monday, October 30, 1995 at 1:00 p.m., local time.
A Proxy Card and a Prospectus/Proxy Statement for the Meeting are enclosed.
The Meeting is being held for the purpose of considering and acting upon:
1. The approval of the Agreement and Plan of Merger, as amended (the
"Agreement") by and between Heritage and First American Corporation
("First American") which provides for the merger of Heritage with and
into First American (the "Merger") pursuant to which shareholders of
Heritage will receive for each share of Heritage's common stock, $1.00
par value (the "HFB Common Stock"), the number of shares of common stock
of First American, $5.00 par value ("FAC Common Stock"), determined by
dividing $28.00 by the average closing sale price ("Average Closing
Price") per share of FAC Common Stock on The Nasdaq Stock Market (as
reported in The Wall Street Journal) for the twenty (20) consecutive
trading days ending on and including the third day immediately
preceding, but not including the Effective Time (the "Exchange Ratio")
and cash in lieu of any fractional share; provided, that the Exchange
Ratio shall not exceed 1.098 shares of FAC Common Stock per share of HFB
Common Stock and shall not be less than 0.8116 shares of FAC Common
Stock per share of HFB Common Stock, unless prior to the Effective Time
the outstanding shares of FAC Common Stock shall have been increased,
decreased, changed into or exchanged for a different number or kind of
shares through a reorganization, reclassification, stock dividend, stock
split, reverse stock split or other similar change, in which case
applicable adjustments shall be made to the Average Closing Price and
the maximum and minimum number of shares of FAC Common Stock to be
exchanged. First American may terminate the Agreement if the Average
Closing Price of the FAC Common Stock is above $36.50 per share, and
Heritage may terminate the Agreement if such Average Closing Price is
below $23.50 per share.
2. The approval of an amendment to Article XIV of the charter of Heritage,
which currently prohibits the acquisition of beneficial ownership of
more than 10% of any class of equity security of Heritage, to provide a
specific exception for the proposed transaction with First American
described in Item 1 above (the "Charter Amendment").
3. The adjournment of the Meeting to a later date, if necessary, to solicit
additional proxies in the event insufficient shares are present in
person or by proxy at the Meeting to approve the Agreement and the
Charter Amendment.
Copies of the Agreement and the Charter Amendment are attached to or
included in the Prospectus/Proxy Statement which accompanies this Notice.
Any action may be taken on any one of the foregoing proposals at the
Meeting on the date specified above, or on any date or dates to which, by
original or later adjournment, the Meeting may be adjourned. Pursuant to the
Bylaws, the Board of Directors has fixed the close of business on September 22,
1995, as the record date for determination of the shareholders entitled to vote
at the Meeting and any adjournments thereof.
<PAGE> 6
Please fill in and sign the enclosed form of proxy (i.e., the Proxy Card)
which is solicited by the Board of Directors and mail it promptly in the
enclosed envelope. The proxy will not be used if you attend and vote at the
Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Richard D. Brumfield
------------------------
RICHARD D. BRUMFIELD
Secretary
Kingsport, Tennessee
September 29, 1995
- --------------------------------------------------------------------------------
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING. WHETHER OR NOT YOU INTEND TO
ATTEND THE MEETING, PLEASE EXECUTE THE ENCLOSED FORM OF PROXY TO ENSURE THAT
YOUR VOTE WILL BE COUNTED. THE PROMPT RETURN OF PROXIES WILL SAVE YOUR COMPANY
THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A
PRE-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
** PLEASE DO NOT SEND IN STOCK CERTIFICATES AT THIS TIME **
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION........................................................................... 1
AVAILABLE INFORMATION.................................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................ 3
SUMMARY................................................................................ 5
Parties to the Reorganization........................................................ 5
The Meeting.......................................................................... 6
The Proposed Merger.................................................................. 6
Effective Time....................................................................... 7
Termination of the Agreement......................................................... 7
Accounting Treatment................................................................. 7
Recommendation of the Board of Directors............................................. 7
Opinion of Financial Advisor......................................................... 8
Vote Required........................................................................ 8
No Dissenters' Rights................................................................ 8
Interests of Certain Persons in the Merger........................................... 9
Conditions; Regulatory Approvals; Waiver; Damages.................................... 9
Certain Federal Income Tax Consequences of the Merger................................ 10
Certain Differences in Rights of Shareholders........................................ 10
Market Prices and Dividends.......................................................... 10
COMPARATIVE PER SHARE DATA............................................................. 13
SELECTED FINANCIAL DATA................................................................ 14
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS...................... 19
MEETING INFORMATION.................................................................... 25
Date, Place and Time................................................................. 25
Record Date; Voting Rights........................................................... 25
Voting and Revocation of Proxies..................................................... 25
Solicitation of Proxies.............................................................. 26
PROPOSAL I -- THE MERGER............................................................... 27
Background of the Merger............................................................. 27
Reasons for the Merger; Recommendation of the Board of Directors..................... 30
Terms of the Merger.................................................................. 31
Opinion of Financial Advisor......................................................... 31
Conversion of Shares; Procedures for Exchange of Certificates........................ 35
Representations and Warranties; Conditions to the Merger; Waiver..................... 35
Regulatory Approvals................................................................. 37
Business Pending the Merger.......................................................... 37
No Solicitation of Competing Transactions............................................ 38
Effective Time of the Merger; Termination; Damages................................... 38
Management and Operations After the Merger........................................... 39
Effect on Certain Employees and Benefit Plans........................................ 40
Interests of Certain Persons in The Merger........................................... 40
Certain Federal Income Tax Consequences of the Merger................................ 42
Certain Differences in Rights of Shareholders........................................ 43
Resale of FAC Common Stock........................................................... 49
Dividend Reinvestment and Stock Purchase Plan........................................ 50
</TABLE>
i
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Expenses............................................................................... 50
Accounting Treatment................................................................... 50
No Dissenters' Rights.................................................................. 51
Nasdaq Authorization................................................................... 51
CERTAIN REGULATORY CONSIDERATIONS...................................................... 51
General.............................................................................. 51
Capital.............................................................................. 52
Acquisition and Expansion............................................................ 53
Bank Regulation...................................................................... 54
PROPOSAL II -- AMENDMENT TO THE HERITAGE CHARTER....................................... 57
PROPOSAL III -- ADJOURNMENT OF THE MEETING............................................. 58
INFORMATION ABOUT HERITAGE FEDERAL BANCSHARES, INC..................................... 59
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER ENTITIES............................ 70
EXPERTS................................................................................ 71
LEGAL OPINION.......................................................................... 72
SHAREHOLDER PROPOSALS.................................................................. 72
CONSOLIDATED FINANCIAL STATEMENTS OF HERITAGE
FEDERAL BANCSHARES, INC. AND SUBSIDIARY.............................................. F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER AND
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
APPENDIX B -- OPINION OF TRIDENT FINANCIAL CORPORATION
</TABLE>
ii
<PAGE> 9
Heritage Federal Bancshares, Inc.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1995
------------------------
First American Corporation
PROSPECTUS
Up to 4,026,274 Shares of Common Stock
(par value $5.00 per share)
INTRODUCTION
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, par value $1.00 per share ("HFB Common Stock"), of Heritage
Federal Bancshares, Inc. ("Heritage" or "HFB") in connection with the
solicitation of proxies by the Board of Directors of Heritage for use at a
Special Meeting of Shareholders, and any adjournment thereof, to be held at the
time and place set forth in the accompanying notice ("Meeting"). It is
anticipated that the mailing of this Prospectus/Proxy Statement and the enclosed
proxy card will commence on or about September 29, 1995.
At the Meeting, shareholders of Heritage will be asked to approve an
Agreement and Plan of Merger, dated as of February 21, 1995, and as amended as
of May 17, 1995, providing for the acquisition of Heritage by First American
Corporation ("First American" or "FAC") by means of the merger ("Merger") of
Heritage with and into First American, with First American as the surviving
entity. First American is a Tennessee corporation and a registered bank holding
company. The Agreement and Plan of Merger and the amendment thereto are attached
to this Prospectus/Proxy Statement as Appendix A and are hereinafter
collectively referred to as the "Agreement." At the effective time of the Merger
(the "Effective Time"), each share of HFB Common Stock issued and outstanding
immediately prior to the Effective Time will be converted into the number of
shares of common stock of First American, par value $5.00 per share ("FAC Common
Stock") determined by dividing $28.00 by the average closing sale price
("Average Closing Price") per share of FAC Common Stock on The Nasdaq Stock
Market (as reported in The Wall Street Journal) for the twenty (20) consecutive
trading days ending on and including the third day immediately preceding but not
including the Effective Time (the "Exchange Ratio") and cash in lieu of any
fractional share; provided, that if the Average Closing Price per share of FAC
Common Stock is $25.50 or less, the Exchange Ratio shall not exceed 1.098 shares
of FAC Common Stock per share of HFB Common Stock, and if the Average Closing
Price per share of FAC Common Stock is $34.50 or greater, the Exchange Ratio
shall not be less than 0.8116 shares of FAC Common Stock per share of HFB Common
Stock. Each such Exchange Ratio at the respective $25.50 minimum or $34.50
maximum price per share of FAC Common Stock is intended to provide an equivalent
value of $28.00 per share of HFB Common Stock. Prior to the Effective Time, if
the outstanding shares of FAC Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares through a
reorganization, reclassification, stock dividend, stock split, reverse stock
split or other similar change, applicable adjustments shall be made to the
maximum and minimum number of shares of FAC Common Stock to be exchanged. First
American may terminate the Agreement if the Average Closing Price of the FAC
Common Stock is above $36.50 per share, and Heritage may terminate the Agreement
if such Average Closing Price is below $23.50 per share (which would provide an
equivalent per share value of $25.80 per share of HFB Common Stock). Immediately
following the Merger, it is intended that Heritage Federal Bank for Savings,
Kingsport, Tennessee ("Heritage Bank"), a wholly owned subsidiary of Heritage,
will be merged (the "Bank Merger") with and into First American
<PAGE> 10
National Bank, Nashville, Tennessee ("FANB"), a wholly owned subsidiary of First
American, with FANB as the survivor.
At the Meeting, the shareholders of Heritage will also be asked to approve
an amendment to Article XIV of Heritage's charter, which currently prohibits the
acquisition of beneficial ownership of more than 10% of any class of equity
security of Heritage, to provide a specific exception for the Merger (the
"Charter Amendment").
THE FAC COMMON STOCK THAT WOULD BE ISSUED IN THE MERGER HAS NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES AUTHORITY NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OF FAC COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS OR OTHER
OBLIGATIONS OF ANY BANK OR ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
First American and Heritage are Nasdaq National Market companies and the
FAC Common Stock and the HFB Common Stock trade on The Nasdaq Stock Market. On
February 17, 1995, the last business day prior to public announcement of the
execution of the Agreement, the last reported sales prices per share of FAC
Common Stock and of HFB Common Stock were $32.625 and $22.50, respectively.
Based on the last reported sales price per share of FAC Common Stock on
September 25, 1995 of $43.56 (assuming that this is the Average Closing Price as
described above), each share of HFB Common Stock would be exchangeable for
0.8116 shares of FAC Common Stock having a value of $35.35. If the actual
Average Closing Price is less than $43.56 but greater than $34.50, the Exchange
Ratio will remain fixed at 0.8116 shares, but the value of the shares of FAC
Common Stock into which each share of HFB Common Stock will be converted will
have a lower value. If the Average Closing Price is between $25.50 and $34.50,
the Exchange Ratio will be adjusted such that each share of HFB Common Stock
will be exchanged for a number of shares of FAC Common Stock having a value of
$28.00. If the Average Closing Price exceeds $36.50, First American could
terminate the Agreement.
No person is authorized to give any information or to make any
representation not contained in this Prospectus/Proxy Statement and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by this
Prospectus/Proxy Statement, in any jurisdiction, to any person to whom it is
unlawful to make such offer or solicitation of an offer in such jurisdiction.
Neither the delivery of this Prospectus/Proxy Statement nor any distribution of
securities made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of First American or Heritage since
the date of this Prospectus/Proxy Statement.
The date of this Prospectus/Proxy Statement, which also constitutes the
prospectus of First American for up to 4,026,274 shares of FAC Common Stock to
be issued in connection with the Merger, is September 29, 1995.
AVAILABLE INFORMATION
First American and Heritage are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder ("Exchange Act"), and, in accordance therewith, file
reports, proxy statements and other information with the Securities and Exchange
Commission ("Commission"). Such reports, proxy statements and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's regional offices located at: 7 World Trade Center, 13th Floor, New
York,
2
<PAGE> 11
New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material can be obtained at prescribed
rates by writing to the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, materials filed by First American and
Heritage are available for inspection at the offices of The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20006.
First American has filed with the Commission a registration statement under
the Securities Act of 1933, as amended ("Securities Act"), relating to the
shares of FAC Common Stock that may be issued in connection with the Merger
("Registration Statement"). This Prospectus/Proxy Statement also constitutes the
prospectus of First American filed as part of the Registration Statement and
does not contain all of the information set forth in the Registration Statement
and exhibits thereto. The Registration Statement and the exhibits thereto may be
inspected and copied, at prescribed rates, at the public reference facilities
maintained by the Commission at the addresses set forth above. All information
concerning First American and its subsidiaries contained in this
Prospectus/Proxy Statement has been furnished by First American, and all
information concerning Heritage and its subsidiaries has been furnished by
Heritage.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO FIRST
AMERICAN (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST TO CARROLL KIMBALL, DIRECTOR OF INVESTOR
RELATIONS, FIRST AMERICAN CORPORATION, FIRST AMERICAN CENTER, NASHVILLE,
TENNESSEE 37237-0708. TELEPHONE REQUESTS MAY BE DIRECTED TO (615) 748-2455.
DOCUMENTS RELATING TO HERITAGE (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS)
ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO WILLIAM F.
RICHMOND, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, HERITAGE FEDERAL
BANCSHARES, INC., 220 BROAD STREET, KINGSPORT, TENNESSEE 37660. TELEPHONE
REQUESTS MAY BE DIRECTED TO (615) 378-2810. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY OCTOBER 23, 1995.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by First American (File
No. 0-6198) are incorporated herein by reference:
1. Annual Report on Form 10-K of First American for the year ended
December 31, 1994;
2. First American's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1995 and June 30, 1995;
3. The description of the FAC Common Stock contained in the
Registration Statement on Form 8-A dated April 24, 1972, as amended January
31, 1983, May 14, 1986, and January 11, 1989, filed by First American to
register such securities under the Exchange Act, and any amendment or
report filed for the purpose of updating such description; and
4. First American's Current Reports on Form 8-K dated February 23,
1995, May 22, 1995, July 7, 1995 and August 15, 1995.
5. Form 10-Q/A for the quarter ended June 30, 1995, filed September
22, 1995.
3
<PAGE> 12
The following documents filed with the Commission by Heritage (File No.
0-20000) are incorporated herein by reference:
1. Annual Report on Form 10-K for Heritage for the fiscal year ended
June 30, 1995.
2. Form 10-K/A-1 for Heritage for the fiscal year ended June 30, 1995,
filed September 21, 1995.
All documents filed by First American pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date hereof until the date of
the Meeting shall be deemed to be incorporated herein by reference and to be a
part hereof from the date of such filing. 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 of this Prospectus/Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus/Proxy Statement.
4
<PAGE> 13
SUMMARY
This summary is necessarily general and abbreviated and has been prepared
to assist shareholders in their review of this Prospectus/Proxy Statement. This
summary is not intended to be a complete explanation of the matters covered in
this Prospectus/Proxy Statement and is qualified in all respects by reference to
the more detailed information contained elsewhere in this Prospectus/Proxy
Statement, the Appendices hereto and the documents incorporated herein by
reference, which shareholders are urged to read carefully.
PARTIES TO THE REORGANIZATION
FIRST AMERICAN CORPORATION. First American is a Tennessee corporation
registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). As
of June 30, 1995, First American had total consolidated assets of approximately
$8.1 billion and shareholders' equity of approximately $638.1 million. As of
June 30, 1995, First American ranked, on the basis of aggregate deposits held by
FANB, First American's principal subsidiary, as the third largest bank holding
company headquartered in Tennessee.
In addition to FANB, First American owns all of the capital stock of First
American National Bank of Kentucky ("FANBKY"), a national banking association
headquartered in Bowling Green, Kentucky, and First American Trust Company
("FATC"), a national banking association headquartered in Nashville, Tennessee,
which provides all of the trust functions, both individual and corporate, for
the customers of First American and its subsidiaries. First American derives its
income from interest, dividends and management fees received from its
subsidiaries.
The mailing address of the principal executive offices of First American is
First American Center, Nashville, Tennessee 37237-0708, and the telephone number
is (615) 748-2000. For additional information concerning the business of First
American and its financial condition, reference should be made to the First
American documents incorporated herein by reference. See "AVAILABLE INFORMATION"
and "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
Pending Acquisitions by First American. First American, through its lead
financial institution subsidiary FANB, primarily has focused its business
strategy on meeting the banking needs of the retail and middle market commercial
customers through an extensive branch network. The acquisitions by First
American of savings associations, such as Heritage, are designed to complement
First American's branch expansion strategy. First American has determined that
the acquisition of what it believes are well-managed savings associations will
help it to realize this strategy and enhance its ability to compete with other
financial institutions. First American was particularly attracted to Heritage
because it has a branch network servicing the needs of retail customers which
will enhance First American's ability to compete with other financial
institutions.
First American also has entered into an Agreement and Plan of
Reorganization dated as of May 17, 1995 to acquire Charter Federal Savings Bank
("Charter"), a federal savings bank headquartered in Bristol, Virginia, with
approximately $750 million in assets at June 30, 1995, in a stock transaction
valued at approximately $70 million, through the merger of an interim federal
savings bank subsidiary of First American with and into Charter. It is the
intention of First American and Charter that certain branches of Charter will be
transferred to and operated as branches of FANB. The remaining branches of
Charter are intended to be operated as a federal savings bank which will be
headquartered in Roanoke, Virginia.
The pro forma financial statements included in this Prospectus/Proxy
Statement show the effects on First American of the acquisition of both Heritage
and Charter. See "UNAUDITED FULLY PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS."
First American also has entered into an Agreement and Plan of Merger dated
as of July 5, 1995 to acquire First City Bancorp, Inc., a Tennessee corporation
("First City"), in a stock transaction valued at approximately $51 million
through the merger of First City with and into First American. First City, with
approximately $340 million in assets, is the owner of 100% of the capital stock
of each of First City Bank, Murfreesboro, Tennessee, and Citizens Bank,
Smithville, Tennessee. It is the intention of First American and
5
<PAGE> 14
First City that First City Bank and Citizens Bank each will be merged with and
into FANB immediately following the merger of First City with and into First
American.
HERITAGE. Heritage is a Tennessee corporation which serves as the holding
company for, and conducts its principal business through, its wholly-owned
subsidiary, Heritage Bank. As of June 30, 1995, Heritage had total consolidated
assets of approximately $528.2 million and shareholders' equity of approximately
$53.8 million.
For regulatory purposes, Heritage is classified as a unitary savings and
loan holding company and its principal business is that of its wholly-owned
subsidiary, Heritage Bank, a federally-chartered stock savings bank with its
principal executive and administrative offices in Kingsport, Tennessee. The
principal business of Heritage Bank consists of accepting deposits from the
general public through its branch offices and investing these funds in loans
secured by one- to four-family residential properties located in its market
areas. Heritage Bank also maintains a substantial investment portfolio and
originates a limited amount of consumer, commercial and commercial real estate
loans secured by properties in its market areas. In addition, Heritage Bank
offers trust services and, through its wholly-owned subsidiary, sells title
insurance. For additional information regarding Heritage, see "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE," and
"INFORMATION ABOUT HERITAGE FEDERAL BANCSHARES, INC."
The mailing address of the principal executive offices of Heritage is 110
East Center Street, Kingsport, Tennessee 37660, and its main telephone number is
(615) 378-8000.
THE MEETING
The Meeting of Shareholders of Heritage will be held on Monday, October 30,
1995, at 1:00 p.m., local time, in the Training Room of the Heritage Federal
Bank Building, 220 Broad Street, Kingsport, Tennessee. The purpose of the
Meeting is to consider and vote upon a proposal to approve and adopt the
Agreement, to approve and adopt the Charter Amendment and to approve the
adjournment of the Meeting if an insufficient number of votes to approve the
Agreement and the Charter Amendment is received. Only holders of record of HFB
Common Stock at the close of business on September 22, 1995 (the "Record Date")
will be entitled to notice of and to vote at such Meeting. At such date,
3,245,117 shares of HFB Common Stock were outstanding and entitled to vote. For
additional information with respect to the Meeting and the voting rights of
Heritage shareholders, see "MEETING INFORMATION."
THE PROPOSED MERGER
Pursuant to the terms of the Agreement, Heritage will be merged with and
into First American, with First American as the surviving entity. At the
Effective Time, each outstanding share of HFB Common Stock (excluding shares
held by First American or by Heritage, in each case other than in a fiduciary
capacity or in satisfaction of debts previously contracted) will be converted
into shares of FAC Common Stock, using the Exchange Ratio which will be
determined by dividing $28.00 by the Average Closing Price; provided, that the
Exchange Ratio shall not exceed 1.098 shares of FAC Common Stock per share of
HFB Common Stock and shall not be less than 0.8116 shares of FAC Common Stock
per share of HFB Common Stock, unless prior to the Effective Time the
outstanding shares of FAC Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares through a
reorganization, reclassification, stock dividend, stock split, reverse stock
split or other similar change, in which case applicable adjustments shall be
made to the maximum and minimum number of shares of FAC Common Stock to be
exchanged. See "PROPOSAL I -- THE MERGER -- Terms of the Merger." The Agreement
may be terminated by Heritage if, among other things, the Average Closing Price
is less than $23.50 or by First American if, among other things, the Average
Closing Price is more than $36.50. See "PROPOSAL I -- THE MERGER -- Effective
Time of the Merger; Termination; Damages."
After the Merger, those persons serving as directors of First American
immediately prior to the Effective Time shall continue as directors of First
American. In addition, pursuant to the Agreement, the Board of Directors of
First American has elected Sam H. Anderson, Jr., the current Chairman of the
Board of
6
<PAGE> 15
Directors of Heritage, to become a member of the Board of Directors of First
American, subject to consummation of the Merger. In addition, First American has
agreed to take action to cause such other persons serving on the Board of
Directors of Heritage immediately prior to the Effective Time to be appointed to
serve as advisory directors of FANB as may be mutually agreed upon by FANB and
such persons. The Agreement also contains provisions relating to, among other
things, employee benefits, indemnification of directors and officers, and
directors' and officers' liability insurance after the Merger. See "PROPOSAL
I -- THE MERGER -- Management and Operations After the Merger" and "-- Effect on
Certain Employees and Benefit Plans."
EFFECTIVE TIME
In the event that all conditions to the Merger have been satisfied or
waived, the Effective Time shall take place on the date and at the time of
filing of Articles of Merger with the Secretary of State of Tennessee (or such
later time as set forth in such Articles); the parties, however, intend that the
Effective Time shall be 12:01 a.m. of the first calendar day of the month
immediately following the month in which the closing occurs. The Merger will be
consummated at a closing to be held on the last business day of a calendar
quarter or of a calendar month if after October 1, 1995, or at such other time
mutually agreed upon by First American and Heritage. See "PROPOSAL I -- THE
MERGER -- Effective Time of the Merger; Termination; Damages."
TERMINATION OF THE AGREEMENT
The Agreement may be terminated at any time prior to the Effective Time by
the mutual consent of Heritage and First American and by either of them
individually under certain specified circumstances, including if the Merger has
not been consummated by January 31, 1996. In addition, the Agreement provides
that Heritage has the right to terminate the Agreement if the Average Closing
Price is less than $23.50, and that First American has the right to terminate
the Agreement if the Average Closing Price exceeds $36.50. See "PROPOSAL
I -- THE MERGER -- Effective Time of the Merger; Termination; Damages."
Under certain circumstances, if the Agreement is terminated by First
American or Heritage and the Board of Directors of Heritage has taken certain
actions regarding its recommendation of the Merger to the Heritage shareholders
or has taken certain actions regarding a possible transaction with a third party
which would result in such third party acquiring a significant portion of the
assets or securities of Heritage, Heritage may be required to pay First American
liquidated damages of $4,500,000. If the Agreement is terminated and Heritage is
not otherwise liable for the payment of liquidated damages described above,
Heritage may nevertheless be liable to First American for up to $500,000 in
expenses incurred by First American in connection with the Merger. Similarly,
under certain circumstances First American may be liable to Heritage for
expenses related to the Merger of up to $500,000. See "PROPOSAL I -- THE
MERGER -- Effective Time of the Merger; Termination; Damages" and "-- Expenses."
ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. First American intends to obtain an opinion
from its independent accountants confirming that the Merger will qualify for
"pooling of interests" accounting. See "PROPOSAL I -- THE MERGER -- Accounting
Treatment."
RECOMMENDATION OF THE BOARD OF DIRECTORS
Heritage's Board of Directors has unanimously approved the Merger and the
Agreement and has determined that the Merger is fair to, and in the best
interests of, Heritage and its shareholders. The Board of Directors therefore
unanimously recommends that Heritage's shareholders vote FOR approval of the
Merger and the Agreement. Heritage's Board of Directors believes that the Merger
will provide significant value to all Heritage shareholders in relation to
market value, book value and earnings per share of the HFB Common Stock. See
"PROPOSAL I -- THE MERGER -- Background of the Merger" and "-- Reasons for the
Merger; Recommendation of the Board of Directors." In considering the
recommendation of Heritage's Board
7
<PAGE> 16
of Directors, shareholders should be aware that certain members of the Board of
Directors and the executive officers of Heritage have interests in the Merger in
addition to their interests as shareholders of Heritage generally. See "PROPOSAL
I -- THE MERGER -- Interests of Certain Persons in the Merger."
OPINION OF FINANCIAL ADVISOR
Trident Financial Corporation ("Trident"), Heritage's financial advisor,
has rendered its opinion to Heritage's Board of Directors that the consideration
to be received by Heritage's shareholders in the Merger is fair to such
shareholders from a financial point of view. This opinion, which updates
Trident's earlier opinion provided to Heritage's Board of Directors and is
attached as Appendix B to this Prospectus/Proxy Statement, should be read in its
entirety with respect to the assumptions made, matters considered, and limits of
the review undertaken by Trident in rendering such opinion. For its services as
a financial advisor, Trident will receive a fee equal to 0.60% of the aggregate
value of the Merger (and therefore contingent upon such value), less $40,000
previously received, upon consummation of the Merger (a balance due of
approximately $728,000, assuming a price of $43 per share of FAC Common Stock in
the Merger). See "PROPOSAL I -- THE MERGER -- Opinion of Financial Advisor."
VOTE REQUIRED
Approval of the Merger and of the Charter Amendment each requires the
affirmative vote of the holders of a majority of the outstanding shares of HFB
Common Stock entitled to vote thereon. Approval of an adjournment of the Meeting
requires the affirmative vote of a majority of the votes cast at the Meeting.
A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON AT
THE MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE AGREEMENT AND THE
CHARTER AMENDMENT. SIMILARLY, ABSTENTIONS AND "BROKER NON-VOTES" WILL HAVE THE
EFFECT OF VOTES AGAINST THE AGREEMENT AND THE CHARTER AMENDMENT. FURTHER,
BECAUSE THE CHARTER AMENDMENT MUST BE APPROVED IN ORDER TO ALLOW THE MERGER TO
OCCUR, HERITAGE WILL BE UNABLE TO CONSUMMATE THE MERGER UNLESS BOTH THE
AGREEMENT AND THE CHARTER AMENDMENT RECEIVE SHAREHOLDER APPROVAL.
Directors and executive officers of Heritage and affiliates of such persons
had sole or shared voting power with respect to 516,010 shares of HFB Common
Stock, representing 15.90% of the HFB Common Stock outstanding as of the Record
Date. First American has entered into a Voting Agreement signed by each member
of the Board of Directors of Heritage, whereby each such person has agreed to
vote all shares of HFB Common Stock that he or she is entitled to vote in favor
of the Agreement, subject to certain conditions set forth in the Voting
Agreements. Entering into the Voting Agreements by the directors of Heritage was
an inducement to First American to enter into the Agreement. No such person
received any form of compensation from First American for entering into the
Voting Agreements beyond execution of the Agreement. Such persons had sole or
shared voting power with respect to 334,123 shares of HFB Common Stock,
representing 10.30% of the HFB Common Stock outstanding as of the Record Date.
See "MEETING INFORMATION -- Voting and Revocation of Proxies."
Heritage's Employee Stock Ownership Plan currently holds 208,895 shares of
HFB Common Stock, of which 83,545 shares have been allocated to participants.
Further, Heritage's profit sharing plan currently holds 288,713 shares of HFB
Common Stock, all of which are allocated to participants. The trustees of each
plan must vote all allocated shares in accordance with the instructions of the
participants, and otherwise as directed by the Heritage Board of Directors. See
"SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER ENTITIES."
NO DISSENTERS' RIGHTS
The holders of shares of HFB Common Stock will not have dissenters' rights
in connection with the Merger and the transactions contemplated by the
Agreement. Therefore, if the Agreement is approved by the affirmative vote of a
majority of the outstanding shares of HFB Common Stock, and all other conditions
to consummation of the Merger are satisfied, all shareholders of Heritage will
receive the consideration provided
8
<PAGE> 17
for in the Agreement in exchange for their shares of HFB Common Stock. See
"PROPOSAL I -- THE MERGER -- No Dissenters' Rights."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Heritage's management and of the Heritage Board of
Directors have certain interests in the Merger that are in addition to their
interests as shareholders of Heritage generally. These interests include, among
others, provisions in the Agreement relating to liability insurance and
indemnification, the accelerated vesting of previously-granted awards of shares
of HFB Common Stock, possible membership on advisory boards of FANB or First
American's Board of Directors and the continuation of certain employee benefits.
It is also currently anticipated by First American and Heritage that four
executive officers of Heritage will become entitled to severance payments under
their current employment agreements as a result of the Merger. See "PROPOSAL
I -- THE MERGER -- Interests of Certain Persons in the Merger -- Severance
Payments." In addition, First American has separately entered into certain
employment/consulting agreements with these officers. In particular, Messrs.
Kreis, Brumfield, Osborne and Richmond may receive up to $485,000, $330,000,
$320,000, and $251,000, respectively, upon termination of their existing
employment agreements with Heritage; $130,000, $84,000, $83,000, and $64,000,
respectively, for services rendered pursuant to twelve-month combination
employment/consulting agreements entered into by each such officer with First
American and which commence at the Effective Time; and up to $177,000, $217,000,
$84,000, and $53,000, respectively, in a lump-sum distribution from First
American's pension plan (as successor to Heritage's pension plan) upon
termination of employment with First American. Also, as a result of the Merger,
at the Effective Time, Messrs. Kreis, Brumfield, Osborne, and Richmond would
become immediately vested in 10,263, 7,923, 5,299, and 6,249 restricted shares
of HFB Common Stock, respectively, under Heritage's existing stock benefit
plans, with an approximate value (assuming a price of $43 per share of FAC
Common Stock in the Merger) of $358,000, $277,000, $185,000, and $218,000,
respectively, or approximately $1.04 million in the aggregate. In addition, the
net realizable value of the options to acquire HFB Common Stock held by Messrs.
Kreis, Brumfield, Osborne and Richmond as of the Record Date (assuming a price
of $43 per share of FAC Common Stock in the Merger) will be approximately $2.1
million, $1.3 million, $1.0 million and $1.0 million, respectively, or
approximately $5.4 million in the aggregate. See "PROPOSAL I -- THE
MERGER -- Interests of Certain Persons in the Merger."
The Heritage Board of Directors was aware of these interests and considered
them among other matters in approving the Agreement and the transactions
contemplated thereby. See "PROPOSAL I -- THE MERGER -- Interests of Certain
Persons in the Merger." Mr. Kreis, a member of the Board of Directors, would be
eligible to receive up to $1.15 million in aggregate fees and other payments
upon consummation of the Merger through termination of his existing severance
agreement, completion of his employment/consulting agreement with First
American, acceleration of the vesting of restricted stock awards and receipt of
lump sum payments from First American's pension plan (as successor to Heritage's
pension plan). No other Heritage directors would receive any such benefits as a
result of the Merger, but all directors would be eligible to serve as advisory
directors to FANB (with one member appointed to First American's Board of
Directors) and would be covered by indemnification provisions and liability
insurance as set forth in the Agreement. In addition, at the Effective Time and
assuming a price of $43 per share of FAC Common Stock in the Merger, the net
realizable value of the options to acquire HFB Common Stock held by Directors
Anderson, Bracy, Craven, Fox, LaGuardia, Manahan and Patton as of the Record
Date will be approximately $768,000, $767,000, $88,000, $88,000, $772,000,
$778,000, and $789,000, respectively, or approximately $4.1 million in the
aggregate.
CONDITIONS; REGULATORY APPROVALS; WAIVER; DAMAGES
Consummation of the Merger is subject to satisfaction of a number of
conditions, including approval of the Agreement by the shareholders of Heritage,
and the receipt of all regulatory approvals required or mutually deemed
necessary in connection with the Merger, the Agreement, and the transactions
contemplated thereby. First American has filed applications with the Office of
Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended ("HOLA"),
with the Board of Governors of the Federal Reserve System
9
<PAGE> 18
("Federal Reserve Board") under the BHCA, and with the Tennessee Department of
Financial Institutions ("Tennessee Department") under the Tennessee Reciprocal
Banking Act ("Tennessee Act"), for prior approval of the Merger, and FANB has
filed an application with the Office of the Comptroller of the Currency ("OCC")
under the Bank Merger Act and the so-called "Oakar Amendment" to the Federal
Deposit Insurance Act, as amended ("FDIA"), and a notice with the OTS, for prior
approval of the Bank Merger. The Bank Merger Act provides that the Bank Merger
may not be consummated until the 30th day after OCC approval is received, or,
under certain circumstances, the 15th day after OCC approval is received. All of
the approvals described above have been obtained and all of the applicable
waiting periods have expired. See "PROPOSAL I -- THE MERGER -- Representations
and Warranties; Conditions to the Merger; Waiver" and "-- Regulatory Approvals."
The conditions to consummation of the Merger (except for required
shareholder and regulatory approvals and listing on The Nasdaq Stock Market of
the FAC Common Stock issued or subject to option as a result of the Merger) may
be waived at any time by the party for whose benefit they were created. In
addition, the Agreement may be terminated, either before or after shareholder
approval, under certain circumstances. See "PROPOSAL I -- THE
MERGER -- Representations and Warranties; Conditions to the Merger; Waiver" and
"-- Effective Time of the Merger; Termination; Damages."
The Agreement provides for payment of certain fees as liquidated damages
upon the occurrence of certain events leading to certain terminations of the
Agreement. See "PROPOSAL I -- THE MERGER -- Effective Time of the Merger;
Termination; Damages."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to be a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Generally, no gain or loss should be recognized for federal income tax purposes
by Heritage shareholders as a result of the Merger, except a gain or loss will
be recognized with respect to cash received in lieu of the receipt of fractional
shares of FAC Common Stock. A condition to the consummation of the Merger is the
receipt by First American of an opinion of KPMG Peat Marwick LLP as to the
qualification of the Merger as a tax-free reorganization and the receipt by
Heritage of an opinion of Housley Goldberg Kantarian & Bronstein, P.C., as to
the qualification of the Merger as a tax-free reorganization and certain other
federal income tax consequences of the Merger. See "PROPOSAL I -- THE
MERGER -- Certain Federal Income Tax Consequences of the Merger."
BECAUSE THE TAX CONSEQUENCES MAY VARY DEPENDING UPON A HOLDER'S INDIVIDUAL
CIRCUMSTANCES OR TAX STATUS, IT IS RECOMMENDED THAT EACH SHAREHOLDER OF HERITAGE
CONSULT HIS OR HER TAX ADVISOR CONCERNING THE PARTICULAR FEDERAL (AND ANY
APPLICABLE STATE, LOCAL OR OTHER) TAX CONSEQUENCES OF THE MERGER TO SUCH
SHAREHOLDER.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Upon completion of the Merger, shareholders of Heritage will become
shareholders of First American and their rights as such will be governed by
First American's charter and bylaws, and will continue to be governed by
Tennessee law. The rights of shareholders of First American are different in
certain respects from the rights of shareholders of Heritage. For a summary of
these differences, see "PROPOSAL I -- THE MERGER -- Certain Differences in
Rights of Shareholders."
MARKET PRICES AND DIVIDENDS
FAC Common Stock and HFB Common Stock are both traded on The Nasdaq Stock
Market, under the symbol "FATN" in the case of First American and under the
symbol "HFBS" in the case of Heritage. The information presented in the
following table reflects the closing price for FAC Common Stock and the last
reported sale price for HFB Common Stock on February 17, 1995, the last trading
day preceding public announcement of the proposed Merger, and the HFB Common
Stock equivalent per share basis, calculated by multiplying the closing price of
FAC Common Stock on such date by the Exchange Ratio (as it would have
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<PAGE> 19
been calculated as of such date, assuming an Average Closing Price of $32.625,
or the closing price of FAC Common Stock on such date). No assurance can be
given as to what the market price of FAC Common Stock or the Exchange Ratio will
be if and when the Merger is consummated.
<TABLE>
<CAPTION>
MARKET VALUE HERITAGE
FEBRUARY 17, 1995 EQUIVALENT
--------------------------- PER SHARE
FIRST AMERICAN HERITAGE BASIS
-------------- -------- ----------
<S> <C> <C> <C>
Common Stock.............................. $32 5/8 $22 1/2 $28.00
</TABLE>
FIRST AMERICAN
On June 30, 1995 there were approximately 9,092 record holders of FAC
Common Stock and 25,426,355 shares of FAC Common Stock issued and outstanding.
The following table sets forth the cash dividends declared by First
American on the FAC Common Stock and the range of high and low prices of the FAC
Common Stock during the fiscal years ended December 31, 1993 and 1994, and
during the first three quarters of fiscal year 1995 based on information
obtained by First American. The table reflects high and low prices as quoted on
The Nasdaq Stock Market. Stock price data on The Nasdaq Stock Market reflect
interdealer prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
PRICE
CASH DIVIDENDS -------------
PER SHARE HIGH LOW
-------------- ---- ----
<S> <C> <C> <C>
1993
First Quarter................................... $ 0.10 30 1/4 25 1/4
Second Quarter.................................. 0.15 33 3/4 27
Third Quarter................................... 0.15 34 1/2 28 1/4
Fourth Quarter.................................. 0.15 34 1/8 28 1/8
1994
First Quarter................................... 0.21 32 29 1/8
Second Quarter.................................. 0.21 34 3/4 28 3/4
Third Quarter................................... 0.21 35 31
Fourth Quarter.................................. 0.25 33 1/8 26 1/8
1995
First Quarter................................... 0.25 34 1/2 26 7/8
Second Quarter.................................. 0.25 36 33
Third Quarter (through September 25, 1995)...... 0.28 44 3/4 35 3/4
</TABLE>
HERITAGE
On the Record Date there were approximately 1,043 record holders of HFB
Common Stock and 3,245,117 shares of HFB Common Stock issued and outstanding.
11
<PAGE> 20
The following table sets forth the cash dividends declared by Heritage on
the HFB Common Stock and the range of high and low prices of the HFB Common
Stock during calendar years 1993 and 1994, and during the first three quarters
of calendar year 1995 based on information obtained by Heritage. The table
reflects high and low prices as quoted on The Nasdaq Stock Market. Stock price
data on The Nasdaq Stock Market reflect interdealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PRICE
CASH DIVIDENDS ------------------
PER SHARE HIGH LOW
-------------- ------ --------
<S> <C> <C> <C>
1993
First Quarter.......................................... $ -- 13 11 1/4
Second Quarter......................................... -- 15 1/2 12 1/2
Third Quarter.......................................... -- 15 1/2 13
Fourth Quarter......................................... 0.0825 15 3/4 14 1/4
1994
First Quarter.......................................... 0.0825 17 1/4 14 5/8
Second Quarter......................................... 0.0825 18 1/4 16 1/8
Third Quarter.......................................... 0.0950 23 16 11/16
Fourth Quarter......................................... 0.0950 23 1/2 16 1/2
1995
First Quarter.......................................... 0.0950 27 17
Second Quarter......................................... 0.0950 27 24
Third Quarter (through September 25, 1995)............. 0.0950 33 26
</TABLE>
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<PAGE> 21
COMPARATIVE PER SHARE DATA
The following table presents at the dates and for the periods indicated (i)
historical consolidated per share data for FAC Common Stock, (ii) historical and
equivalent pro forma per share data for HFB Common Stock, (iii) pro forma
combined per share data for FAC Common Stock (with HFB); (iv) historical per
share data for Charter Common Stock, (v) fully pro forma combined per share data
for FAC Common Stock (with HFB and Charter), and (vi) equivalent pro forma per
share data for HFB Common Stock (with FAC and Charter). The FAC pro forma with
HFB data is presented using the pooling-of-interests method of accounting and
the application of the assumed market price of $34.50 (the maximum price allowed
in calculating the Exchange Ratio under the Agreement) for the FAC Common Stock
and an Exchange Ratio of 0.8116 shares of FAC Common Stock for each share of HFB
Common Stock. The First American pro forma data with HFB represents the effect
of the Merger on a share of FAC Common Stock. The Heritage pro forma equivalent
data represents the First American pro forma data multiplied by the Exchange
Ratio and thereby reflects the effect of the Merger on a share of HFB Common
Stock. The FAC fully pro forma combined data (with HFB and Charter) is presented
using the purchase method of accounting for the merger with Charter and the
application of the assumed market price of $35.875 for the FAC Common Stock (its
closing price on June 30, 1995) and a Charter exchange ratio of .38 shares of
FAC Common Stock for each share of Charter Common Stock. The FAC fully pro forma
combined (with HFB and Charter) data represents the effect of the Merger and the
Charter merger on a share of FAC Common Stock. The Heritage equivalent pro forma
data represent the FAC fully pro forma combined (with HFB and Charter)
multiplied by the Exchange Ratio and thereby reflects the effect of the two
mergers on a share of HFB Common Stock. Earnings per share data is based on net
earnings before cumulative effects of changes in accounting principles for all
companies. The data are not necessarily indicative of actual results that would
have been achieved had the Merger been consummated at the beginning of the
periods presented and is not indicative of future results.
<TABLE>
<CAPTION>
FAC/HFB/
CHARTER HFB
FULLY EQUIVALENT
HISTORICAL FAC/HFB HFB PRO PRO FORMA
--------------- PRO FORMA EQUIVALENT HISTORICAL FORMA (FAC/HFB/
FAC HFB COMBINED PRO FORMA CHARTER COMBINED CHARTER)
------ ------ --------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS PER SHARE
Years Ended (a)
1995.......................... $ 3.48 $ 1.58 $ 3.52 $ 2.86 $ 1.08 $ 3.44 $ 2.79
1994.......................... 3.93 1.85 3.78 3.07 1.87 3.78 3.07
1993.......................... 1.74 1.67 2.60 2.11 (50.72) 2.60 2.11
CASH DIVIDENDS DECLARED PER
SHARE
Years Ended (a)
1995.......................... $ .88 $ .38 $ .96(b) $ .78(c) $ .275 $ .96(b) $ .78(d)
1994.......................... .55 .25 .72(b) .58(c) -- .72(b) .58(d)
1993.......................... .20 -- .45(b) .37(c) -- .45(b) .37(d)
BOOK VALUE PER SHARE
End of Period (a)
1995.......................... $23.59 $16.88 $ 24.54 $ 19.91 $ 9.06 $24.77 $ 20.10
1994.......................... 22.38 15.29 21.96 17.83 8.24 21.96 17.83
1993.......................... 18.16 13.23 19.33 15.69 (13.51) 19.33 15.69
</TABLE>
- ---------------
(a) All columns are at or for the years ended June 30, except for the FAC
historical column, which is at or for the fiscal years ended December 31,
1994, 1993, and 1992, respectively. The FAC data reflected in pro forma
columns is at or for the years ended June 30.
(b) Represents cash dividends declared per share by FAC for the years ended June
30, 1995, 1994 and 1993, respectively.
(c) Represents FAC/HFB Pro Forma Combined dividend per share multiplied by the
Exchange Ratio.
(d) Represents FAC/HFB/Charter Fully Pro Forma Combined cash dividends per share
multiplied by the Exchange Ratio.
13
<PAGE> 22
SELECTED FINANCIAL DATA
The following tables set forth certain historical financial data and pro
forma financial information for First American, Heritage and Charter.
The selected financial data for First American for the five years ended
December 31, 1994 and for the six months ended June 30, 1995 and 1994, are
derived from the consolidated financial statements of First American. The
selected financial data for Heritage, for Charter, for First American pro forma
combined with Heritage, and First American fully pro forma combined for the five
years ended June 30, 1995 are derived from the respective consolidated financial
statements of Heritage, Charter and First American. The pro forma information
gives effect to the expected merger of First American with Heritage under the
pooling-of-interests method of accounting and gives effect to the expected
affiliation of First American with Charter under the purchase method of
accounting. The pooling-of-interests method of accounting combines assets and
liabilities at their historical bases and restates the results of operations as
if First American and Heritage had been combined at the beginning of the
earliest reported period. The purchase method of accounting requires that all
assets and liabilities of Charter be adjusted to their estimated fair market
value as of the date of acquisition. Since purchase accounting does not permit
restatement of results for prior periods, Charter pro forma information is only
presented as of and for the year ended June 30, 1995. This summary should be
read in connection with the financial statements, Management's Discussion and
Analysis of Results of Operations and Financial Condition and other financial
information included in documents incorporated herein by reference. See
"AVAILABLE INFORMATION."
FIRST AMERICAN CORPORATION
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS ENDED
JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME DATA
(in thousands)
Net interest income.............. $146,111 $138,589 $279,626 $267,439 $251,688 $216,460 $226,853
Provision for loan losses........ -- -- (10,000) (42,000) 38,500 51,570 193,677
Non-interest income.............. 49,701 47,726 84,856 85,817 74,691 80,493 111,168
Non-interest expense............. 119,138 114,898 229,615 235,963 228,426 221,685 221,134
Income tax (benefit)............. 28,190 27,417 54,135 57,396 17,481 6,761 (14,369)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative
effect of changes in
accounting principles........ $ 48,484 $ 44,000 $ 90,732 $101,897 $ 41,972 $ 16,937 $(62,421)
======== ======== ======== ======== ======== ======== ========
END OF PERIOD BALANCE SHEET ITEMS
(in millions)
Assets........................... $ 8,071 $ 7,228 $ 7,757 $ 7,188 $ 6,716 $ 6,377 $ 6,480
Total net loans.................. 5,154 4,381 4,736 4,206 3,518 3,626 4,036
Deposits......................... 6,158 5,701 5,861 5,691 5,522 5,332 5,556
Long-term debt................... 252 52 252 66 17 17 18
Shareholders' equity............. 638 581 617 582 468 385 368
PER SHARE DATA
Income (loss) before cumulative
effect of changes in accounting
principles..................... $ 1.87 $ 1.69 $ 3.48 $ 3.93 $ 1.74 $ .73 $ (2.69)
Cash dividends declared.......... .50 .42 .88 .55 .20 -- .31
Book value, end of period........ 25.09 22.27 23.59 22.38 18.16 16.47 15.79
SHARES OUTSTANDING
(in thousands)
Average.......................... 25,911 26,057 26,093 25,913 24,082 23,337 23,224
End of period.................... 25,426 26,094 26,145 25,988 25,786 23,395 23,311
</TABLE>
14
<PAGE> 23
HERITAGE FEDERAL BANCSHARES, INC.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
-------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME DATA
(in thousands)
Net interest income.................... $18,181 $19,063 $19,761 $16,509 $13,520
Provision for loan losses.............. 82 487 595 749 1,496
Non-interest income.................... 2,755 2,484 3,110 2,634 2,421
Non-interest expense................... 12,241 11,354 12,812 11,673 11,089
Income tax............................. 3,146 3,502 3,952 2,540 2,244
------- ------- ------- ------- -------
Income before cumulative effect of
changes in accounting
principles........................ $ 5,467 $ 6,204 $ 5,512 $ 4,181 $ 1,112
======= ======= ======= ======= =======
END OF PERIOD BALANCE SHEET ITEMS
(in millions)
Assets................................. $ 528 $ 516 $ 519 $ 540 $ 507
Total net loans........................ 298 309 327 358 364
Deposits............................... 449 451 460 497 484
Long-term debt......................... 17 11 11 2 1
Shareholders' equity................... 54 49 42 36 16
PER SHARE DATA
Income before cumulative effect of
changes in accounting principles.... $ 1.58 $ 1.85 $ 1.67 $ n/a n/a
Cash dividends declared................ .38 .25 -- n/a n/a
Book value, end of period.............. 16.88 15.29 13.23 11.90 n/a
SHARES OUTSTANDING
(in thousands)
Average (a)............................ 3,464 3,372 3,309 n/a n/a
End of period.......................... 3,186 3,173 3,165 2,990 n/a
</TABLE>
- ---------------
n/a Not applicable for periods prior to HFB's conversion from mutual to stock
ownership during the fiscal year ended June 30, 1992.
(a) Includes common share equivalents.
15
<PAGE> 24
FIRST AMERICAN PRO FORMA COMBINED WITH HERITAGE
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA
(in thousands)
Net interest income............... $305,329 $293,613 $282,375 $248,185 $227,825
Provision for loan losses......... (9,918) (33,513) 10,595 41,519 102,805
Non-interest income............... 89,586 93,974 81,889 81,978 79,492
Non-interest expense.............. 246,096 249,624 242,259 236,464 224,204
Income tax........................ 58,054 62,825 38,755 16,598 2,281
-------- -------- -------- -------- --------
Income (loss) before cumulative
effect of changes in
accounting principles........ $100,683 $108,651 $ 72,655 $ 35,582 $(21,973)
======== ======== ======== ======== ========
END OF PERIOD BALANCE SHEET ITEMS
(in millions)
Assets............................ $ 8,601 $ 7,744 $ 7,241 $ 7,113 $ 6,718
Total net loans................... 5,451 4,690 3,946 3,826 4,080
Deposits.......................... 6,608 6,152 5,906 5,937 5,712
Long-term debt.................... 269 63 77 19 18
Shareholders' equity.............. 687 630 551 441 388
PER SHARE DATA
Income before cumulative effect of
changes in accounting
principles..................... $ 3.52 $ 3.78 $ 2.60 $ n/a n/a
Cash dividends declared........... .96 .72 .45 -- --
Book value, end of period......... 24.54 21.96 19.33 16.96 n/a
SHARES OUTSTANDING
(in thousands)
Average........................... 28,606 28,746 27,955 n/a n/a
End of period..................... 28,012 28,669 28,488 26,003 n/a
</TABLE>
- ---------------
n/a First American pro forma combined data is not presented for periods prior to
Heritage Bank's conversion from mutual to stock ownership during the fiscal
year ended June 30, 1992.
16
<PAGE> 25
CHARTER FEDERAL SAVINGS BANK
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
--------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA
(in thousands)
Net interest income......................... $22,299 $25,534 $ 25,454 $18,211 $ 11,929
Provision for loan losses................... 1,975 2,150 5,087 (1,011) 9,791
Non-interest income......................... 5,282 1,990 3,523 4,718 3,607
Non-interest expense(a)..................... 16,676 17,103 59,204(a) 19,539 19,169
Income tax (benefit)........................ 3,373 (322) 1,778 -- --
------- ------- -------- ------- --------
Income (loss) before extraordinary item
and cumulative effect of changes in
accounting principles.................. $ 5,557 $ 8,593 $(37,092) $ 4,401 $(13,424)
======= ======= ======== ======= ========
END OF PERIOD BALANCE SHEET ITEMS
(in millions)
Assets...................................... $ 751 $ 733 $ 678 $ 822 $ 843
Total net loans............................. 404 389 404 424 405
Deposits.................................... 525 548 573 617 627
Long-term debt.............................. 105 105 105 105 105
Shareholders' equity........................ 46 42 (10) 26 18
PER SHARE DATA
Income (loss) before extraordinary item and
cumulative effect of changes in
accounting principles.................... $ 1.08 $ 1.87 $ (50.72) $ 6.02 $ (18.36)
Cash dividends declared..................... .275 -- -- -- --
Book value, end of period................... 9.06 8.24 (13.51) 35.52 25.02
SHARES OUTSTANDING
(in thousands)
Average..................................... 5,125 4,596 731 731 731
End of period............................... 5,125 5,125 731 731 731
</TABLE>
- ---------------
(a) The 1993 non-interest expense amount includes a write-off of $41.1 million
of remaining goodwill as of March 31, 1993.
17
<PAGE> 26
FIRST AMERICAN FULLY PRO FORMA COMBINED(A)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED JUNE 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME DATA
(in thousands)
Net interest income............... $321,545 $293,613 $282,375 $248,185 $227,825
Provision for loan losses......... (7,943) (33,513) 10,595 41,519 102,805
Non-interest income............... 94,868 93,974 81,889 81,978 79,492
Non-interest expense.............. 265,322 249,624 242,259 236,464 224,204
Income tax........................ 58,711 62,825 38,755 16,598 2,281
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of changes
in accounting principles..... $100,323 $108,651 $ 72,655 $ 35,582 $(21,973)
======== ======== ======== ======== ========
END OF PERIOD BALANCE SHEET ITEMS
(in millions)
Assets............................ $ 9,327 $ 7,744 $ 7,241 $ 7,113 $ 6,718
Total net loans................... 5,847 4,690 3,946 3,826 4,080
Deposits.......................... 7,129 6,152 5,906 5,937 5,712
Long-term debt.................... 370 63 77 19 18
Shareholders' equity.............. 708 630 551 441 388
PER SHARE DATA
Income before extraordinary item
and cumulative effect of
changes in accounting
principles..................... $ 3.44 $ 3.78 $ 2.60 $ n/a n/a
Cash dividends declared........... .96 .72 .45 -- --
Book value, end of period......... 24.77 21.96 19.33 16.96 n/a
SHARES OUTSTANDING
(in thousands)
Average........................... 29,186 28,746 27,955 n/a n/a
End of period..................... 28,592 28,669 28,488 26,003 n/a
</TABLE>
- ---------------
(a) Represents First American, Heritage and Charter on a fully pro forma
combined basis.
n/a First American fully pro forma combined data is not presented for periods
prior to Heritage Bank's conversion from mutual to stock ownership during
the fiscal year ended June 30, 1992.
18
<PAGE> 27
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma combined condensed financial statements combine the
historical financial statements of FAC, HFB, and Charter. The pro forma combined
condensed balance sheet as of June 30, 1995 gives effect to the affiliations of
HFB and Charter with FAC as if the affiliations occurred on June 30, 1995. The
pro forma combined condensed statements of income for the years ended June 30,
1995, 1994 and 1993 give effect to the affiliation of FAC and HFB as of the
beginning of the earliest year and the affiliation of FAC and Charter as of the
beginning of the most recent year. The pro forma combined condensed statements
give effect to the expected merger with HFB under the pooling-of-interests
method of accounting and give effect to the expected affiliation of FAC with
Charter under the purchase method of accounting. The pooling-of-interests method
of accounting combines assets and liabilities at their historical bases and
restates the results of operations as if FAC and HFB had been combined at the
beginning of the reported period. The purchase method of accounting requires
that all assets and liabilities of Charter be adjusted to their estimated fair
market value as of the date of acquisition.
The unaudited pro forma combined condensed statements of income do not
include nonrecurring merger-related one-time charges. It is anticipated that
approximately $4.7 million, net of taxes, will be expensed as incurred in
connection with the merger of FAC and HFB. Additionally, the unaudited pro forma
combined condensed financial statements do not give effect to any cost savings
which may be realized following the two mergers. Any anticipated transfers of
assets and liabilities to other banking entities of FAC are not reflected in the
Unaudited Fully Pro Forma Combined Condensed Financial Statements.
The pro forma combined condensed financial statements are provided for
informational purposes. The pro forma combined condensed statements of income
are not necessarily indicative of the actual results that would have been
achieved had the acquisitions been consummated at the beginning of the period
presented, and are not indicative of future results. The pro forma financial
statements should be read in conjunction with the audited financial statements
and the notes thereto of FAC and HFB incorporated by reference or included
herein. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
FAC reports its financial information on the basis of a December 31 fiscal
year. Heritage and Charter report their financial information on the basis of a
June 30 fiscal year. The information for FAC in the pro forma combined condensed
statements of income has been restated with Heritage's and Charter's fiscal year
end.
19
<PAGE> 28
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1995
<TABLE>
<CAPTION>
FAC FAC
PRO FORMA FULLY
POOLING WITH PURCHASE PRO FORMA
FAC HFB ADJUSTMENTS HFB CHARTER ADJUSTMENTS COMBINED
---------- -------- ----------- ---------- -------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks.......... $ 413,232 $ 14,878 $ $ 428,110 $ 24,150 $ (49,340)(d) $ 402,920
Time deposits with other banks... 26,284 26,284 26,284
Securities:
Held to maturity............... 1,461,960 170,622 1,632,582 295,191 (814)(d) 1,926,959
Available for sale............. 558,671 20,213 578,884 7,603 586,487
---------- -------- ------- ---------- -------- -------- ----------
Total securities........... 2,020,631 190,835 2,211,466 302,794 (814) 2,513,446
---------- -------- ------- ---------- -------- -------- ----------
Federal funds sold and securities
purchased under agreements to
resell......................... 83,805 7,000 90,805 90,805
Trading account securities....... 29,224 29,224 29,224
Total loans...................... 5,285,743 301,768 5,587,511 410,104 (8,529)(d) 5,989,086
Unearned discount and net
deferred loan fees............. 5,463 1,908 7,371 1,272 8,643
---------- -------- ------- ---------- -------- -------- ----------
Loans, net of unearned discount
and net deferred loan fees... 5,280,280 299,860 5,580,140 408,832 (8,529) 5,980,443
Allowance for possible loan
losses......................... 126,575 2,327 128,902 5,021 133,923
---------- -------- ------- ---------- -------- -------- ----------
Total net loans............ 5,153,705 297,533 5,451,238 403,811 (8,529) 5,846,520
---------- -------- ------- ---------- -------- -------- ----------
Premises and equipment, net...... 110,186 6,786 116,972 5,876 122,848
Foreclosed properties............ 9,256 9,256 7,006 16,262
Other assets..................... 224,823 11,137 1,572 (a) 237,667 7,690 8,822 (d) 278,954
135 (c) 24,775 (d)
---------- -------- ------- ---------- -------- -------- ----------
Total assets................... $8,071,146 $528,169 $ 1,707 $8,601,022 $751,327 $ (25,086) $9,327,263
========== ======== ======= ========== ======== ======== ==========
LIABILITIES
Deposits......................... $6,158,336 $449,318 $ $6,607,654 $525,400 $ (3,854)(d) $7,129,200
Short-term borrowings............ 819,993 789 820,782 63,614 884,396
Long-term debt................... 251,637 17,452 269,089 104,500 (3,947)(d) 369,642
Other liabilities................ 203,124 6,836 6,075 (a) 216,035 11,389 7,210 (d) 235,756
1,122 (d)
---------- -------- ------- ---------- -------- -------- ----------
Total liabilities.............. 7,433,090 474,395 6,075 7,913,560 704,903 531 8,618,994
---------- -------- ------- ---------- -------- -------- ----------
SHAREHOLDERS' EQUITY
Common stock..................... 127,132 3,186 9,744 (b) 140,062 51 2,900 (d) 142,962
(51)(d)
Capital surplus.................. 96,223 16,510 (9,744)(b) 102,989 52,006 17,907 (d) 120,896
(52,006)(d)
Retained earnings................ 416,898 35,070 (4,503)(a) 447,245 (5,612) 5,612 (d) 447,245
(220)(c)
Other............................ (1,696) (1,076) 355 (c) (2,417) (49) 49 (d) (2,417)
---------- -------- ------- ---------- -------- -------- ----------
Realized shareholders'
equity....................... 638,557 53,690 (4,368) 687,879 46,396 (25,589) 708,686
Net unrealized gains (losses) on
securities available for sale,
net of tax..................... (501) 84 (417) 28 (28)(d) (417)
---------- -------- ------- ---------- -------- -------- ----------
Total shareholders'
equity................... 638,056 53,774 (4,368) 687,462 46,424 (25,617) 708,269
---------- -------- ------- ---------- -------- -------- ----------
Total liabilities and
shareholders' equity..... $8,071,146 $528,169 $ 1,707 $8,601,022 $751,327 $ (25,086) $9,327,263
========== ======== ======= ========== ======== ======== ==========
</TABLE>
(See footnotes on following page.)
20
<PAGE> 29
FOOTNOTES TO UNAUDITED FULLY PRO FORMA COMBINED CONDENSED
BALANCE SHEET
The pro forma adjustments are based on the best available preliminary
information as of June 30, 1995, and may be different from the actual
adjustments to reflect the fair value of the net assets purchased as of the date
of acquisition of Charter. The final allocation of the purchase price of Charter
has not been determined. Subsequent changes to the purchase adjustments, as well
as the final allocation of the intangible assets between goodwill and other
identifiable intangible assets may result in an adjustment to goodwill, which
may have a corresponding impact on amortization expense.
(a) To record a liability for estimated one-time charges of $4,042,000 for
various items such as severance and systems conversions and record a
related deferred tax asset in the amount of $1,572,000, plus record a
$2,033,000 estimated liability related to recapture of tax bad debt reserve
related to conversion of Heritage Bank to a commercial bank.
(b) Reclassification of $9,744,000 of capital surplus to FAC Common Stock to
reflect the FAC Common Stock of $127,132,000 plus the $5 par value of
2,586,000 shares of FAC Common Stock to be issued to effect the Merger.
(c) To record one-time charge of $355,000, net of deferred tax asset of
$135,000, related to immediate vesting of restricted stock upon completion
of the Merger and reduce unearned compensation of the Management Recognition
Plan within other shareholders' equity by $355,000.
(d) Based on an exchange ratio of .38 share of FAC Common Stock to one share of
Charter Common Stock, FAC will exchange 1,955,342 shares of FAC Common Stock
for the shares of Charter Common Stock. Based on the closing price of FAC
Common Stock on June 30, 1995 of $35.875, the purchase price of Charter is
approximately $70,147,000. To close the transaction, FAC expects to reissue
580,000 shares of FAC Common Stock purchased in the open market prior to
June 30, 1995, and purchase an additional 1,375,342 shares of FAC Common
Stock after June 30, 1995, for reissuance in the acquisition of Charter. The
580,000 shares of FAC Common Stock were purchased for approximately
$20,000,000. Under Tennessee law, such shares have been recognized as
authorized but unissued with the excess of purchase price over par reflected
as a reduction from capital surplus. Based on a price per share of FAC
Common Stock of $35.875, the reissuance of the 580,000 shares of stock will
result in an increase in common stock of $2,900,000 and an increase in
surplus of $17,907,000. Additionally, the purchase of an additional
1,375,342 shares of FAC Common Stock to exchange with Charter shareholders
will result in a decrease in cash of approximately $49,340,000 based on a
price of FAC Common Stock of $35.875 per share.
The following adjustments are currently expected to be made to reflect the
estimated fair value of assets acquired and estimated fair value of
liabilities assumed: held to maturity securities are estimated to decrease
$814,000, loans are estimated to decrease $8,529,000, core deposit rights of
$8,200,000 and loan servicing rights of $622,000 are expected to be recorded
as other assets, deposits are estimated to decrease $3,854,000, and
long-term debt is estimated to decrease $3,947,000.
A total of $7,210,000 of other liabilities are expected to be recorded to
reflect various estimated one-time charges consisting of $4,410,000 for
various items such as severance and systems conversions, $1,400,000 of
estimated deferred taxes related to Statement of Financial Accounting
Standards No. 109, and a $1,400,000 estimated liability related to tax loss
carryforward.
An estimated net deferred tax liability in the amount of $1,122,000 is
expected to be recorded at the rate of 38.9% related to the effect of the
fair value adjustments and the $4,410,000 of certain one-time charges
discussed above.
Purchase accounting requires that the various components of Charter's equity
be reclassified to surplus which is then eliminated on a consolidated basis.
The elimination results in a common stock decrease of $51,000, a surplus
decrease of $52,006,000, a retained earnings increase of $5,612,000, an
other equity increase of $49,000, and a decrease in net unrealized gains on
securities available for sale of $28,000.
21
<PAGE> 30
All of the above is expected to result in an increase in the goodwill
balance of $24,775,000 to reflect the excess of the total acquisition cost
over the estimated fair value of the assets acquired less liabilities
assumed.
The following summarizes the above and provides detail of the estimated
allocation of the purchase price for the Charter acquisition:
<TABLE>
<S> <C>
Total shareholders' equity............................................... $46,424,000
Estimated fair value adjustments:
Held to maturity securities............................................ (814,000)
Loans.................................................................. (8,529,000)
Core deposit rights.................................................... 8,200,000
Loan servicing rights.................................................. 622,000
Deposits............................................................... 3,854,000
Long-term debt......................................................... 3,947,000
Estimated one-time charges:
Severance and systems conversions, etc................................. (4,410,000)
Deferred taxes related to Statement of Financial Accounting Standards
No. 109............................................................. (1,400,000)
Liability related to tax loss carryforward............................. (1,400,000)
Estimated net deferred tax liability related to fair value adjustments
and the $4,410,000 of one-time charges above........................... (1,122,000)
Goodwill................................................................. 24,775,000
-----------
Total purchase price..................................................... $70,147,000
==========
</TABLE>
22
<PAGE> 31
UNAUDITED FULLY PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
FAC FAC
PRO FORMA FULLY
POOLING WITH PURCHASE PRO FORMA
FAC HFB ADJUSTMENTS HFB CHARTER ADJUSTMENTS COMBINED
-------- ------- ----------- --------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income............... $525,989 $35,979 $561,968 $53,117 $ 779 (a) $612,903
(2,961)(b)
Interest expense.............. 238,841 17,798 256,639 30,818 3,901 (c) 291,358
------- -------- -------- -------- ------- ------- --------
Net interest income......... 287,148 18,181 305,329 22,299 (6,083) 321,545
Provision for loan losses..... (10,000) 82 (9,918) 1,975 (7,943)
------- -------- -------- -------- ------- ------- --------
Net interest income after
provision................. 297,148 18,099 315,247 20,324 (6,083) 329,488
Non-interest income........... 86,831 2,755 89,586 5,282 94,868
Non-interest expense.......... 233,855 12,241 246,096 16,676 898 (d) 265,322
1,652 (e)
------- -------- -------- -------- ------- ------- --------
Income before income tax
expense and cumulative
effect of changes in
accounting principles....... 150,124 8,613 158,737 8,930 (8,633) 159,034
Income tax expense............ 54,908 3,146 58,054 3,373 (2,716)(f) 58,711
------- -------- -------- -------- ------- ------- --------
Income before cumulative
effect of changes in
accounting principles..... $ 95,216 $ 5,467 $100,683 $ 5,557 $(5,917) $100,323
======= ======== ======== ======== ======= ======= ========
Earnings before cumulative
effect of changes in
accounting principles per
share....................... $ 3.66 $ 3.52 $ 3.44
Weighted average common shares
outstanding................. 26,020 28,606 29,186
</TABLE>
FOOTNOTES TO UNAUDITED FULLY PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(a) $779,000 of accretion associated with purchase accounting adjustments
related to securities and loans accreted over 12 years, the estimated
remaining lives of the related assets.
(b) Estimated reduction in interest income of $2,961,000 at a rate of 6%, which
represents an investment rate at June 30, 1995, related to $49,340,000 of
cash used to purchase FAC Common Stock to exchange with Charter
shareholders.
(c) $3,901,000 of amortization associated with purchase accounting adjustments
related to time deposits and long-term debt amortized over 2 years, the
estimated remaining lives of the liabilities.
(d) $898,000 of amortization associated with purchase accounting adjustments
related to core deposit rights and loan servicing rights amortized over 10
and 8 years, respectively, the estimated remaining lives of the assets.
(e) $1,652,000 of amortization associated with purchase accounting adjustments
related to goodwill amortized over 15 years, the estimated life of the
asset.
(f) Reduction in income tax at a rate of 38.9% related to net of amounts in
(a), (b), (c), and (d).
23
<PAGE> 32
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
FAC
POOLING PRO FORMA
FAC HFB ADJUSTMENTS WITH HFB
-------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income....................................... $449,776 $35,550 $ 485,326
Interest expense...................................... 175,226 16,487 191,713
-------- ------- ----------- ---------
Net interest income......................... 274,550 19,063 293,613
Provision for loan losses............................. (34,000) 487 (33,513)
Net interest income after provision......... 308,550 18,576 327,126
Non-interest income................................... 91,490 2,484 93,974
Non-interest expense.................................. 238,270 11,354 249,624
-------- ------- ----------- ---------
Income before income tax expense and cumulative effect
of changes in accounting principles................. 161,770 9,706 171,476
Income tax expense.................................... 59,323 3,502 62,825
-------- ------- ----------- ---------
Income before cumulative effect of changes in
accounting principles............................... $102,447 $ 6,204 $ 108,651
======== ======= ========= ========
Earnings before cumulative effect of changes in
accounting principles per share..................... $ 3.94 $ 3.78
Weighted average common shares outstanding............ 26,010 28,746
</TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1993
<TABLE>
<CAPTION>
FAC
POOLING PRO FORMA
FAC HFB ADJUSTMENTS WITH HFB
-------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income....................................... $430,316 $39,066 $ 469,382
Interest expense...................................... 167,702 19,305 187,007
-------- ------- ----------- ---------
Net interest income......................... 262,614 19,761 282,375
Provision for loan losses............................. 10,000 595 10,595
-------- ------- ----------- ---------
Net interest income after provision......... 252,614 19,166 271,780
Non-interest income................................... 78,779 3,110 81,889
Non-interest expense.................................. 229,447 12,812 242,259
-------- ------- ----------- ---------
Income before income tax expense and cumulative effect
of changes in accounting principles................. 101,946 9,464 111,410
Income tax expense.................................... 34,803 3,952 38,755
-------- ------- ----------- ---------
Income before cumulative effect of changes in
accounting principles............................... $ 67,143 $ 5,512 $ 72,655
======== ======= ========= ========
Earnings before cumulative effect of changes in
accounting principles per share..................... $ 2.66 $ 2.60
Weighted average common shares outstanding............ 25,269 27,955
</TABLE>
24
<PAGE> 33
MEETING INFORMATION
DATE, PLACE AND TIME
The proxy card accompanying this Prospectus/Proxy Statement is solicited by
and on behalf of the Board of Directors of Heritage to be used at the Meeting,
which will be held in the Training Room of the Heritage Federal Bank Building,
220 Broad Street, Kingsport, Tennessee on Monday, October 30, 1995, at 1:00
p.m., local time. The Meeting has been called for the purpose of considering and
voting upon: (1) approval of the Agreement; (2) approval of the Charter
Amendment; and (3) approval of an adjournment of the Meeting to a later date, if
necessary, to solicit additional proxies if insufficient shares are present in
person or by proxy at the Meeting to approve the Agreement and the Charter
Amendment. The accompanying Notice of Meeting and form of proxy and this
Prospectus/Proxy Statement are being first mailed to shareholders on or about
September 29, 1995.
RECORD DATE; VOTING RIGHTS
The securities entitled to vote at the Meeting consist of the HFB Common
Stock. Each share of the HFB Common Stock entitles the record holder to one vote
on each matter. The close of business on September 22, 1995 (the "Record Date")
has been fixed by the Board of Directors of Heritage as the record date for
determining shareholders entitled to notice of and to vote at the Meeting. As of
the Record Date, Heritage had 3,245,117 shares of the HFB Common Stock issued
and outstanding, and approximately 1,043 shareholders of record.
The affirmative vote of the holders of a majority of the outstanding shares
of HFB Common Stock is necessary to approve the Agreement and to approve the
Charter Amendment, and the affirmative vote of a majority of the votes cast is
necessary to approve the adjournment of the Meeting.
VOTING AND REVOCATION OF PROXIES
Proxies solicited by the Board of Directors of Heritage will be voted in
accordance with the directions given therein. WHERE NO INSTRUCTIONS ARE
INDICATED, PROXIES WILL BE VOTED FOR APPROVAL OF THE AGREEMENT, FOR APPROVAL OF
THE CHARTER AMENDMENT AND FOR APPROVAL OF AN ADJOURNMENT OF THE MEETING TO
SOLICIT ADDITIONAL PROXIES IF INSUFFICIENT SHARES ARE PRESENT IN PERSON OR BY
PROXY AT THE MEETING TO APPROVE THE AGREEMENT AND THE CHARTER AMENDMENT. The
proxy also confers discretionary authority on the persons named therein to vote
with respect to matters incident to the conduct of the Meeting. Proxies marked
as abstentions will not be counted as votes cast. In addition, shares held in
street name which have been designated by brokers on proxy cards as not voted
will not be counted as votes cast. Proxies marked as abstentions or as broker
no-votes, however, will be treated as shares present for purposes of determining
whether a quorum is present.
Shareholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by properly executed proxies in
the form enclosed herewith will be voted at the Meeting and all adjournments
thereof. Proxies may be revoked by sending written notice to the Secretary of
Heritage at the address shown above or by the filing of a later-dated proxy
prior to the closing of the polls at the Meeting. A proxy will not be voted if a
shareholder attends the Meeting and votes in person. The presence of a
shareholder alone at the Meeting will not revoke such shareholder's proxy.
The Board of Directors of Heritage is not aware of any other business to be
acted upon at the Meeting other than as described herein. It is not anticipated
that other matters will be brought before the Meeting. If, however, other
matters are duly brought before the Meeting, or any adjournment thereof, the
persons appointed as proxies will have discretion to vote or act thereon in
accordance with the determination of a majority of Heritage's Board of
Directors.
Directors and executive officers of Heritage and affiliates of such persons
had sole or shared voting power with respect to 516,010 shares of HFB Common
Stock, representing 15.90% of the HFB Common Stock outstanding as of the Record
Date. First American has entered into a Voting Agreement signed by each
25
<PAGE> 34
member of the Board of Directors of Heritage, whereby each such person has
agreed to vote all shares of HFB Common Stock that he or she is entitled to vote
in favor of the Agreement, subject to certain conditions set forth in the Voting
Agreements. Entering into the Voting Agreements by the directors of Heritage was
an inducement to First American to enter into the Agreement. No such person
received any form of compensation from First American for entering into the
Voting Agreements beyond execution of the Agreement. Such persons had sole or
shared voting power with respect to 334,123 shares of HFB Common Stock,
representing 10.30% of the HFB Common Stock outstanding as of the Record Date.
The foregoing description sets forth the material aspects of the Voting
Agreements.
SOLICITATION OF PROXIES
The cost of soliciting proxies for the Meeting will be borne by Heritage.
In addition to the use of the mails, proxies may be solicited personally or by
telephone or telegraph by directors, officers and other employees of Heritage
who will not be specifically compensated for their solicitation activities.
Heritage has retained Corporate Communications, Inc. to assist in the
solicitation of proxies at the time and to the extent deemed necessary by
Heritage. Because of Heritage's existing relationship with Corporate
Communications, Inc., which assists Heritage in the preparation of public
communications and other documents and also provides general advice regarding
investor relations, Heritage will not be charged any additional fee by Corporate
Communications, Inc. for any services related to proxy solicitation.
HERITAGE SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
26
<PAGE> 35
PROPOSAL I -- THE MERGER
This section of the Prospectus/Proxy Statement describes the material terms
of the Agreement. The following description does not purport to be complete and
is qualified in its entirety by reference to the Agreement, which is attached as
Appendix A to this Prospectus/Proxy Statement and is incorporated herein by
reference. All shareholders are urged to read the Agreement in its entirety.
BACKGROUND OF THE MERGER
Heritage Bank has operated since 1930 as a community-oriented savings
institution and currently serves the personal banking needs of residents in the
east Tennessee counties of Anderson, Carter, Roane, Hawkins, Sullivan and
Washington and, until its sale of certain branches in August 1992, also served
the middle Tennessee counties of Putnam, Rutherford, Warren, Williamson and
Wilson. Following the initial public offering of the HFB Common Stock as part of
Heritage Bank's conversion from mutual to stock form in March 1992, Heritage
strategically deployed the resulting capital which resulted in increased
earnings and otherwise benefited Heritage's financial results. Heritage's return
on average assets increased from 0.80% at June 30, 1992 to 1.32% at June 30,
1994; its average interest rate spread increased from 3.23% at June 30, 1992 to
3.54% at June 30, 1994; its net yield on average interest-earning assets
increased from 3.36% at June 30, 1992 to 3.79% at June 30, 1994; and its
percentage of non-performing assets to total assets declined from 0.50% at June
30, 1992 to 0.19% at June 30, 1994. Also for the fiscal year ended June 30,
1994, Heritage's return on average equity was 15.33%. During the same time
period, the price per share of the HFB Common Stock steadily increased. The HFB
Common Stock was initially issued in March 1992 at $5.75 per share (as adjusted
for stock splits), with a closing price per share on The Nasdaq Stock Market of
$18 3/16 (as adjusted for stock splits) on June 30, 1994 and $23 1/4 on November
9, 1994.
Heritage's Board of Directors continued, following the mutual to stock
conversion, to monitor the financial institution industry and the general
economic environment in which Heritage operates. Notwithstanding these favorable
financial results, the Board became concerned as to whether the financial
performance of Heritage could be sustained, especially since the financial
markets of which Heritage Bank is a part and the regulatory environment in which
Heritage Bank operates have become increasingly complex and, in recent years,
have been undergoing fundamental restructuring. Such restructuring has resulted
in heightened competition from commercial banks and from non-bank financial
service companies that generally operate with fewer structural impediments than
Heritage Bank. While Heritage's financial results during the two-year period
following Heritage Bank's conversion were generally favorable, the Board became
aware of trends, such as the decrease in Heritage Bank's deposits, and a
narrowing of the increase in Heritage Bank's average interest rate spread and
net yield on average interest-earning assets, that could result in less
favorable financial returns during future periods. To withstand this competition
as well as address those challenges resulting from the changing environment and
these adverse trends, Heritage's Board of Directors concluded that it was
important for Heritage Bank to increase its size. Heritage briefly explored
various acquisition possibilities as a means of achieving a faster rate of
growth than would be possible solely through internally generated earnings;
however, none of these efforts resulted in business combinations, because of the
desire of the potential target corporation to remain independent or the relative
unattractiveness of thrift common stock as merger consideration. Heritage also
held preliminary discussions with several regional bank holding companies
regarding a potential affiliation, and, in one case, commenced negotiations
which were abandoned in mid-1993 following a decline in the market value of the
other party's capital stock, but none of these discussions resulted in agreement
as to the substantive terms for such an affiliation.
In response to its continuing concerns regarding Heritage Bank's ability to
maintain its level of financial performance, the evolving regulatory environment
and the increased competition in Heritage Bank's market, as well as a desire to
obtain a strategic overview of Heritage Bank's profitability and its long-term
growth options, Heritage's Board of Directors in early 1994 engaged Trident
Financial Corporation ("Trident"), a firm experienced in the evaluation and
analysis of financial institutions and which had served as Heritage's financial
advisor since Heritage Bank's conversion in 1992, to perform a comparative
analysis of the value of Heritage as a going concern and the resultant effect
that Heritage's anticipated future financial condition and operating results as
a going concern would have on Heritage's stock price and its future acquisition
value,
27
<PAGE> 36
versus Heritage's current acquisition value based on its financial condition and
operating results. In performing this analysis, Trident: (i) reviewed Heritage's
then-current financial condition and historical results of operations; (ii)
compared Heritage's financial condition and results of operations to those of
other financial institutions; (iii) marked Heritage's assets and liabilities to
then-current market values; (iv) considered anticipated future operating results
over a six-year period; and (v) reviewed the market for the sale of control of
thrift institutions. This analysis, provided by Trident to the Board of
Directors in April 1994, noted certain unfavorable trends in Heritage Bank's
recent financial performance -- the declining growth rate of its interest rate
spread since Heritage Bank's conversion due to a shrinking loan portfolio and a
downward repricing of its adjustable rate loans, its shrinking asset base since
1992, and its increasingly excessive capitalization -- as well as Heritage
Bank's relative strengths -- its consistent earnings growth, high asset quality,
good loan loss reserve coverage, large market share in its primary market, below
average operating expenses, and low-risk balance sheet, among other things.
During the following several months, Heritage's Board of Directors
discussed in detail the results of Trident's study at its regular Board
meetings, including meetings at which Trident's representative attended and
answered questions raised by the Board members. Based upon these discussions and
the rapidly changing financial marketplace during that time, the Board of
Directors asked Trident to again review Heritage's financial performance and
analyze Heritage's potential for sustaining its continued growth. At a special
meeting held on November 9, 1994, and using the information and analysis
provided by Trident in a report dated November 9, 1994, the Board of Directors
evaluated options available to Heritage and the question of whether Heritage
should continue as an independent company or instead solicit proposals from
other financial institutions regarding an affiliation between Heritage and such
other financial institutions. At the special meeting, at which Trident's
representative and Heritage's legal counsel were also present, the Board
discussed the unfavorable trends in Heritage Bank's recent financial
performance, the effect of such results on the value of HFB Common Stock, the
views of each of the executive officers, and the consolidation in the financial
institutions industry currently ongoing in Heritage's market area as well as
generally in the Southeast and the United States. The Board of Directors also
discussed Trident's estimate in its November 9, 1994 report that Heritage's
acquisition value ranged from $25.00 to $29.00 per share. The HFB Common Stock
was initially issued in March 1992 at $5.75 per share (as adjusted for stock
splits), with a closing price per share on The Nasdaq Stock Market of $18 3/16
(as adjusted for stock splits) on June 30, 1994 and $23 1/4 on November 9, 1994.
Based on all these factors, the Board debated the relative merits of continuing
to operate independently or affiliating with another financial institution and
the course most likely to enhance shareholder value. Trident also discussed with
the Board of Directors those financial institutions that, in Trident's opinion,
would have the highest level of interest in affiliating with Heritage. The Board
of Directors expressed confidence in Heritage's business plan and in Heritage's
future as a going concern. However, based upon the estimated future earnings for
Heritage, the future trading and acquisition values of the HFB Common Stock (as
discounted to present value), and the control premium that could be expected in
an affiliation based on recent acquisitions by other institutions, the Board of
Directors determined that it was the appropriate time to consider alternatives
to remaining independent and also determined to solicit indications of interest
regarding an affiliation with another financial institution. The Board of
Directors then appointed a committee, comprised of Directors Sam H. Anderson,
Jr., Clyde W. Craven, and William E. Kreis (who is also President and Chief
Executive Officer of Heritage and Heritage Bank) to act on behalf of the Board
of Directors in soliciting such interest and also engaged Trident as Heritage's
financial advisor in connection with this process.
At the request of the Board of Directors, Trident prepared a discussion
memorandum for distribution to potentially interested parties. The committee
then directed that the discussion memorandum (which included financial statement
and financial ratio analyses relating to Heritage, copies of Heritage's publicly
filed securities documents during 1994, Heritage's then-most recent trial
balance reports, interest rate risk reports, mark to market balance sheets,
copies of benefit plans, personnel overviews and summaries, market share
analyses, and industry-wide analyses) be distributed to seven financial
institutions identified by Trident as potentially interested parties. These
institutions had either previously informally expressed an interest in
discussing an affiliation with Heritage or had been identified by Trident as
potentially interested parties based on their respective capital levels,
earnings performance, limited market share in Heritage's market area, stock
price, expected interest in an acquisition of Heritage, and recent acquisition
experience. In December 1994,
28
<PAGE> 37
the Heritage Board of Directors reviewed and approved the discussion memorandum
and, upon obtaining executed confidentiality agreements from each of the
potentially interested parties, Trident, on behalf of the Board of Directors,
forwarded a copy of the discussion memorandum to each of the seven financial
institutions. Additional information regarding Heritage was also requested by
certain of the potentially interested parties afterwards, and all of such
additional information was provided to each of the seven potentially interested
parties.
At a meeting held on January 18, 1995, the Board of Directors was advised
by Trident that six of the seven potentially interested parties had submitted
letters indicating their interest in a business combination with Heritage at
various ranges of value (i.e., an "indication of interest"). Trident also
reported that the seventh potentially interested party had declined to submit an
indication of interest because it did not wish to participate in a multi-party
process. This seventh party, however, did indicate its willingness to submit a
separate proposal for consideration by the Board of Directors after the
submission of indications of interest by the other six potentially interested
parties. The Board of Directors determined that this party's request should not
be granted because of concerns that this party may not actually submit an
indication of interest and also because the Board of Directors did not wish to
jeopardize the continued participation of the six potentially interested parties
by modifying its process solely to accommodate this seventh party. The Board of
Directors then analyzed each of the six indications of interest using
information provided by Trident regarding the six parties and Trident's
financial analysis of the six proposals, comparing them in terms of: (i)
proposed valuation; (ii) type of consideration; (iii) financial condition and
results of operations and overall financial strength of each interested party;
and (iv) strengths and weaknesses of each interested party, as well as specific
factors unique to each particular proposal. In addition, the Board of Directors
reviewed the pro forma financial statements in a combination with Heritage of
the three interested parties offering the highest valuations, various financial
analysts' reviews of these three interested parties, the common stock
performance of each such party, and other relevant financial information. The
Board discussed each of the indications of interest and, with the assistance of
Trident and Heritage's legal advisors, determined that Heritage would pursue
further discussions with the three potentially interested parties offering the
highest valuations and other more favorable terms. Each of the three interested
parties, which included First American, was then invited to conduct a limited
on-site examination of Heritage and submit a revised indication of interest
containing a "best and final" valuation as well as additional financial
information requested by the Board of Directors.
At a meeting of the Board of Directors held on February 6, 1995, the Board
was advised by Trident that revised indications of interest had been received
from two of the three potentially interested parties, including First American.
The third potentially interested party advised Trident that it was unable to
submit a competitive bid and therefore it did not wish to pursue further
discussions with Heritage. Trident discussed with the Board of Directors each of
the two revised proposals, including the analysis of each proposal prepared by
Trident on a fully-diluted basis and distributed in advance to each member of
the Board. The proposal from First American was a price of $28.00 per share,
subject to increase or decrease under certain conditions, in a stock-for-stock
transaction intended as a tax-free merger and represented 184.7% of Heritage's
book value on a per share basis, a price/earnings ratio of 15.9 times and a
12.0% premium over tangible book value as a percentage of core deposits. The
proposal from the other potentially interested party was a price of $25.50 per
share, subject to increase or decrease over an unspecified range, in a
stock-for-stock transaction that represented 159.2% of Heritage's book value on
a per share basis, a price/earnings ratio of 13.5 times and a 9.7% premium over
tangible book value as a percentage of core deposits. Based upon its review of
each of the two proposals, the Board of Directors determined that it favored
First American's proposal over the other potentially interested party due to the
significantly higher price offered by First American as well as First American's
more complete pricing information, its financial condition, market
considerations relating to the FAC Common Stock and the fact that the price
offered by First American was at the high end of the Trident's estimated range
of Heritage's acquisition value.
At the direction of the Board of Directors, Heritage then proceeded to
negotiate with First American the terms of a definitive agreement between
Heritage and First American. On February 15, 1995, the Board of Directors met to
review the status of the negotiations with First American and also to review the
terms of the draft merger agreement proposed by First American. On February 21,
1995, the Board of Directors met to
29
<PAGE> 38
consider approving the Agreement as finally negotiated. With the assistance of
Trident and of Heritage's legal counsel, the Board considered the final terms of
First American's proposal, the advantages and disadvantages of the merger to
Heritage and its shareholders, the underlying financial and operating condition
of First American based upon an on-site examination conducted by Trident, and
the opinion of Trident as to the fairness of the Merger to Heritage's
shareholders from a financial point of view. See "-- Opinion of Financial
Advisor." After extensive consideration, the Board of Directors unanimously
approved the Agreement, subject to shareholder approval. On February 21, 1995,
First American and Heritage entered into the Agreement.
REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Heritage Board of Directors has determined that the Merger is in the
best interests of Heritage and its shareholders. In evaluating the Agreement,
the Heritage Board of Directors, with the assistance of legal counsel,
considered a variety of factors including:
(i) The consideration offered by First American in relation to the
historical trading prices, book value, and book value and earnings per
share of the HFB Common Stock. In particular, the Heritage Board was aware
that the value of the consideration represented a substantial premium over
the $22.50 per share at which the HFB Common Stock had been trading
immediately prior to the announcement of the Merger and represented a
substantial premium in terms of percentage of book value and multiple of
earnings. Based on the $28.00 per share value of the transaction at the
time of the Board's consideration of the Agreement, the consideration to be
received by shareholders represented 124.4% of the market value, 184.7% of
book value and 15.9 times earnings per share of HFB Common Stock. The
Heritage Board of Directors considered the presentation of Trident,
Heritage's financial advisor, as to the fairness from a financial point of
view of the Merger to shareholders of Heritage and the various analyses
contained therein. In this regard, the Heritage Board of Directors has
received from Trident a written opinion dated February 21, 1995 that, as of
such date, the Merger is fair to Heritage's shareholders from a financial
point of view. Such opinion was reconfirmed in writing as of the date of
mailing of this Prospectus/Proxy Statement. The presentation of Trident is
summarized below under "-- Opinion of Financial Advisor." The Heritage
Board also considered the expected tax-free nature of the transaction and
the liquidity of the FAC Common Stock. Accordingly, the Heritage Board
determined that the Merger would result in an immediate and substantial
increase in shareholder value.
(ii) The respective financial conditions, results of operations and
prospects of Heritage and First American. Although Heritage has been
consistently profitable and has substantial capital resources, the Heritage
Board believes that it will be increasingly difficult for Heritage to meet
competition and expand its business as a thrift institution in the current
environment. The Heritage Board believes that First American, as a bank
holding company, has greater prospects for earnings and asset growth than
Heritage and is better positioned to create long-term value for
shareholders.
(iii) The financial and managerial resources of First American. As a
larger financial institution holding company, First American has the
financial resources to serve the lending and deposit needs of the local
communities served by Heritage and provide comprehensive financial services
in relevant markets. In addition, the Heritage Board believes that First
American has the managerial resources to realize significant growth in
Heritage's market area. The Board of Directors of Heritage believes that
these factors will contribute to long-term shareholder value through
increased earnings by the combined entities.
(iv) The compatibility of the respective business management
philosophies of Heritage and First American. The Heritage Board of
Directors believes that this compatibility will contribute to a smoother
transition and integration of the operations of Heritage with those of
First American and enable First American to more quickly realize
efficiencies from the transaction. In the Heritage Board's view, this will
also contribute to long-term shareholder value.
The foregoing discussion includes all the material factors considered by
the Heritage Board of Directors in determining to recommend the Merger to
shareholders. While the Heritage Board did not quantify or otherwise attempt to
assign relative weights to the factors considered in reaching its determination
that the
30
<PAGE> 39
Merger is in the best interests of Heritage's shareholders, the Heritage Board
believes that the ordering of the foregoing factors reflects their relative
importance. In its consideration of the Agreement, the Heritage Board also
considered that certain features of the Agreement, such as the provision for the
payment of a termination fee in certain circumstances and the restrictions on
Heritage's operations during the pendency of the Merger, might have an
unfavorable impact if the Agreement were terminated but determined that the
benefits of the Merger significantly outweighed these factors. The Board of
Directors of Heritage was also aware of certain interests of certain members of
Heritage's Board of Directors and management and considered them in approving
the Agreement and the Merger. See "-- Interests of Certain Persons in the
Merger." The Heritage Board's approval and recommendation of the Merger,
however, is based on the factors described above and the interests of such
persons did not influence the Board's decision to approve or recommend the
Merger.
THE HERITAGE BOARD OF DIRECTORS THEREFORE UNANIMOUSLY RECOMMENDS THAT
HERITAGE'S SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER AND THE AGREEMENT.
Shareholders should be aware that even if this Proposal I receives shareholder
approval, Heritage will be unable to consummate the Merger unless shareholders
also approve the Charter Amendment. See "PROPOSAL II -- AMENDMENT TO THE
HERITAGE CHARTER."
TERMS OF THE MERGER
Pursuant to the Agreement, Heritage will merge with and into First American
in the Merger, with First American as the surviving corporation. Upon
consummation of the Merger, each outstanding share of HFB Common Stock will be
converted into shares of FAC Common Stock, using the Exchange Ratio which will
be determined by dividing $28.00 by the average closing sale price per share
("Average Closing Price") of FAC Common Stock on The Nasdaq Stock Market (as
reported in The Wall Street Journal) for the twenty (20) consecutive trading
days ending on and including the third day immediately preceding, but not
including the Effective Time and cash in lieu of any fractional share; provided,
that the Exchange Ratio shall not exceed 1.098 shares of FAC Common Stock per
share of HFB Common Stock and shall not be less than 0.8116 shares of FAC Common
Stock per share of HFB Common Stock, unless prior to the Effective Time the
outstanding shares of FAC Common Stock shall have been increased, decreased,
changed into or exchanged for a different number or kind of shares through a
reorganization, reclassification, stock dividend, stock split, reverse stock
split or other similar change, in which case applicable adjustments shall be
made to the maximum and minimum number of shares of FAC Common Stock to be
exchanged. The Agreement may be terminated by Heritage if, among other things,
the Average Closing Price is less than $23.50 or by First American, if, among
other things, the Average Closing Price is more than $36.50. Unless the
Agreement is terminated, if the Average Closing Price is $34.50 or greater, the
Exchange Ratio will be 0.8116 shares of FAC Common Stock for each share of HFB
Common Stock. See "-- Effective Time of the Merger; Termination; Damages."
Heritage has issued options for the purchase of HFB Common Stock (the
"Heritage Options") pursuant to certain plans (the "Heritage Stock Plans"). At
the Effective Time, each Heritage Option issued pursuant to the Heritage Stock
Plans and outstanding will be assumed by First American and shall be deemed to
constitute an option to acquire, on the same terms applicable to such Heritage
Option and the Heritage Stock Plan under which it was issued, the same number of
shares of FAC Common Stock as the holder of such Heritage Option would have been
entitled to receive pursuant to the Merger had such holder exercised the
Heritage Option in full immediately prior to the Effective Time, at a price per
share equal to (i) the aggregate exercise price for the shares of HFB Common
Stock otherwise purchasable pursuant to such Heritage Option divided by (ii) the
number of full shares of FAC Common Stock deemed purchasable pursuant to such
Heritage Option, provided, that in the case of any Heritage Option to which
Section 421 of the Code applies by reason of its qualification under Section 422
of the Code, the option price, the number of shares purchasable pursuant to such
Heritage Option and the terms and conditions of exercise of such Heritage Option
will be determined in order to comply with Section 424(a) of the Code. As of the
Record Date, there were outstanding under the Heritage Stock Plans options to
acquire an aggregate of 421,799 shares of HFB Common Stock at exercise prices
ranging from $5.75 per share to $27.50 per share. For additional information,
see "-- Interests of Certain Persons in the Merger."
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OPINION OF FINANCIAL ADVISOR
Heritage has retained Trident to act as its financial advisor and to render
a fairness opinion in connection with the Merger. See "-- Background of the
Merger." As part of its engagement, Trident performed a valuation analysis of
Heritage based upon an acquisition. On November 9, 1994, Trident presented its
valuation report dated November 9, 1994 (the "Valuation Report") to Heritage's
Board of Directors. Following numerous Board meetings and the solicitation by
the Board of Directors of indications of interest to acquire Heritage, the Board
received and reviewed indications of interest from six different parties. After
reviewing these indications of interest, the Board of Directors eventually
commenced negotiations for a definitive agreement with First American.
On February 21, 1995, Trident met with Heritage's Board of Directors to
review the proposed terms of the Agreement. At that time, Trident summarized the
report of February 18, 1995 to Heritage's Board of Directors discussing the
financial terms of the Merger and updated market information with respect to
thrift mergers and acquisitions. Trident also compared First American's offer to
the valuation of Heritage set forth in the Valuation Report and also analyzed
the advantages and disadvantages of the Merger. Trident further reported on its
financial analysis and on-site due diligence examination of First American. In
addition, Trident rendered its written opinion to Heritage's Board of Directors
to the effect that, as of that date, the consideration to be received by
Heritage's shareholders pursuant to the Agreement was fair to them from a
financial point of view. Further, Trident delivered its updated written opinion
to Heritage's Board of Directors as of the date of this Prospectus/Proxy
Statement stating that, as of the date hereof, the consideration to be received
by the shareholders of Heritage in the Merger was fair to them from a financial
point of view. The full text of Trident's opinion dated as of the date hereof is
attached as Appendix B to this Prospectus/Proxy Statement and is incorporated
herein by reference, and Trident has consented to the inclusion of such opinion
and the related disclosure in this Prospectus/Proxy Statement. The description
of the opinion herein is qualified in its entirety by reference to Appendix B.
Holders of HFB Common Stock are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions and qualifications made,
matters consulted and limitations on the reviews undertaken by Trident.
TRIDENT'S OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF HERITAGE ONLY
AND IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY HERITAGE'S SHAREHOLDERS BASED ON CONDITIONS AS
THEY EXISTED AND COULD BE EVALUATED AS OF THE DATE OF THE OPINION. TRIDENT'S
OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HERITAGE SHAREHOLDER AS TO
HOW SUCH SHAREHOLDER SHOULD VOTE AT THE MEETING, NOR DOES TRIDENT'S OPINION
ADDRESS THE UNDERLYING BUSINESS DECISION TO EFFECT THE MERGER. THIS SUMMARY OF
TRIDENT'S OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TEXT OF SUCH
OPINION, WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS APPENDIX B.
SHAREHOLDERS ARE URGED TO READ TRIDENT'S OPINION IN ITS ENTIRETY FOR A
DESCRIPTION OF THE ASSUMPTIONS MADE AND MATTERS CONSIDERED AND THE LIMITS ON THE
REVIEW UNDERTAKEN IN RENDERING SUCH OPINION.
In connection with rendering its opinions, Trident reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) certain publicly
available information concerning Heritage, including the audited financial
statements of Heritage for each of the years in the three-year period ended June
30, 1995; (iii) certain publicly available information concerning First
American, including the audited financial statements of First American for each
of the years in the three-year period ended December 31, 1994 and the unaudited
financial statements of First American for the six months ended June 30, 1995;
(iv) certain other internal information, primarily financial in nature,
concerning the business and operations of Heritage and First American furnished
to Trident by Heritage and First American for purposes of Trident's analysis;
(v) certain information with respect to the pricing and trading of HFB Common
Stock; (vi) certain information with respect to the pricing and trading of FAC
Common Stock; (vii) certain publicly available information with respect to other
companies that Trident believed to be comparable to Heritage and First American
and the trading markets for such other companies' securities; and (viii) certain
publicly available
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information concerning the nature and terms of other transactions that Trident
considered relevant to its inquiry. Trident also met with certain officers and
employees of Heritage and First American to discuss the foregoing, as well as
other matters which it believed relevant to its inquiry.
In its review and analysis, and in arriving at its opinions, Trident
assumed and relied upon the accuracy and completeness of all of the financial
and other information provided to it or that was publicly available and did not
attempt independently to verify any such information. The financial information
was of the type normally produced by the management of Heritage and reviewed by
the Heritage Board of Directors at its regular meetings and the Heritage Board
of Directors had no reason to believe that Trident's reliance thereon was
unreasonable. The Heritage Board, however, did not specifically review the
information, projections, assumptions and other information provided by
management to Trident for accuracy and completeness. Trident did not conduct a
physical inspection of the properties or facilities of Heritage or First
American, nor did it make or obtain any independent evaluations or appraisals of
any of such properties or facilities. While Heritage's Board of Directors has
carefully reviewed Trident's opinions, the Board has relied upon the expertise
of Trident in preparing the opinions, and determining the methodologies and the
appropriateness of assumptions used in rendering its opinions and, accordingly,
did not undertake to independently review the methodologies and the
appropriateness of the assumptions used by Trident in reaching its determination
as to the fairness of the Merger.
In conducting its analyses and arriving at its opinions as expressed
herein, Trident considered such financial and other factors as it deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial condition and results of operations of
Heritage and First American, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest
expenses, earnings, dividends, book value, return on assets, return on equity,
capitalization, the amount and type of non-performing assets and the reserve for
loan losses; (ii) the business prospects of Heritage and First American; (iii)
the economies in Heritage's and First American's market areas; (iv) the
historical and current market for HFB Common Stock and FAC Common Stock and for
the equity securities of certain other companies that Trident believed to be
comparable to Heritage and First American; and (v) the nature and terms of
certain other acquisition transactions that Trident believed to be relevant.
Trident also took into account its assessment of general economic, market,
financial and regulatory conditions and trends, as well as its knowledge of the
financial institutions industry, its experience in connection with similar
transactions, and its knowledge of securities valuation generally. Trident's
opinions necessarily were based upon conditions in existence and subject to
evaluation on the respective dates of its opinions. Trident's opinions are, in
any event, limited to the fairness, from a financial point of view, of the
consideration to be received by the holders of HFB Common Stock in the Merger
and does not address Heritage's underlying business decision to effect the
Merger.
The following is a brief summary of the Valuation Report presented by
Trident to the Board of Directors of Heritage on November 9, 1994:
Industry Comparative Analysis. Trident reviewed Heritage's strengths and
weaknesses by comparing the financial performance of Heritage to that of
the following groups of SAIF-insured, OTS-regulated institutions: (i) all
United States institutions; (ii) all institutions in the Southeastern
United States; (iii) all Tennessee institutions; (iv) all United States
institutions with total assets between $400 million and $600 million; and
(v) all Southeastern institutions with total assets between $400 million
and $600 million (the "Aggregates"). This analysis compared a number of
Heritage's historical financial ratios to those of the Aggregates,
including but not limited to: (i) the balance sheet composition as a
percentage of total assets at June 30, 1994; (ii) the loan portfolio as a
percentage of total assets at June 30, 1994; (iii) the investment portfolio
as a percentage of total assets at June 30, 1994; and (iv) asset quality at
June 30, 1994. Trident also compared Heritage's growth rates between
December 31, 1990 and June 30, 1994, its yields on assets and costs of
liabilities and its income and expense data for 1993 and for the six months
ended June 30, 1994 to those of the Aggregates.
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Valuation of Heritage. Trident estimated the fair market value of Heritage
in a merger scenario. In valuing Heritage, Trident based its determination
after consideration of the results of its analysis under the asset
approach, the income approach and the market approach.
The asset approach considers the market value of a company's assets and
liabilities, as well as any intangible value the company may have. Trident
estimated Heritage's net asset value by adjusting the carrying value of its
assets and liabilities to reflect current market values (rather than
liquidation values). In addition, the net asset value of Heritage was
adjusted downward based on an estimate of the impact of recapturing
Heritage's bad debt reserve for tax purposes and estimated transaction and
other costs. Finally, Trident increased Heritage's net asset value for the
assumed exercise of outstanding options to purchase HFB Common Stock. Based
on the adjustments discussed above, Trident estimated Heritage's fully
diluted net asset value to be approximately $45.7 million or $12.70 per
share. After determining Heritage's net asset value, Trident added an
intangible premium to reflect the estimated value of its customer
relationships. According to the asset approach, the total value of Heritage
is the sum of its net asset value and its intangible value. Based on
intangible ("core deposit") premiums observed in the market for thrift
mergers, as well as Trident's knowledge of Heritage, Trident applied
premiums equal to 8% of core deposits and 11% of core deposits to
Heritage's estimated fully diluted net asset value in order to estimate a
range of value using the asset approach. Using this approach, Trident
established a reference range of $23.50 to $27.00 per share of HFB Common
Stock.
Trident also used an income approach in its valuation of Heritage by
discounting Heritage's projected future earnings. Trident projected
Heritage's earnings for the six-year period beginning September 30, 1994,
based on certain assumptions, including annual asset growth of 5%,
gradually increasing interest rates, merger cost savings of 15%, 25% and
35% as a result of an assumed acquisition of Heritage, and a 37% to 38% tax
rate. The projected earnings were discounted to the present at rates of
13%, 15% and 17%. The discount rates chosen were estimates of the required
rates of return for holders or prospective holders of shares of financial
institutions similar to Heritage, based on a number of factors including
prevailing interest rates, the pricing ratios of publicly-traded financial
institutions, the financial condition and operating results of Heritage, as
well as Trident's general knowledge of valuation, the securities markets,
and acquisition values in other mergers of financial institutions. Using
the income approach, Trident established a reference range of $15.00 to
$20.00 per share.
In the market approach, Trident analyzed certain median pricing ratios
(e.g., price to book value, price to tangible book value, price to reported
earnings, price to assets, and the premium paid over tangible book value as
a percentage of core deposits) resulting from selected completed thrift
merger transactions, as well as recently announced pending transactions. In
applying the market approach, Trident considered the pricing ratios for the
following groupings of thrift merger transactions: (i) All pending thrift
mergers (78 transactions); (ii) all pending thrift mergers announced during
the 90 days prior to October 31, 1994 (the date of the market data) (30
transactions); (iii) all pending thrift mergers involving actively-traded
thrifts (39 transactions); (iv) all pending thrift mergers involving
thrifts located in the Southeast (11 transactions); (v) all pending thrift
mergers in which the aggregate consideration was between $70 and $110
million (5 transactions); (vi) all pending thrift mergers in which the
target thrift had assets between $300 million and $1 billion (17
transactions); (vii) all pending thrift mergers in which the target thrift
had a return on average assets of between 1.20% and 1.40% (9 transactions);
(viii) all pending thrift mergers in which the target thrift had a return
on average equity of between 12% and 15% (16 transactions); (ix) all
pending thrift mergers in which the target thrift had a tangible equity
ratio between 8% and 10% (21 transactions); and (x) all pending thrift
mergers in which the target thrift had a non-performing assets to total
assets ratio of less than 0.5% (22 transactions). Trident also considered
the pricing ratios for 12 thrift merger transactions, announced in either
1993 or 1994, in which the target thrift was of similar size and capital
structure as that of Heritage. Trident then performed a comparison of a
number of financial ratios for Heritage to those of the target thrift
institutions. Based on Heritage's financial condition and results of
operations, as well as other factors, relative to that of the groupings,
Trident chose ranges of pricing ratios to apply to Heritage. Trident chose
price to book value ratios of 165% to 185%, resulting in per share values
of $26.00 to $29.00; price to tangible book value ratios of
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165% to 185%, resulting in per share values of $25.00 to $28.50; price to
earnings ratios of 14 to 16 times, resulting in per share values of $26.00
to $30.00; price to asset ratios of 17.0% to 18.0%, resulting in per share
values of $27.50 to $29.00; and premiums over tangible book value as a
percentage of core deposits of 8% to 11%, resulting in per share values of
$25.50 to $29.50. Based on these derived ranges of value, Trident
established an overall reference range of value using the market approach
of $26.00 to $29.00 per share.
Trident then reviewed the results from the three approaches, and after
consideration of all relevant facts, reconciled the acquisition values
generated by each approach and determined a final range for the acquisition
value of Heritage of $25.00 to $29.00 per share. Trident did not apply
specific weights to the three individual approaches, but rather applied its
judgment and experience in determining the final range of value for
Heritage. However, Trident did give greater consideration to the market
approach over the asset and income approaches in reconciling the reference
ranges and estimating the final range of value.
The following is a brief summary of the report dated February 18, 1995, and
presented by Trident to the Board of Directors of Heritage on February 21, 1995:
Summary of Proposed Transaction. Trident presented a summary of the
financial terms of the Merger. Trident also compared the pricing ratios for
the Merger with the median pricing ratios for selected groups of pending
thrift mergers and acquisitions. Trident presented a pro forma combined
balance sheet as of December 31, 1994 and a pro forma combined income
statement for the four quarters ended December 31, 1994. Trident analyzed
the contribution of each of Heritage and First American (on a fully diluted
basis) to the pro forma combined company for, among other things,
ownership, equity, and earnings. The analysis also examined the pro forma
capitalization, book value and earnings per share dilution resulting from
the Merger. However, this analysis did not take into account any of First
American's subsequently announced pending acquisitions.
Review of Due Diligence Examination of First American. Trident presented a
summary of its on-site due diligence examination of First American. First
American's historical balance sheets and income statements were presented,
along with a variety of financial ratios that analyzed First American's
financial condition and operating results through December 31, 1994.
Trident discussed First American's strengths and weaknesses, peer group
comparisons, asset quality, loan loss reserve coverage, asset
classifications, results of recent regulatory examinations, strategic plan
and its 1995 budget, as well as recent bank analysts' reports on First
American, First American's previous mergers and acquisitions and its
subsidiary banks, and other issues. Trident reported that during its
investigation, it did not discover any conditions that would prevent it
from rendering its fairness opinion to Heritage's Board of Directors. As
discussed above, Trident relied, without independent verification, upon the
accuracy and completeness of all of the financial and other information
provided by First American.
First American's Stock Pricing. Trident examined the pricing of First
American's common stock as of February 15, 1995 in relation to other
regional commercial banks, commercial banks of a similar size and all
actively-traded commercial banks.
The summary of Trident's reports set forth above reflects all the material
analysis, factors and assumptions considered by Trident and the material
valuation methodologies used by Trident in arriving at its opinions as to
fairness described above. The preparation of a fairness opinion is a complex
process and is not necessarily susceptible to partial or summary description.
Trident believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all of the analyses, or all the above summary, without considering
all factors and analyses, would create an incomplete view of the processes
underlying the analyses set forth in Trident's reports and its opinion.
Therefore, the ranges of valuations resulting from any single analysis described
above should not be taken to be Trident's view of the actual value of Heritage
or the combined company. In performing its analyses, Trident made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of Heritage
or First American. The results of the specific analyses performed by Trident may
differ from Heritage's actual values or actual future results. Actual results
and actual future values may differ from the analyses as a result of changing
economic conditions, changes in company strategy and policies, as well as a
number of other factors. Such individual analyses were
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prepared to provide valuation guidance solely as part of Trident's overall
valuation analysis and the determination of the fairness of the consideration to
be received by Heritage's shareholders and were provided to Heritage's Board of
Directors in connection with the delivery of Trident's opinion. The analyses do
not purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. In addition, as described above, Trident's
opinions and presentations to Heritage's Board of Directors were among the many
factors taken into consideration by Heritage's Board of Directors in making its
determination to approve the Agreement.
Trident, as part of its investment banking business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwriting, and valuations for corporate and
other purposes. Trident has extensive experience with the valuation of financial
institutions. Trident served as Heritage's appraiser in its mutual-to-stock
conversion in March 1992 and Trident's affiliate, Trident Securities, Inc.,
served as Heritage's sales agent in such conversion. Heritage's Board of
Directors selected Trident as its financial advisor because of Heritage's
previous experience with Trident, because Trident is a nationally recognized
investment banking firm specializing in financial institutions and because of
Trident's substantial experience in transactions similar to the Merger. Trident
is not affiliated with either Heritage or First American.
For its services as financial advisor, Trident received from Heritage a
retainer of $15,000 and a fee of $25,000 upon execution of the Agreement, for a
total of $40,000. An additional fee equal to 0.60% of the aggregate value of the
Merger (and therefore contingent upon such value), less the $40,000 already
paid, will be payable to Trident upon consummation of the Merger (a balance due
of approximately $728,000, assuming a price of $43 per share of FAC Common Stock
in the Merger). Heritage has also agreed to reimburse Trident for its reasonable
out-of-pocket expenses and to indemnify Trident against certain liabilities,
including certain liabilities under federal securities laws.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, but in no event later than five business
days thereafter, the stock transfer agent of First American, acting in the
capacity of exchange agent, will mail to all holders of HFB Common Stock a
letter of transmittal, together with instructions for the exchange of their HFB
Common Stock certificates for certificates representing FAC Common Stock and a
check representing the amount paid in lieu of issuing any fractional share.
Until so exchanged, each certificate representing HFB Common Stock outstanding
immediately prior to the Effective Time shall be deemed for all purposes to
evidence the right to receive upon such surrender the number of shares of FAC
Common Stock into which such shares have been converted and cash in lieu of any
fractional share.
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE
FURTHER INSTRUCTIONS.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties by Heritage
regarding, among other things, its organization, capitalization, ownership and
capitalization of its subsidiaries, authority to enter into the Agreement,
filings with the Commission, certain information supplied or to be supplied to
First American, compliance with laws, pending and threatened litigation, tax
matters, certain material agreements, employee benefit plans, its subsidiaries,
regulatory matters, absence of material adverse changes, the vote required for
approval of the Merger, title to its assets, ownership of FAC Common Stock,
allowance for loan losses, transactions with affiliated persons, qualified
thrift lender status of Heritage Bank, activities of Heritage and Heritage Bank,
environmental matters and certain provisions of Heritage's organizational
documents and relevant state anti-takeover laws. The Agreement also contains
representations and warranties by First
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American regarding, among other things, its organization, capitalization,
ownership and capitalization of FANB, authority to enter into the Agreement,
filings with the Commission, certain information supplied or to be supplied to
Heritage, compliance with laws, pending and threatened litigation, absence of
material adverse changes, the absence of an approval requirement by holders of
FAC Common Stock of the Merger, reservation of shares of FAC Common Stock,
regulatory matters, tax matters, title to its assets and allowance for loan
losses. These representations and warranties will not survive the Effective
Time.
The respective obligations of First American and Heritage to consummate the
Merger are conditioned upon, among other things: (i) approval of the Agreement
by the shareholders of Heritage; (ii) that shares of FAC Common Stock to be
issued in the Merger shall have been approved for trading on The Nasdaq Stock
Market; (iii) the receipt of all authorizations, consents, orders or approvals
of, or declarations or filings from any governmental entity which are necessary
for the consummation of the Merger, and the expiration of all applicable waiting
periods required after the granting of any such approvals; (iv) the
effectiveness under the Securities Act of a registration statement relating to
the FAC Common Stock to be issued in connection with the Merger, the absence of
any stop order suspending the effectiveness of such registration statement or
the initiation of any proceedings seeking such a stop order; (v) the absence of
a restraining order or injunction preventing the consummation of the Merger, or
the pendency of any proceeding by any governmental entity seeking a restraining
order or injunction, or the existence of an applicable statute, rule, regulation
or order making the consummation of the Merger illegal; (vi) the accuracy of the
representations and warranties set forth in the Agreement as of the Effective
Time; (vii) the performance in all material respects of all obligations of the
other party as required to be performed by the other party at or prior to the
Effective Time by the parties to the Agreement; (viii) the receipt of the
consent or approval of each person (other than governmental entities) whose
consent or approval shall be required in order to permit the succession of First
American to any obligation, right or interest of Heritage or any subsidiary of
Heritage under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, individually or in the aggregate,
have a material adverse effect on First American and its subsidiaries taken as a
whole or upon the consummations contemplated by the Agreement; (ix) the receipt
by First American of an opinion of First American's tax advisors, dated as of
the Effective Time, to the effect that the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code, and that each
of Heritage and First American will be a party to that reorganization pursuant
to Section 368(b) of the Code; (x) receipt by First American of certain opinions
of legal counsel to Heritage, in form reasonably satisfactory to First American;
(xi) the receipt by Heritage of an opinion of Heritages's tax advisors, dated as
of the Effective Time, to the effect that the Merger (including the Bank Merger)
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, that Heritage and First American will
each be a party to that reorganization within the meaning of Section 368(b) of
the Code, that no gain or loss will be recognized by Heritage shareholders who
exchange their HFB Common Stock solely for FAC Common Stock in the Merger, and
related matters; (xii) the receipt by Heritage of certain opinions of legal
counsel to First American, in form reasonably satisfactory to Heritage; (xiii)
in the case of First American, the absence of any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger by any governmental entity which, in connection with the grant of a
specified regulatory approval, imposes any requirement upon First American or
its subsidiaries to dispose of 10% or more of the assets or deposits of
Heritage; (xiv) the absence of material adverse changes in the business,
financial condition, prospects or results of operations or prospects of
Heritage, in the case of First American, or the absence of such changes with
respect to First American, in the case of Heritage; (xv) the receipt by First
American of certain agreements from the "affiliates" of Heritage; (xvi) receipt
by First American of a letter from Coopers & Lybrand L.L.P. dated as of the
Effective Time, providing certain assurances as to Heritage's financial
statements; (xvii) receipt by First American of a certificate from Heritage as
to the capitalization of Heritage immediately prior to the Effective Time;
(xviii) receipt by Heritage of an opinion of Trident dated as of the date of the
Agreement to the effect that the consideration to be received by the holders of
HFB Common Stock pursuant to the Agreement upon consummation of the Merger is
fair to such shareholders from a financial point of view; (xix) receipt by
Heritage of an acknowledgment from First American's exchange agent that it is in
receipt of the consideration required to effect the Merger; and (xx) receipt by
Heritage of a letter
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from KPMG Peat Marwick LLP dated as of the Effective Time providing certain
assurances as to certain First American financial information.
Except with respect to obtaining the approval by Heritage's shareholders of
the Merger and the Agreement, the approval for trading on The Nasdaq Stock
Market of the shares of FAC Common Stock issued in the Merger, and the receipt
of all required regulatory approvals, the conditions to consummation of the
Merger may be waived at any time by the party for whose benefit they were
created.
REGULATORY APPROVALS
The Merger and the Bank Merger are subject to certain regulatory approvals.
The Merger is subject to the approval of the OTS under Section 10 of the HOLA,
of the Federal Reserve Board under Section 4 of the BHCA, and of the Tennessee
Department under the Tennessee Act.
The Bank Merger is subject to approval by the OCC under the Bank Merger
Act, under standards similar to those used by the OTS in connection with its
approval of the Merger under the HOLA. In addition, the OCC must approve the
Bank Merger pursuant to Section 5(d)(3) of the Federal Deposit Insurance Act, as
amended (the "Oakar Amendment"). The Bank Merger Act provides that the Merger
may not be consummated until the thirtieth day after approval by the OCC, during
which time the United States Department of Justice ("DOJ") may challenge the
transaction on antitrust grounds; provided, however, that the OCC has the
discretion, upon request, to shorten the thirty day waiting period to 15 days in
the event the DOJ indicates to the OCC that it will not object to the
transaction on competitive grounds.
First American, FANB, Heritage and Heritage Bank, as appropriate, have
received all of the foregoing regulatory approvals and all applicable waiting
periods for the Merger and the Bank Merger have passed.
First American and Heritage are not aware of any other governmental
approvals or actions that are required for consummation of the Merger and the
Bank Merger except as described above. Should any such approval or action be
required, it is presently contemplated that such approval or action would be
sought. There can be no assurance that any such approval or action, if needed,
could be obtained, would not delay consummation of the Merger and the Bank
Merger and would not be conditioned in a manner that would cause First American
to abandon the Merger and the Bank Merger.
BUSINESS PENDING THE MERGER
The Agreement contains negative and affirmative covenants that are
customary in similar transactions. In addition, the Agreement provides that,
except as otherwise specifically contemplated or permitted thereby, each of
First American and Heritage shall, and shall cause each of its respective
subsidiaries to, operate its business only in the usual, regular and ordinary
course and preserve intact its business organizations and assets and maintain
its rights and franchises, and take no action which would materially adversely
affect the ability of any party to perform its covenants in all material
respects and to consummate the Merger or prevent or impede the transactions
contemplated in the Agreement from qualifying as a reorganization under Section
368 of the Code; provided, however, that the foregoing generally does not
prevent First American from acquiring or disposing of assets or businesses.
Further, without the prior written consent of First American, or as otherwise
provided in the Agreement, Heritage generally may not, and may not permit its
subsidiaries to: incur new debt other than in the ordinary course of business;
declare or pay dividends other than its current quarterly dividend of $0.095 per
share; increase compensation or benefits of employees, officers or directors
except as specifically permitted in the Agreement; or take certain other
actions, other than in the ordinary course of business or as described in the
Agreement, that might impact the financial condition or business of Heritage.
The Agreement also contains certain other provisions pursuant to which Heritage
has agreed to take certain actions relating to its lending, environmental and
other policies with the purpose of coordinating such policies with those of
First American in anticipation of the completion of the Merger and the
transactions contemplated thereby.
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NO SOLICITATION OF COMPETING TRANSACTIONS
Heritage has agreed that it will not authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Heritage or any subsidiary of Heritage
directly or indirectly to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any Competing Transaction (as defined
below). Except as the fiduciary duties of Heritage's Board of Directors may
otherwise require, Heritage has agreed not to authorize or permit any officer,
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Heritage or any subsidiary of Heritage
directly or indirectly: (A) to cooperate with, or furnish or cause to be
furnished any non-public information concerning its business, properties or
assets to, any person or entity in connection with any Competing Transaction;
(B) to negotiate any Competing Transaction with any person or entity; or (C) to
enter into any agreement, letter of intent or agreement in principle as to any
Competing Transaction. Heritage has also agreed to promptly give written notice
to First American upon becoming aware of any Competing Transaction.
"Competing Transaction" is defined in the Agreement as one of the following
involving Heritage (other than the transactions contemplated by the Agreement):
(i) any merger, consolidation, share exchange, business combination, or other
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 15% or more of the assets of Heritage in a single
transaction or series of transactions to the same person, entity or group; or
(iii) any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
If this particular covenant is breached by Heritage, or any of its
directors, officers, employees or agents, and the Agreement is terminated as a
result, under certain circumstances Heritage may be required to pay to First
American liquidated damages of $4,500,000. See "-- Effective Time of the Merger;
Termination; Damages."
EFFECTIVE TIME OF THE MERGER; TERMINATION; DAMAGES
After such time as the conditions to the closing of the Merger have been
satisfied or waived, the Merger shall become effective upon the filing of
Articles of Merger with the Secretary of State of Tennessee or at such time
thereafter as is provided in the Articles of Merger, but in any event the
parties intend that the Effective Time shall be 12:01 a.m. on the first calendar
day of the month immediately following the month in which the closing of the
Merger occurs.
The Agreement may be terminated, whether before or after shareholder
approval, in writing: (i) by mutual consent of First American and Heritage; (ii)
by either party if the Merger shall not have been consummated on or before
January 31, 1996 (provided that the terminating party shall not have breached in
any material respect its obligations under the Agreement in a manner that
proximately contributed to the failure to consummate the Merger by such date);
(iii) by either party if any governmental regulatory body, the consent of which
is a condition to the obligations of First American and Heritage to consummate
the transactions contemplated by the Agreement, shall have determined not to
grant its consent and all appeals of such determination shall have been taken
and have been unsuccessful; (iv) by either party if any court of competent
jurisdiction shall have issued an order or judgment restraining, enjoining or
otherwise prohibiting the Merger and such order or judgment shall have become
final and unappealable; (v) by First American if any event shall have occurred
as a result of which certain conditions are no longer capable of being
satisfied, (vi) by First American if there has been a breach by Heritage of any
representation or warranty contained in the Agreement which would have or would
be reasonably likely to have a material adverse effect on the assets,
liabilities, financial condition, results of operations, business or prospects
of Heritage and its subsidiaries taken as a whole, or there has been a material
breach by Heritage of a covenant or agreement set forth in the Agreement which
breach is not curable, or, if curable, is not cured within 20 days after written
notice of such breach is given by First American; (vii) by First American if
Heritage or its Board of Directors shall have authorized, recommended, proposed
or publicly announced its intention to enter into a Competing Transaction which
has not been consented to in writing by First American; (viii) by First American
if Heritage's Board of Directors shall have failed to make or shall have
withdrawn or materially modified its recommendation to the shareholders of
Heritage with respect to the Merger or the Agreement; (ix) by First American if
the Average
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Closing Price of the FAC Common Stock exceeds $36.50 (subject to adjustment);
(x) by Heritage if any event shall have occurred as a result of which certain
conditions are no longer capable of being satisfied; (xi) by Heritage if there
has been a breach by First American of any representation or warranty contained
in the Agreement which would have or would be reasonably likely to have a
material adverse effect on the assets, liabilities, financial condition, results
of operations, business or prospects of First American and its Subsidiaries
taken as a whole, or there has been a material breach of any of the covenants or
agreements set forth in the Agreement on the part of First American which breach
is not curable or, if curable, is not cured within 20 days after written notice
of such breach is given by Heritage; or (xii) by Heritage if the Average Closing
Price is less than $23.50 (subject to adjustment).
The Agreement provides that Heritage is required to pay liquidated damages
in the amount of $4,500,000 (the "Fee") to First American if: (1) First American
terminates the Agreement by reason of a failure of Heritage to meet certain
conditions due to Heritage's knowing and intentional misrepresentation or
knowing and intentional breach of warranty or of any covenant or agreement, and,
between the date of the Agreement and the date of such event or breach, Heritage
or any subsidiary of Heritage made certain contacts regarding a Competing
Transaction; (2) if First American terminates the Agreement after the Board of
Directors of Heritage shall have withdrawn or materially modified its
authorization, approval or recommendation to the shareholders of Heritage with
respect to the Merger or the Agreement in a manner adverse to First American or
shall have failed to make a favorable recommendation to the shareholders of
Heritage regarding the Merger and the Agreement; (3) if First American
terminates the Agreement because, without first obtaining First American's
consent, Heritage or its Board of Directors shall have authorized, recommended,
proposed or publicly announced its intention to enter into a Competing
Transaction and within 12 months from the date of such termination a Competing
Transaction is consummated or Heritage shall have entered into an agreement
which if consummated would constitute a Competing Transaction; or (4) if
Heritage terminates the Agreement because the Agreement did not receive the
requisite vote of the Heritage shareholders and within 12 months from the date
of such termination a Competing Transaction is consummated or Heritage shall
have entered into an agreement which if consummated would constitute a Competing
Transaction. If First American is entitled to the Fee, Heritage is also
obligated to pay to First American interest at the rate of 6% per year on any
amounts that are not paid when due, plus all costs and expenses in connection
with or arising out of the enforcement of the obligation of Heritage to pay the
Fee or such interest.
If the Agreement is terminated and Heritage is not otherwise liable for
payment of the Fee to First American, Heritage may nevertheless be liable to
First American for up to $500,000 in expenses incurred by First American in
connection with the Merger. Similarly, First American may be liable to Heritage
for expenses related to the Merger up to $500,000. See "-- Expenses."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
At the Effective Time, Heritage will merge with and into First American,
and Heritage thereafter will cease to exist as a separate corporate entity.
The Board of Directors of First American following the Merger shall consist
of those persons serving as directors immediately prior thereto. In addition,
pursuant to the Agreement, the Board of Directors of First American has elected
Sam H. Anderson, Jr., the current Chairman of the Board of Directors of
Heritage, to become a member of First American's Board of Directors, subject to
consummation of the Merger. In addition, First American has agreed to cause the
other persons who serve as members of the Board of Directors of Heritage
immediately prior to the Effective Time to be appointed to serve as advisory
directors of FANB immediately after the Effective Time upon such terms and
conditions as may be agreed upon by FANB and such persons.
EFFECT ON CERTAIN EMPLOYEES AND BENEFIT PLANS
Employees. The Agreement provides that all Heritage employees who are
terminated within one year following the Merger as a result of the Merger will
be eligible for benefits available under First American's reduction in force
policy, which may include, among other benefits, certain notices, severance
payments, continuing paid health benefits, and outplacement assistance. First
American currently anticipates that in
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connection with the Merger approximately 100 Heritage positions will be
eliminated by combining certain of Heritage's branches with existing branches of
FANB. However, First American has not finalized its plans in this regard and
this estimate is subject to change.
Employee Benefit Plans. Employees of Heritage and its subsidiaries will be
eligible to participate in the pension and welfare plans maintained by First
American after the Effective Time, subject to the eligibility requirements of
such plans. For purposes of determining eligibility to participate in the
qualified pension plans maintained by First American, employees of Heritage or
its subsidiaries shall be credited with service to the extent credited under the
respective predecessor plans. Vesting service under the First American plans
will be in accordance with the rules of the First American 401(k) Plan governing
vesting service for employees of acquired employers and consistent with the
current policies of First American. Employees of Heritage and its subsidiaries
will participate in the First American Corporation Master Retirement Plan in
accordance with its terms and will be credited with prior service with Heritage
and its subsidiaries for eligibility and vesting purposes, but not for benefit
accrual purposes.
The Agreement also provides generally that the tax-qualified defined
benefit plans maintained by Heritage or its subsidiaries (other than any such
plans described in Section 4063(a) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), will be terminated by Heritage on or before
the Effective Time, and the benefits thereunder will be distributed to
participants to the extent permitted under the Code, ERISA and the respective
plan provisions, except that Heritage Bank's Employee Stock Ownership Plan and
Trust will continue after the Effective Time.
Employee Stock Ownership Plan. Heritage Bank's Employee Stock Ownership
Plan and Trust ("ESOP") has unallocated assets with a fair market value
exceeding the outstanding balance of the loan secured by those assets. Without
changing the existing vesting and allocation provisions in the ESOP (or in any
of First American's qualified plans), the parties intend that current employees
of Heritage will benefit from this investment. Therefore, after the Effective
Time and until all unallocated shares now held by the ESOP are released from
collateral pledge and allocated to current Heritage employees (the "100%
Allocation Date"), the ESOP will be continued as a separate plan for the benefit
of current employees of Heritage eligible to participate therein in accordance
with the ESOP's terms for so long as a separate plan is legally permissible
under the Code and the rules promulgated thereunder without causing
disqualification of the ESOP. If before the 100% Allocation Date, it becomes
legally impermissible under the Code and the rules promulgated thereunder to
maintain the ESOP as a separate plan, to the extent legally permissible under
Code qualification requirements, the assets now held by the ESOP shall continue
to be allocated only to current employees of Heritage, until the 100% Allocation
Date.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain executive officers and directors of Heritage have interests in the
Merger in addition to their interests as shareholders of HFB Common Stock
generally. The Heritage Board was aware of these interests and considered them,
among other matters, in approving the Agreement and the transactions
contemplated thereby.
Severance Payments. The four executive officers of Heritage are parties to
employment agreements with Heritage that provide for severance payments upon the
occurrence of certain events, including termination of their respective
employment under such agreements following a change in control of Heritage. It
is currently anticipated by First American and Heritage that as a result of the
Merger, the four executive officers will become entitled to severance payments
under their current employment agreements with Heritage. In such event Messrs.
Kreis, Brumfield, Osborne and Richmond will be entitled to payments under their
employment agreements in the approximate amounts of, respectively, $485,000,
$330,000, $320,000, and $251,000. These payments would be subject to revision
prior to payment at the Effective Time to reflect both the then-current Internal
Revenue Service interest rates and changes, if any, to such other amounts.
Employment/Consulting Agreements. In order to maintain continuity of
Heritage's business operations after the Effective Time, FANB has entered into a
twelve-month combination employment/consulting agreement, commencing as of the
Effective Time, with each of Heritage's four executive officers, during which
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time each such person will serve as an employee of FANB on an exclusive and
full-time basis for three months (two months in the case of Mr. Kreis) and as a
consultant for the remaining months. Under the agreements, such officers will,
among other things, provide advice and counsel to FANB in connection with the
ongoing operations of Heritage Bank as one or more branches of FANB; assist in
the transition of Heritage Bank into one or more branches of FANB; assist in
maintaining and developing customer and employee relationships; and, if
requested by the chief executive officer of First American, provide counsel and
advice in connection with acquisitions or potential acquisitions to be made by
First American or FANB and serve as an advisory director of FANB. For their
services during the twelve-month term of their respective agreements, Messrs.
Kreis, Brumfield, Osborne and Richmond will receive approximately $130,000,
$84,000, $83,000, and $64,000, respectively. However, these agreements shall
become null and void if the individuals are employed by FANB as an employee at
will on a full-time basis for continuing service for longer than three months
(two months in the case of Mr. Kreis) after the Merger.
Stock Options. As a result of the Merger, the Heritage Options will be
converted into options to acquire shares of FAC Common Stock. For further
information, see "-- Terms of the Merger." All outstanding Heritage Options have
already vested in and are fully exercisable by the holders thereof. As of the
Record Date, Directors Anderson, Bracy, Craven, Fox, LaGuardia, Manahan, and
Patton had Heritage Options for 33,455 shares, 33,345 shares, 8,000 shares,
8,000 shares, 33,614 shares, 33,792 shares and 34,260 shares of HFB Common
Stock, respectively, at a weighted average exercise price of approximately
$12.93 per share. Also as of the Record Date, Messrs. Kreis, Brumfield, Osborne
and Richmond had Heritage Options to acquire 76,668 shares, 47,119 shares,
39,827 shares and 37,649 shares of HFB Common Stock, respectively, at a weighted
average exercise price of $7.76, $7.69, $8.75 and $7.70 per share, respectively.
Restricted Stock Awards. Heritage has previously issued shares of HFB
Common Stock pursuant to Heritage's Management Recognition Plan ("MRP") and
Heritage's Incentive Compensation Plan for Senior Officers (the "Officer
Incentive Plan") to Heritage's executive officers. These plans restrict the
transfer of such shares based upon vesting requirements contained in these plans
and also provide for the immediate vesting of all such shares upon a change of
control of Heritage. As a result of a change in control of Heritage because of
the Merger, at the Effective Time, Messrs. Kreis, Brumfield, Osborne and
Richmond would become immediately vested in 10,263 shares, 7,923 shares, 5,299
shares, and 6,249 shares of HFB Common Stock, respectively, issued under such
plans with an approximate aggregate value (assuming a price of $43 per share of
FAC Common Stock in the Merger) of $358,000, $277,000, $185,000, and $218,000,
respectively, and a combined value for all four officers of approximately $1.04
million.
Pension Plan. Heritage currently maintains a non-contributory defined
benefit pension plan for the benefit of employees of Heritage Bank and its
subsidiary (the "Heritage Pension Plan"). Effective at the Effective Time and in
connection with the Merger, Heritage and First American will merge the Heritage
Pension Plan with and into First American's non-contributory defined benefit
pension plan (the "First American Pension Plan"). Each participant in the
Heritage Pension Plan will be fully vested in the portion of his or her accrued
benefit under the First American Pension Plan that had accrued under the
Heritage Pension Plan as of the Effective Time. In addition to the forms of
benefit otherwise provided by the First American Pension Plan, each such
participant will be entitled to have the portion of his or her First American
Pension Plan benefit attributable to the Heritage Pension Plan (plus any
additional benefit accrued under the First American Pension Plan after the
Effective Time, with a present value not exceeding $3,500) distributed in the
form of a single lump sum payment as soon as practicable following his or her
termination of employment, subject to applicable election and spousal consent
procedures. The lump sum amount attributable to the Heritage Pension Plan will
be equal to the present value of such participant's accrued benefit under the
Heritage Pension Plan as of the Effective Time based upon applicable interest
rates determined by the Pension Benefit Guaranty Corporation as of July 1, 1995
for the purposes of determining the present value of lump sum distributions on
plan terminations plus interest on such present value at 4.75% per year for any
period from the Effective Time through the date of such termination of
employment. Assuming an Effective Time of November 1, 1995, Messrs. Kreis,
Brumfield, Osborne and Richmond would be eligible for lump sum cash
distributions from the First American Pension Plan of approximately $177,000,
$217,000, $84,000 and $53,000, respectively, if they were to terminate
employment on that date.
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Indemnification; Insurance. First American has agreed to indemnify, defend
and hold harmless each person who was, at the date of the Agreement or at any
time prior thereto, or who becomes prior to the Effective Time, an officer,
director or employee of Heritage or any of its subsidiaries (the "Indemnified
Parties") against all losses, claims, damages, costs, expenses (including
attorneys' fees), liabilities or judgments, or amounts that are paid in
settlement with the approval of First American (which approval shall not be
unreasonably withheld), of or in connection with any claim, action, suit,
proceeding or investigation in which an Indemnified Party is, or is threatened
to be made a party or witness, based in whole or in part on or arising in whole
or in part out of the fact that such person is or was a director, officer or
employee of Heritage, Heritage Bank or its subsidiary, whether pertaining to any
matter existing or occurring at or prior to the Effective Time and whether
asserted or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), in each case to the full extent Heritage would have been
permitted under Tennessee or Federal law in effect as of the date of the
Agreement or as amended applicable to a time prior to the Effective Time, and
its charter and bylaws or the charter and bylaws of Heritage Bank or its
subsidiary, as applicable, to indemnify such person. Such indemnification shall
be limited to cover claims only to the extent that those claims are not
otherwise covered under Heritage's directors' and officers' liability insurance
coverage or such coverage obtained by First American for the benefit of such
directors and officers.
From and after the Effective Time and for a period of six years thereafter,
First American has also agreed in the Agreement to use its best efforts to
maintain in effect directors' and officers' liability insurance coverage which
is at least as advantageous as to coverage and amounts as maintained by Heritage
immediately prior to the Effective Time with respect to claims arising from
facts or events which occurred before the Effective Time. However, First
American is not obligated under the Agreement to make annual premium payments
for such insurance to the extent such premiums exceed $81,000, which is 1.5
times the annual premiums paid by Heritage for such insurance as of the date of
the Agreement. See also "-- Certain Differences in Rights of
Shareholders -- Liability of Directors; Indemnification."
Board Membership. Pursuant to the Agreement, the Board of Directors of
First American in accordance with its Bylaws has elected Sam H. Anderson, Jr.,
the current Chairman of the Board of Directors of Heritage, to become a member
of First American's Board of Directors immediately after the Effective Time.
First American has also agreed to cause the other persons who serve as directors
of Heritage immediately prior to the Effective Time to be appointed as advisory
directors of FANB after the Effective Time upon such terms and conditions as may
be agreed upon by FANB and such persons. Service as an advisory director or
member of First American's Board will be considered "service" for purposes of
allowing Heritage's directors the continuing opportunity to exercise their
non-incentive stock options.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Set forth below is a discussion of the material federal income tax
consequences of the Merger to Heritage and to Heritage shareholders who are
citizens or residents of the United States. THE FOLLOWING DISCUSSION DOES NOT
PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS
RELEVANT TO A DECISION WHETHER TO VOTE IN FAVOR OF APPROVAL OF THE MERGER AND
THE TRANSACTIONS CONTEMPLATED THEREBY. FURTHER, THE DISCUSSION DOES NOT ADDRESS
THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A PARTICULAR HERITAGE SHAREHOLDER
SUBJECT TO SPECIAL TREATMENT UNDER CERTAIN FEDERAL INCOME TAX LAWS, SUCH AS
DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS,
NON-UNITED STATES PERSONS AND SHAREHOLDERS WHO ACQUIRED THEIR SHARES AS
COMPENSATION, NOR ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCALITY
OR FOREIGN JURISDICTION. THE DISCUSSION IS BASED UPON THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED (I.E., THE CODE), TREASURY REGULATIONS THEREUNDER AND
ADMINISTRATIVE RULINGS AND COURT DECISIONS AS OF THE DATE HEREOF. ALL OF THE
FOREGOING ARE SUBJECT TO CHANGE, AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING
VALIDITY OF THIS DISCUSSION.
HOLDERS OF HFB COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO
THE PARTICULAR EFFECT OF THEIR OWN PARTICULAR FACTS AND CIRCUM-
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STANCES ON THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THEM, AND ALSO
AS TO THE EFFECT OF ANY STATE, LOCAL, FOREIGN AND OTHER FEDERAL TAX LAWS.
Under current federal income tax law, and based upon assumptions and
representations to be made by Heritage and First American, and assuming that the
Merger is consummated in the manner set forth in the Agreement, it is
anticipated that the following federal income tax consequences will result: (i)
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code; (ii) a shareholder of Heritage will recognize no gain or loss for
federal income tax purposes to the extent FAC Common Stock is received in the
Merger in exchange for HFB Common Stock; (iii) the tax basis in the FAC Common
Stock received by a Heritage shareholder in the Merger will be the same as the
tax basis in the HFB Common Stock surrendered in exchange therefor; (iv) the
holding period for FAC Common Stock received in exchange for HFB Common Stock
will include the period during which the shareholder held the HFB Common Stock
surrendered in the exchange, provided that the HFB Common Stock was held as a
capital asset at the Effective Time; and (v) cash received by a Heritage
shareholder in lieu of a fractional share interest of FAC Common Stock will be
treated as having been received as a distribution in full payment in exchange
for the fractional share interest of FAC Common Stock that such Heritage
shareholder would otherwise be entitled to receive.
A condition to the consummation of the Merger is the receipt by First
American of an opinion of KPMG Peat Marwick LLP as to the qualification of the
Merger as a tax-free reorganization and the receipt by Heritage of an opinion of
Housley Goldberg Kantarian & Bronstein, P.C., as to the qualification of the
Merger as a tax-free reorganization with the consequences set forth above. Each
opinion will be subject to various assumptions and qualifications, including
that the Merger is consummated in the manner and in accordance with the terms of
the Agreement. Both opinions would be based entirely upon the Code, regulations
then in effect or proposed thereunder, then-current administrative rulings and
practice and judicial authority, all of which would be subject to change,
possibly with retroactive effect. Assuming that certain representations to be
made by Heritage and First American are true as of the Effective Time, KPMG Peat
Marwick LLP will render its respective tax opinion to First American and Housley
Goldberg Kantarian & Bronstein, P.C. will render its tax opinion to Heritage.
No ruling has been or will be requested from the IRS, including any ruling
as to federal income tax consequences of the Merger to First American, Heritage
or Heritage's shareholders. Unlike a ruling from the IRS, an opinion is not
binding on the IRS. There can be no assurance that the IRS will not take a
position contrary to the positions reflected in the tax opinions noted above or
that such opinions will be upheld by the courts if challenged.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
The present holders of HFB Common Stock own voting common stock in a
Tennessee corporation subject to regulatory oversight by the OTS. First American
also is a Tennessee corporation, and shareholders of Heritage who receive FAC
Common Stock will continue to be subject to the privileges and restrictions
provided by the Tennessee Business Corporation Act ("TBCA"). In addition, First
American is a bank holding company subject to the supervision of the Federal
Reserve Board under the BHCA, will be subject to regulatory oversight of the OTS
following the acquisition of Charter, and is subject to certain of the state
banking laws of each state in which its subsidiary banks are located.
Shareholders of Heritage who receive FAC Common Stock will also be subject to
the provisions of the charter and bylaws of First American, which differ in
certain respects from those contained in the charter and bylaws of Heritage.
Certain of the differences are summarized below. This summary contains a list of
the material differences but is not meant to be relied upon as an exhaustive
list or a detailed description of the provisions discussed and is qualified in
its entirety by reference to the First American charter and bylaws and
Heritage's charter and bylaws as well as the applicable statutes.
Authorized Common Stock. First American is authorized to issue 50,000,000
shares of FAC Common Stock, of which as of June 30, 1995, 25,426,355 shares were
outstanding, and 780,660 shares were reserved for
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issuance pursuant to First American's Dividend Reinvestment and Stock Purchase
Plan and various employee benefit plans. Heritage is authorized to issue
8,000,000 shares of HFB Common Stock, 3,245,117 shares of which were issued and
outstanding as of the Record Date.
Authorized Preferred Stock. As of the Record Date, First American was
authorized to issue up to 2,500,000 shares of preferred stock, no par value
("FAC Preferred Stock"), none of which were issued or are outstanding. The
rights and preferences evidenced by shares of FAC Common Stock are limited or
qualified by the rights and preferences evidenced by shares of FAC Preferred
Stock. Information with respect to the relative rights and preferences of FAC
Common Stock and FAC Preferred Stock is included in the description of FAC
Common Stock incorporated herein by reference. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." As provided in First
American's charter, the Board of Directors of First American is expressly vested
with the authority to amend such charter to establish and designate additional
series of FAC Preferred Stock and to fix and determine the terms thereof,
without the necessity of obtaining the approval of First American's
shareholders. Heritage is authorized to issue up to 2,000,000 shares of
Preferred Stock, $1.00 par value ("Heritage Preferred Stock"), none of which
have been issued or are outstanding. The Board of Directors of Heritage also is
expressly vested with the authority to amend Heritage's charter to establish and
designate series of Heritage Preferred Stock and to fix and define the terms
thereof, without the necessity of obtaining the approval of Heritage's
shareholders.
Issuance of Authorized Shares. The Boards of Directors of First American
and Heritage generally may authorize the issuance of authorized and unissued
shares of common stock and preferred stock upon a majority vote of the Board of
Directors present at a meeting at which a quorum is present. In the case of
Heritage, consideration for the issuance of shares must be paid in full before
their issuance. Heritage and First American each are subject to certain rules of
the National Association of Securities Dealers, Inc. applicable to companies
with stock traded on The Nasdaq Stock Market which require a vote of
shareholders for the approval of certain transactions, including without
limitation, mergers involving subsidiaries (which otherwise are not subject to
required approval by the respective shareholders of First American or Heritage)
including certain acquisitions of stock or assets of another company where the
issuance of shares of common stock could result in an increase in the number of
outstanding shares of 20% or more.
Number of Directors. Heritage's charter provides that the number of
directors, which shall be stated in Heritage's bylaws, shall not be more than
twelve. Heritage's Bylaws currently provide that the Board of Directors of
Heritage shall consist of eight directors and shall be divided into three
classes as nearly equal in number as possible. The members of each class shall
be elected for a term of three years and until their successors are elected and
qualified. Pursuant to Heritage's charter, no action shall be taken to decrease
or increase the number of directors unless at least two-thirds of the directors
then in office shall have concurred in such action.
First American's charter and bylaws provide that the Board of Directors of
First American shall consist of not less than nine nor more than twenty-seven
members, and shall be divided into three classes as nearly equal in number as
possible. As permitted in the bylaws, contingent upon the consummation of the
Merger effective as of July 20, 1995, the Board of Directors of First American
has increased the number of directors from 20 to 21. The members of each class
are elected for a term of three years and each director remains on the Board for
the term for which the director was elected and until his successor has been
elected and qualified.
Director Nominations. Under Heritage's charter, shareholders may nominate
candidates for the Heritage Board of Directors by delivering to the secretary of
Heritage a written nomination not less than 30 days nor more than 60 days prior
to an annual or special meeting at which directors will be elected; provided,
however, that if notice or public disclosure of such meeting is effected fewer
than 40 days before the meeting, shareholders must deliver a director nomination
notice in writing not later than the close of the 10th day following the day on
which notice of the meeting was mailed to shareholders.
First American's bylaws establish procedures for shareholder nominations of
persons for election to the Board of Directors. A shareholder nomination may be
made if written notice of such shareholder's intent to make such nomination has
been given not later than 210 days in advance of an annual meeting of
shareholders, or with respect to an election to be held at a special meeting of
the shareholders, the close of
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business on the tenth day following the date on which notice of such meeting is
first given to shareholders. The shareholder nomination notice must set forth
certain information about the nominee and any information that is required to be
disclosed in solicitations of proxies with respect to director nominees as
required pursuant to the Commission's Regulation 14A under the Exchange Act.
Such notice also must set forth certain information about the person submitting
the notice, including the name and address of the shareholder and the class and
number of shares of First American capital stock which are beneficially owned by
such shareholder. The Chairman of the meeting may refuse to acknowledge the
nomination of any person not made in compliance with the procedures set forth in
the bylaws.
Director Vacancies. Heritage's charter provides that any vacancy on the
Board of Directors may be filled by the affirmative vote of two-thirds of the
remaining directors. A director elected to fill a vacancy shall be elected to
serve until the next meeting of shareholders at which directors are elected.
First American's bylaws provide that, subject to the rights of the holders
of any series of FAC Preferred Stock then outstanding, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies on the Board of Directors shall be filled only by a majority
vote of the directors then in office, though less than a quorum, and a director
so chosen shall hold office for the unexpired term of his or her predecessor, or
if there is no such predecessor, until the next annual meeting of the
shareholders. In addition, no decrease in the number of authorized directors
constituting the entire Board of Directors of First American shall shorten the
term of any incumbent director.
Removal of Directors. Heritage's charter provides that any director may be
removed only for cause by a vote of the holders of at least 80% of the
outstanding shares then entitled to vote generally in the election of directors
cast at a meeting of Heritage's shareholders called for that purpose.
First American's bylaws provide that, at a meeting of shareholders called
expressly for the purpose of removing a director or directors, a director may be
removed only for cause (as defined by the laws of Tennessee) by a vote of 75% of
the shares entitled to vote at such meeting. If any voting group (other than
shares of FAC Common Stock) is entitled to elect one or more directors, the
provisions of the foregoing sentence do not apply in respect of the removal of
the director or directors so elected, and the vote of the holders of that voting
group and the rights of the holders of such shares shall be as set forth in the
charter.
Shareholder Proposals. Under Heritage's charter, in order for a
shareholder to make a proposal for any new business to be taken up at an annual
or special meeting, such shareholder must give written notice thereof to the
secretary of Heritage not fewer than 30 nor more than 60 days prior to any such
meeting; provided, however, that if notice or public disclosure of the meeting
is effected fewer than 40 days before the meeting, the notice of the shareholder
proposal shall be given to the secretary of Heritage not later than the close of
the 10th day following the day on which notice of the meeting was mailed to
Heritage's shareholders. However, federal law requires that a shareholder
proposal made in connection with an annual meeting and submitted for inclusion
in Heritage's proxy statement under the Commission's Regulation 14A under the
Exchange Act must be received at Heritage's principal executive offices not less
than 120 calendar days in advance of the date of Heritage's proxy statement sent
to shareholders in connection with the previous year's annual meeting of
shareholders, except in limited circumstances or in the case of a special
meeting of shareholders, in which case a "reasonable time" prior to the proxy
solicitation is required. The shareholder also must comply with requirements
concerning, among other things, minimum stock ownership and notice.
First American's bylaws provide that, in order for a proposal to be
submitted to a vote of the shareholders of First American at an annual meeting
of shareholders, such proposal must be made by a shareholder delivering written
notice to the secretary of First American not less than 50 days nor more than 75
days prior to the meeting; provided, however, that if less than 60 days' notice
of the date of the meeting is given, such written notice by the shareholder must
be so received not later than the tenth day after the day on which such notice
of the date of the meeting was given. The shareholder proposal notice must
comply with the Commission's Rule 14a-8 under the Exchange Act and must set
forth: (i) a brief description of the proposal and the reasons for its
submission; (ii) the name and address of the shareholder, as they appear on
First American's books; (iii) the classes and number of shares of First American
stock owned by the shareholder; and (iv) any financial interest of the
shareholder in such proposal. The Chairman of the meeting will, if the
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facts warrant, determine that any proposal was not properly submitted in
accordance with the provisions prescribed by the bylaws and the defective
proposal will not be submitted to the meeting for a vote of the shareholders.
Special and Annual Shareholders Meetings. Pursuant to the bylaws of First
American, written notices of the annual meeting of the shareholders of First
American are required to be mailed not less than 10 days nor more than 60 days
before the meeting.
Heritage's charter and bylaws provide that a special meeting of the
shareholders of Heritage may be called only by the Board of Directors or by a
duly authorized committee of the Board of Directors.
The bylaws of First American provide that a special meeting of shareholders
may be called at any time by the Board of Directors, the Chairman of the Board,
the President, the Vice Chairman of the Board or after the receipt of a written
demand for such a meeting from shareholders owning of record 10% or more of the
entire capital stock of First American issued and outstanding and entitled to
vote at such a meeting, together with a certified check for fifty thousand
dollars ($50,000) payable to First American to cover First American's expenses
in connection with such meeting. In any case in which shareholders shall have
properly called a special meeting of First American, the special meeting shall
be held no sooner than 75 and no later than 90 days after the receipt of the
written demand by the shareholders. Written notice of special meetings of the
shareholders called pursuant to the request of shareholders owning 10% or more
of the capital stock of First American shall be given by First American to each
shareholder of record entitled to vote at such meeting not less than 45 days nor
more than 60 days before the meeting. Written notice of other special meetings
of the shareholders shall be given not less than 10 days nor more than 60 days
before the meeting. First American's bylaws provide that, if a quorum exists,
approval of action on a matter (other than election of directors) by a voting
group entitled to vote thereon is received if the votes cast within the voting
group favoring the action exceeds the votes cast disapproving the action.
Amendment of Charter. An amendment to certain provisions in Heritage's
charter relating to anti-takeover protections must be approved by the
affirmative vote of 80% of the outstanding shares of capital stock of Heritage
entitled to vote generally in the election of directors cast at a meeting of the
shareholders called for the purpose of amending the charter. Notwithstanding the
foregoing, an amendment to Heritage's charter may be made by the affirmative
vote of the holders of a majority of Heritage's capital stock if such amendment
is first approved by a majority of directors who are "Continuing Directors," as
such term is defined in Heritage's charter. A "Continuing Director" is a
director who is unaffiliated with a "Related Person" and was a member of the
Board of Directors prior to the time that the Related Person became a Related
Person. As defined in Heritage's charter, a "Related Person" is an entity which,
together with its affiliates, beneficially owns 10% or more of the outstanding
shares of the common stock of Heritage. Other than in connection with the
foregoing, Heritage's charter may be amended in a manner consistent with the
TBCA, which provides for amendment by a majority of votes cast at a meeting of a
corporation's shareholders.
An amendment to First American's charter generally requires the
recommendation of the Board of Directors of First American and the approval of a
majority of all shares entitled to vote thereon. In accordance with the TBCA,
the Board of Directors of First American may condition its submission of the
proposed amendment on any basis. Notwithstanding the foregoing, the repeal or
amendment of certain articles of First American's charter, including Article X
which requires certain supermajority votes for certain business combinations and
Article XI which contains certain provisions relating to the number of
directors, filling of director vacancies and removal of directors, requires the
affirmative vote of 75% of the votes entitled to be cast by all holders of
voting stock of First American.
Amendment of Bylaws. Heritage's bylaws may be amended in a manner
consistent with the TBCA at any time by a majority vote of the Heritage Board of
Directors or by vote of at least 80% of the outstanding shares of capital stock
of Heritage entitled to vote generally in the election of directors cast by
shareholders of Heritage at a meeting of shareholders called for that purpose.
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An amendment to the bylaws of First American generally requires the
approval by either a majority vote of the Board of Directors of First American
or by the shareholders upon the affirmative vote of a majority of the votes
entitled to be cast by all holders of voting stock of First American.
Acquisition of Capital Stock. Heritage's charter contains a provision
prohibiting, for a period of five years from the effective date of the
completion of the conversion of Heritage Bank from mutual to stock form, any
person from acquiring or offering to acquire beneficial ownership of more than
10% of any class of equity security of Heritage. During the same five-year
period, the shares acquired by any person in violation of the foregoing
prohibition shall not be counted as shares entitled to vote, shall not be voted
by any person and shall not be counted as outstanding for purposes of
determining a quorum or the affirmative vote necessary to approve any matter
submitted to the shareholders for a vote. It is proposed herein that the
Heritage charter be amended to provide that the HFB Common Stock to be acquired
by First American pursuant to the Merger not be subject to the foregoing
provision. See "PROPOSAL II -- AMENDMENT TO THE HERITAGE CHARTER."
Heritage's charter also provides that, after the expiration of five years
after completion of the conversion of Heritage Bank from mutual to stock form,
any person who acquires more than 10% of any class of equity security of
Heritage without the prior approval of two-thirds vote of the Continuing
Directors shall have only the following voting rights: with respect to each vote
in excess of 10% of the voting power of the outstanding shares of voting stock
of Heritage which such holders would otherwise be entitled to cast, such holders
shall be entitled to cast only one-hundredth of a vote, and the aggregate voting
power of such holders shall be allocated proportionately among such holders.
First American's charter and bylaws contain no similar provisions. However,
both First American and Heritage are subject to the Tennessee Control Share
Acquisitions Act, which restricts the voting powers of shares acquired by a
party once a specific level of control is acquired, unless certain conditions
are met.
Antitakeover Provisions; Shareholder Rights Plan. The charter and bylaws
of First American, and certain provisions of the TBCA applicable to First
American, contain provisions that may have the effect of discouraging a change
in control that is not supported by First American's Board of Directors or of
making such a transaction more difficult to accomplish, even if such a
transaction is desired by a simple majority of First American's shareholders.
Heritage's charter and bylaws contain certain similar provisions.
First American has in place a Rights Agreement, dated December 14, 1988,
(the "Rights Agreement") under which holders of FAC Common Stock are issued
certain rights ("Rights") the effect of which may be to discourage coercive or
abusive takeover tactics. Pursuant to the Rights Agreement, the Board of
Directors of First American authorized and declared a distribution of one Right
for each outstanding share of FAC Common Stock to shareholders of record at the
close of business on December 27, 1988 (the "Rights Record Date") and for each
share of FAC Common Stock issued (including shares distributed from treasury) by
First American after the Rights Record Date but prior to the Distribution Date
(described below). Accordingly, a Right will attach to each share of FAC Common
Stock issued in the Merger. Each Right entitles the registered holder, subject
to the terms of the Rights Agreement, to purchase from First American one
one-hundredth of a share (a "Unit") of Series A Junior Preferred Stock (the
"Preferred Stock"), at a purchase price of $80.00 per Unit, subject to
adjustment. The Rights attach to all certificates representing shares of
outstanding FAC Common Stock, and no separate Rights Certificates have been
issued. The Rights will separate from the FAC Common Stock, and the Distribution
Date will occur, upon the earlier of: (i) 10 days following public announcement
(the date of the announcement being the "Stock Acquisition Date") that a person
or group of affiliated or associated persons (other than First American, any
subsidiary of First American or any employee benefit plan of First American or
such subsidiary) has acquired, obtained the right to acquire, or otherwise
obtained the beneficial ownership of 20% or more of the then outstanding shares
of the FAC Common Stock, or (ii) 10 days following the commencement of a tender
or exchange offer that would result in a person or group beneficially owning 20%
of more of the then outstanding shares of the FAC Common Stock. As soon as
practicable after the Distribution Date, Rights Certificates would be mailed to
holders of record of the FAC Common Stock as of the close of business on the
Distribution Date and, thereafter, the separate Rights Certificates alone would
represent the Rights.
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Until a Right is exercised, the holder thereof has no rights as a
shareholder of First American, including, among other things, the right to vote
or to receive dividends. Once the Right is exercised, however, each Unit of
Preferred Stock will have one vote, voting together with the FAC Common Stock.
Rights are not exercisable until the Distribution Date and will expire at
the close of business on December 27, 1998 (the "Final Expiration Date") unless
earlier redeemed by First American. They may be redeemed by First American at
its option, by action of a majority of the First American independent directors,
at any time prior to the earlier of (i) the close of business on the Final
Expiration Date or (ii) the close of business on the tenth day following the
Stock Acquisition Date. The Rights may only be redeemed in whole, not in part,
at a price of $.01 per Right, payable, at the election of such majority of
independent directors, in cash or shares of FAC Common Stock.
The Rights Agreement also provides shareholders certain Rights in the
following situations. In the event that (i) a person becomes the beneficial
owner of 20% or more of the then outstanding shares of FAC Common Stock or (ii)
during the pendency of any tender or exchange offer for FAC Common Stock or
prior to the expiration of 20 business days (or such later date as a majority of
the independent directors may determine) after the date such tender or exchange
offer is terminated or expires, a person becomes the beneficial owner of 10% or
more of the then outstanding shares of FAC Common Stock (unless the 10%
beneficial ownership results from certain circumstances specified in the Rights
Agreement), then in each case, each holder of a Right will thereafter have the
right to receive, upon exercise, FAC Common Stock having a value equal to two
times the exercise price of the Right.
In addition, in the event that, at any time following the Stock Acquisition
Date, (i) First American is acquired in a merger or other business combination
transition (other than a merger described in the preceding paragraph) and First
American is not the surviving corporation, (ii) any person effects a share
exchange or merger First American and all or part of the FAC Common Stock is
converted or exchanged for securities, cash or property of any other person, or
(iii) 50% or more of First American's assets or earning power is sold or
transferred, each holder of a Right (except Rights which previously have been
voided pursuant to the "Beneficial Ownership" provision of the Rights Agreement)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring person having a value equal to two times the exercise price of the
Right.
Certain Business Combinations. The First American charter provides that
the affirmative vote of not less than 75% of the outstanding shares of all
voting stock and the affirmative vote of a majority of the outstanding shares of
voting stock held by shareholders other than an Interested Shareholder, (as
defined below), is required for approval of any merger consolidation, the sale,
lease, exchange or other disposition of assets of First American with a value of
more than $1,000,000, the issuance of any securities of First American or any
subsidiary having an aggregate fair market value of $1,000,000, or the adoption
of a plan of liquidation or dissolution proposed by or on behalf of an
Interested Shareholder (as defined below), and any similar transaction, if any
such transaction involves any person or group of persons owning or controlling,
either directly or indirectly, 10% or more of the outstanding voting stock of
First American ("Interested Shareholder"). These voting requirements are not
applicable in such transactions (a) if approved by a majority of disinterested
directors or (b) if certain conditions set forth in First American's charter
relating to the fairness and form of the consideration have been met.
Heritage's charter provides that, unless previously approved by at least
two-thirds of the Continuing Directors (as defined above), the affirmative vote
of (i) the holders of 80% of the outstanding shares entitled to vote and (ii) a
majority of the outstanding shares not beneficially owned by a 10% holder of the
HFB Common Stock ("Related Person") shall be required in order to authorize any
merger, share exchange or consolidation of Heritage and a Related Person; any
sale, lease, exchange, transfer or other disposition of 25% or more of the
assets of Heritage or its subsidiary to a Related Person or of 25% or more of
the assets of a Related Person to Heritage; issuance of the securities of
Heritage or its subsidiary to a Related Person; the acquisition by Heritage or a
subsidiary of Heritage of any securities of a Related Person; any
reclassification of the common stock of Heritage; or any agreement providing for
any of the foregoing.
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Liability of Directors; Indemnification. The Agreement provides that, from
and after the Effective Time, First American will indemnify each person who is,
was, or prior to the Effective Time, becomes, an employee, officer or director
of Heritage or any of its subsidiaries against liabilities based or arising in
whole or in part out of the fact that such person is or was an employee, officer
or director of Heritage or any of its subsidiaries. In addition, for a period of
six years after the Effective Time, First American will use its best efforts to,
or to cause Heritage to, maintain in effect directors' and officers' liability
insurance which is at least as advantageous as to coverage and amounts as was
maintained by Heritage immediately prior to the Effective Time with respect to
claims arising from facts or events occurring prior to the Effective Time;
provided, however, that First American shall not be obligated to pay annual
premiums on such insurance to the extent such premiums exceed 1.5 times the
premiums paid as of the date hereof by Heritage for such insurance.
The charter of First American provides for the discretionary
indemnification of directors and officers in accordance with and to the full
extent permitted by law as in effect at the time of such indemnification. The
bylaws of First American provide that no indemnification of an officer or
director shall be made by First American (i) if a judgment or other final
adjudication adverse to such person establishes his liability for intentional
misconduct or knowing violation of the law or for unlawful distributions, (ii)
if a judgment or other final adjudication adverse to such person for breach of a
duty of loyalty to First American is based upon such person's gaining in fact
personal profit or advantage to which he was not entitled, (iii) in a proceeding
by or in the right of the corporation, for any amounts if such person is
adjudged liable to the corporation, or for any amounts paid to First American in
settlement of such a proceeding by such person, and (iv) in a proceeding by
First American directly for expenses, unless such proceeding is brought after a
change in control of First American. First American has purchased directors' and
officers' liability insurance covering certain liabilities which may be incurred
by the officers and directors of First American in connection with the
performance of their duties.
The charter of Heritage provides for the mandatory indemnification of
Heritage's directors in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative because he
is or was a director against liability incurred in such proceeding if: (1) he
conducted himself in good faith; (2) he reasonably believed, (a) in the case of
conduct in his official capacity with Heritage, that his conduct was in
Heritage's best interest, and (b) in all other cases, that his conduct was at
least not opposed to its best interests; and (3) in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful. No
indemnification is allowed where the liability of the director arises from an
action brought by or on behalf of Heritage or from a personal benefit improperly
received from Heritage. At its discretion, Heritage may also provide similar
indemnification to officers, employees or agents of Heritage who are not
directors. Heritage Bank has purchased directors' and officers' liability
insurance covering certain liabilities which may be incurred by the directors
and officers of Heritage Bank in connection with the performance of their
duties.
RESALE OF FAC COMMON STOCK
The shares of FAC Common Stock issuable to shareholders of Heritage upon
consummation of the Merger have been registered under the Securities Act. It is
a condition to consummation of the Merger that such shares will be approved for
trading on The Nasdaq Stock Market. Such shares may be traded freely by those
shareholders not deemed to be affiliates of Heritage as that term is defined
under the Securities Act. The term "affiliate" generally means each person who,
or is a member of a group that, controls, is controlled by or is under common
control with, Heritage, and for purposes hereof could be deemed to include all
executive officers, directors and 10% shareholders of Heritage.
FAC Common Stock received and beneficially owned by those shareholders who
are deemed to be affiliates of Heritage may be resold without registration as
provided by Rule 145, or as otherwise permitted, under the Securities Act. Such
affiliates, provided they are not affiliates of First American, may publicly
resell FAC Common Stock received by them in the Merger subject to certain
limitations, principally as to the number of shares and the manner of sale,
during the two years following the Effective Time. After the two-year period,
such affiliates may resell their shares without restriction. In addition,
assuming (as is currently expected) that First American will account for the
Merger using the pooling-of-interest method, shares of
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FAC Common Stock issued to affiliates of Heritage in the Merger will not be
transferable during the 30-day period prior to the Effective Time and continuing
until financial results covering at least 30 days of post-Merger combined
operations of First American and Heritage have been published.
The Agreement provides that Heritage shall use its reasonable efforts to
cause each person identified by Heritage as an affiliate of Heritage to deliver
to First American, prior to the Meeting, a written agreement providing that such
person will not dispose of HFB Common Stock, or any FAC Common Stock received in
the Merger, except in compliance with the Securities Act and the rules and
regulations promulgated thereunder.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
First American has a Dividend Reinvestment and Stock Purchase Plan which
provides, for those FAC shareholders of record who elect to participate, that
dividends on FAC Common Stock may be invested in additional shares of FAC Common
Stock at a five percent (5%) discount from the then-current market price without
payment of brokerage commissions, fees or service charges. The plan also permits
participants to invest voluntary cash payments, within certain dollar
limitations, in additional shares of FAC Common Stock at the then-current market
price. It is anticipated that, after the Effective Time, First American will
continue to offer such a Dividend Reinvestment and Stock Purchase Plan and
shareholders of Heritage who receive FAC Common Stock in the Merger will have
the right to participate therein if they are shareholders of record.
EXPENSES
All expenses incurred in connection with the Agreement and the transactions
contemplated thereby are to be paid by the party incurring such expenses, except
that First American and Heritage shall bear equally all expenses associated with
the printing and mailing of the Registration Statement and this Prospectus/Proxy
Statement.
If First American terminates the Agreement by reason of the failure of
Heritage to meet the conditions contained in the Agreement relating to the
accuracy of Heritage's representations and warranties or the performance of
Heritage's obligations under the Agreement, due to Heritage's knowing or
intentional misrepresentation or knowing and intentional breach of warranty or
breach of any covenant or agreement, and Heritage is not obligated to pay the
Fee either at such time or in the future, then Heritage shall pay (but not as
liquidated damages) to First American all reasonable out-of-pocket expenses and
fees (including, without limitation, fees and expenses payable to all investment
banking firms and their respective agents and counsel, and all fees of counsel,
accountants, experts and consultants to First American) actually incurred by
First American or on its behalf in connection with the Merger and all
transactions contemplated by the Agreement, but in no event more than $500,000.
If Heritage terminates the Agreement by reason of the failure of First
American to meet the conditions contained in the Agreement relating to the
accuracy of First American's representations and warranties or the performance
of First American's obligations, due to First American's knowing and intentional
misrepresentation or knowing and intentional breach of warranty or breach of any
covenant or agreement, First American is obligated to pay (but not as liquidated
damages) to Heritage all reasonable out-of-pocket expenses and fees (including,
without limitation, fees and expenses payable to all investment banking firms
and their respective agents and counsel, and all fees of counsel, accountants,
experts and consultants to Heritage) actually incurred by Heritage or on its
behalf in connection with the Merger and all transactions contemplated by the
Agreement, but in no event more than $500,000.
ACCOUNTING TREATMENT
First American anticipates that it will account for the Merger as a pooling
of interests. Under the pooling-of-interests method of accounting, the
historical basis of the assets and liabilities of First American and Heritage
will be combined and carried forward at their previously recorded amounts.
Revenue and expenses of First American and Heritage will be combined at
historically recorded amounts. In order for the pooling-of-interests method to
apply, among other things, affiliates of Heritage cannot reduce their holdings
of HFB
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Common Stock or FAC Common Stock received in the Merger, as the case may be, for
a period beginning 30 days prior to the Effective Time and ending upon the
publication of at least 30 days of post-Merger combined operations of First
American and Heritage. FAC expects to receive an opinion of KPMG Peat Marwick
LLP prior to consummation of the Merger to the effect that the Merger will
properly be accounted for as a pooling of interests, although the receipt of
such an opinion is not a condition precedent to consummation of the Merger.
NO DISSENTERS' RIGHTS
The TBCA provides that the holders of shares of HFB Common Stock will not
have dissenters' rights in connection with the Merger and the transactions
contemplated by the Agreement. Therefore, if the Agreement is approved by the
affirmative vote of a majority of the outstanding shares of HFB Common Stock,
and all other conditions to consummation of the Merger are satisfied, all
shareholders of HFB will receive the consideration provided for in the Agreement
in exchange for their shares of HFB Common Stock.
NASDAQ AUTHORIZATION
Under the Agreement, it is a condition to consummation of the Merger that
all shares of FAC Common Stock to be issued in the Merger and to be reserved for
issuance upon exercise of Heritage Options shall have been authorized for
trading on The Nasdaq Stock Market prior to the Effective Time.
CERTAIN REGULATORY CONSIDERATIONS
First American and its subsidiaries are subject to extensive regulation
under state and federal statutes and regulations. The discussion in this
section, which summarizes certain of such statutes and regulations, does not
purport to be complete and is qualified in its entirety by reference to such
statutes and regulations, and in certain circumstances, proposed regulations.
GENERAL
First American is a bank holding company subject to the supervision of the
Federal Reserve Board under the BHCA. After First American's acquisition of
Charter, Charter will be a separate savings association subsidiary of First
American and, as a result, First American also will be a savings and loan
holding company registered under the HOLA, subject to the supervision and
regulation of the OTS. FANB, FANBKY and FATC are national banks and, as such,
are subject to the supervision of, and are regularly examined by, the OCC. Each
of First American's banking subsidiaries is also insured by, and subject to the
regulations of, the Federal Deposit Insurance Corporation (the "FDIC"), and is
also affected significantly by the actions of the Federal Reserve Board by
virtue of its role in regulating money supply and credit availability, as well
as by the U.S. economy in general. Areas subject to regulation by federal
authorities include loan loss reserves, investments, loans, mergers, issuance of
securities, payment of dividends, establishment and closing of branches, product
offering and other aspects of operations.
First American's non-banking subsidiaries are subject to the supervision of
the Federal Reserve Board, and other non-banking subsidiaries may be subject to
the supervision of other regulatory agencies including the Commission, the
National Association of Securities Dealers, Inc. and state securities
regulators.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or is in default.
For example, under Federal Reserve Board policy, First American is expected to
serve as a source of financial and managerial strength to each of its subsidiary
banks and to commit resources to support each of them. This support may be
required at times when First American would not otherwise be inclined to provide
it.
Under the "cross guarantee" provisions of the Federal Deposit Insurance Act
("FDIA"), any FDIC-insured subsidiary of First American can be held liable for
any loss incurred by, or reasonably expected to be
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incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured subsidiary or (ii) any assistance provided by the FDIC
to any commonly controlled FDIC-insured subsidiary "in danger of default."
"Default" is defined generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") or both.
The FDIC's claim for damages is superior to claims of shareholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any of the bank subsidiaries of First American.
CAPITAL
The Federal Reserve Board and the OCC have adopted substantially similar
risk-based capital and leverage guidelines applicable to U.S. banking
organizations. The minimum guideline for the ratio of total capital ("Total
Capital") to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is 8.00%. At least half of the
Total Capital must be composed of common stockholders' equity, and to the extent
applicable, minority interests in the equity accounts of consolidated
subsidiaries, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less disallowed intangibles ("Tier 1
Capital"). The remainder, which is "Tier 2 Capital", may consist of subordinated
debt (or certain other qualifying debt issued prior to March 12, 1988), other
preferred stock and a limited amount of loan loss reserves. In addition, each of
the federal bank regulatory agencies has established minimum leverage capital
ratio guidelines. These guidelines provide for a minimum Tier 1 leverage capital
ratio (Tier 1 Capital to total assets, less disallowed intangibles) of 3% for
banks and bank holding companies that meet certain specified criteria, including
that such financial institutions have the highest regulatory examination rating
and are not contemplating significant growth or expansion. All other
institutions are expected to maintain a leverage ratio of at least 100 to 200
basis points above the minimum. At June 30, 1995, First American's Tier 1
risk-based capital and total risk-based capital ratios were 9.98% and 12.04%,
respectively, and its Tier 1 leverage capital ratio at June 30, 1995 was 7.93%,
each of which exceeded the minimum ratios established by the Federal Reserve
Board. On a pro forma basis assuming consummation of the Merger and the proposed
merger with Charter as of June 30, 1995, First American's Tier 1 risk-based
capital and total risk-based capital ratios would be 9.65% and 11.64%, and its
Tier 1 leverage capital ratio would be 7.27%, also in excess of Federal Reserve
Board minimums.
At June 30, 1995, FANB's Tier 1 risk-based, total risk-based and Tier 1
leverage capital ratios were 9.64%, 10.90% and 7.70%, respectively, and FANBKY's
were 17.59%, 18.55% and 10.24%, respectively, all of which exceeded the minimum
ratios established by the OCC.
Heritage Bank is subject to capital requirements adopted by the OTS, which
are similar but not identical to those issued by the Federal Reserve Board and
the OCC. Under the OTS' capital guidelines, a savings association is required to
maintain tangible capital of at least 1.5% of tangible assets, core (leverage)
capital of at least 3% of the association's adjusted total assets and risk-based
capital of at least 8% of risk-weighted assets. At June 30, 1995, Heritage's
tangible ratio was 9.77%, its core (leverage) capital ratio was 9.85%, Tier 1
capital ratio was 23.97% of risk-weighted assets and its total risk-based
capital ratio was 25.00%.
As a result of a federal law enacted in 1991 that required each federal
banking agency to revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk, concentration of credit
risk and the risks of nontraditional activities, each of the federal banking
agencies has revised the
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<PAGE> 62
risk-based capital guidelines described above to take account of concentration
of credit risk and risk of nontraditional activities. In addition, the Federal
Reserve Board, the FDIC and the OCC recently adopted a new rule that amends,
effective September 1, 1995, the capital standards to include explicitly a
bank's exposure to declines in the economic value of its capital due to changes
in interest rates as a factor to be considered in evaluating a bank's capital
adequacy. This rule does not codify a measurement framework for assessing the
level of a bank's interest rate exposure. Such agencies have issued for comment
a joint policy statement that describes the process to be used to measure and
assess the exposure of a bank's net economic value to changes in interest rates.
These agencies have indicated that in the second step of this regulation process
they intend to issue a proposed rule that would propose to establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate exposure. The agencies intend to implement the second
step after the agencies and the banking industry have had more experience with
the proposed supervisory and measurement process. Neither First American nor
Heritage believes that these recent proposals and revisions to the capital
guidelines will materially impact its operations.
ACQUISITION AND EXPANSION
The BHCA requires any bank holding company to obtain the prior approval of
the Federal Reserve Board before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank,
if, after acquiring such shares, it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank.
Recently, Congress enacted an interstate banking law establishing both
nationwide and statewide concentration limits. Effective September 29, 1995,
federal nationwide concentration limits prohibit a bank holding company which
controls more than 10% of the total amount of deposits of insured depository
institutions in the United States from further acquisitions; federal statewide
concentration limits prohibit an acquisition if, upon consummation of the
transaction, a bank holding company would control 30% or more of the total
amount of deposits of insured depository institutions in the state which is the
home state of the bank or bank holding company being acquired. First American
estimates that, as of March 31, 1995, it held approximately 10% of all such
deposits in Tennessee and 0.4% of all such deposits in Kentucky. Although
individual state deposit caps are not superseded by the legislation, the
Tennessee General Assembly, in its 1995 Session, adopted conforming legislation
which adopts the deposit caps enacted by Congress. The legislation also repeals,
as of September 29, 1995, the Tennessee laws previously applicable to
acquisitions by bank holding companies, and reenacts in modified form one of
these laws, the Tennessee Bank Structure Act (the "TBSA"). Under the TBSA, as
reenacted, no bank holding company, whether a Tennessee or out-of-state company,
may acquire any bank in Tennessee that has been in operation less than five
years or organize a new bank in Tennessee, except in the case of certain interim
bank mergers and acquisitions of banks in financial difficulty. Under the
Tennessee laws pertaining to bank mergers, which (with the exception of a merger
between a Tennessee bank and an out-of-state bank) were not directly affected by
the new legislation, banks in separate counties in Tennessee which have been in
operation at least five years may merge. Banks with principal offices in the
same county may merge, even if one or both have been in operation less than five
years. The effect of these provisions is that First American in the future may
acquire banks in Tennessee which have been in operation for over five years but
may not form or acquire a new bank in any Tennessee county other than Davidson
County, in which the main office of First American National Bank is located.
The BHCA currently prohibits the Federal Reserve Board from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. However, under the recently enacted federal
interstate banking law described above, the restriction on interstate
acquisitions will be abolished effective September 1995, and thereafter, bank
holding companies from any state will be able to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
the nationwide and state imposed concentration limits described above. Banks
also will be able to branch across state lines by acquisition, merger or de
novo, effective June 1, 1997 (unless state law would permit such interstate
branching at an earlier date), provided certain conditions are met, including
that applicable state law
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<PAGE> 63
must expressly permit such de novo interstate branching. Tennessee has enacted
an interstate branching law in response to the federal law which will become
effective June 1, 1997.
BANK REGULATION
Payment of Dividends. First American is a legal entity separate and
distinct from its subsidiary banks and its nonbank subsidiaries. First
American's revenues (on a parent company only basis) result, in part, from
dividends paid to First American by its subsidiaries. The right of First
American, and consequently the right of creditors and shareholders of First
American, to participate in any distribution of the assets or earnings of any
subsidiary through the payment of such dividends or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary (including
depositors, in the case of banking subsidiaries), except to the extent that
claims of First American in its capacity as a creditor may be recognized.
There are statutory and regulatory restrictions applicable to the payment
of dividends by subsidiary banks to First American. National banks are required
to obtain the prior approval of the OCC for the payment of dividends if the
total of all dividends declared in any year exceeds the total of (i) such bank's
net profits (as defined by the OCC) for that year plus (ii) the retained net
profits (as defined by the OCC) for the preceding two years, less any required
transfers to surplus. In addition, national banks may only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed statutory bad debts. In accordance with these regulations, at June 30,
1995, FANB had approximately $168.7 million, FANBKY had approximately $1.7
million and FATC had approximately $750,000 available for distribution as
dividends to First American without the prior approval of the OCC.
First American is further restricted by the terms of its $50,000,000
revolving credit facility, for which Chemical Bank serves as agent. Under the
terms of this facility, approximately $94.6 million of First American's retained
earnings were available to pay dividends on June 30, 1995.
In addition to the foregoing, under the FDIA, insured depository
institutions, such as FANB, FANBKY, FATC and Heritage Bank, are prohibited from
making capital distributions, including the payment of dividends, if, after
making such distribution, the institutions would become "undercapitalized" (as
such term is used in the statute). Based on the current financial condition of
these institutions, First American does not expect that this provision will have
any impact on its ability to obtain dividends from its bank subsidiaries.
FDIC Insurance. First American's subsidiary banks and Heritage Bank are
subject to FDIC deposit insurance assessments. The FDIC has promulgated
risk-based deposit insurance assessment regulations which became effective in
1993. Under these regulations, insured institutions are assigned assessment risk
classifications based upon capital levels and supervisory evaluations. The
annual assessment rates for insured institutions for semi-annual periods in 1995
currently range from 0.23% to 0.31%, depending on the institution's assessment
risk classification. Under these regulations, both FANB's and FANBKY's assigned
assessment rate for the first semi-annual period of 1995 was 0.23%. Heritage
Bank's assigned assessment rate for the same period was also 0.23%. With the
exception of deposits attributable to the acquisition of First Fidelity Bank,
FSB, a SAIF insured institution acquired by FANB in 1994 for approximately $6.5
million, FANB pays its premiums at the BIF rate, and, as a savings association
and a former savings and loan association, respectively, each of Heritage Bank
and FANBKY pays its premiums at the SAIF rate. Thus, First American's deposit
insurance premium expenses may be affected by changes in both the BIF and the
SAIF assessment rate. On August 8, 1995, the FDIC voted to reduce the assessment
rates paid by most banks and to keep existing assessment rates intact for
savings associations. Under the new rate structure, the best-rated banks will
pay assessments at 0.04% of insured deposits, while the weakest ones would
continue to pay at the 0.31% rate. The new rate structure will apply from the
first day of the month after which the BIF was recapitalized. Such
recapitalization was confirmed by the FDIC in September 1995. BIF members
(including FANB) that have overpaid their assessments based on the newly adopted
premium rate can expect to receive a refund of any overpayment plus interest.
Current federal law provides that the SAIF assessment rate may not be less than
0.18% from January 1, 1994 through December 31, 1997. After December 31, 1997,
the SAIF assessment rate must be a rate determined by the FDIC to be appropriate
to increase the SAIF's reserve ratio to 1.25% of insured deposits or such higher
percentage as the FDIC determines to be appropriate, but the
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<PAGE> 64
assessment rate may not be less than 0.15%. In order to mitigate the potential
effects of a BIF/SAIF premium disparity, Congress recently proposed legislation
that would, among other things, recapitalize the SAIF by imposing a special
one-time assessment of between 85-90 basis points on SAIF deposits. The proposed
legislation also contemplates the merger of the BIF and the SAIF into one
insurance fund after the SAIF is recapitalized. It cannot be predicted whether
or when this or any other legislation addressing recapitalization of the SAIF
will be enacted. If a one-time assessment of 85 to 90 basis points had been
assessed at March 31, 1995 (the deposit base that would be subject to such
assessment based on current proposals before Congress), Charter would have been
required to pay between $4.43 million and $4.69 million and Heritage would have
been required to pay between $3.75 and $3.97 million.
Community Reinvestment Act. First American's subsidiary banks, as well as
Heritage Bank, also are subject to the requirements of the Community
Reinvestment Act of 1976 ("CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process, as well as when an institution applies to undertake a
merger, acquisition or to open a branch facility. Under recently enacted
revisions to the CRA regulations, the current CRA assessment system will be
replaced with a new evaluation system that would rate institutions based on
their actual performance (rather than efforts) in meeting community credit
needs. Under these new regulations, each institution would be evaluated based on
the degree to which it is providing loans (the lending test), branches and other
services (the service test) and investments (the investment test) to low- and
moderate-income areas in the communities it serves, based on the communities'
demographics, characteristics and needs, the institution's capacity, product
offerings and business strategy. Each depository institution would have to
report to its federal supervisory agency and make available to the public data
on the geographic distribution of its loan applications, denial, originations
and purchases. Institutions would continue to receive one of four composite
ratings: Outstanding, Satisfactory, Needs to Improve or Substantial
Noncompliance. The new rules are scheduled to go into effect in stages from July
1995 to January 1997. First American does not believe that the new CRA
regulations will substantially change its programs and policies designed to meet
the needs of its communities.
Certain Transactions with Affiliates. Provisions of the Federal Reserve
Act impose restrictions on the type, quantity and quality of transactions
between affiliates of an insured bank (including FAC and its nonbank
subsidiaries) and the insured bank itself. Under these restrictions, an insured
bank (or savings institution) and its subsidiaries are, among other things,
limited in engaging in "covered transactions" with any one affiliate to no more
than 10% of the capital stock and surplus of the insured bank (or savings
institution); and with all affiliates in the aggregate, to no more than 20% of
the capital stock and surplus of the bank (or savings institution). "Covered
transactions" are defined by statute to include a loan or extension of credit,
as well as a purchase of securities issued by an affiliate, a purchase of assets
(unless otherwise exempted by the Federal Reserve Board), the acceptance of
securities issued by the affiliate as collateral for a loan and the issuance of
a guarantee, acceptance, or letter of credit on behalf of an affiliate. In
addition, any transaction with an affiliate, including loans, contractual
arrangements and purchases, must be on terms and conditions that are
substantially the same or at least as favorable to the bank (or savings
institution) as those prevailing at the time for comparable transactions with
non-affiliated companies. The purpose of these restrictions is to prevent the
misuse of the resources of the bank by its uninsured affiliates. An exception to
the quantitative restrictions is provided for transactions between two insured
banks or savings institutions that are within the same holding company structure
where the holding company owns 80% or more of each institution.
Transactions with Insiders. Any loans made by First American's bank
subsidiaries or by Heritage Bank to their respective executive officers,
directors or 10% shareholders, as well as entities such persons control, are
required to be made on terms substantially the same as those offered to
unaffiliated individuals and to not involve more than the normal risk of
repayment, and are subject to individual and aggregate limits depending on the
person involved. Further, provisions of the BHCA prohibit a bank holding company
and its subsidiaries from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of
services.
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Other Safety and Soundness Regulations. The federal banking agencies have
broad powers under current federal law to take prompt corrective action to
resolve problems of insured depository institutions. The extent of these powers
depends upon whether the institutions in question are categorized as "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," as such terms are defined
under uniform regulations defining such capital levels issued by each of the
federal banking agencies.
In addition, FDIC regulations require that management report on its
institution's responsibility for preparing financial statements, and
establishing and maintaining an internal control structure and procedures for
financial reporting and compliance with designated laws and regulations
concerning safety and soundness; and that independent auditors attest to and
report separately on assertions in management's reports concerning the
effectiveness of the internal control structure over financial reporting and
compliance with such laws and regulations, using FDIC-approved audit procedures.
The FDIA also requires each of the federal banking agencies to develop
regulations addressing certain safety and soundness standards for insured
depository institutions, including operational and managerial standards, asset
quality, earnings and stock valuation standards, as well as compensation
standards (but not dollar levels of compensation). Each of the federal banking
agencies has issued regulations and interagency guidelines implementing these
standards. The regulations and guidelines set forth general operational and
managerial standards in the areas of internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Recently proposed
rules would add asset quality and earnings standards to the guidelines. The
current rules contemplate that each federal agency would determine compliance
with these standards through the examination process, and if necessary to
correct weaknesses, require an institution to file a written safety and
soundness compliance plan.
Qualified Thrift Lender Test. Under the HOLA, savings institutions, such
as Heritage Bank, are required to maintain a minimum of 65% of their total
portfolio assets (as defined in the statute) in certain investments ("Qualified
Thrift Investments") on a monthly average basis in 9 out of every 12 months in
order to remain a Qualified Thrift Lender. Qualified Thrift Investments
generally consist of (i) loans that were made to purchase, refinance, construct,
improve or repair domestic residential or manufactured housing, (ii) home equity
loans, (iii) securities backed by or representing an interest in mortgages on
domestic residential or manufactured housing, (iv) obligations issued by the
federal deposit insurance agencies, and (v) shares of stock issued by any
Federal Home Loan Bank. Subject to a 200% of assets limitation, Qualified Thrift
Investments also include consumer loans, investments in certain subsidiaries,
loans for the purchase or construction of schools, churches, nursing homes and
hospitals, 200% of investments in loans for low- to moderate-income housing and
certain other community oriented investments, and shares of stock issued by the
Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA").
A savings institution that does not become or remain a Qualified Thrift
Lender must either convert to a bank charter or comply with certain restrictions
on its activities, branching powers and ability to obtain advances from the
Federal Home Loan Bank. As of June 30, 1995, Heritage Bank maintained 84.84% of
its portfolio assets in Qualified Thrift Investments, which was in excess of the
65% minimum under the Qualified Thrift Lender Test.
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PROPOSAL II -- AMENDMENT TO THE HERITAGE CHARTER
Article XIV of the Charter of Heritage provides, in part, that "For a
period of five years from the effective date of the completion of the conversion
of [Heritage Bank] from mutual to stock form . . . , no person shall directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of equity security of [Heritage]." In its current form, Article XIV
would prohibit First American from offering to acquire or acquiring more than
10% of the outstanding shares of HFB Common Stock. Management of Heritage
believes that it is necessary either to amend or repeal Article XIV in order to
consummate the proposed Merger. Accordingly, if this Proposal II does not
receive the required shareholder approval, Heritage would be unable to
consummate the Merger even if shareholders approve the Merger and the Agreement.
See "PROPOSAL I -- THE MERGER."
Accordingly, in order to facilitate the Merger, the Board of Directors of
Heritage hereby proposes and submits for stockholder approval an amendment to
Paragraph (A) of Article XIV of the Heritage Charter to add a clause to the end
of the first sentence thereof, so that, as so amended, the first sentence would
read as follows:
"For a period of five years from the effective date of the
completion of the conversion of Heritage Federal Bank for
Savings from mutual to stock form (which entity shall become a
wholly-owned subsidiary of the Corporation upon such
conversion), no person shall directly or indirectly offer to
acquire or acquire the beneficial ownership of more than 10% of
any class of equity security of the Corporation; PROVIDED THAT
THE FOREGOING SHALL NOT APPLY TO AND SHALL NOT PROHIBIT AN
ACQUISITION OF THE CAPITAL STOCK OF THE CORPORATION BY FIRST
AMERICAN CORPORATION ("FIRST AMERICAN") PURSUANT TO THE
AGREEMENT AND PLAN OF MERGER DATED AS OF FEBRUARY 21, 1995
BETWEEN FIRST AMERICAN AND THE CORPORATION, AS SUCH AGREEMENT
HAS BEEN AMENDED AS OF MAY 17, 1995 AND AS SUCH AGREEMENT MAY
THEREAFTER BE AMENDED." (Emphasis added to show additional
language added by amendment).
Article XXI of the Charter of Heritage provides that the affirmative vote
of the holders of at least 80% of the outstanding shares of HFB Common Stock is
required to amend or repeal Article XIV (among other Articles) unless at least
two-thirds of the Continuing Directors of Heritage (as defined in Article XV of
the Charter) have approved such amendment or repeal prior to its submission to
the shareholders of Heritage for their vote. The Board of Directors of Heritage,
all of whom are Continuing Directors, have unanimously approved the foregoing
proposed amendment to the Charter of Heritage. Accordingly, only the affirmative
vote of the holders of a majority of the outstanding shares of HFB Common Stock
is required to adopt the proposed amendment to the Charter.
THE BOARD OF DIRECTORS OF HERITAGE BELIEVES THAT THE PROPOSED AMENDMENT TO
THE CHARTER OF HERITAGE IS IN THE BEST INTERESTS OF THE SHAREHOLDERS OF HERITAGE
AND THEREFORE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
PROPOSED AMENDMENT.
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PROPOSAL III -- ADJOURNMENT OF THE MEETING
Approval of the Agreement requires the affirmative vote of at least a
majority of the votes entitled to be cast by the holders of HFB Common Stock. In
the event there is an insufficient number of shares present in person or by
proxy at the Meeting to approve the Agreement, the Board of Directors intends to
adjourn the Meeting to a later date. The place and date to which the Meeting
would be adjourned would be announced at the Meeting. Under Heritage's Bylaws,
unless the adjourned meeting is held 30 days or more after the date of the
Meeting, it shall not be necessary to give any notice of the time and place of
the adjourned meeting other than by an announcement at the Meeting.
The effect of any such adjournment would be to permit Heritage to solicit
additional proxies for approval of the Agreement. While such an adjournment
would not invalidate any proxies previously filed, including those filed by
shareholders voting against the Agreement, it would give Heritage the
opportunity to solicit additional proxies in favor of the Agreement. Approval of
the adjournment requires the affirmative vote of the holders of a majority of
the shares of HFB Common Stock present in person or by proxy at the Meeting.
THE BOARD OF DIRECTORS OF HERITAGE RECOMMENDS A VOTE "FOR" APPROVAL OF THE
ADJOURNMENT UNDER THE CIRCUMSTANCES DESCRIBED HEREIN.
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INFORMATION ABOUT HERITAGE FEDERAL BANCSHARES, INC.
SELECTED FINANCIAL AND OTHER DATA FOR HERITAGE
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION AT JUNE 30,
Assets...................................... $528,169 $515,888 $519,459 $540,478 $506,706
Cash and investment securities(1)........... 128,719 95,702 113,251 117,638 113,138
Loans receivable, net(2).................... 297,533 308,700 327,095 357,915 363,979
Mortgage-backed securities.................. 83,995 92,558 60,089 41,174 4,107
Excess cost over fair value of net assets
acquired and other intangibles, net(3).... 780 1,270 1,863 3,231 4,132
Deposits.................................... 449,318 450,819 459,993 496,929 484,395
Other borrowed funds(4)..................... 18,122 10,468 10,887 1,259 89
Obligations under capital leases............ 119 120 221 322 423
Stockholders' equity(5)..................... 53,774 48,503 41,853 35,578 16,337
OPERATING RESULTS FOR YEAR ENDED JUNE 30,
Interest income............................. $ 35,979 $ 35,550 $ 39,066 $ 44,291 $ 46,932
Interest expense............................ 17,798 16,487 19,305 27,782 33,412
Provision for loan losses................... 82 487 595 749 1,496
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................... 18,099 18,576 19,166 15,760 12,024
Gain (loss) on sales of interest-earning
assets.................................... -- -- -- 364 35
Gain on sale of branches.................... -- -- 1,000 -- --
Other noninterest income.................... 2,755 2,484 2,110 2,270 2,386
Amortization of excess of cost over fair
value of net assets acquired(6)........... 423 525 1,302 853 990
Other noninterest expense................... 11,818 10,829 11,510 10,820 10,099
-------- -------- -------- -------- --------
Income before income tax expense............ 8,613 9,706 9,464 6,721 3,356
Income tax expense(7)....................... 3,146 3,502 3,952 2,540 2,244
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle...................... 5,467 6,204 5,512 4,181 1,112
Cumulative effect at July 1, 1993 of change
in accounting for income taxes(8)......... -- 764 -- -- --
-------- -------- -------- -------- --------
Net income.................................. $ 5,467 $ 6,968 $ 5,512 $ 4,181 $ 1,112
======== ======== ======== ======== ========
Net income per share(9)..................... $ 1.58 $ 2.07 $ 1.67 $ 1.36 N/A
Dividends per share......................... $ .38 $ .25 -- -- --
Average common shares and common stock
equivalents outstanding(9)................ 3,464 3,372 3,309 3,071 --
OTHER DATA AS OF AND FOR YEAR ENDED JUNE 30,
Average interest rate spread................ 3.32% 3.54% 3.79% 3.23% 2.88%
Net yield on average interest-earning
assets.................................... 3.67% 3.79% 4.03% 3.36% 2.86%
Return on average total assets.............. 1.05% 1.32% 1.07% 0.80% 0.22%
Return on average equity.................... 10.70% 15.33% 14.23% 17.72% 6.76%
Equity as a percent of year-end total
assets.................................... 10.18% 9.40% 8.06% 6.58% 3.22%
Dividend payout ratio(10)................... 22.11% 12.65% -- -- --
</TABLE>
(Continued on next page)
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<PAGE> 69
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Tangible equity as a percent of year-end
total assets.............................. 10.03% 9.16% 7.70% 5.98% 2.41%
Other noninterest expense (excluding
amortization of intangibles) as a percent
of average total assets................... 2.28% 2.05% 2.23% 2.08% 1.99%
Ratio of non-performing assets to total
assets(11)................................ 0.16% 0.19% 0.37% 0.50% 0.74%
Ratio of allowance for loan losses to gross
loans..................................... 0.76% 0.72% 0.71% 0.63% 0.51%
Ratio of allowance for loan losses to
non-accrual loans and loans past due more
than 90 days.............................. 1034.07% 490.03% 186.86% 196.33% 97.26%
Ratio of allowance for loan losses to non-
performing assets......................... 268.18% 228.72% 125.49% 86.89% 51.10%
Number of (at end of period):
Real estate loans outstanding............. 5,870 6,322 7,132 7,992 8,301
Savings accounts.......................... 52,614 54,026 55,531 63,744 65,545
Banking offices(12)....................... 13 13 13 18 18
</TABLE>
- ---------------
(1) Cash and investment securities consists of cash, interest-earning deposits
in other banks, federal funds sold, certificates of deposit, and investment
securities.
(2) Includes loans held for sale.
(3) Excess of cost over fair value of net assets acquired has been restated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 72
for each period presented.
(4) Other borrowed funds includes advances from the Federal Home Loan Bank
("FHLB") of Cincinnati. Also includes obligation of the Employee Stock
Ownership Plan of Heritage Bank until its refinancing in January 1995.
(5) Represents retained earnings only prior to fiscal year 1992.
(6) Excess of cost over fair value of net assets acquired and the related
amortization expense have been restated in accordance with SFAS No. 72 for
each period presented.
(7) During 1992, Heritage Bank entered into transactions involving its
portfolio of FHLB stock. These resulted in the realization of capital gains
for income tax purposes that were offset by capital loss carryforwards from
prior years. As a result, in accordance with SFAS No. 96, deferred tax
liabilities were reduced by $469,000 during the year ended June 30, 1992.
The Bank's effective tax rates for fiscal years 1995, 1994, 1993, 1992 and
1991 were 36.5%, 36.1%, 41.8%, 37.8% and 66.9%, respectively. See Note 11
of Notes to Consolidated Financial Statements.
(8) During the first quarter of fiscal year 1994, Heritage adopted SFAS No.
109, "Accounting for Income Taxes." The cumulative effect of this change in
accounting principle on prior periods added $764,000 or $.22 per share to
net income for that fiscal year.
(9) Pro forma primary earnings per share for fiscal year 1992 are calculated by
dividing net earnings by 3,071,000 shares of HFB Common Stock issued at
conversion and common stock equivalents, which include certain stock
options.
(10) Based on net income before cumulative change in accounting principle.
(11) Non-performing assets are composed of loans over 90 days delinquent,
restructured loans and real estate owned.
(12) All of Heritage Bank's offices are full-service offices. The lower number
of banking offices since 1992 reflects the August 1992 sale of five
branches.
GENERAL. On March 30, 1992, Heritage Bank converted from mutual to stock
form and became a wholly owned subsidiary of Heritage. The sole operations of
Heritage consist of those of Heritage Bank and its subsidiary, Citizens
Financial Corporation ("Citizens Financial").
The principal business of Heritage Bank consists of accepting deposits from
the general public through its branches and investing these funds in loans
secured by one- to four-family residential properties located in its market
areas. Heritage Bank also maintains a substantial investment portfolio and
originates consumer loans and limited amounts of commercial and commercial real
estate loans secured by properties in its market areas. Additionally, Heritage
Bank offers trust services and through Citizens Financial sells title insurance.
In August 1993, Citizens Financial began to sell annuities and securities from
Heritage Bank's locations via an arrangement with a third-party vendor, and this
arrangement continued throughout most of fiscal year 1995.
Heritage Bank's net income is dependent primarily on its net interest
income, which is the difference between interest earned on its loans and
investments and the interest paid on interest-bearing liabilities. The
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<PAGE> 70
net income of Heritage Bank also is affected by the generation of noninterest
income such as commissions, income from trust activities, service charges and
other fees, rental income, and gains or losses on the sale of loans and
investment securities. In addition, net income is affected by the level of
operating expenses, the amount of loan loss reserves set aside each year, and
the amount of income tax expense.
Heritage Bank's operations, as with those of the entire thrift industry,
are significantly affected by prevailing economic conditions, competition, and
the monetary and fiscal policies of governmental agencies. Lending activities
are influenced by the demand for and supply of housing, competition among
lenders, the level of interest rates, and the availability of funds. Deposit
flows and costs of funds are influenced by prevailing market rates of interest,
primarily on competing investments, account maturities, and the levels of
personal income and savings in the market area.
ASSET/LIABILITY MANAGEMENT. Net interest income, the primary component of
Heritage Bank's net income, arises from both the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities, and the
relative amounts of such assets and liabilities. In the early 1980s, Heritage
Bank's primary interest-earning assets, like those of most thrift institutions
at the time, consisted of long-term, fixed-rate mortgages. Conversely, its
liabilities were principally short-term deposits that were highly sensitive to
interest rate changes. Consequently, during the early 1980s, as general interest
rate levels rose, the interest rates on Heritage Bank's loans and securities did
not reprice as quickly to higher levels as did the rates on its deposits. As a
result, Heritage Bank's interest rate spread was adversely affected during that
time.
Heritage Bank has sought to reduce its exposure to changes in interest
rates by matching more closely the effective maturities or repricings of its
interest-sensitive assets and liabilities. In accordance with Heritage Bank's
interest rate risk policy, management has emphasized the origination and/or
purchase of adjustable-rate mortgages and mortgage-backed securities,
intermediate-term fixed-rate mortgages, medium-term U.S. agency and
government-sponsored enterprise ("GSE") notes, and short-term consumer loans.
Because of generally moderate interest rate levels during the past three years,
however, there has been increased consumer interest in fixed-rate loans. In
order to maintain market share under these changing conditions, Heritage Bank
began to originate fixed-rate loans for potential resale to secondary market
investors and for its portfolio. In all cases, originations of long-term,
fixed-rate mortgages are underwritten according to guidelines of the FHLMC and
the FNMA. Since February 1994, higher interest rates have slowed the trend
toward fixed-rate lending and have created renewed interest in adjustable-rate
loans, enabling Heritage Bank to again increase the mix of adjustable-rate loans
in its overall loan balances as compared with the fiscal year ended June 30,
1992. However, because of the moderate rise in mortgage rates during most of
Heritage Bank's fiscal year ended June 30, 1995, the adjustable-rate component
of Heritage Bank's portfolio of mortgage loans and mortgage-backed securities
increased only marginally to 68%, with fixed-rate loans comprising 32% as
compared to the portfolio mix at June 30, 1994, of 67% and 33%, respectively.
The portfolio mix at June 30, 1992, was 53% and 47%, respectively.
In addition, Heritage Bank manages its interest rate risk in part by
maintaining a substantial portfolio of short-term investments. The weighted
average life of its investment portfolio at June 30, 1995, was approximately 3.9
years.
INTEREST RATE SENSITIVITY ANALYSIS. As a result of Heritage Bank's interest
rate risk management policy and management's strategy emphasizing the
origination of short-term and/or adjustable-rate mortgages, Heritage Bank's
excess of interest-bearing liabilities over interest-earning assets maturing or
repricing within one year (i.e., its "one-year gap") at June 30, 1995, was
estimated to be $49,523,000 or a negative 9.38% of total assets versus
$47,844,000 or a negative 9.27% at June 30, 1994. This marginal increase in
negative gap position primarily reflected the moderate increase in market
interest rates during most of fiscal year 1995 that resulted in the shifting
behavioral pattern of deposit customers' preference for higher-yielding,
longer-term certificate of deposit accounts, versus lower-yielding,
transaction-type accounts such as demand and passbook savings accounts. The
changing composition of liability accounts resulted in a lower amount of
liability sensitivity to short-term interest rate fluctuations at June 30, 1995,
compared with the previous fiscal year. This was functionally mirrored by a
similar reduction of short-term loans receivable/mortgage-backed securities
balances, thereby resulting in a minimal change in Heritage Bank's one-year gap
position. The
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increase in market interest rates during fiscal year 1995 also continued the
slowdown in the rate of loan prepayments, extending the duration of Heritage
Bank's loans and mortgage-backed securities. Management considers its one-year
gap to represent an acceptable balance between reducing Heritage Bank's interest
rate risk and enhancing its interest rate spread. However, as a result of
Heritage Bank's negative one-year gap, Heritage Bank's net interest income would
be adversely affected by increases in prevailing interest rates.
The following table sets forth the interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1995, which
are expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
OVER
THREE THREE MONTHS OVER ONE OVER FIVE OVER TEN OVER
MONTHS THROUGH THROUGH THROUGH THROUGH TWENTY
OR LESS ONE YEAR FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
-------- ------------ ---------- --------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net... $ 54,628 $ 86,410 $130,374 $ 21,408 $ 4,713 $ 0 $297,533
Mortgage-backed
securities............ 23,153 33,045 18,089 5,054 3,008 1,646 83,995
Investment securities... 14,276 11,768 55,209 25,157 431 0 106,841
Federal funds sold...... 7,000 0 0 0 0 0 7,000
Interest-earning
deposits.............. 5,593 0 0 0 0 0 5,593
FHLB stock.............. 0 0 0 0 0 4,057 4,057
-------- -------- -------- ------- ------- ------- --------
Total................. 104,650 131,223 203,672 51,619 8,152 5,703 505,019
-------- -------- -------- ------- ------- ------- --------
INTEREST-BEARING
LIABILITIES:
Total NDA deposits...... 9,434 23,605 48,728 0 0 0 81,767
Passbook savings........ 5,132 14,955 48,346 0 0 0 68,433
Certificates of
deposit............... 72,823 148,158 67,463 99 0 0 288,543
Other borrowed money.... 10,687 602 3,683 3,150 119 0 18,241
-------- -------- -------- ------- ------- ------- --------
Total................. 98,076 187,320 168,220 3,249 119 0 456,984
-------- -------- -------- ------- ------- ------- --------
Interest sensitivity
gap..................... $ 6,574 $(56,097) $ 35,452 $ 48,370 $ 8,033 $ 5,703 $ 48,035
======== ======== ======== ======= ======= ======= ========
Cumulative interest
sensitivity gap......... $ 6,574 $(49,523) $(14,071) $ 34,299 $ 42,332 $48,035 $ 48,035
======== ======== ======== ======= ======= ======= ========
Ratio of interest-earning
assets to
interest-bearing
liabilities............. 106.70% 70.05% 121.07% 1588.77 % 6850.42% 0.00% 110.51%
======== ======== ======== ======= ======= ======= ========
Ratio of cumulative
interest sensitivity gap
to total assets......... 1.24% -9.38% -2.66% 6.49 % 8.01% 9.09% 9.09%
======== ======== ======== ======= ======= ======= ========
</TABLE>
The table is based on a number of assumptions regarding the future annual
prepayment rate for Heritage Bank's various categories of loans and
mortgage-backed securities and the attrition rate of certain deposits.
Certain shortcomings are inherent in the method of analysis presented in
the table above. The data are derived from information reported by savings
institutions in urban areas in Tennessee. Use of other data derived from
non-urban or non-Tennessee savings institutions could lead to materially
different results. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. The ability of
borrowers to service their debt may decrease in the event of an interest rate
increase.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES. The following
table sets forth information regarding average balances of interest-earning
assets and interest-bearing liabilities, as well as the weighted average yields
earned on Heritage Bank's assets and the weighted average interest rates paid on
Heritage
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Bank's liabilities, together with the net yield on interest-earning assets for
the past three fiscal years. Non-accrual loans have been included in the average
balances of loans receivable.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net........... $305,124 $ 24,771 8.12 % $314,336 $ 25,449 8.10 % $342,583 $ 30,221 8.82 %
Investment securities........... 90,970 5,561 6.11 % 87,649 5,042 5.75 % 79,995 5,152 6.44 %
Mortgage-backed securities...... 87,805 5,034 5.73 % 86,056 4,539 5.27 % 48,977 3,075 6.28 %
Federal funds sold.............. 3,256 172 5.28 % 6,708 203 3.03 % 8,409 302 3.59 %
Interest-earning deposits....... 3,767 192 5.10 % 4,721 135 2.86 % 6,266 160 2.55 %
FHLB stock...................... 3,919 249 6.35 % 3,705 182 4.91 % 3,540 156 4.41 %
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-earning
assets...................... 494,841 35,979 7.27 % 503,175 35,550 7.07 % 489,770 39,066 7.97 %
Non-interest-earning assets..... 23,538 23,993 26,022
-------- -------- --------
Total assets.................. $518,379 $527,168 $515,792
======== ======== ========
INTEREST-BEARING LIABILITIES:
Demand accounts................. $ 92,440 $ 2,339 2.53 % $100,423 $ 2,361 2.35 % $ 90,336 $ 2,517 2.79 %
Passbook savings................ 79,116 2,176 2.75 % 91,075 2,551 2.80 % 82,091 2,747 3.35 %
Certificates of deposit......... 262,357 12,315 4.69 % 262,928 10,934 4.16 % 280,539 13,610 4.85 %
Other borrowed money............ 16,651 968 5.81 % 12,255 641 5.23 % 8,631 431 4.99 %
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities................. 450,564 17,798 3.95 % 466,681 16,487 3.53 % 461,597 19,305 4.18 %
Non-interest-bearing
liabilities*.................. 16,719 15,034 15,454
-------- -------- --------
Total liabilities............. 467,283 481,715 477,051
Stockholders' Equity............ 51,096 45,453 38,741
-------- -------- --------
Total liabilities and
stockholders' equity........ $518,379 $527,168 $515,792
======== ======== ========
NET INTEREST INCOME............. $ 18,181 $ 19,063 $ 19,761
======== ======== ========
INTEREST RATE SPREAD............ 3.32 % 3.54 % 3.79 %
==== ==== ====
NET YIELD ON INTEREST-EARNING
ASSETS........................ 3.67 % 3.79 % 4.03 %
==== ==== ====
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING
LIABILITIES................... 109.83 % 107.82 % 106.10 %
==== ==== ====
</TABLE>
- ---------------
* Includes average non-interest-bearing demand deposits of $9,060,000,
$10,940,000 and $8,609,000 during fiscal years 1995, 1994 and 1993,
respectively.
RATE/VOLUME ANALYSIS. The table below sets forth certain information
regarding changes in interest income and interest expense of Heritage Bank for
the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(1) changes in volume (changes in volume multiplied by old rate); and (2)
changes in rate (change in rate multiplied by old volume). Changes in
rate-volume (changes in rate multiplied by changes in volume) are allocated
between
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changes in volume and changes in rate on a proportional basis. Average balances
are derived from daily balances.
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
------------------------ ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------ ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable, net................... $(748) $ 70 $ (678) $(2,389) $(2,383) $(4,772)
Investment securities................... 196 323 519 468 (578) (110)
Mortgage-backed securities.............. 94 401 495 2,021 (557) 1,464
Federal funds sold...................... (136) 105 (31) (56) (43) (99)
Interest-earning deposits............... (32) 89 57 (43) 18 (25)
FHLB stock.............................. 11 56 67 8 18 26
----- ------ ------ ------- ------- -------
Total interest-earning assets........ $(615) $1,044 $ 429 $ 9 $(3,525) $(3,516)
===== ====== ====== ======= ======= =======
INTEREST EXPENSE:
Total NDA deposits...................... $(195) $ 173 $ (22) $ 263 $ (419) $ (156)
Passbook savings........................ (330) (45) (375) 281 (477) (196)
Certificates of deposit................. (24) 1,405 1,381 (817) (1,859) (2,676)
----- ------ ------ ------- ------- -------
Total deposits....................... (549) 1,533 984 (273) (2,755) (3,028)
Other borrowed money.................... 249 78 327 189 21 210
----- ------ ------ ------- ------- -------
Total interest-bearing liabilities... (300) 1,611 1,311 (84) (2,734) (2,818)
===== ====== ====== ======= ======= =======
Change in net interest income............. $(315) $ (567) $ (882) $ 93 $ (791) $ (698)
===== ====== ====== ======= ======= =======
</TABLE>
FINANCIAL CONDITION. Heritage Bank's total assets increased 2.4% to
$528,169,000 at June 30, 1995, compared with $515,888,000 at June 30, 1994. This
change primarily reflected an increase in investment securities and cash and
cash equivalents from year to year, offset in part by a decline in loans
receivable and mortgage-backed securities.
Heritage Bank adopted on a prospective basis SFAS No. 115 at the beginning
of fiscal year 1995, and in doing so, designated a portion of its investment
portfolio as available for sale. Securities designated as available for sale
consist of U. S. Treasury notes with laddered maturities, amounting to
approximately $20,000,000 in principal face value at June 30, 1995. The fair
value of these securities at June 30, 1995, with unrealized gains or losses, net
of taxes, of approximately $84,000 reflected as a separate component of
stockholders' equity, totaled $20,213,000. At that date, available for sale
securities had a weighted average life of approximately 1.1 years. Heritage Bank
anticipates the available for sale portion of its investment portfolio will be
maintained as necessary in order to satisfy its liquidity needs. In the event
funds are needed for deposit account withdrawals, loan demand or other liquidity
purposes, these securities could be liquidated.
Cash and cash equivalents increased 46.8% to $21,878,000 or 4.1% of total
assets at June 30, 1995, from $14,906,000 or 2.9% of total assets at June 30,
1994.
Net loans receivable declined 3.6% to $297,533,000 at June 30, 1995,
compared with $308,700,000 at June 30, 1994. This change reflected the net
repayment of loans, which slowed significantly during fiscal 1995 from the
year-earlier period due to higher market rates and moderating refinancing
activity, in excess of new loan originations, which declined to $51,536,000 in
fiscal year 1995 compared with $81,902,000 in fiscal year 1994 due to: a
declining consumer demand for adjustable-rate mortgage loans, which are Heritage
Bank's principal source of loan originations; increased competition in the
mortgage origination business; a general slowdown in new home construction; and
a general decline in the volume of residential loan refinancings.
The cash inflow from the net repayment of loans during fiscal year 1995
together with the proceeds of matured and called investment securities were
invested primarily in GSE debt obligations issued by the FHLMC, the FNMA, and
the FHLB System. Terms of these securities were more favorable than
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<PAGE> 74
investments in mortgage-backed securities, because of shorter terms and
competitive yields and had risk characteristics consistent with Heritage Bank's
philosophy on interest rate risk. During fiscal year 1994, investable cash flows
were deployed primarily toward purchases of adjustable-rate mortgage-backed
securities as part of Heritage Bank's interest rate risk management in a lower
rate environment. By investing in mortgage-backed securities, Heritage Bank was
able to obtain higher yields than those available on other government and agency
securities with similar repricing characteristics at the time. Because borrowers
on the mortgages underlying such securities generally have the right to prepay
their loans without penalty, however, mortgage-backed securities expose Heritage
Bank to the risk that the security will prepay at a faster-than-anticipated rate
in a declining rate environment. Conversely, in a rising rate environment,
borrowers may prepay at a slower rate, effectively extending the maturity of
these securities and also compressing Heritage Bank's net interest spread as its
cost of funds rises.
Heritage Bank seeks to avoid these risks by investing in adjustable-rate,
mortgage-backed securities. Heritage Bank invests solely in mortgage-backed
securities issued by the government-sponsored enterprises such as the FNMA and
the FHLMC, or guaranteed by the Government National Mortgage Association
("GNMA"). These securities include fixed- and adjustable-rate collateralized
mortgage obligations, sometimes included in the definition of mortgage
derivatives, but which do not meet the regulatory definition of high risk
derivatives. A high risk derivative is any derivative financial product that
fails to satisfy an annual "stress" test that is intended to measure the
instrument's price volatility against a benchmark mortgage-backed pass-through
security. To avoid characterization as a high risk derivative, a fixed-rate
instrument must not fail any of three specific tests -- an average life test, an
average life sensitivity test, and a price sensitivity test -- and a
floating-rate (i.e., adjustable rate) instrument must not fail the price
sensitivity test. The average life test requires that the derivative product
have an expected weighted average life of not more than ten years, the average
life sensitivity test analyzes the relationship between the increase or decrease
of the weighted average life of a derivative product and an immediate and
sustained 300 basis point (i.e., 3.0%) increase or decrease in the underlying
yield curve, and the price sensitivity test analyzes the relationship between
the estimated change in the price of the derivative product and an immediate and
sustained 300 basis point (i.e., 3.0%) increase or decrease in the underlying
yield curve.
Investments and mortgage-backed securities increased 10.1% to $190,835,000
at June 30, 1995, from $173,354,000 as of June 30, 1994. Investments totaled
$106,841,000 at the end of fiscal year 1995, or approximately 20.2% of Heritage
Bank's total assets at June 30, 1995, compared with $80,796,000 or 15.7% of
total assets at June 30, 1994. Gross unrealized gains on the investment
portfolio at June 30, 1995 and 1994 were approximately $1.2 million and
$351,000, respectively. Gross unrealized losses on the investment portfolio at
June 30, 1995 and 1994 were approximately $2.4 million and $6.6 million, with
the decrease at June 30, 1995 attributable to the lower market rates of interest
as compared to the interest rate environment at June 30, 1994. Heritage Bank's
investment in mortgage-backed securities declined to $83,995,000 at June 30,
1995, from $92,558,000 as of June 30, 1994. Adjustable-rate products comprised
60.4% and 59.4% of total mortgage-backed securities as of the end of fiscal
years 1995 and 1994, respectively. Collateralized mortgage obligations ("CMOs")
at June 30, 1995, and 1994 totaled $14,942,000 and $5,615,000, respectively. The
increase in CMO balances was funded primarily by the proceeds of an advance
obtained from the FHLB of Cincinnati. These securities offered a favorable yield
differential over the cost of the advance, thereby generating additional net
interest income for Heritage Bank during the fiscal year.
Heritage Bank's deposits declined 0.3% during fiscal year 1995 to
$449,318,000 from $450,819,000 as of June 30, 1994. Heritage Bank relied both
upon advances from the FHLB of Cincinnati and internally generated earnings
during fiscal year 1995 to help fund its increase in interest-earning assets.
Advances from the FHLB totaled $18,122,000 at June 30, 1995, compared with
$9,587,000 at June 30, 1994. The increase in borrowings from the FHLB of
Cincinnati during fiscal year 1995 was used toward the purchase of CMOs.
RESULTS OF OPERATIONS. Net income for fiscal year 1995 decreased 21.5% to
$5,467,000 or $1.58 per share from $6,968,000 or $2.07 per share in fiscal year
1994. All per share amounts have been adjusted for a four-for-three stock split
declared in July 1994 and a three-for-two stock split declared in August 1993.
Heritage's earnings for fiscal year 1994 included $764,000 in non-recurring
income attributable to the adoption of the new standard for accounting for
income taxes. Net income before adoption of the new accounting standard
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<PAGE> 75
declined $737,000, or 11.9%, from fiscal year 1994. Heritage's lower earnings
for fiscal year 1995 reflected primarily a decline in net interest income before
provision for loan losses and an increase in noninterest expense, which more
than offset a lower provision for loan losses in fiscal year 1995 and slightly
higher noninterest income.
Net income for fiscal year 1994, excluding the impact of the adoption of a
new accounting standard for income taxes, increased 12.6% from the $5,512,000 or
$1.67 per share reported in fiscal year 1993. In general, the increase in fiscal
year 1994 compared with fiscal year 1993 reflected a reduction in the provision
for loan losses and lower noninterest expense, which more than offset a decline
in net interest income and total non-interest income.
Net Interest Income. Net interest income declined 4.6% to $18,181,000 in
fiscal year 1995 from $19,063,000 in fiscal year 1994. Net interest income for
fiscal year 1994 declined 3.5% from $19,761,000 in fiscal year 1993.
The three-year period ended June 30, 1995, reflected a generally favorable
interest rate environment, although a number of rate increases implemented by
the Federal Reserve Board beginning in February 1994 resulted in higher rate
levels in the last half of fiscal year 1994 and much of fiscal year 1995.
Reflecting this increase midway through fiscal year 1994, Heritage Bank's
average interest rate spread in fiscal year 1995 declined to 3.32% from 3.54% in
fiscal year 1994 and 3.79% in fiscal year 1993.
Heritage Bank's net yield on average interest-earning assets declined to
3.67% in fiscal year 1995 from 3.79% in fiscal year 1994, again reflecting
increases in interest rates throughout most of fiscal year 1995. Heritage Bank's
net yield declined in fiscal year 1994 from 4.03% in fiscal year 1993.
Heritage Bank's average interest-earning assets decreased 1.7% to
$494,841,000 in fiscal year 1995 from $503,175,000 in fiscal year 1994,
reflecting primarily a decline in net loans receivable. Interest-earning assets
in fiscal year 1994 increased 2.7% from $489,770,000 during fiscal year 1993,
due in general to an increase during the year in investment and mortgage-backed
securities.
During the three-year period ended June 30, 1995, however, Heritage Bank
steadily increased its ratio of interest-earning assets to interest-bearing
liabilities to 109.8% during fiscal year 1995 from 107.8% in fiscal year 1994
and 106.1% in fiscal year 1993. Heritage Bank achieved this increase primarily
by increasingly funding its activities with its net earnings rather than
liabilities. Likewise, the average yields on interest-earning assets for fiscal
years 1995, 1994 and 1993 were 7.27%, 7.07% and 7.97%, respectively. The
increase in average yields during the most recent fiscal year reflects increases
in yields on mortgage-backed securities and adjustable-rate mortgage loans.
Because of the increase in Heritage Bank's average yield on its
interest-earning assets from fiscal year 1994 to fiscal year 1995, and the
increasing ratio of interest-earning assets to interest-bearing liabilities,
interest income increased to $35,979,000 in fiscal year 1995 from $35,550,000 in
fiscal year 1994. Interest income in fiscal year 1993 totaled $39,066,000.
Reflecting the same interest rate trends, interest expense increased to
$17,797,000 in fiscal year 1995 from $16,487,000 in fiscal year 1994. Interest
expense in fiscal year 1993 totaled $19,305,000. The increase during fiscal year
1995 reflects the increase in the average cost of interest-bearing liabilities
as a result of the general rise in market rates as well as Heritage Bank's
continued reliance on higher-costing FHLB advances and certificates of deposit
as funding sources. As with the yields on interest-earning assets, costs on
interest-bearing liabilities fell in fiscal year 1994 and increased in fiscal
year 1995. The average cost of interest-bearing liabilities over the past three
years was 3.95% in fiscal year 1995, 3.53% in fiscal year 1994 and 4.18% in
fiscal year 1993.
Average interest-bearing liabilities declined to $450,564,000 in fiscal
year 1995 compared with $466,681,000 in fiscal year 1994, reflecting primarily a
decrease in lower-costing demand and passbook savings accounts due to greater
competition from other investment vehicles. Average interest-bearing liabilities
for fiscal year 1994, however, increased from $461,597,000 during fiscal year
1993 as funds flowed into passbook accounts during a period of lower interest
rates.
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Provision for Loan Losses. For fiscal years 1995, 1994, and 1993, Heritage
Bank provided $82,000, $487,000 and $595,000, respectively, for loan losses. The
allowance for loan losses is increased by charges against income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on Heritage Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrowers' ability to repay, estimated value of any underlying collateral,
and current economic conditions. While management believes that it has
established the allowance in accordance with generally accepted accounting
principles and has taken into account the views of its regulators and the
current economic environment, there can be no assurance that in the future
Heritage Bank's regulators or its economic environment will not require further
increases in the allowance.
The decline in the amount provided for loan losses in fiscal year 1995
reflected a significant improvement in Heritage Bank's non-performing assets. At
June 30, 1995, the allowance for possible loan losses represented 1034.07% of
total non-accrual loans and loans past due more than 90 days. This compared with
490.03% at June 30, 1994, and 186.86% as of June 30, 1993. At June 30, 1995,
1994 and 1993, Heritage Bank's ratio of allowance for loan losses to
non-performing assets, including real estate owned, was 268.18%, 228.72% and
125.49%, respectively.
Noninterest Income. Noninterest income totaled $2,755,000 in fiscal year
1995, $2,484,000 in fiscal year 1994, and $3,110,000 in fiscal 1993. The higher
amount in fiscal year 1993 reflected a gain of $1,000,000 on the sale of five
branches during the year. Noninterest income, other than gains or losses on the
sale of the branches and interest-earning assets, increased moderately over the
three-year period ended June 30, 1995, aggregating $2,755,000, $2,484,000 and
$2,110,000 in fiscal years 1995, 1994 and 1993, respectively, reflecting
primarily an increase in other ancillary services such as checking fee income
and fee income from the sale of securities and annuities.
Noninterest Expense. Noninterest expense totaled $12,242,000 in fiscal
year 1995, $11,354,000 in fiscal year 1994, $12,813,000 in fiscal year 1993. The
increase in noninterest expense in fiscal year 1995 reflected higher
compensation and benefits expense, due to normal salary increases for personnel
and greater benefit costs, and because of the revision to certain compensation
plans in fiscal year 1994 which became effective during fiscal year 1995. The
decline in noninterest expense during fiscal year 1994 was due primarily to the
decrease in amortization expense associated with the excess of cost over fair
value of net assets acquired (i.e., goodwill) compared with fiscal year 1993,
during which a portion of the goodwill was written off because of Heritage
Bank's sale of the related assets. The decline also reflected lower
compensation-related expenses, due to revisions in certain compensation plans
during the year, along with lower communications and other office expense and
real estate owned expense and provisions.
Income Taxes. The effective income tax rates for fiscal years 1995, 1994
and 1993 were 36.5%, 36.1% and 41.8%, respectively, compared with the maximum
statutory corporate income tax rate of 38.0% during those periods. The higher
effective tax rate in fiscal year 1993 reflected tax on the gain on the sale of
five branches during the first quarter; the write-off of goodwill associated
with those branches was not tax deductible. Effective at the beginning of fiscal
year 1994, Heritage adopted SFAS No. 109, Accounting for Income Taxes, on a
prospective basis. The cumulative effect of this new accounting standard on
prior periods added $764,000 or $.22 per share to net income for fiscal year
1994.
IMPACT OF NEW ACCOUNTING STANDARDS. In December 1991, the Financial
Accounting Standards Board ("the FASB") issued SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. SFAS No. 107 requires disclosures of
information about the fair value of all financial instruments. Such disclosure
is effective for fiscal years ending after December 15, 1992. Heritage adopted
SFAS No. 107 for the fiscal year ended June 30, 1993.
Heritage adopted SFAS No. 109, Accounting for Income Taxes, on a
prospective basis during the first quarter of fiscal year 1994. The cumulative
effect of this new accounting standard on prior periods added $764,000 or $.22
per share to net income for fiscal year 1994.
The FASB issued SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, which amended SFAS No. 5, Accounting for Contingencies, and SFAS No. 15,
Accounting by Debtors and Creditors for
68
<PAGE> 77
Troubled Debt Restructurings. SFAS No. 114, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosure, requires the use of the discounted cash flow method for measuring
impairment of loans when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. If expedient, the creditor may use a loan's observable market price
or the fair value of any collateral.
Heritage adopted SFAS No. 114 on a prospective basis as of July 1, 1993 for
the fiscal year ending June 30, 1994. The adoption of SFAS No. 114 did not have
a material effect on Heritage's financial position or results of operations.
The FASB issued SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, which supersedes SFAS No. 12, Accounting for Certain
Marketable Securities and amends SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. SFAS No. 115 became effective for fiscal years beginning
after December 15, 1993. SFAS No. 115 requires investments in certain debt and
equity securities to be classified into three categories -- held to maturity,
available for sale, or trading. Securities classified into the held to maturity
category will be accounted for at cost, adjusted for amortization of premiums
and discounts. Securities in the remaining two categories will be carried at
market value, with changes in the market value of securities available for sale
being accounted for as changes in stockholders' equity and changes in the market
value of trading account securities being recognized in income.
Heritage adopted SFAS No. 115 on a prospective basis in the first quarter
of fiscal year 1995. The adoption of SFAS No. 115 did not have a material effect
on Heritage's financial position.
LIQUIDITY AND CAPITAL RESOURCES. Heritage Bank's principal sources of funds
for operations are deposits from its primary market areas, principal and
interest payments on loans and mortgage-backed securities, and proceeds from
maturing investment securities. Additionally, Heritage Bank may borrow funds
from the FHLB of Cincinnati or sell loans in order to increase liquidity.
Heritage Bank's deposits declined 0.3% during fiscal year 1995 to $449,318,000
from $450,819,000 as of June 30, 1994. During fiscal year 1995, Heritage Bank
increased its advances from the FHLB of Cincinnati for the purpose of increasing
its net interest income through the purchase of additional CMOs. Advances from
the FHLB of Cincinnati totaled $18,122,000 at June 30, 1995, compared with
$9,587,000 at June 30, 1994.
Heritage Bank must satisfy three capital standards, as set by the OTS.
These standards include a ratio of core capital to adjusted total assets of
3.0%, a tangible capital standard expressed as 1.5% of total adjusted assets,
and a combination of core and "supplementary" capital equal to 8.0% of
risk-weighted assets. The OTS recently finalized regulations that add an
interest rate risk component to capital requirements under certain
circumstances. Heritage Bank does not expect that this regulation will require
it to reduce its capital materially for purposes of determining compliance with
its risk-based capital requirement. In addition, the OTS has recently adopted
regulations that impose certain restrictions on savings associations that have a
total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital
(or core capital) to risk-weighted assets of less than 4.0%, or a ratio of Tier
1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution
receives the highest rating under the OTS examination rating system).
Heritage Bank presently exceeds all capital requirements as currently
promulgated. At June 30, 1995, Heritage Bank had tangible, core, Tier 1 to
risk-weighted assets, and risk-based capital ratios of 9.77%, 9.85%, 23.97%, and
25.00%, respectively.
69
<PAGE> 78
The following table reconciles Heritage Bank's net worth at June 30, 1995,
under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS (UNAUDITED)
--------------------------------------------------------------------------------
GAAP TANGIBLE TIER 1/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$52,378,000 $52,378,000 9.93% $52,378,000 9.92% $52,378,000 24.16%
===========
Add:
General valuation
allowances................. - - - - 2,247,000 1.03%
Deduct:
Goodwill..................... 780,000 -0.15% 333,000 -0.06% 333,000 -0.15%
Unrealized gains on available
for sale securities........ 84,000 -0.01% 84,000 -0.01% 84,000 -0.04%
----------- ----- ----------- ----- ----------- -----
Regulatory
capital -- computed.......... 51,514,000 9.77% 51,961,000 9.85% 54,208,000 25.00%
Minimum capital requirement.... 7,909,000 1.50% 15,832,000 3.00% 17,345,000 8.00%
----------- ----- ----------- ----- ----------- -----
Regulatory capital -- excess... $43,605,000 8.27% $36,129,000 6.85% $36,863,000 17.00%
=========== ===== =========== ===== =========== =====
</TABLE>
Heritage Bank must maintain liquidity ratios at certain regulatory levels.
Regulations specify the types of assets that qualify for liquidity, which
generally include cash, federal funds sold, certificates of deposit and
qualifying types of U.S. Treasury and agency securities, and other investments
having maturities of five years or less. Such investments serve as a source of
funds upon which Heritage Bank may rely to meet deposit withdrawals and for
other short-term needs. The required levels of such liquidity are calculated on
a "liquidity base" consisting of net withdrawable accounts plus borrowings due
in one year or less. Presently, Heritage Bank is required to maintain total
liquid assets as described above of at least 5% of its liquidity base. Short-
term liquid assets (maturing in one year or less) may not be less than 1% of
Heritage Bank's liquidity base.
In recent years, Heritage Bank has maintained higher levels of liquid
assets than required by regulation. Management believes that the liquidity
levels maintained are adequate to meet potential deposit outflows, loan demand
and normal operations. Its short-term ratios were 5.07%, 3.30% and 5.36% at June
30, 1995, 1994 and 1993, respectively. Total liquidity ratios were 19.25%,
16.24% and 20.59%, respectively, for the same periods.
At June 30, 1995, Heritage Bank had outstanding commitments to originate
loans totaling $1,733,000, excluding $3,492,000 in approved but unused home
equity lines of credit. Management believes that Heritage Bank's sources of
funds are sufficient to fund all of its outstanding commitments.
IMPACT OF INFLATION AND CHANGING PRICES. The consolidated financial
statements and notes thereto, presented herein, have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
consideration of the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
Heritage Bank's operations. Unlike most industrial companies, however, nearly
all the assets and liabilities of Heritage Bank are monetary. As a result,
interest rates have a greater impact on Heritage Bank's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
70
<PAGE> 79
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER ENTITIES
The following table sets forth, as of the Record Date, certain information
as to the HFB Common Stock beneficially owned by (i) any person or group of
persons who is known to Heritage to be the beneficial owner of more than 5% of
the HFB Common Stock, and (ii) each of Heritage's directors, each of Heritage's
executive officers who are not directors and by all of Heritage's directors and
executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND NATURE SHARES
OF BENEFICIAL OF COMMON STOCK
OWNERSHIP(1) OUTSTANDING(2)
----------------- ---------------
<S> <C> <C>
Heritage Federal Bank for Savings.................. 208,895(3) 6.44%
Employee Stock Ownership Plan and Trust
110 East Center Street
Kingsport, Tennessee 37660
Heritage Federal Bank for Savings.................. 288,713(4) 8.90%
Profit Sharing Plan
110 East Center Street
Kingsport, Tennessee 37660
DIRECTORS:
Sam H. Anderson, Jr. .............................. 88,159 2.69%
John C. Bracy...................................... 58,333 1.78%
Clyde W. Craven.................................... 63,245(5) 1.94%
Robert C. Fox...................................... 74,780(6) 2.30%
William E. Kreis................................... 138,707(7) 4.18%
Thomas E. LaGuardia, Jr.,th........................ 51,003 1.56%
Richard A. Manahan................................. 47,770(8) 1.46%
C. Mack Patton..................................... 73,260(9) 2.23%
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS:
Richard D. Brumfield............................... 122,003(10) 3.71%
Don R. Osborne..................................... 118,320(11) 3.60%
William F. Richmond................................ 66,159(12) 2.02%
All Directors and Executive Officers as a Group
(11 persons)..................................... 901,739(13) 24.84%
</TABLE>
- ---------------
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of the
HFB Common Stock over which he or she has or shares voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the Record Date. As used herein,
"voting power" is the power to vote or direct the voting of shares and
"investment power" is the power to dispose or direct the disposition of
shares. Except as otherwise noted, ownership is direct and the named
beneficial owners exercise sole voting and investment power over the
indicated shares of the HFB Common Stock. Includes 33,455, 33,345, 8,000,
8,000, 76,668, 33,614, 33,792, 34,260, 47,119, 39,827 and 37,649 shares
which Messrs. Anderson, Bracy, Craven, Fox, Kreis, LaGuardia, Manahan,
Patton, Brumfield, Osborne and Richmond, respectively, have the right to
acquire within 60 days of the Record Date pursuant to stock options.
(2) In calculating the percentage of shares outstanding for a named person or
group, the number of shares outstanding includes any shares of HFB Common
Stock which the person or group has the right to acquire within 60 days of
the Record Date.
(3) Consists of allocated and unallocated shares of the HFB Common Stock held
in trust for the benefit of participating employees over which the ESOP may
be deemed to have shared voting and dispositive power. The ESOP is
administered by a committee consisting of Directors Robert C. Fox and
William E. Kreis and Vice President Jeffrey S. Little (the "ESOP
Trustees"). The ESOP Trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of the participating employees.
Unallocated shares and allocated shares for which no timely direction is
received must be voted as directed by the ESOP Trustees, as directed by the
Board of Directors. The ESOP Trustees and Heritage Bank disclaim beneficial
ownership over the shares of HFB Common Stock held by the ESOP.
(4) Consists of shares of the HFB Common Stock held in trust for the benefit of
participating employees over which the Heritage Federal Bank for Savings
Profit Sharing Plan (the "401(k) Plan") may be deemed to have shared voting
and dispositive power. The Plan Trustee votes shares as directed by
participants, and otherwise as directed by Heritage Bank in its capacity as
Plan Administrator and over which Heritage Bank disclaims beneficial
ownership.
71
<PAGE> 80
(5) Includes 7,588 shares held in a defined benefit pension plan of which Dr.
Craven serves as trustee and thereby exercises voting power over such
shares, and 3,676 shares held in spouse's individual retirement account
("IRA").
(6) Includes 5,265 shares held in IRA and 2,649 shares held in spouse's IRA.
Does not include shares held by the ESOP of which he is a trustee and over
which he disclaims beneficial ownership.
(7) Includes 20,491 shares in Mr. Kreis' account in the 401(k) Plan; 4,484
shares allocated to his account in the ESOP; and 10,263 shares of
restricted shares of HFB Common Stock ("restricted stock") granted to Mr.
Kreis pursuant to the Heritage Federal Bank for Savings Management
Recognition Plan and Trust (the "MRP") and the Officer Incentive Plan over
which Mr. Kreis exercises voting power. Does not include shares held by the
ESOP of which he is a trustee and over which he disclaims beneficial
ownership.
(8) Includes 12,773 shares held in IRA and 509 shares held in spouse's IRA.
(9) Includes 3,800 shares held in IRA.
(10) Includes 40,930 shares in Mr. Brumfield's account in the 401(k) Plan; 3,426
shares allocated to his account in the ESOP; and 7,923 shares granted to
Mr. Brumfield as restricted stock awards pursuant to the MRP and the
Officer Incentive Plan, over which Mr. Brumfield exercises voting power.
(11) Includes 17,026 shares in Mr. Osborne's account in the 401(k) Plan; 3,073
shares allocated to his account in the ESOP; and 5,299 shares granted to
Mr. Osborne as restricted stock awards pursuant to the MRP and the Officer
Incentive Plan, over which Mr. Osborne exercises voting power.
(12) Includes 5,546 shares in Mr. Richmond's account in the 401(k) Plan; 2,481
shares allocated to his account in the ESOP; and 6,249 shares granted to
Mr. Richmond as restricted stock awards pursuant to the MRP and the Officer
Incentive Plan, over which Mr. Richmond exercises voting power.
(13) Includes shares held by certain directors and officers as custodians under
Uniform Transfer to Minors Acts, by their spouses and children, and for the
benefit of certain directors and officers under IRAs as set forth above.
Includes 83,993 shares held in the 401(k) Plan and 13,464 shares allocated
to the accounts of executive officers in the ESOP, the voting of which
shares such officers have the power to direct. Also includes 29,734 shares
of restricted stock granted to the executive officers pursuant to the MRP
and the Officer Incentive Plan. Does not include 125,350 unallocated shares
held by the ESOP, the voting of which is directed by the ESOP Trustees as
directed by the Board of Directors. Includes 74,750 shares, 33,716 shares
and 76,000 shares which directors have the right to purchase pursuant to
stock options granted under the Option Plan, Director Incentive Plan, and
1994 Stock Option Plan for Non-Employee Directors, respectively. Also
includes 142,129 shares and 59,134 shares which executive officers have the
right to purchase pursuant to stock options granted under the Option Plan
and the Officer Incentive Plan, respectively.
EXPERTS
The consolidated financial statements of First American at December 31,
1994 and 1993 and for each of the three years in the period ended December 31,
1994 included in the Annual Report on Form 10-K of First American for the fiscal
year ended December 31, 1994 and incorporated by reference into this
Prospectus/Proxy Statement have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. The report of KPMG Peat Marwick LLP covering
the December 31, 1994 financial statements contains an explanatory paragraph
that refers to changes in accounting principles related to the adoption in 1993
of the provisions of the Financial Accounting Standards Board's Statements of
Financial Accounting Standards No. 109, Accounting for Income Taxes; No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions; No. 112,
Employers' Accounting for Postemployment Benefits; and No. 115, Accounting for
Certain Investments in Debt and Equity Securities. The aforementioned
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited interim financial information of First
American for the periods ended March 31, 1995 and 1994, and June 30, 1995 and
1994, incorporated by reference, KPMG Peat Marwick LLP, the independent
certified public accountants, have reported that they applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate reports included in the First American's quarterly
reports on Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995,
and Form 10-Q/A for the quarter ended June 30, 1995, and incorporated by
reference herein, state that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. The accountants are not
subject to the liability provisions of Section 11 of the Securities Act for
their report on the unaudited interim financial information because that
72
<PAGE> 81
report is not a "report" or a "part" of the Registration Statement prepared or
certified by the accountants within the meaning of Sections 7 and 11 of the
Securities Act.
The consolidated statements of financial condition of Heritage as of June
30, 1995 and 1994 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1995, have been included in this Prospectus/Proxy Statement in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
Documents incorporated herein by reference in the future will include
financial statements, related schedules (if required) and auditors' reports,
which financial statements and schedules will have been audited to the extent
and for the periods set forth in such reports by the firm or firms rendering
such reports, and, to the extent so audited and consent to incorporation by
reference is given, will be incorporated herein by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting and
auditing.
LEGAL OPINION
A legal opinion to the effect that the issuance of the shares of FAC Common
Stock offered hereby, when issued in accordance with the terms of the Agreement,
will be validly issued, fully paid and nonassessable, has been rendered by
Martin E. Simmons, Esquire, Executive Vice President -- Administration,
Secretary, General Counsel and Principal Financial Officer of First American. As
of September 27, 1995, Mr. Simmons held options granted under stock option plans
covering 25,900 shares of FAC Common Stock, 10,060 of which are currently
exercisable. Mr. Simmons also holds 5,500 shares of FAC Common Stock subject to
restrictions under a First American stock incentive plan.
SHAREHOLDER PROPOSALS
It is not currently anticipated that Heritage will hold a 1995 Annual
Meeting of Stockholders unless the Merger is not consummated. In the event the
Merger is not consummated and the 1995 Annual Meeting is held, any stockholder
proposal to take action at such meeting must have been received at Heritage's
main office at 110 East Center Street, Kingsport, Tennessee 37660, no later than
May 18, 1995 in order to have been eligible for inclusion in Heritage's proxy
materials for the 1995 Annual Meeting of Stockholders. Any such proposals shall
be subject to the requirements of the proxy rules adopted under the Exchange
Act.
73
<PAGE> 82
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Accountants' Report.................................................... F-2
Consolidated Statements of Financial Condition as of June 30, 1995 and 1994........ F-3
Consolidated Statements of Income for the Years Ended June 30, 1995, 1994, and
1993............................................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1995,
1994 and 1993.................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995, 1994 and
1993............................................................................. F-6
Notes to Consolidated Financial Statements......................................... F-8
</TABLE>
F-1
<PAGE> 83
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Heritage Federal Bancshares, Inc.
We have audited the accompanying consolidated statements of financial
condition of Heritage Federal Bancshares, Inc. and Subsidiary as of June 30,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended June 30,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion of these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Heritage
Federal Bancshares, Inc. and Subsidiary at June 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its methods of accounting for securities and income taxes in
1995 and 1994, respectively.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 1, 1995
F-2
<PAGE> 84
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks......................................... $ 9,285,434 $ 9,610,848
Interest-earning deposits in financial institutions............. 5,592,680 2,295,206
Federal funds sold.............................................. 7,000,000 3,000,000
------------ ------------
Total cash and cash equivalents....................... 21,878,114 14,906,054
Securities available-for-sale................................... 20,213,195 --
Securities held-to-maturity:
U.S. government and agencies and collateralized mortgage
obligations -- approximate market value of $86,258,000..... 86,627,642 --
Mortgage-backed securities -- approximate market value of
$83,012,000................................................ 83,994,659 --
Investment securities -- approximate market value of
$78,754,000................................................... -- 80,796,409
Mortgage-backed securities -- approximate market value of
$88,397,000................................................... -- 92,557,813
Loans receivable, net........................................... 297,533,313 308,699,625
Interest receivable............................................. 3,666,307 3,446,516
Real estate owned, net of allowance for losses of $211,771 and
$262,322 at June 30, 1995 and 1994, respectively.............. -- 531,275
Premises and equipment, net..................................... 6,785,895 6,676,464
Investment in Federal Home Loan Bank stock, at cost............. 4,057,300 3,807,700
Excess of cost over fair value of net assets acquired and other
intangibles, net.............................................. 780,132 1,270,127
Deferred income taxes........................................... 897,514 1,457,138
Other assets.................................................... 1,735,008 1,738,951
------------ ------------
$528,169,079 $515,888,072
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits........................................................ $449,317,977 $450,818,608
Advances from Federal Home Loan Bank............................ 18,121,921 9,587,083
Advances from borrowers for taxes and insurance................. 4,027,987 3,990,598
Accrued expenses and other liabilities.......................... 2,927,221 2,107,869
Employee Stock Ownership Plan obligation........................ -- 880,885
------------ ------------
474,395,106 467,385,043
Commitments and contingencies (Notes 2, 3, 5, 12, 15, 16, 18 and
21)
Stockholders' equity:
Preferred stock of $1.00 par value, authorized 2,000,000
shares; none issued or outstanding......................... -- --
Common stock of $1.00 par value, 8,000,000 shares authorized;
issued and outstanding -- 3,186,158 at June 30, 1995 and
3,172,826 at June 30, 1994 (Note 19)....................... 3,186,158 3,172,826
Additional paid-in capital.................................... 16,509,491 16,108,095
Retained earnings-substantially restricted.................... 35,070,071 30,813,111
Unrealized appreciation on available-for-sale securities, net
of tax of $51,530 in 1995.................................. 84,079 --
Employee Stock Ownership Plan obligation...................... (720,765) (880,885)
Unearned compensation of Management Recognition Plan.......... (355,061) (710,118)
------------ ------------
53,773,973 48,503,029
------------ ------------
$528,169,079 $515,888,072
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 85
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans....................................................... $24,770,777 $25,448,506 $30,220,709
Securities available-for-sale............................... 1,361,695 -- --
Securities held-to-maturity:
U.S. government and agencies and
collateralized mortgage obligations..................... 4,199,355 -- --
Mortgage backed securities................................ 5,034,437 -- --
Investments................................................. -- 5,041,697 5,151,660
Mortgage-backed securities.................................. -- 4,539,140 3,074,851
Other interest-earning assets............................... 612,630 521,327 619,111
----------- ----------- -----------
Total interest income................................ 35,978,894 35,550,670 39,066,331
----------- ----------- -----------
Interest expense:
Deposits.................................................... 16,829,466 15,846,768 18,873,962
Other borrowed money........................................ 968,030 640,513 431,042
----------- ----------- -----------
Total interest expense............................... 17,797,496 16,487,281 19,305,004
----------- ----------- -----------
Net interest income.................................. 18,181,398 19,063,389 19,761,327
Provision for loan losses..................................... 82,247 487,346 595,140
----------- ----------- -----------
Net interest income after provision for loan
losses............................................. 18,099,151 18,576,043 19,166,187
----------- ----------- -----------
Noninterest income:
Loan fees and service charges............................... 1,826,140 1,574,221 1,426,069
Other operating income...................................... 928,831 909,600 684,393
Gain on sale of branches.................................... -- -- 1,000,000
----------- ----------- -----------
Total noninterest income............................. 2,754,971 2,483,821 3,110,462
----------- ----------- -----------
Noninterest expense:
Compensation and benefits................................... 6,198,938 5,306,228 5,713,579
Occupancy and equipment..................................... 1,124,528 1,089,392 1,130,840
Communications and other office expenses.................... 1,510,758 1,371,648 1,543,704
Regulatory and other insurance premiums..................... 1,180,955 1,196,911 1,090,247
Computer processing......................................... 636,232 597,360 570,524
Real estate owned expenses, including provision for loss.... (87,398) 55,744 270,340
Other operating costs....................................... 1,254,716 1,211,057 1,191,916
Amortization of excess of cost over fair value of
net assets acquired....................................... 422,873 525,336 1,301,646
----------- ----------- -----------
Total noninterest expense............................ 12,241,602 11,353,676 12,812,796
----------- ----------- -----------
Income before income tax expense and change in
method of accounting for income taxes....................... 8,612,520 9,706,188 9,463,853
Income tax expense............................................ 3,145,666 3,501,963 3,951,634
----------- ----------- -----------
Net income before change in method of
accounting for income taxes........................ 5,466,854 6,204,225 5,512,219
Cumulative effect of change in method of
accounting for income taxes................................. -- 764,255 --
----------- ----------- -----------
Net income........................................... $ 5,466,854 $ 6,968,480 $ 5,512,219
=========== =========== ===========
Earnings per share:
Net income before change in method of
accounting for income taxes............................... $ 1.58 $ 1.85 $ 1.67
Cumulative effect of change in method of
accounting for income taxes............................... -- .22 --
----------- ----------- -----------
Earnings per share (Note 19)................................ $ 1.58 $ 2.07 $ 1.67
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 86
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET UNREALIZED
RETAINED DEPRECIATION
COMMON STOCK ADDITIONAL EARNINGS- ON CERTAIN
---------------------- PAID-IN SUBSTANTIALLY MARKETABLE
SHARES AMOUNT CAPITAL RESTRICTED EQUITY SECURITIES
--------- ---------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1992............................... 1,495,000 $1,495,000 $14,553,290 $20,703,246 $ --
Net income............................................ -- -- -- 5,512,219 --
Proceeds from issuance of common stock................ 42,468 42,468 445,915 -- --
Implementation of Management Recognition Plan,
including issuance of common stock.................. 44,850 44,850 880,181 -- --
Three for two stock split............................. 791,159 791,159 -- (791,159) --
Increases in fair value of shares held by Management
Recognition Plan through award date................. -- -- 140,156 -- --
Amortization of unearned compensation of Management
Recognition Plan.................................... -- -- -- -- --
Reduction of Employee Stock Ownership Plan
obligation.......................................... -- -- -- -- --
--------- ---------- ---------- ---------- -------
Balances at June 30, 1993............................... 2,373,477 2,373,477 16,019,542 25,424,306 --
Net income............................................ -- -- -- 6,968,480 --
Proceeds from issuance of common stock, including
effect of three for two stock split................. 6,143 6,143 88,553 (1,419) --
Cash dividend paid on common stock at $.25 per
share............................................... -- -- -- (785,050) --
Four for three stock split............................ 793,206 793,206 -- (793,206) --
Amortization of unearned compensation of Management
Recognition Plan.................................... -- -- -- -- --
Reduction of Employee Stock Ownership Plan
obligation.......................................... -- -- -- -- --
--------- ---------- ---------- ---------- -------
Balances at June 30, 1994............................... 3,172,826 3,172,826 16,108,095 30,813,111 --
Net income............................................ -- -- -- 5,466,854 --
Adoption of change in accounting for securities, net
of tax.............................................. -- -- -- -- (44,843)
Proceeds from issuance of common stock, including
effect of four for three stock split................ 13,332 13,332 122,226 (1,269) --
Cash dividend paid on common stock at $.38 per
share............................................... -- -- -- (1,208,625) --
Tax benefit from exercise of stock options............ -- -- 67,800 -- --
Tax benefit from Management Recognition Plan.......... -- -- 211,370 -- --
Change in unrealized appreciation, net of tax......... -- -- -- -- 128,922
Amortization of unearned compensation of Management
Recognition Plan.................................... -- -- -- -- --
Reduction of Employee Stock Ownership Plan
obligation.......................................... -- -- -- -- --
--------- ---------- ---------- ---------- -------
Balances at June 30, 1995............................... 3,186,158 $3,186,158 $16,509,491 $35,070,071 $ 84,079
========= ========== ========== ========== =======
<CAPTION>
EMPLOYEE
STOCK UNEARNED
OWNERSHIP COMPENSATION OF
PLAN MANAGEMENT
OBLIGATION RECOGNITION PLAN TOTAL
----------- ---------------- -----------
<S> <C> <C> <C>
Balances at June 30, 1992............................... $(1,173,388) $ -- $35,578,148
Net income............................................ -- -- 5,512,219
Proceeds from issuance of common stock................ -- -- 488,383
Implementation of Management Recognition Plan,
including issuance of common stock.................. -- (925,031) --
Three for two stock split............................. -- -- --
Increases in fair value of shares held by Management
Recognition Plan through award date................. -- (140,156) --
Amortization of unearned compensation of Management
Recognition Plan.................................... -- 154,009 154,009
Reduction of Employee Stock Ownership Plan
obligation.......................................... 120,348 -- 120,348
----------- --------- -----------
Balances at June 30, 1993............................... (1,053,040) (911,178) 41,853,107
Net income............................................ -- -- 6,968,480
Proceeds from issuance of common stock, including
effect of three for two stock split................. -- -- 93,277
Cash dividend paid on common stock at $.25 per
share............................................... -- -- (785,050)
Four for three stock split............................ -- -- --
Amortization of unearned compensation of Management
Recognition Plan.................................... -- 201,060 201,060
Reduction of Employee Stock Ownership Plan
obligation.......................................... 172,155 -- 172,155
----------- --------- -----------
Balances at June 30, 1994............................... (880,885) (710,118) 48,503,029
Net income............................................ -- -- 5,466,854
Adoption of change in accounting for securities, net
of tax.............................................. -- -- (44,843)
Proceeds from issuance of common stock, including
effect of four for three stock split................ -- -- 134,289
Cash dividend paid on common stock at $.38 per
share............................................... -- -- (1,208,625)
Tax benefit from exercise of stock options............ -- -- 67,800
Tax benefit from Management Recognition Plan.......... -- -- 211,370
Change in unrealized appreciation, net of tax......... -- -- 128,922
Amortization of unearned compensation of Management
Recognition Plan.................................... -- 355,057 355,057
Reduction of Employee Stock Ownership Plan
obligation.......................................... 160,120 -- 160,120
----------- --------- -----------
Balances at June 30, 1995............................... $ (720,765) $ (355,061) $53,773,973
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 87
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 5,466,854 $ 6,968,480 $ 5,512,219
Adjustments to reconcile net income to net cash provided by
operating activities:
Cumulative effect of change in method of accounting for
income taxes............................................. -- (764,255) --
Amortization of:
Excess of cost over fair value of net assets acquired.... 422,873 525,336 1,301,646
Discounts and premiums on securities..................... 536,232 952,346 534,952
Deferred loan origination fees........................... (505,384) (381,771) (60,562)
Loan discounts........................................... (753,527) (900,468) (1,056,576)
Provision for loan losses and losses on real estate........ 83,298 560,337 846,965
Gain on sale of branches................................... -- -- (1,000,000)
Recognition of Management Recognition Plan expense......... 355,057 201,060 154,009
Recognition of ESOP expense................................ 160,120 172,155 120,348
Dividends received in stock of Federal Home Loan Bank...... (249,600) (179,900) (156,100)
Deferred income taxes and charge in-lieu of taxes.......... 787,264 16,554 260,000
Depreciation and amortization of premises and equipment.... 534,605 505,748 558,126
Increase in unearned compensation of Management
Recognition Plan......................................... -- -- (925,031)
Decrease (increase) in:
Other assets............................................. 71,065 28,116 4,851
Accrued interest receivable.............................. (219,791) 329,588 265,059
Increase (decrease) in:
Accrued expenses and other liabilities................... 820,568 (496,008) 650,624
------------- ------------- -------------
Total adjustments..................................... 2,042,780 568,838 1,498,311
------------- ------------- -------------
Net cash provided by operating activities............. 7,509,634 7,537,318 7,010,530
------------- ------------- -------------
Cash flows from investing activities:
Net repayments of loans...................................... 12,298,111 19,119,421 30,619,553
Principal receipts on mortgage-backed securities............. 8,289,568 15,847,363 9,069,390
Purchases of available-for-sale securities................... (3,984,063) -- --
Proceeds from maturities of available-for-sale securities.... 6,035,681 -- --
Purchases of securities held-to-maturity..................... (64,990,375) -- --
Proceeds from maturities of securities held-to-maturity...... 36,767,292 -- --
Purchases of mortgage-backed securities...................... -- (48,754,748) (28,186,079)
Purchases of investment securities, certificates of deposit
and term federal funds sold................................ -- (49,295,935) (65,860,242)
Proceeds from maturities of investment securities and
certificates of deposit.................................... -- 57,157,839 44,279,779
Proceeds from sales of foreclosed real estate................ 575,089 91,281 795,102
Purchases of Federal Home Loan Bank stock.................... -- -- (3,400)
Cash and cash equivalents transferred in sale of branches.... -- -- (51,318,038)
Purchases of premises and equipment, net..................... (644,036) (458,083) (501,176)
------------- ------------- -------------
Net cash used by investing activities................. $ (5,652,733) $ (6,292,862) $(61,105,111)
------------- ------------- -------------
(Continued)
</TABLE>
F-6
<PAGE> 88
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits.......................... $ (1,500,631) $ (9,174,309) $ 17,878,579
Net increase (decrease) in mortgage escrow funds............. 37,389 (30,602) (358,953)
Lease payments for obligations under capital leases.......... (1,216) (101,100) (100,996)
Repayment of ESOP obligation................................. (880,885) (172,155) (120,348)
Advances (repayments) from the Federal Home Loan Bank........ 8,534,838 (246,605) 9,748,028
Net proceeds from issuance of common stock................... 134,289 93,277 1,413,414
Dividends paid............................................... (1,208,625) (785,050) --
------------- ------------- -------------
Net cash provided (used) by financing activities...... 5,115,159 (10,416,544) 28,459,724
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents......................................... 6,972,060 (9,172,088) (25,634,857)
Cash and cash equivalents at beginning of year................. 14,906,054 24,078,142 49,712,999
------------- ------------- -------------
Cash and cash equivalents at end of year....................... $ 21,878,114 $ 14,906,054 $ 24,078,142
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payments made during the period for:
Interest................................................... $ 17,666,029 $ 16,503,090 $ 19,262,868
Income taxes............................................... $ 2,389,500 $ 3,289,871 $ 3,967,122
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Real estate foreclosures and related transfers............... $ 44,865 $ 70,627 $ 172,183
============= ============= =============
</TABLE>
The Company sold certain branches during 1993. In conjunction with that
transaction, assets sold, liabilities transferred and gain recognized were as
follows:
<TABLE>
<S> <C>
Deposits transferred.................................... $54,814,922
Premises and equipment sold, net........................ (2,122,622)
Share loans sold........................................ (550,468)
Accrued interest and other liabilities transferred...... 176,206
Gain on sale............................................ (1,000,000)
-----------
Cash and cash equivalents transferred................... $51,318,038
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 89
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Heritage Federal Bancshares, Inc. (the Company) and its
wholly-owned subsidiary, Heritage Federal Bank for Savings (the Bank) and the
Bank's wholly-owned subsidiary, Citizens Financial Corporation. All significant
intercompany balances and transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, cash and
cash equivalents consist of federal funds sold, cash on hand, and due from
banks. Cash and due from banks includes interest-bearing deposits of $5,592,680
and $2,295,206 at June 30, 1995 and 1994, respectively. Federal funds sold
included in cash equivalents have maturities ranging from one to 14 days. The
Bank maintained cash reserves required by the Federal Reserve Bank amounting to
$3,168,000 and $4,720,000 as of June 30, 1995 and 1994, respectively.
INVESTMENT SECURITIES -- Effective July 1, 1994, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain
Investments in Debt and Equity Securities. Investments in certain debt and
equity securities are classified as either Held-to-Maturity (reported at
amortized cost), Trading (reported at fair value with unrealized gains and
losses included in earnings), or Available-for-Sale (reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity).
Premiums and discounts on debt securities are recognized in interest income
on the level interest yield method over the period to maturity.
Prior to the adoption of SFAS 115, investment securities were those
securities held for investment purposes which management determined they had the
ability and intent to hold to maturity. Investment securities were stated at
cost adjusted for amortization of premiums and accretion of discounts.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. These securities, which have been classified as held-to-maturity in
1995, are carried at unpaid principal balances, adjusted for unamortized
premiums and unearned discounts. Premiums and discounts are amortized using the
interest method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Gains and losses on the sale of securities are determined using the
specific identification method.
LOANS RECEIVABLE -- Loans receivable are stated at unpaid principal
balances, net of discounts, deferred loan origination fees, and the allowance
for loan losses.
Unearned discounts on mortgage loans purchased are amortized to interest
income using the interest method over the estimated average lives of the loans.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure, on July 1, 1994. Under the new standards, a loan is considered
impaired, based on current information and events, if it is probable that the
Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment based on the present value of
expected future cash flows discounted at the historical effective interest rate,
while all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. The adoption of SFAS 114 and 118 resulted in no
additional provision for credit losses, at July 1, 1994.
At June 30, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS 114 totaled $2,111,000, and these loans
had a corresponding valuation allowance of $70,000. The impaired loans at June
30, 1995, were measured for impairment using the fair value of the
F-8
<PAGE> 90
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
collateral as all of these loans were collateral dependent. For the year ended
June 30, 1995, the average recorded investment in impairment loans was
approximately $1,943,000. The Company recognized approximately $128,000 of
interest on impaired loans during the portion of the year that they were
impaired.
The Company uses several factors in determining if a loan is impaired under
SFAS No. 114. The internal asset classification procedures include a thorough
review of significant loans and lending relationships and include the
accumulation of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows, operating
income or loss, etc.
The allowance for loan losses is increased by charges against income and
decreased by chargeoffs (net of recoveries). Management's periodic evaluation of
the adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrowers' ability to repay, estimated value of any underlying collateral,
and current economic conditions. While management believes that it has
established the allowance in accordance with generally accepted accounting
principles and has taken into account the views of its regulators and the
current economic environment, there can be no assurance that in the future the
Bank's regulators or its economic environment will not require further increases
in the allowance.
The allowance for credit losses is established through charges to earnings
in the form of provision for credit losses. Increases and decreases in the
allowance due to changes in the measurement of the impaired loans are included
in the provision for credit losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS -- Loans, including
impaired loans, are generally classified as nonaccrual if they are past due as
to maturity or payment of principal or interest for a period of more than 90
days, unless such loans are well-secured and in the process of collection. If a
loan or a portion of a loan is classified as doubtful or is partially charged
off, the loan is generally classified as nonaccrual. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectibility of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan had been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
DISCOUNTS ON LOANS ACQUIRED THROUGH MERGERS -- Discounts on loans acquired
through mergers are accreted into income principally on the interest method over
the remaining contractual terms of the respective loans, adjusted for expected
prepayments.
F-9
<PAGE> 91
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS -- Loan fees are
accounted for in accordance with Statement of Financial Accounting Standards
(SFAS) No. 91. Loan fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized in the statement of income using the
interest method over the contractual life of the loans, adjusted for estimated
prepayments based on the Bank's historical prepayment experience. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitment is subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield. The Bank ceases amortization of net
deferred fees on loans which are contractually 90 days or more past due or where
management has determined that such amounts may be uncollectible.
REAL ESTATE OWNED -- Real estate properties acquired through loan
foreclosure or deed in lieu of foreclosure and properties classified as in
substance foreclosures are initially recorded at the lower of the related loan
balance, less any specific allowance for loss, or fair value at the date of
foreclosure. Costs subsequently incurred relating to development and improvement
of property are capitalized, whereas costs relating to holding property are
expensed. In substance foreclosed properties are those properties where the
borrower retains title but has little or no remaining equity in the property
considering its fair value; where repayment can only be expected to come from
the operation or sale of the property; and where the borrower has effectively
abandoned control of the property or it is doubtful that the borrower will be
able to rebuild equity in the property. Property acquired by deed in lieu of
foreclosure results when a borrower voluntarily transfers title to the Bank in
full settlement of the related debt in an attempt to avoid foreclosure.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Amortization is computed on the straight-line method over the term of the lease
or the life of the assets, whichever is shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLES -- The Bank is amortizing the excess of cost over fair value of net
assets acquired (goodwill) through business combinations at a constant rate when
applied to the interest-earning assets, through June 1996, which is the
estimated remaining life of the long-term interest-earning assets. During 1993,
$637,000 of goodwill relating to the branches sold was written-off. Other
intangibles amounting to $447,482 and $514,604 at June 30, 1995 and 1994,
respectively, consist of value related to a branch network acquired in 1981,
which is being amortized straight line through 2001; value assigned to the
management in place in the 1981 acquisition, which is being amortized straight
line over the remaining service life of the managers through 2001; and value
assigned to core deposits acquired in 1986, which is being amortized straight
line through 1996.
TRUST ASSETS -- Assets held by the Bank in trust capacities are not
included in the accompanying consolidated statements of financial condition,
because such items are not assets of the Bank.
INCOME TAXES -- Effective July 1, 1993, the Company adopted the provisions
of the Financial Accounting Standards Board Statement No. 109 (Statement 109),
Accounting for Income Taxes, on a prospective basis for the fiscal year ending
June 30, 1994. The adoption of Statement 109 resulted in an increase of the
Company's deferred income tax asset of $764,255. Prior to that date, the Company
followed Statement of Financial Accounting Standards No. 96, Accounting for
Income Taxes (Statement 96). Statements 109 and 96 require the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial carrying amounts and the tax
F-10
<PAGE> 92
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER
On March 30, 1992, the Bank converted from a mutual savings bank to a
capital stock savings bank. The Bank issued all of its outstanding capital stock
to Heritage Federal Bancshares, Inc., a holding company for Heritage Federal
Bank for Savings. Heritage Federal Bancshares, Inc. consummated a public
offering of 2,990,000 shares of common stock (after giving effect to stock
splits) which generated net proceeds of $16,048,290 after conversion costs
totaling $1,144,210. The Bank received 99% of the net proceeds in exchange for
the stock it issued to the holding company.
At the time of conversion, the Bank established a liquidation account in an
amount equal to the Bank's net worth for the benefit of eligible account holders
at the time of conversion. The liquidation account will be reduced annually to
the extent that eligible account holders have reduced their eligible deposits,
and shall cease upon the closing of the accounts, and shall never be increased.
In the event of liquidation of the Bank, such person shall be entitled, after
all payments to creditors, to a distribution from the liquidation account before
any distribution to stockholders.
Federal regulations adopted by the Office of Thrift Supervision (OTS)
impose certain limitations on the payment of dividends and other capital
distributions, including stock repurchases, by the Bank. Based upon current OTS
regulations and its capital structure at June 30, 1995, the Bank may make
capital distributions during a year up to the greater of (i) 100% of its net
earnings to date during the calendar year plus an amount equal to one-half of
the amount by which its total capital-to-assets ratio exceeded its fully
phased-in capital-to-assets ratio at the beginning of the calendar year or (ii)
75% of its net income during the most recent four-quarter period. At June 30,
1995, approximately $19,850,000 was available for payment of dividends from the
Bank to the Company under the above mentioned OTS restrictions. Capital
distributions by the Bank are further subject to 30-day advance written notice
to the OTS.
The Company's charter authorizes 2,000,000 shares of preferred stock of the
Company, of $1.00 par value. The Company's charter expressly vests in the Board
of Directors of the Company the authority to issue the preferred stock in one or
more series and to determine, to the extent permitted by law prior to the
issuance of the preferred stock (or any series of the preferred stock), the
relative rights, limitations, and preferences of the preferred stock or any such
series.
In February 1995, the Company entered into a merger agreement with First
American Corporation (FAC). All of the outstanding shares of the Company stock
will be exchanged for common shares of FAC in a transaction that will be
accounted for as a pooling of interest. The transaction is expected to be
consummated during the Company's second fiscal quarter.
F-11
<PAGE> 93
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES
At June 30, 1995, securities have been classified in the consolidated
financial statements according to management's intent. The carrying amount of
securities and their approximate market values at June 30, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations......... $ 20,077,586 $ 139,223 $ 3,614 $ 20,213,195
============ ========== ========== ============
Held-to-maturity:
U.S. government and agencies........ $ 71,685,619 $ 307,843 $1,068,462 $ 70,925,000
Collateralized mortgage
obligations...................... 14,942,023 484,692 93,715 15,333,000
------------ ---------- ---------- ------------
86,627,642 792,535 1,162,177 86,258,000
------------ ---------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates................... 49,076,676 189,729 623,405 48,643,000
FNMA Certificates................... 12,826,298 14,157 205,455 12,635,000
FHLMC Certificates.................. 22,091,685 71,897 429,582 21,734,000
------------ ---------- ---------- ------------
83,994,659 275,783 1,258,442 83,012,000
------------ ---------- ---------- ------------
$170,622,301 $1,068,318 $2,420,619 $169,270,000
============ ========== ========== ============
</TABLE>
Investment securities and mortgage-backed securities at June 30, 1994 were
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
BOOK UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. government and agencies................. $ 75,181,904 $270,072 $2,102,976 $ 73,349,000
Collateralized mortgage obligations.......... 5,614,505 7,370 216,875 5,405,000
------------ -------- ---------- ------------
80,796,409 277,442 2,319,851 78,754,000
------------ -------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates.......................... 52,390,756 10,508 2,866,264 49,535,000
FHLMC Certificates......................... 25,810,401 58,079 823,480 25,045,000
FNMA Certificates.......................... 14,356,656 4,520 544,176 13,817,000
------------ -------- ---------- ------------
92,557,813 73,107 4,233,920 88,397,000
------------ -------- ---------- ------------
$173,354,222 $350,549 $6,553,771 $167,151,000
============ ======== ========== ============
</TABLE>
F-12
<PAGE> 94
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SECURITIES -- (CONTINUED)
Debt securities at June 30, 1995 will mature on the following schedule:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------- ---------------------------
APPROXIMATE APPROXIMATE
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less................... $ 7,048,291 $ 7,072,000 $ 5,966,753 $ 6,017,000
Due after one year through five years..... 13,029,295 13,141,195 56,275,626 55,467,000
Due after five years through ten years.... -- -- 31,994,678 31,742,000
Due after ten years....................... -- -- 76,385,244 76,044,000
----------- ----------- ------------ ------------
$20,077,586 $20,213,195 $170,622,301 $169,270,000
=========== =========== ============ ============
</TABLE>
The amortized cost and approximate market value of mortgage-backed
securities at June 30, 1995, by contractual maturities are shown in the above
table. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
The weighted average interest yield for all securities was approximately
6.35% at June 30, 1995 and 5.69% at June 30, 1994.
Investment securities carried in the consolidated statements of financial
condition at $23,850,000 and $19,760,000 as of June 30, 1995 and 1994,
respectively, were pledged to secure public deposits.
F-13
<PAGE> 95
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Loans secured by first mortgages on real estate:
Principal balances:
One to four single family residential.............. $239,624,145 $251,144,767
Construction loans, gross commitment............... 7,044,838 11,219,927
Partially guaranteed by VA or insured by FHA....... 804,254 998,812
Other conventional................................. 32,549,777 32,177,760
Other.............................................. 1,431,052 1,746,064
------------ ------------
281,454,066 297,287,330
Less:
Discounts on loans acquired through mergers........ 1,013,821 1,767,348
Allowance for loan losses.......................... 1,222,676 1,222,676
Undisbursed portion of construction loans.......... 2,436,442 3,732,820
Net deferred loan origination fees................. 871,853 1,192,445
------------ ------------
Total first mortgage loans.................... 275,909,274 289,372,041
------------ ------------
Consumer and other loans:
Principal balances:
Secured by deposits................................ 2,224,023 2,429,921
Education.......................................... 6,216 10,213
Home equity and second mortgage.................... 13,050,389 10,600,812
Credit card........................................ 535,134 595,452
Other consumer and commercial...................... 7,666,405 6,823,118
------------ ------------
23,482,167 20,459,516
Less:
Net deferred loan origination fees (costs)......... 21,894 (39,945)
Allowance for loan losses.......................... 1,103,992 1,055,962
Loans-in-process................................... 732,242 115,915
------------ ------------
Total consumer and other loans................ 21,624,039 19,327,584
------------ ------------
Loans receivable, net......................... $297,533,313 $308,699,625
============ ============
Weighted average contractual yield...................... 8.18% 7.38%
============ ============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year................... $2,278,638 $2,387,673 $2,338,314
Provisions charged against income.............. 82,247 487,346 595,140
Chargeoffs, net of recoveries.................. (34,217) (596,381) (545,781)
---------- ---------- ----------
Balance at end of year......................... $2,326,668 $2,278,638 $2,387,673
========== ========== ==========
</TABLE>
F-14
<PAGE> 96
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS RECEIVABLE -- (CONTINUED)
The following is a summary of the principal balances of loans on nonaccrual
status and loans past due ninety days or more:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Loans contractually past due 90 days or more and/or on
nonaccrual status:
Residential.................................................. $178,000 $271,000
Consumer and commercial...................................... 47,000 194,000
-------- --------
$225,000 $465,000
======== ========
</TABLE>
During the years ended June 30, 1995, 1994, and 1993, interest income of
approximately $17,000, $22,000, and $106,000, respectively, was not recorded
related to loans accounted for on a nonaccrual basis.
In the ordinary course of business, the Bank makes loans to directors and
officers and their related interests. Loans to directors and officers and their
related interests are as follows:
<TABLE>
<S> <C>
Balance at June 30, 1993................................................. $1,640,199
Advances............................................................... 702,860
Repayments............................................................. (346,402)
Separation of officer with loans....................................... (43,363)
----------
Balance at June 30, 1994................................................. 1,953,294
Advances............................................................... 381,926
Repayments............................................................. (545,673)
----------
Balance at June 30, 1995................................................. $1,789,547
==========
</TABLE>
The Bank offers an unsecured $100,000 line of credit to each of its seven
non-employee directors. Amounts outstanding against line of credit agreements
with the two directors who have accepted the credit line were $99,878 and
$99,971 at June 30, 1995 and 1994, respectively. The directors may retain their
lines of credit after they leave the board, so long as they continue to meet the
normal credit requirements of the Bank.
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The approximate unpaid principal
balances of these loans were $7,821,000 and $9,905,000 at June 30, 1995 and
1994, respectively.
F-15
<PAGE> 97
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTEREST RECEIVABLE
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Securities available-for-sale............................... $ 352,072 $ --
Securities held-to-maturity................................. 1,533,030 --
Investment securities....................................... -- 1,255,288
Mortgage-backed securities.................................. -- 488,815
Loans receivable............................................ 1,781,205 1,702,413
---------- ----------
$3,666,307 $3,446,516
========== ==========
</TABLE>
7. REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of year...................... $262,322 $284,947 $ 201,330
Provision charged against income.................. 1,051 72,991 251,825
Chargeoffs........................................ (51,602) (95,616) (168,208)
-------- -------- --------
Balance at end of year............................ $211,771 $262,322 $ 284,947
======== ======== ========
</TABLE>
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land.......................................................... $1,587,801 $1,540,381
Office buildings and leasehold improvements................... 8,935,532 8,831,100
Furniture, fixtures, and equipment............................ 4,363,695 5,526,720
Automobiles................................................... 105,765 93,017
---------- ----------
14,992,793 15,991,218
Less accumulated depreciation and amortization.............. 8,206,898 9,314,754
---------- ----------
Premises and equipment, net................................. $6,785,895 $6,676,464
========== ==========
</TABLE>
F-16
<PAGE> 98
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
AMOUNT % AMOUNT %
------------ ----- ------------ -----
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits.......... $ 10,574,976 2.4% $ 8,395,930 1.9%
Demand and NOW accounts at 2.25%............. 56,407,635 12.5 64,671,094 14.3
SuperNow at 2.50%............................ 7,514,508 1.7 10,916,498 2.4
Money market at 3.31%........................ 17,844,834 4.0 24,135,360 5.4
Passbook savings at 2.75%.................... 68,433,425 15.2 91,440,876 20.3
------------ ----- ------------ -----
160,775,378 35.8 199,559,758 44.3
------------ ----- ------------ -----
Certificates of deposit:
2.00 to 2.50%.............................. 1,016,523 .2 1,466,043 .3
2.51 to 3.00%.............................. 701,623 .2 2,367,612 .5
3.01 to 3.50%.............................. 2,850 .0 85,027,440 18.9
3.51 to 4.00%.............................. 13,693,624 3.0 56,385,354 12.5
4.01 to 4.50%.............................. 53,029,316 11.8 38,661,139 8.6
4.51 to 5.00%.............................. 56,907,063 12.7 27,079,048 6.0
5.01 to 5.50%.............................. 33,348,110 7.4 18,379,993 4.1
5.51 to 6.00%.............................. 34,780,123 7.8 15,273,215 3.4
6.01 to 6.50%.............................. 52,314,919 11.6 1,246,910 .3
6.51 to 7.00%.............................. 39,678,704 8.8 2,320,911 .5
7.01 to 7.50%.............................. 2,376,130 .5 1,123,279 .2
7.51 to 8.00%.............................. 222,920 .1 1,480,020 .3
8.01 to 8.50%.............................. 296,088 .1 286,531 .1
8.51 to 9.00%.............................. 99,110 .0 92,491 .0
9.01 to 9.50%.............................. 75,496 .0 68,864 .0
------------ ----- ------------ -----
288,542,599 64.2 251,258,850 55.7
------------ ----- ------------ -----
$449,317,977 100.0% $450,818,608 100.0%
============ ===== ============ =====
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination greater than $100,000 was $17,250,670 and $9,264,566 at June 30,
1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30
-------------------------------------------------------------
<S> <C>
1996.................................................... $221,752,925
1997.................................................... 41,336,160
1998.................................................... 16,498,383
Later................................................... 8,955,131
------------
$288,542,599
============
</TABLE>
F-17
<PAGE> 99
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DEPOSITS -- (CONTINUED)
Interest expense on deposits for the years ended June 30, 1995, 1994 and
1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Demand, Money Market, NOW, and
SuperNOW.......................... $ 2,338,807 $ 2,361,347 $ 2,517,330
Passbook savings.................... 2,175,733 2,550,798 2,746,998
Time deposits....................... 12,314,926 10,934,623 13,609,634
----------- ----------- -----------
$16,829,466 $15,846,768 $18,873,962
=========== =========== ===========
</TABLE>
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Variable rate advance which reprices monthly based on the
one month London Interbank Offering Rate (LIBOR) plus 5
basis points (6.1203% at June 30, 1995), with interest
only due monthly, and principal due on October 14,
2004..................................................... $10,000,000 $ --
8.1% fixed rate advance payable in monthly principal and
interest payments of $865 through February, 2006......... 74,005 78,207
6.0% fixed rate advance payable in monthly principal and
interest payments of $45,830, due through November 1,
2002..................................................... 3,256,279 4,265,337
Variable rate advance which reprices monthly based on the
one month London Interbank Offering Rate (LIBOR) (6.0625%
at June 30, 1995), with interest only due monthly, and
principal due on November 14, 1997....................... 492,000 536,000
5.15% fixed rate advance payable in monthly principal and
interest payments of $53,400, due through October 1,
2003..................................................... 4,299,637 4,707,539
----------- ----------
$18,121,921 $9,587,083
=========== ==========
</TABLE>
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $27,279,181 at June 30, 1995.
11. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current........................................ $2,358,402 $3,485,409 $3,691,634
Deferred....................................... 654,476 (47,280) (268,381)
Charge-in-lieu of taxes........................ 262,227 248,529 528,381
Change in effective tax rate on
temporary differences........................ (129,439) (184,695) --
---------- ---------- ----------
$3,145,666 $3,501,963 $3,951,634
========== ========== ==========
</TABLE>
F-18
<PAGE> 100
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
Included in the above are state income taxes of $393,037, $457,561, and
$473,310 in 1995, 1994, and 1993, respectively.
The differences between income tax expense and the expected amounts
computed by applying the federal income tax rate to income before income tax
expense are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
AMOUNT % AMOUNT % AMOUNT %
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax expense
at statutory rate............. $2,928,257 34.0% $3,300,104 34.0% $3,217,710 34.0%
Increases (decreases) in tax
resulting from:
Interest on tax-free
investments................ (25,442) (.3) (23,708) (.2) (34,565) (.4)
Purchase method of accounting
in conjunction with
mergers.................... 143,777 1.7 178,614 1.8 435,221 4.6
Change in effective rate on
temporary differences...... (129,439) (1.5) (184,695) (1.9) -- --
Other, net.................... (30,891) .1 (44,053) (.5) 20,883 .2
State income taxes, net of
Federal benefit............ 259,404 2.5 275,701 2.9 312,385 3.4
---------- ---- ---------- ---- ---------- ----
Actual income tax expense....... $3,145,666 36.5% $3,501,963 36.1% $3,951,634 41.8%
========== ==== ========== ==== ========== ====
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and as
measured by tax laws and regulations. The sources of these temporary differences
are as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Excess of book over tax basis of equipment.................. $(288,614) $ (221,276)
Discounts on loans acquired through mergers................. 385,252 616,765
Allowance for loan losses................................... 450,075 783,880
Federal Home Loan Bank stock................................ (288,221) (177,595)
Deferred loan fees.......................................... (125,159) 187,354
Deferred compensation....................................... 833,322 290,202
Unrealized appreciation on available-for-sale securities.... (51,530) --
Other....................................................... (17,611) (22,192)
-------- ----------
$ 897,514 $1,457,138
======== ==========
</TABLE>
The Bank qualifies under provisions of the Internal Revenue Code which
permit it to deduct from income an allowance for bad debts based on
approximately 8% of taxable income before such deduction, or actual chargeoffs.
As of June 30, 1995, the Company has taken aggregate bad debt deductions of
approximately $4,647,000 for income tax purposes under the percentage of taxable
income method for which no provisions for federal income tax have been made in
the financial statements. This amount may be used only for absorbing losses for
tax purposes. It is not related to amounts of losses actually anticipated and
the additions thereto have not been charged against income.
F-19
<PAGE> 101
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMPENSATION AND BENEFITS
PENSION PLAN
Substantially all employees of the Bank and its subsidiary are covered by a
noncontributory defined benefit pension plan. The plan calls for benefits to be
paid to all eligible employees at retirement based primarily upon years of
service with the Bank and compensation paid in the five consecutive years when
earnings were the greatest within the ten year period preceding retirement. Plan
assets consist primarily of fixed income and equity securities and money market
instruments.
The following sets forth the funded status of the plan as of June 30, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $2,112,692 $1,981,368
Nonvested benefits........................................ 57,092 60,645
---------- ----------
Accumulated benefit obligations................... $2,169,784 $2,042,013
========== ==========
Projected benefit obligations............................. $3,167,095 $3,110,004
Fair value of assets held in the plan..................... 2,697,472 2,631,386
---------- ----------
Fair value of plan assets under projected benefit
obligations............................................ (469,623) (478,618)
Net unrecognized loss from past experience
different than assumed................................. 817,537 960,278
Unrecognized prior service cost........................... (119,620) 43,730
Unrecognized net asset as of July 1, 1987................. (253,209) (274,309)
---------- ----------
Prepaid (accrued) pension cost.................... $ (24,915) $ 251,081
========== ==========
</TABLE>
The change in projected benefit obligations resulted from additions for
such factors as interest on the beginning balance and current year service cost,
less distributions to participants.
Pension expense for the years ended June 30, 1995, 1994, and 1993, includes
the following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Service cost of the current period............... $128,817 $ 110,807 $ 116,232
Interest cost on the projected benefit
obligations.................................... 230,242 202,372 179,720
Actual return on assets held in the plan......... (192,957) 36,410 (34,726)
Net amortization and deferral.................... (48,877) (307,182) (251,987)
-------- --------- ---------
$117,225 $ 42,407 $ 9,239
======== ========= =========
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligations is 8.0%, the assumed rate of increase in future compensation levels
is 5.0%, and the expected long-term rate of return on assets is 9.5%. The Bank
uses the straight-line method of amortization of unrecognized gains and losses.
THRIFT AND PROFIT SHARING PLAN
The Bank has a thrift and profit sharing plan for substantially all
employees who have completed at least one year of service. The plan has been
amended to comply with the regulations of the Tax Equity and Fiscal
Responsibility Act, Code Section 401(k), the Retirement Equity Act of 1984, the
Deficit Reduction Act of 1984, the Tax Reform Act of 1986, and the Revenue
Reconciliation Act of 1993.
F-20
<PAGE> 102
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMPENSATION AND BENEFITS -- (CONTINUED)
Under these regulations, the Bank agrees to match an employee's
contribution equal to 5% of the employee's salary, although the employee may
contribute up to 10%. The expense for this plan for the years ended June 30,
1995, 1994, and 1993 was approximately $154,000, $128,000 and $116,000,
respectively.
13. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Heritage Federal Bancshares, Inc.
(parent company only) as of June 30, 1995 and 1994, was as follows:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash...................................................... $ 724,287 $ 1,044,132
Investment in subsidiary.................................. 33,841,080 29,147,192
Other assets.............................................. 56,321 7,796
----------- -----------
Total assets.................................... $34,621,688 $30,199,120
=========== ===========
LIABILITIES
Accounts payable.......................................... $ 105,591 $ 73,082
Employee Stock Ownership Plan obligation.................. -- 880,885
----------- -----------
Total liabilities............................... 105,591 953,967
----------- -----------
STOCKHOLDERS' EQUITY
Common stock.............................................. 3,186,158 3,172,826
Additional paid-in capital................................ 16,509,491 16,108,095
Retained earnings......................................... 15,812,195 11,555,235
Net unrealized appreciation on available-for-sale
securities.............................................. 84,079 --
Employee Stock Ownership Plan obligation.................. (720,765) (880,885)
Unearned compensation of Management Recognition Plan...... (355,061) (710,118)
----------- -----------
Total stockholders' equity...................... 34,516,097 29,245,153
----------- -----------
Total liabilities and stockholders' equity...... $34,621,688 $30,199,120
=========== ===========
</TABLE>
F-21
<PAGE> 103
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PARENT COMPANY FINANCIAL INFORMATION -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Revenue:
Equity in earnings of subsidiary.......................... $6,043,382 $7,484,815
Loan interest income...................................... 30,837 --
---------- ----------
Total revenue..................................... 6,074,219 7,484,815
---------- ----------
Expenses
Management fees........................................... 572,340 636,442
Legal fees................................................ 237,039 143,167
Other..................................................... 154,339 80,949
---------- ----------
Total expenses.................................... 963,718 860,558
---------- ----------
Income before income taxes........................ 5,110,501 6,624,257
Income tax benefit.......................................... (356,353) (344,223)
---------- ----------
Net income........................................ $5,466,854 $6,968,480
========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOW
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 5,466,854 $ 6,968,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary..................... (6,043,382) (7,484,815)
Increase (decrease) in other liabilities............. 32,507 (77,337)
----------- -----------
Net cash used by operating activities........... (544,021) (593,672)
----------- -----------
Cash flows from investing activities:
Dividends from subsidiary............................... 2,000,000 2,000,000
Advances to ESOP........................................ (720,765) --
Decrease in other assets................................ 19,277 43,246
----------- -----------
Net cash provided by investing activities....... 1,298,512 2,043,246
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 134,289 93,277
Dividend payments....................................... (1,208,625) (785,050)
----------- -----------
Net cash used by financing activities........... (1,074,336) (691,773)
----------- -----------
Net increase (decrease) in cash........................... (319,845) 757,801
Cash at beginning of year................................. 1,044,132 286,331
----------- -----------
Cash at end of year....................................... $ 724,287 $ 1,044,132
=========== ===========
</TABLE>
F-22
<PAGE> 104
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CITIZENS FINANCIAL CORPORATION
Summarized financial information of the Bank's wholly-owned service
corporation, Citizens Financial Corporation, is as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets...................................................... $1,842,612 $1,758,357
========== ==========
Accrued expenses and other liabilities...................... $ 54,175 $ 117,204
Capital stock, paid-in capital and retained earnings........ 1,788,437 1,641,153
---------- ----------
$1,842,612 $1,758,357
========== ==========
</TABLE>
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income............................................. $301,775 $310,776 $181,202
Expenses........................................... 154,491 155,956 100,573
-------- -------- --------
Net earnings............................. $147,284 $154,820 $ 80,629
======== ======== ========
</TABLE>
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT-RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the statements of financial
condition. The contract or notional amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Outstanding lines of credit balances were $1,682,944 and $1,685,212 at June
30, 1995 and 1994, respectively. Commitments to originate or purchase loans were
approximately $1,733,000 and $5,195,000 at June 30, 1995 and 1994, respectively.
The commitments exclude approved, but unused, home equity lines of credit of
$3,492,558 and $3,523,810 in 1995 and 1994, respectively. The commitments to
originate or purchase loans at June 30, 1995, were composed of variable rate
loans of $1,204,000 and fixed rate loans of $529,000. The fixed rate loans had
interest rates ranging from 6.5% to 9.25%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if
F-23
<PAGE> 105
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK -- (CONTINUED)
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the borrower. Collateral held varies but may include trade
accounts receivable; property, plant, and equipment; and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. At June 30, 1995, the unused amount
of letters of credit issued totaled $212,602.
Most of the Bank's business activity is with customers located within the
state of Tennessee. A majority of the loans are collateralized by residential or
commercial real estate or other personal property. The loans are expected to be
repaid from cash flow or proceeds from the sale of selected assets of the
borrowers. The Bank grants residential, consumer, and commercial loans to
customers throughout the eastern portion of the state of Tennessee.
16. EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATION
In conjunction with converting to a stock ownership form, the Company and
the Bank established an Employee Stock Ownership Plan (ESOP), under which the
Bank makes annual contributions to a trust for the benefit of eligible
employees. To be eligible, an employee must be 21 years of age and have
completed at least one year of service. The contributions may be in the form of
cash, other property, or common shares of the Company. The amount of the annual
contribution is at the discretion of the Board of Directors of the Bank.
Initially, the ESOP acquired 209,300 shares of the Company's common stock
financed by $1,203,475 in borrowings by the ESOP. The Board of Directors intends
to contribute to the Plan an amount equal to the required principal and interest
payments related to the ESOP loan.
During 1995, the ESOP refinanced its notes payable with borrowings from the
Company. The new loan, which has essentially the same terms as the prior
borrowing, is payable in quarterly principal payments of $30,087 plus interest
at the lender's base rate through March 30, 2002. At June 30, 1995, the loan
bore interest at 9.00%. The plan is noncontributory and there is no past service
liability. The principal balance of the ESOP loan was $720,765 at June 30, 1995
and $880,885 at June 30, 1994. The Company is using the dividends paid on
unallocated shares held by the ESOP to reduce the outstanding debt. The
financial statements for the years ended June 30, 1995, 1994 and 1993 include
compensation expense of $91,241, $120,348 and $120,348 and interest expense of
$37,592, $63,613 and $74,407, respectively, related to the ESOP.
The ESOP debt agreement contains certain affirmative financial covenants
related to the Bank's operations and financial position. The Bank is in
compliance with all such covenants.
In prior years, the Company had guaranteed the repayment of the ESOP debt
to the outside lender and, accordingly, recorded the debt on its balance sheet
with a corresponding contra-equity account.
F-24
<PAGE> 106
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATION -- (CONTINUED)
Future minimum principal payments due to the Company related to the
Employee Stock Ownership Plan obligation are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------------------
<S> <C>
1996....................................................... $120,348
1997....................................................... 120,348
1998....................................................... 120,348
1999....................................................... 120,348
2000....................................................... 120,348
Thereafter................................................. 119,025
--------
$720,765
========
</TABLE>
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the years
ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995:
Interest income......................... $8,640,565 $8,959,429 $9,074,420 $9,304,480
Interest expense........................ 4,049,674 4,338,990 4,468,926 4,939,906
---------- ---------- ---------- ----------
Net interest income..................... 4,590,891 4,620,439 4,605,494 4,364,574
Provision for loan losses............... 20,591 2,501 30,920 28,235
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses.......................... 4,570,300 4,617,938 4,574,574 4,336,339
---------- ---------- ---------- ----------
Other income............................ 719,009 682,585 701,777 651,600
General and administrative expenses..... 3,112,009 3,143,617 3,104,945 2,881,031
---------- ---------- ---------- ----------
Income before income taxes.............. 2,177,300 2,156,906 2,171,406 2,106,908
Income tax expense...................... 769,853 689,759 798,920 887,134
---------- ---------- ---------- ----------
Net income.............................. $1,407,447 $1,467,147 $1,372,486 $1,219,774
========== ========== ========== ==========
Net income per share.................... $ 0.41 $ 0.43 $ 0.39 $ 0.35
========== ========== ========== ==========
1994:
Interest income......................... $9,181,104 $8,986,173 $8,679,829 $8,703,564
Interest expense........................ 4,309,713 4,198,871 3,997,124 3,981,573
---------- ---------- ---------- ----------
Net interest income..................... 4,871,391 4,787,302 4,682,705 4,721,991
Provision for loan losses............... 216,652 212,519 45,295 12,880
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses.......................... 4,654,739 4,574,783 4,637,410 4,709,111
---------- ---------- ---------- ----------
Other income............................ 556,673 586,449 702,434 638,265
General and administrative expenses..... 3,049,639 3,021,942 2,415,619 2,866,476
---------- ---------- ---------- ----------
Income before income taxes.............. 2,161,773 2,139,290 2,924,225 2,480,900
Income tax expense...................... 863,870 828,453 969,150 840,490
---------- ---------- ---------- ----------
Net income before accounting change..... 1,297,903 1,310,837 1,955,075 1,640,410
Accounting change....................... 764,255 -- -- --
---------- ---------- ---------- ----------
Net income after accounting change...... $2,062,158 $1,310,837 $1,955,075 $1,640,410
========== ========== ========== ==========
Net income per share.................... $ 0.61 $ 0.39 $ 0.58 $ 0.49
========== ========== ========== ==========
</TABLE>
F-25
<PAGE> 107
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. STOCK OPTION AND AWARD PLANS
1992 STOCK OPTION PLAN
The Company has adopted a stock option plan for the benefit of employees of
the Bank and nonemployee directors of the Company. The number of shares of
common stock authorized and awarded under the 1992 stock option plan was
299,000, equal to 10% of the total number of shares issued in the Company's
public offering. The option exercise price of $5.75 per share is equal to 100%
of the fair market value of the common stock on the date of grant. The option
term is ten years. Options issued to employees of the Bank in connection with
the conversion became exercisable over a three year period ending in March 1995.
Options issued to nonemployee directors of the Company are immediately
exercisable. During 1993, a former director exercised options for 14,950 shares
at an exercise price of $5.75 per share. During 1994, 2,728 options were
exercised at an exercise price of $5.75 per share. During 1995, 8,377 options
were exercised at an exercise price of $5.75 per share.
MANAGEMENT RECOGNITION PLAN (MRP)
The Bank issued 89,700 shares of common stock to a MRP Trust created during
1993. All of these shares, with a market value of $1,065,187 on the date of
award, have been awarded to certain executive officers as restricted stock which
will vest over the three year period ending March 1996. Compensation expense in
the amount of $355,057, $201,060 and $154,009 was recognized during 1995, 1994
and 1993, respectively, related to these awards. The plan contains provisions
providing for forfeiture of unvested shares in the event of termination, and
vesting in the event of death, disability, retirement or a change in control.
The shares issued to the MRP Trust have been recorded as outstanding
shares, and the unvested portion has been recorded as unearned compensation
through a contra-equity account.
INCENTIVE COMPENSATION PLANS
The Company has established an incentive compensation plan for certain
officers. The plan provides for annual cash bonuses, restricted stock awards and
stock options based upon base annual compensation and certain operating results.
For the year ended June 30, 1995, compensation in the aggregate amount of
$510,228 was recorded, including awards of 3,348 shares of common stock which
will vest over three years and options on 14,350 shares of common stock
exercisable at $13.00 related to discounted option plans. In 1994, the
compensation recorded under these plans aggregated $442,464, including awards of
5,073 shares of common stock which will vest over three years and 30,735 options
on shares of common stock exercisable at $8.72 related to discounted option
plans. In 1993, the compensation recorded under these plans aggregated $404,463
including awards of 5,672 shares of common stock. In addition, in 1995, 1994 and
1993 participants were granted stock options for 6,696 shares exercisable at
$26.00 per share, 10,149 shares exercisable at $17.44 per share, and 11,352
shares exercisable at $14.25 per share, respectively.
The Company has established an incentive compensation plan for nonemployee
directors. This unfunded plan provides benefits in the form of performance stock
options for shares of common stock. The number of shares received, exercisable
at 50% of the fair market value on the date of the grant, is determined based on
the amount of director fees deferred during the year by each director. Director
compensation recorded for 1995 related to this plan amounted to $177,250,
representing 13,635 shares at an exercise price of $13.00 per share. Director
compensation recorded for 1994 related to this plan amounted to $134,650,
representing 15,446 shares at an exercise price of $8.72 per share.
In 1994, the Company adopted a new Director Option Plan that was approved
by the shareholders at the Annual Meeting in October. The plan provides for
automatic grants to each director of options to purchase 4,000 shares of common
stock annually at the fair market value on the date of the grant. At June 30,
1995, no
F-26
<PAGE> 108
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. STOCK OPTION AND AWARD PLANS -- (CONTINUED)
options had been exercised and 28,000 options are exercisable at $20.25 per
share and 28,000 options are exercisable at $15.19 per share.
19. EARNINGS PER SHARE
On July 20, 1994, Heritage Federal Bancshares, Inc. declared a four for
three stock split for all shares outstanding as of August 5, 1994, to be paid on
August 26, 1994, to be effected as a stock dividend. On August 18, 1993,
Heritage Federal Bancshares, Inc. declared a three for two stock split for all
shares outstanding as of September 8, 1993 to be effected as a stock dividend.
This stock split was paid September 30, 1993. All references to the outstanding
number of shares and earnings per share amounts have been restated to reflect
the splits.
Stock options are regarded as common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
Following are weighted average shares outstanding for computation of
earnings per share for 1995, 1994, and 1993 after adjusting for stock splits:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Shares issued and outstanding..................... 3,179,737 3,171,216 3,099,422
Common stock equivalents computed by the treasury
stock method-options............................ 284,079 200,856 209,633
--------- --------- ---------
3,463,816 3,372,072 3,309,055
========= ========= =========
</TABLE>
20. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 (Statement 107)
requires disclosures of the estimated fair value of an entity's financial
instrument assets and liabilities. For the Company, as for most financial
institutions, the great bulk of its assets and liabilities are considered
financial instruments as defined in Statement 107. However, many of such
instruments lack an available trading market, as characterized by a willing
buyer and seller engaging in an exchange transaction. Also, it is the Company's
general practice and intent to hold its financial instruments to maturity and
not to engage in trading or sales activities. Therefore, the Company used
estimations and present value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned that
there may not be reasonable comparability between institutions due to the wide
range of permitted assumptions and methodologies in the absence of active
markets. This lack of uniformity gives rise to a high degree of subjectivity in
estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, and estimation methodologies deemed suitable for the pertinent
category of financial instrument. The estimation methodologies and resulting
fair values, and recorded carrying amounts at June 30, 1995 and 1994, were as
follows:
Cash and cash equivalents are by definition short-term and do not
present any unanticipated credit issues. Therefore, the carrying amount is
a reasonable estimate of fair value. The estimated fair values of
securities are provided in Note 3 to the financial statements. These are
based on quoted market prices, when available. If a quoted market price is
not available, fair value is estimated using quoted market prices for
similar securities.
F-27
<PAGE> 109
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The fair value of the net loan portfolio has been estimated using
present value cash flow discounted at an interest rate adjusted for
servicing costs and giving consideration to estimated prepayment risk and
credit loss factors.
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1-4 family mortgages...... $247,984,000 $247,238,858 $259,692,000 $261,813,285
Consumer.................. 23,226,000 23,482,167 20,214,000 20,459,516
Non-Residential........... 33,969,000 34,215,208 33,906,000 35,474,045
------------ ------------ ------------ ------------
$305,179,000 $304,936,233 $313,812,000 $317,746,846
============ ============ ============ ============
</TABLE>
Fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand), totaling
$160,775,378 and $199,559,758 in 1995 and 1994, respectively. Under Statement
107, the fair value of deposits with no stated maturity is equal to the amount
payable on demand. Therefore, the fair value estimates for these products do not
reflect the benefits that the Bank receives from the low-cost, long-term funding
they provide. These benefits are significant. There is no material difference
between the carrying amount of deposit liabilities with stated maturities and
their estimated fair value since the majority of the liabilities mature within
one year.
The fair value of certificates of deposits and advances from the Federal
Home Loan Bank is estimated by discounting the future cash flows using the
current rates offered for similar deposits and advances with the same remaining
maturities. The carrying value and estimated fair values of certificates of
deposit and Federal Home Loan Bank advances at June 30, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Certificates of deposits:
Carrying amount....................................... $288,542,599 $251,258,850
Estimated fair value.................................. $290,144,000 $252,205,000
Advances from Federal Home Loan Bank:
Carrying amount....................................... $ 18,121,921 $ 9,587,083
Estimated fair value.................................. $ 17,852,000 $ 8,992,000
</TABLE>
In 1994, there was no material difference between the carrying amount and
estimated fair value of the obligation to the Employee Stock Ownership Plan
because it bore interest at a variable rate equivalent to a current market rate.
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $3,415,944 in 1995 and $6,880,212
in 1994, which are primarily comprised of unfunded loan commitments which are
generally priced at market at the time of funding.
The Company's remaining assets and liabilities are not considered financial
instruments.
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA),
which was signed into law in 1989, imposed stringent capital requirements upon
savings institutions. In addition, FIRREA included provisions for changes in the
federal regulatory structure for savings institutions including a new deposit
insurance system, increased deposit premiums and restricted investment
activities with respect to noninvest-
F-28
<PAGE> 110
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT
ACT -- (CONTINUED)
ment grade corporate debt and certain other investments. FIRREA also increased
the required ratio of housing-related assets in order to qualify as a qualified
thrift lender under federal regulations.
The Bank must satisfy three capital standards, as set by the Office of
Thrift Supervision ("the OTS"). These standards include a ratio of core capital
to adjusted total assets of 3.0%, a tangible capital standard expressed as 1.5%
of total adjusted assets, and a combination of core and "supplementary" capital
equal to 8.0% of risk-weighted assets. The OTS recently finalized regulations
that add an interest rate risk component to capital requirements under certain
circumstances. The Bank does not expect that this regulation will require it to
reduce its capital materially for purposes of determining compliance with its
risk-based capital requirement. In addition, the OTS has recently adopted
regulations that impose certain restrictions on savings associations that have a
total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital
(or core capital) to risk-weighted assets of less than 4.0%, or a ratio of Tier
1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution
receives the highest rating under the OTS examination rating system).
F-29
<PAGE> 111
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 21, 1995
BETWEEN
FIRST AMERICAN CORPORATION
AND
HERITAGE FEDERAL BANCSHARES, INC.
<PAGE> 112
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - The Merger . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Effective Time of the Merger . . . . . . . . . . . . . . . . . 1
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effects of the Merger . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II - Effect of the Merger on the Capital Stock
of the Constituent Corporations; Exchange
of Certificates . . . . . . . . . . . . . . . . . . . . . 2
2.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . 2
2.2 Exchange of Certificates . . . . . . . . . . . . . . . . . . . 4
ARTICLE III - Representations and Warranties . . . . . . . . . . . . . . 6
3.1 Representations and Warranties of HFB . . . . . . . . . . . . . 6
3.2 Representations and Warranties of FAC . . . . . . . . . . . . . 18
ARTICLE IV - Covenants Relating to Conduct of Business . . . . . . . . . 24
4.1 Covenants of Both Parties . . . . . . . . . . . . . . . . . . . 24
4.2 Covenants of HFB . . . . . . . . . . . . . . . . . . . . . . . 24
4.3 Covenants of FAC . . . . . . . . . . . . . . . . . . . . . . . 26
4.4 Adverse Changes in Condition . . . . . . . . . . . . . . . . . 27
4.5 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.6 Affirmative Covenants of HFB . . . . . . . . . . . . . . . . . 27
4.7 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE V - Additional Agreements . . . . . . . . . . . . . . . . . . . . 28
5.1 Preparation of S-4 and the Proxy Statement . . . . . . . . . . 28
5.2 Letter of HFB's Accountants . . . . . . . . . . . . . . . . . . 29
5.3 Letter of FAC's Accountants . . . . . . . . . . . . . . . . . . 29
5.4 Access to Information . . . . . . . . . . . . . . . . . . . . . 29
5.5 HFB Stockholders Meeting . . . . . . . . . . . . . . . . . . . 30
5.6 Legal Conditions to Merger . . . . . . . . . . . . . . . . . . 30
5.7 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 31
5.8 NASDAQ Listing . . . . . . . . . . . . . . . . . . . . . . . . 31
5.9 Transition of Certain Employee Benefit Plans;
</TABLE>
i
<PAGE> 113
<TABLE>
<S> <C>
Employment Matters . . . . . . . . . . . . . . . . . . . . 31
5.10 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . 34
5.11 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
5.12 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . 35
5.13 Governance; Name . . . . . . . . . . . . . . . . . . . . . . . 36
5.14 Indemnification; Directors' and Officers' Insurance . . . . . . 36
5.15 Coordination of Dividends . . . . . . . . . . . . . . . . . . . 37
5.16 HFB Accruals and Reserves . . . . . . . . . . . . . . . . . . . 37
5.17 Bank Merger . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.18 Additional Agreements . . . . . . . . . . . . . . . . . . . . . 38
5.19 Enforcement of Agreements . . . . . . . . . . . . . . . . . . . 38
5.20 Cooperation Generally . . . . . . . . . . . . . . . . . . . . 38
ARTICLE VI - Conditions Precedent . . . . . . . . . . . . . . . . . . . . 38
6.1 Conditions to Each Party's Obligation To
Effect the Merger . . . . . . . . . . . . . . . . . . . . 38
6.2 Conditions to Obligations of FAC . . . . . . . . . . . . . . . 39
6.3 Conditions to Obligations of HFB . . . . . . . . . . . . . . . 43
ARTICLE VII - Termination and Amendment . . . . . . . . . . . . . . . . . 47
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 47
7.2 Rights an Obligations upon Termination . . . . . . . . . . . . 48
7.3 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . 49
7.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE VIII - General Provisions . . . . . . . . . . . . . . . . . . . . 51
8.1 Nonsurvival of Representations, Warranties
and Agreements . . . . . . . . . . . . . . . . . . . . . . 51
8.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
8.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . 52
8.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.5 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership . . . . . . . . . . . . . . . . . . . 52
8.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.7 Injunctive Relief; Limitations on Remedies . . . . . . . . . . 53
8.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.10 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.11 Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>
ii
<PAGE> 114
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER dated as of February 21,
1995 (the "Agreement"), between First American Corporation, a Tennessee
corporation ("FAC") and Heritage Federal Bancshares, Inc., a Tennessee
corporation ("HFB").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of FAC and HFB have approved,
and deem it advisable and in the best interests of their respective
stockholders to consummate, the business combination transaction provided for
herein in which HFB would merge with and into FAC (the "Merger"); and
WHEREAS, FAC and HFB desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger; and
WHEREAS, as soon as practicable after the execution and
delivery of this Agreement, it is contemplated that First American National
Bank, a national bank and a wholly owned subsidiary of FAC ("FANB") and
Heritage Federal Bank for Savings, a Federal savings association and wholly
owned subsidiary of HFB ("HFBS") will enter into a Bank Plan of Merger of HFBS
with and into FANB, and it is intended that the Bank Plan of Merger will be
consummated immediately after consummation of the Merger; and
WHEREAS, for Federal income tax purposes, it is intended that
the Merger and the Bank Plan of Merger shall qualify as a reorganization under
the provisions of Section 368 of the Internal Revenue Code of 1986, as amended
(the "Code").
NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants and agreements set forth
herein, the parties hereto agree as follows:
ARTICLE I
The Merger
1.1 Effective Time of the Merger. Subject to the
provisions of this Agreement, articles of merger (the "Articles of Merger")
including a plan of merger
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consistent with this Agreement shall be duly prepared, executed and
acknowledged by the Surviving Corporation (as defined in Section 1.3(b)) and
thereafter delivered to the Secretary of State of the State of Tennessee, for
filing, as provided in the Tennessee Business Corporation Act (the "TBCA"), as
soon as practicable on or after the Closing Date (as defined in Section 1.2).
The Merger shall become effective upon the filing of the Articles of Merger
with the Secretary of State of the State of Tennessee or at such time
thereafter as it provided in the Articles of Merger (the "Effective Time"), but
in either event the parties intend that the Effective Time shall be 12:01 a.m.
of the first calendar day of the month immediately following the month in which
the Closing occurs.
1.2 Closing. The closing of the Merger (the "Closing")
will take place at 10:00 a.m. Central Time on the first day which is (a) the
last business day of a calendar quarter or the last business day of a calendar
month if after October 1, 1995 and (b) at least two business days after
satisfaction (or waiver) of each of the conditions set forth in Sections 6.1,
6.2 and 6.3 (other than the delivery of the officers' certificate referred to
in Sections 6.2(b) and 6.3(b) (provided that the other closing conditions set
forth in Article VI have been met or waived as provided in Article VI at or
prior to the Closing (the "Closing Date"), at the offices of FAC, First
American Center, Nashville, Tennessee 37237, unless another time, date or place
is agreed to in writing by the parties hereto.
1.3 Effects of the Merger. (a) At the Effective Time,
(i) the separate existence of HFB shall cease and HFB shall be merged with and
into FAC, (ii) the charter of FAC as in effect immediately prior to the
Effective Time shall be the charter of the Surviving Corporation and (iii) the
By-laws of FAC as in effect immediately prior to the Effective Time shall be
the By-laws of the Surviving Corporation.
(b) As used in this Agreement, "Constituent Corporation"
shall mean FAC and HFB and "Surviving Corporation" shall mean FAC.
(c) At and after the Effective Time, the Merger will have
the effects set forth in Section 48-21-108 of the TBCA.
ARTICLE II
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
2.1 Effect on Capital Stock. As of the Effective Time,
by virtue of the Merger and without any action on the part of the holder of any
shares of HFB Common Stock:
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(a) Cancellation of Stock. All shares of the $1.00 par
value common stock of HFB (the "HFB Common Stock") that are owned by FAC or any
Subsidiary of FAC (other than shares in trust accounts, managed accounts,
custodial accounts and the like that are beneficially owned by third parties
(any such shares, "trust account shares")) shall be canceled and retired and
shall cease to exist and no stock of FAC or other consideration shall be
delivered in exchange therefor. All shares of $5.00 par value common stock of
FAC (the "FAC Common Stock") that are owned by HFB or any Subsidiary (other
than trust account shares) shall become authorized but unissued stock of FAC.
As used in this Agreement, the word "Subsidiary" when used with respect to any
party means any corporation or other organization, whether incorporated or
unincorporated, of which such party or any other Subsidiary of such party is a
general partner or of which at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of
the board of directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party and/or by any one or more of its Subsidiaries.
(b) Conversion of HFB Common Stock. Subject to Section
2.2(a), each issued and outstanding share of HFB Common Stock (other than
shares to be canceled in accordance with Section 2.1(a)) shall, by virtue of
this Agreement and without any action on the part of the holder thereof, be
converted into and exchangeable for the right to receive the number of fully
paid and nonassessable shares of FAC Common Stock rounded to the nearest
thousandth of a share, determined by dividing $28.00 by the Average Closing
Price, as defined below (the "Exchange Ratio") including the corresponding
number of rights associated with the FAC Common Stock pursuant to the FAC
Rights Agreement (as defined in Section 3.2(b)). The Average Closing Price
shall mean the average closing sale price per share of FAC Common Stock on the
NASDAQ national market system (as reported in The Wall Street Journal, or if
not reported thereby, any other authoritative source) for the twenty (20)
consecutive trading days ending on and including the third day immediately
preceding, but not including the Effective Time; provided, that the Exchange
Ratio shall not exceed 1.098 shares of FAC Common Stock per share of HFB Common
Stock and shall not be less than 0.8116 shares of FAC Common Stock per share of
HFB Common Stock unless prior to the Effective Time the outstanding shares of
FAC Common Stock have been increased, decreased, changed into or exchanged for
a different number or kind of shares through a reorganization,
reclassification, stock dividend, stock split, reverse stock split or other
similar change in which case applicable adjustments shall be made to the
Average Closing Price and the maximum and minimum number of shares to be
exchanged.
All such shares of HFB Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall cease to
exist, and each certificate previously representing any such shares shall
thereafter represent the shares of FAC Common Stock into which HFB Common Stock
has been converted
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and the right to cash payment for fractional shares, if any. Certificates
previously representing shares of HFB Common Stock shall be exchanged for
certificates representing whole shares of FAC Common Stock issued in
consideration therefor and cash for fractional shares, if any, upon the
surrender of such certificates in accordance with Section 2.2.
(c) No Dissenters Rights. Pursuant to Section 48-23-102
of the TBCA, holders of HFB Common Stock will not have dissenters' rights of
appraisal as a result of the Merger or any other event or transaction
contemplated by this Agreement.
(d) Shares of FAC Common Stock. Each share of FAC Common
Stock outstanding immediately prior to the Effective Time shall remain issued
and outstanding from and after the Effective Time.
2.2. Exchange of Certificates. (a) Exchange Agent. As
of the Effective Time, FAC shall deposit, or shall cause to be deposited, with
an exchange agent selected by FAC and reasonably acceptable to HFB, (the
"Exchange Agent"), for the benefit of the holders of shares of HFB Common
Stock, for exchange in accordance with this Article II, through the Exchange
Agent, certificates representing the shares of FAC Common Stock (such
certificates for shares of FAC Common Stock together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding
shares of HFB Common Stock and cash for fractional shares.
(b) Exchange Procedures. As soon as reasonably
practicable after the Effective Time, but in no event later than five (5)
business days thereafter, the Exchange Agent shall mail to each holder of
record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of HFB Common Stock (the
"Certificates") whose shares were converted into shares of FAC Common Stock
pursuant to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as FAC and HFB may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of FAC Common
Stock and cash for fractional shares, if any. Upon surrender of a Certificate
for cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of FAC Common Stock which such holder has the right to receive in
respect of the Certificate surrendered pursuant to the provisions of this
Article II (after taking into account all shares of HFB Common Stock then held
by such holder), and cash for fractional shares, if any, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of HFB Common Stock which is not
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registered in the transfer records of HFB, a certificate representing the
proper number of shares of FAC Common Stock may be issued to a transferee if
the Certificate representing such HFB Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of FAC
Common Stock and cash in lieu of any fractional shares of FAC Common Stock as
contemplated by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to FAC Common Stock with a record date after the Effective Time shall
be paid to the holder of any unsurrendered Certificate with respect to the
shares of FAC Common Stock represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.2(e)
until the holder of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificates representing whole shares
of FAC Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of any cash payable with respect to a
fractional share of FAC Common Stock to which such holder is entitled pursuant
to Section 2.2(e) and the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such
whole shares of FAC Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of FAC Common Stock.
(d) No Further Ownership Rights in HFB Common Stock. All
shares of FAC Common Stock issued upon conversion of shares of HFB Common Stock
in accordance with the terms hereof (including any cash paid pursuant to
Section 2.2) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of HFB Common Stock, subject, however, to the
Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have
been declared or made by HFB on such shares of HFB Common Stock in accordance
with the terms of this Agreement on or prior to the Effective Time and which
remain unpaid at the Effective Time, and there shall be no further registration
of transfers on the stock transfer books of the Surviving Corporation of the
shares of HFB Common Stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article II.
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(e) No Fractional Shares. (i) No certificates or scrip
representing fractional shares of FAC Common Stock shall be issued upon the
surrender for exchange of Certificates, and such fractional share interests
will not entitle the owner thereof to vote or to any rights of a stockholder of
FAC including without limitation the right to receive dividends. Each holder of
HFB Common Stock who would otherwise have been entitled to receive a fraction
of a share of FAC Common Stock (after taking into account all certificates
delivered by such holder) shall receive, in lieu thereof, cash (without
interest) in an amount equal to such fractional part of a share of FAC Common
Stock multiplied by the market value of one share of FAC Common Stock on the
day immediately prior to the Effective Time. The market value of one share of
FAC Common Stock on the day immediately prior to the Effective Time shall be
the closing price of such stock on the NASDAQ national market system (as
reported in The Wall Street Journal, or if not reported thereby, any other
authoritative source) on the last trading day preceding the Effective Time. As
soon as practicable after the determination of the amount of cash, if any, to
be paid to holders of HFB Common Stock with respect to any fractional share
interests, the Exchange Agent shall make available such amounts to such holders
of HFB Common Stock subject to and in accordance with the terms of Section
2.2(b).
(f) Termination of Exchange Fund. Any portion of the
Exchange Fund which remains undistributed to the stockholders of HFB for one
year after the Effective Time shall be delivered to FAC, upon demand, and any
stockholders of HFB who have not theretofore complied with this Article II
shall thereafter look only to FAC for payment of their claim for FAC Common
Stock, any cash in lieu of fractional shares of FAC Common Stock and any
dividends or distributions with respect to FAC Common Stock.
(g) No Liability. Neither FAC nor HFB shall be liable to
any holder of shares of HFB Common Stock or FAC Common Stock, as the case may
be, for such shares (or dividends or distributions with respect thereto)
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
ARTICLE III
Representations and Warranties
3.1 Representations and Warranties of HFB. HFB
represents and warrants to FAC as follows (except with respect to matters
disclosed in the HFB Disclosure Schedule delivered by HFB to FAC concurrently
with or prior to the execution of this Agreement, and reference to a matter in
a section of the Disclosure Schedule shall also be deemed a reference to such
matter in any other section of the Disclosure Schedule whether or not
specifically disclosed therein):
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(a) Organization, Standing and Power. HFB is a Tennessee
corporation and a savings and loan holding company subject to regulations with
the Office of Thrift Supervision and the Department of the Treasury. Heritage
Federal Bank for Savings, a federal stock savings bank ("HFBS"), is a wholly
owned Subsidiary of HFB. Each of HFB and its Subsidiaries is a federal savings
bank or corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation or organization, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary other than in such jurisdictions where the failure to
so qualify would not have a material adverse effect on HFB.
(b) Capital Structure. (i) As of the date hereof, the
authorized capital stock of HFB consists of 8,000,000 shares of HFB Common
Stock, $1.00 par value ("HFB Common Stock") and 2,000,000 shares of $1.00 par
value serial preferred stock ("HFB Preferred Stock"). At the close of business
on February 9, 1995, 3,179,181 shares of HFB Common Stock were outstanding, no
shares of HFB Preferred Stock were outstanding, options for 422,532 shares of
HFB Common Stock were outstanding, 477,000 shares of HFB Common Stock were
reserved for issuance upon the exercise of outstanding stock options and for
restricted stock awards and no shares of HFB Common Stock were held by HFB in
treasury or by its Subsidiaries.
(ii) As of the date hereof, no bonds, debentures,
notes or other indebtedness having the right to vote (or convertible into or
exercisable for securities having the right to vote) on any matters on which
stockholders may vote ("Voting Debt") of HFB were issued or outstanding. All
outstanding shares of HFB capital stock are validly issued, fully paid and
nonassessable and not subject to preemptive rights.
(iii) As of the date of this Agreement, except for
this Agreement, the HFB Stock Plans and HFB Stock Options (both as defined in
Section 5.10) and except as disclosed in the HFB Disclosure Schedule, there are
no options, warrants, calls, rights, commitments or agreements of any character
to which HFB or any Subsidiary of HFB is a party or by which it is bound
obligating HFB or any Subsidiary of HFB to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or any Voting
Debt of HFB or of any Subsidiary of HFB or obligating HFB or any Subsidiary of
HFB to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement. Assuming compliance by FAC with Section 5.10, after
the Effective Time, there will be no other option, warrant, call, right or
agreement obligating HFB or any Subsidiary of HFB to issue, deliver or sell, or
cause to be issued, delivered or sold, any shares of capital stock or any
Voting Debt of HFB or any Subsidiary of HFB, or obligating HFB or any
Subsidiary of HFB to grant, extend or enter into any such option, warrant,
call, right or
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agreement. As of the date hereof, there are no outstanding contractual
obligations of HFB or any of its Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of HFB or any of its
Subsidiaries.
(iv) Since December 31, 1994, except as permitted
by this Agreement, HFB has not (A) issued or permitted to be issued any shares
of capital stock, or securities exercisable for or convertible into shares of
capital stock, of HFB or any of its Subsidiaries, other than pursuant to and as
required by the terms of any HFB Stock Options or HFB Stock Plans; (B)
repurchased, redeemed or otherwise acquired, directly or indirectly through one
or more of its subsidiaries, any shares of capital stock of HFB or any of its
Subsidiaries (other than the acquisition of trust account shares); or (C)
declared, set aside, made or paid to the stockholders of HFB dividends or other
distributions on the outstanding shares of capital stock of HFB, other than
regular quarterly cash dividends at a rate not in excess of the regular
quarterly cash dividends most recently declared by HFB prior to the date
hereof.
(c) Authority. (i) HFB has all requisite corporate power
and authority to enter into this Agreement and, subject to approval of this
Agreement and an amendment to Article XIV of the HFB Charter (to make
inapplicable to FAC the restrictions therein) by the stockholders of HFB, to
consummate the transactions contemplated hereby. HFBS has all requisite
corporate power and authority to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of HFB, subject in the case of this Agreement to
such approval of this Agreement by the stockholders of HFB. This Agreement has
been duly executed and delivered by HFB and constitutes the valid and binding
obligation of HFB, enforceable in accordance with its terms.
(ii) Except as disclosed in the HFB Disclosure
Schedule, the execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, (A) conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a material
benefit under, or the creation of a lien, pledge, security interest, charge or
other encumbrance on assets (any such conflict, violation, default, right of
termination, cancellation or acceleration, loss or creation, a "Violation")
pursuant to, any provision of the charter or By-laws of HFB, HFBS or any other
Subsidiary of HFB (other than an amendment to Article XIV of the HFB Charter as
contemplated hereby) or (B) subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declarations and filings
referred to in paragraph (iii) below, result in any Violation of any loan or
credit agreement, note, mortgage, indenture, lease, Benefit Plan (as defined in
Section 3.1(j)) or other agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule
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or regulation applicable to HFB, HFBS or any other Subsidiary of HFB or their
respective properties or assets which Violation would have a material adverse
effect on HFB and HFBS taken as a whole.
As used in this Agreement, (i) any reference to any event,
change or effect being "material" with respect to any entity means an event,
change or effect which is material in relation to the financial condition,
properties, assets, liabilities, businesses, prospects or results of operations
of such entity and its Subsidiaries taken as a whole and (ii) the term
"material adverse effect" means, with respect to HFB or FAC, a material adverse
effect on the business, prospects, assets, results of operations or financial
condition of such party and its Subsidiaries taken as a whole or on the ability
of such party to perform its obligations hereunder.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority or instrumentality (a
"Governmental Entity"), is required by or with respect to HFB, HFBS or any
other Subsidiary of HFB in connection with the execution and delivery of this
Agreement and the transactions contemplated hereby the failure to obtain which
would have a material adverse effect on HFB or any Subsidiary thereof, except
for (A) the filing of applications with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the BHC Act and the Federal
Deposit Insurance Act ("FDIA") and with the U. S. Comptroller of the Currency
(the "OCC") and the U.S. Office of Thrift Supervision ("OTS") and approval of
same, (B) the filing with the SEC of (1) a proxy statement in definitive form
relating to the meeting of HFB's stockholders to be held in connection with the
Merger (the "Proxy Statement") and (2) such reports under Sections 13(a),
13(d), 13(g) and 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement and the
transactions contemplated hereby and the obtaining from HFB of such orders as
may be required in connection therewith, (C) the filing of Articles of Merger
with the Secretary of State of the State of Tennessee and appropriate documents
with the relevant authorities of other states in which HFB is qualified to do
business, (D) the filing of such applications, filings, authorizations, orders
and approvals as may be required under Tennessee banking laws, and with and of
state banking authorities and approval of same ("State Banking Approval") and
pursuant to state takeover or change in control laws ("State Takeover
Approval"), (E) consents, authorizations, approvals, filings or exemptions in
connection with compliance with the applicable provisions of federal and state
securities laws relating to the regulation of broker-dealers or investment
advisers, and federal commodities laws relating to the regulation of future
commission merchants and the rules and regulations thereunder and of any
applicable industry self-regulatory organization, and the rules of NASDAQ, or
which are required under consumer finance, mortgage banking an other similar
laws, (F) notices under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (G) such filings, notifications and approvals
as are required
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in order to terminate the ESOP and other HFB Benefit Plans as hereinafter
defined and described, and (I) filings, notifications and approvals under state
insurance laws and regulations.
(d) SEC Documents. HFB has made available to FAC a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by HFB with the SEC (other than reports filed
pursuant to Section 13(d) or 13(g) of the Exchange Act) since June 30, 1994
including the Form 10-Q for the quarter ended December 31, 1994 (the "HFB
Second Quarter 10-Q") (as such documents have since the time of their filing
been amended, the "HFB SEC Documents"), which are all the documents (other than
preliminary material and reports required pursuant to Section 13(d) or 13(g) of
the Exchange Act) that HFB was required to file with the SEC since such date.
HFB has made available to FAC true and complete copies of HFB's most recent
quarterly OTS financial reports and the HFB annual and quarterly reports on
Form H-(b)11 ("OTS Reports") filed with the OTS. As of their respective dates,
the OTS Reports complied in all material respects with the applicable
regulatory requirements (including regulatory accounting practices). As of
their respective dates, the HFB SEC Documents complied in all material respects
with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such HFB SEC Documents, and
none of the HFB SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of HFB
included in the HFB SEC Documents comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q of the
SEC or normal recurring year-end adjustments) and fairly present the
consolidated financial position of HFB and its consolidated Subsidiaries at the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended. All material agreements, contracts and other
documents required to be filed as exhibits to any of the HFB SEC Documents have
been so filed. Except as set forth in the HFB Disclosure Schedule, HFB has no
off-balance sheet financial instruments including but not limited to letters of
credit, unfunded commitments and derivative financial instruments, and will
have no off-balance sheet financial instruments as of the Effective Time. To
HFB's knowledge, there are no unasserted claims that are not disclosed in the
HFB SEC Documents that would reasonably be expected to have, individually or in
the aggregate, a material adverse effect on HFB and its Subsidiaries, taken as
a whole.
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(e) Information Supplied. None of the information
supplied pursuant to this Agreement or to be supplied by HFB for inclusion or
incorporation by reference in (i) the registration statement on Form S-4 (or
other applicable form) to be filed with the SEC by FAC in connection with the
issuance of shares of FAC Common Stock in the Merger (the "S-4") will, at the
time the S- 4 is filed with the SEC and at the time it becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Proxy Statement will, at the
date of mailing to stockholders and at the times of the meeting of stockholders
to be held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Proxy Statement
(except for such portions thereof that relate only to FAC) will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
(f) Compliance with Applicable Laws. HFB and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities which are material to the operation of
the businesses of HFB and its Subsidiaries, taken as a whole (the "HFB
Permits"). HFB and its Subsidiaries are in compliance with the terms of the
HFB Permits, except where the failure as to comply would not have a material
adverse effect on HFB and its Subsidiaries, taken as a whole. Except as
disclosed in the HFB SEC Documents filed prior to the date of this Agreement or
in the HFB Second Quarter 10-Q, the businesses of HFB and its Subsidiaries are
not being conducted in violation of any law, ordinance or regulation of any
Governmental Entity except for possible violations which individually or in the
aggregate do not, and, insofar as reasonably can be foreseen, in the future
will not, have a material adverse effect on HFB and its Subsidiaries, taken as
a whole. Except for routine examinations by Federal or state Governmental
Entities charged with the supervision or regulation of thrifts or thrift
holding companies or engaged in the insurance of bank deposits ("Bank
Regulators"), as of the date of this Agreement, to the knowledge of HFB, no
investigation by any Governmental Entity with respect to HFB or any of its
Subsidiaries is pending or threatened.
(g) Litigation. As of the date of this Agreement, except
as disclosed in the HFB SEC Documents filed prior to the date of this Agreement
there is no suit, action or proceeding pending or, to the knowledge of HFB,
threatened, against or affecting HFB or any Subsidiary of HFB that would
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on HFB and its Subsidiaries, taken as a whole, nor is there any
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against HFB or any Subsidiary of HFB having, or which
would reasonably be expected to have any such effect.
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(h) Taxes. HFB and each of its Subsidiaries have filed
all tax returns required to be filed by any of them and have paid (or HFB has
paid on their behalf), or have set up an adequate reserve for the payment of,
all taxes required to be paid as shown on such returns, and the most recent
consolidated financial statements contained in the HFB SEC Documents reflect an
adequate provision for current and deferred taxes payable by HFB and its
Subsidiaries accrued through the date of consolidated such financial
statements, except in each case where a failure to do so would not have a
material adverse effect on HFB. No deficiencies for any taxes have been
proposed, asserted or assessed against HFB or any of its Subsidiaries that are
not adequately reserved for, except for deficiencies that would not have a
material adverse effect on HFB. Except with respect to claims for refund, the
Federal income tax returns of HFB and each of its Subsidiaries consolidated in
such returns have been examined by and settled with the United States Internal
Revenue Service (the "IRS"), or the statute of limitations with respect to such
years has expired (and no waiver extending the statute of limitations has been
requested or granted), for all years through 1990. No Federal income tax
returns of HFB and each of its Subsidiaries consolidated are currently under
examination by the IRS. For the purpose of this Agreement, the term "tax"
(including, with correlative meaning, the terms "taxes" and "taxable") shall
include, except where the context otherwise requires, all Federal, state, local
and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy and other taxes,
duties or assessments of any nature whatsoever, together with all interest,
penalties and additions imposed with respect to such amounts.
(i) Certain Agreements. Except as set forth in the HFB
Disclosure Schedule, or as disclosed in the HFB SEC Documents filed prior to
the date of this Agreement, and except for this Agreement, as of the date
hereof, neither HFB nor any of its Subsidiaries is a party to any oral or
written agreement not terminable on 30 days' or less notice or involving the
payment of more than $25,000 per annum.
(j) Benefit Plans. Neither HFB nor any of its
Subsidiaries maintains for the benefit of its employees any "employee benefit
plans" (each a "HFB Benefit Plan"), as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or other
profit-sharing, deferred compensation, bonus stock option, stock purchase,
employee benefit plans or arrangements, except as set forth in the HFB
Disclosure Schedule. HFB has made available to FAC a true and complete copy of
each HFB Benefit Plan and any related funding agreements, including all
amendments, supplements, and modifications thereto, all of which are legally
valid and binding and in full force and effect, and not in default in any
respect. HFB will also make available to FAC a true and complete copy of the
most recent annual report (Form 5500) and actuarial report, if any, for each
HFB Benefit Plan, and the most recent IRS determination letter, if any, for
each HFB Benefit Plan. All contributions required to be made to each HFB
Benefit Plan under the terms of that HFB Benefit Plan, ERISA, or other
applicable law have been timely made. Except as set forth in
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the HFB Disclosure Schedule, in the case of each HFB Benefit Plan that is
subject to Title I, subtitle B, part 3 of ERISA, the net fair market value of
the assets held to fund that HFB Benefit Plan exceed the actuarial present
value (based on the actuarial assumptions used by HFB and its Subsidiaries for
funding) of all accrued benefits, both vested and nonvested under that HFB
Benefit Plan. To the knowledge of HFB, each HFB Benefit Plan complies
currently, and has complied in the past, in form and operation, with the
applicable provisions of ERISA, the Internal Revenue Code of 1954, as amended
(the "Code"), and other applicable law in all material respects. Each HFB
Benefit Plan intended to be a qualified plan and exempt trust under the
provisions of Sections 401 and 501 of the Code has been the subject of an IRS
determination letter to that effect and except as set forth on the HFB
Disclosure Schedule HFB knows of no facts or circumstances that are likely to
adversely affect the qualified status of any HFB Benefit Plan. HFB will make
any amendments required to be made to each HFB Benefit Plan to comply with
applicable legislation or regulations prior to the Effective Time. To the
knowledge of HFB, there have been no "prohibited transactions" (as defined in
Section 4975(c)(1) of the Code or Section 406 of ERISA) that would subject any
of the HFB Benefit Plans, any fiduciary thereof or any party dealing with the
HFB Benefit Plans to the tax on prohibited transactions imposed by Section 4975
of the Code or to a civil penalty imposed by Section 502 of ERISA. No amount
is due or owing from HFB and or any of its Subsidiaries to the Pension Benefit
Guaranty Corporation under Title IV of ERISA for any reason. To the knowledge
of HFB, no event which constitutes a "reportable event" as defined in Section
4043 of ERISA has occurred with respect to any HFB Benefit Plan that is covered
by ERISA. Since September 2, 1974, HFB has not terminated any employee benefit
plan subject to Title IV of ERISA for which a Notice of Sufficiency has not
been issued by the Pension Benefit Guaranty Corporation. To the knowledge of
HFB, there are no issues or disputes with respect to any HFB Benefit Plan, or
the administration thereof, currently existing between any trustee or other
fiduciary thereunder, HFB or any of its Subsidiaries and any governmental
agency, employee, former employee or beneficiary of any employee or former
employee of HFB or any of its Subsidiaries. Except as set forth in the HFB
Disclosure Schedule, neither HFB nor any of its Subsidiaries has previously,
currently or will prior to the Effective Time (i) participate in or contribute
to any multi-employer plan as such term is defined in Section 4001(a) of ERISA
or (ii) agree to provide any post-retirement welfare benefits to its former
employees. All group health plans of HFB and its Subsidiaries have been
operated in good faith compliance with the applicable requirements for group
health plan continuation coverage of Section 4980B of the Code.
(k) Subsidiaries. Exhibit 21 to HFB's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994, includes all the
Subsidiaries of HFB as of the date of this Agreement and indicates for each
such Subsidiary as of such date the jurisdiction of incorporation. Except as
set forth on such Exhibit, neither HFB nor any Subsidiary of HFB owns any
equity interest in any other corporation, association, partnership or other
entity other than the Federal Home Loan Bank of Cincinnati. HFBS is the only
Subsidiary of HFB that is a depository institution and HFBS is an "insured
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depository institution" as defined in the FDIA and applicable regulations
thereunder. All of the shares of capital stock of each of the Subsidiaries
held by HFB or by another Subsidiary of HFB are fully paid and nonassessable
and are owned by HFB or a Subsidiary of HFB free and clear of any claim, lien
or encumbrance.
(l) Agreement with Bank Regulators. As of the date of
this Agreement, neither HFB nor any Subsidiary of it is a party to any written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is subject to any condition imposed in
writing, order or directive by, or is a recipient of any extraordinary
supervisory letter from, any Bank Regulator which restricts materially the
conduct of its business, or in any manner relates to its capital adequacy, its
credit policies or its management, nor has HFB been advised by any Bank
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, condition,
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar submission.
(m) Absence of Certain Changes or Events. Except as
disclosed in the HFB SEC Documents filed prior to the date of this Agreement,
since June 30, 1994, HFB and its Subsidiaries have not incurred any material
liability, except in the ordinary course of their business consistent with
their past practices, nor has there been any change, nor has there occurred any
event involving a prospective change, in the business, assets, financial
condition or results of operations of HFB or any of its Subsidiaries which has
had, or is reasonably likely to have, a material adverse effect on HFB (other
than as a result of changes in banking or thrift laws or regulations of general
applicability or interpretations thereof, changes in generally accepted
accounting principles or regulatory accounting practices or interpretations
thereof, changes in general economic conditions including but not limited to
changes in interest rates, and changes that could, under the circumstances,
reasonably have been anticipated in light of disclosures made in writing by HFB
to FAC prior to execution of this Agreement, changes effected on FAC's request
pursuant to Section 5.16 hereof or the settlement or disposition of any
litigation pending as of the date hereof and set forth on the HFB Disclosure
Schedule by HFB or any Subsidiary).
(n) Vote Required. The affirmative vote of the holders
of a majority of the outstanding shares of HFB Common Stock entitled to vote
thereon is the only vote of the holders of any class or series of HFB capital
stock necessary to approve this Agreement and the transactions contemplated
hereby. Without limitation of the foregoing, HFB affirmatively represents and
warrants that Article XIV Section (A) of the HFB charter may be amended to
exclude FAC from its restrictions upon the affirmative vote of the holders of a
majority of the outstanding shares of HFB Common Stock entitled to vote
thereon.
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(o) Properties. Except as disclosed in the HFB SEC
Documents filed prior to the date of this Agreement, HFB or one of its
Subsidiaries (i) has good, clear and marketable title to all the properties and
assets which are material to HFB's business on a consolidated basis and are
reflected in the latest audited consolidated balance sheet included in the HFB
SEC Documents as being owned by HFB or one of its Subsidiaries or acquired
after the date thereof (except properties sold or otherwise disposed of since
the date thereof), free and clear of all claims, liens, charges, security
interests or encumbrances of any nature whatsoever except (A) statutory liens
securing payments not yet due, (B) liens on assets of Subsidiaries of HFB
incurred in the ordinary course of their business and (C) such imperfections or
irregularities of title, claims, liens, charges, security interests or
encumbrances as do not affect the use of the properties or assets subject
thereto or affected thereby or otherwise materially impair business operations
at such properties, in either case in such a manner as to have a material
adverse effect on HFB and its Subsidiaries, taken as a whole and (ii) is the
lessee of all leasehold estates which are material to HFB's business on a
consolidated basis and are reflected in the latest audited consolidated
financial statements included in the HFB SEC Documents or acquired after the
date thereof (except for leases that have expired by their terms or as to which
HFB has agreed to terminate since the date thereof) and is in possession of the
properties purported to be leased thereunder, and each such lease is valid
without default thereunder by the lessee or, to HFB's knowledge, the lessor,
other than defaults that do not or would not have a material adverse effect on
HFB.
(p) Ownership of FAC Common Stock. As of the date
hereof, neither HFB nor, any of its affiliates or associates (as such terms are
defined under the Exchange Act), (i) beneficially owns, directly or indirectly,
or (ii) are parties to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, shares of
capital stock of FAC, which in the aggregate, represent 10% or more of the
outstanding shares of capital stock of FAC entitled to vote generally in the
election of directors (other than trust account shares).
(q) Allowance for Possible Loan Losses. The allowance
for possible loan losses shown on the statement of financial condition of HFBS
as of December 31, 1994 was in the opinion of management of HFB, consistent
with applicable regulations and adequate in all material respects to provide
for all known and reasonably anticipated possible losses, net of recoveries
relating to loans previously charged off, on loans and leases outstanding and
accrued interest receivable on non-performing loans as of December 31, 1994 and
as of January 31, 1995 and as of the Effective Time will be in the opinion of
management of HFB, consistent with applicable regulations and adequate in all
material respects to provide for all known and reasonably anticipated possible
losses, net of recoveries relating to loans previously charged off, on loans
and leases outstanding and accrued interest receivable on non-performing loans
as of the Effective Time.
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(r) Certain Transactions with Affiliated Persons. Except
as disclosed in the HFB SEC Documents filed prior to the date of this Agreement
or as set forth in the HFB Disclosure Schedule, there are no transactions to
which HFB or any Subsidiary was a party in which any officer or director of HFB
or any Subsidiary or any other entity controlled by, under common control with
or in control of HFB had a direct or indirect interest.
(s) Qualified Thrift Lender. Since its conversion to
stock form, HFBS has at all times satisfied, and as of the date hereof
satisfies, the qualified thrift lender test as in effect from time to time.
(t) Permissible Activities. Except as set forth in the
HFB Disclosure Schedule, all of the business activities conducted by HFB and
its Subsidiaries as of the date hereof are business activities in which a bank
holding company is permitted to engage under the federal Bank Holding Company
Act of 1956, as amended, and Regulation Y promulgated thereunder and all
business activities conducted by HFBS as of the date hereof are business
activities in which national banks are permitted to engage under the rules and
regulations of the OCC.
(u) Environmental Matters. Except as set forth in the HFB
Disclosure Schedule:
(i) The operations of HFB and its Subsidiaries
have been in the past and are now to its knowledge in compliance with all
federal, state and local laws, rules and regulations and other governmental
restrictions relating to pollution or protection of the environment or public
or employee health and safety (collectively, the "Environmental Laws")
including, without limitation, those relating to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq. ("CERCLA"); the Resource Conservation and Recovery
Act of 1976, 42 U.S.C. Section 6901 et seq. ("RCRA"), the Hazardous Materials
Transportation Act, as amended by the Solid Waste Disposal Act and as further
amended, 49 U.S.C. Section 6901 et seq.; the Federal Water Pollution Control
Act, as amended, 33 U.S.C. Section 1251 et seq., the Safe Water Drinking Act,
42 U.S.C. Section 300f-300j; the Clean Air Act, 42 U.S.C. Section 7401 et
seq.; and the Occupational Safety and Health Act.
(ii) Neither HFB nor any Subsidiary have been
notified of an Environmental Laws violation; and are not otherwise aware that
it is considered potentially liable under the Environmental Laws; and neither
HFB nor any Subsidiary have received any requests for information or other
correspondence (including, without limitation consent orders, consent decrees,
judgments, orders or injunctions) by or from any governmental authority or
private party concerning any site, facility or operation relating to (x) the
Environmental Laws, (y) environmental protection and
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health or safety matters, or (z) any statutory or common law theory of
liability involving environmental or health and safety matters.
(iii) To HFB's knowledge, no use, disposal,
releases, burial or placement of any material regulated under or defined by any
Environmental Law, including without limitation, asbestos (collectively,
"Hazardous Materials") has occurred on, in, at, under or about any of the
property owned, leased or operated at any time by HFB or any Subsidiary.
(iv) There has been no disposal, release, burial
or placement of Hazardous Materials on any real property not owned, leased or
operated by HFB or any Subsidiary which may result or has resulted in
contamination of or beneath the property owned, leased or operated at any time
by HFB or any Subsidiary.
(v) All of the above-ground and underground
storage tanks presently on any real property owned, leased or operated by HFB
or any Subsidiary have been properly registered.
(vi) No audit or investigation has been conducted
as to environmental matters relating to any property owned, leased or operated
by HFB or any Subsidiary by any governmental agency.
(vii) There are no civil or criminal actions, suits
or proceedings, or demands, claims, notices or investigations (including,
without limitation, notices, demand letters or requests for information from
any environmental agency) instituted or pending, or threatened relating to the
liability of any properties owned or operated by HFB or any Subsidiary under
any Environmental Law.
(v) Charter Provisions and State Anti-Takeover Laws. HFB
and each of its Subsidiaries has taken or will take all actions necessary so
that the entering into this Agreement and the consummation of the transactions
contemplated hereby (i) are exempt from any applicable state takeover law and
(ii) do not and will not result in the grant of any rights to any person under
the charter, bylaws or other governing instrument of HFB or any Subsidiary
thereof or restrict or impair the right of FAC to vote or otherwise to exercise
the rights of a shareholder with respect to shares of HFB or any Subsidiary
thereof that may be acquired or controlled by FAC pursuant to this Agreement or
the consummation of the transactions contemplated hereby.
For purposes of this Agreement, the term "knowledge" as used with respect to
any person shall mean the knowledge after due inquiry of the chairman,
president, chief financial officer, chief credit officer, or general counsel.
The term "person" shall mean a natural person or any legal, commercial, or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited
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liability company, trust, business association, group acting in concert, or any
person acting in a representative capacity.
3.2. Representations and Warranties of FAC. FAC
represents and warrants to HFB as follows:
(a) Organization, Standing and Power. FAC is a Tennessee
corporation and a bank holding company registered under the Bank Holding
Company Act. First American National Bank ("FANB") is a national banking
association and a wholly owned Subsidiary of FAC. Each of FAC and its
Subsidiaries is a national bank, corporation or partnership duly organized,
validly existing and, in the case of banks or corporations, in good standing
under the laws of its jurisdiction of incorporation or organization, has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted, and is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary other than in such jurisdictions where the failure so
to qualify would not have a material adverse effect on FAC and its
Subsidiaries, taken as a whole.
(b) Capital Structure. (i) As of the date hereof, the
authorized capital stock of FAC consists of 50,000,000 shares of FAC Common
Stock $5.00 par value ("FAC Common Stock") and 2,500,000 shares of preferred
stock without par value (the "FAC Preferred"). As of the close of business on
February 9, 1995 (A) 26,160,563 shares of FAC Common Stock were outstanding, no
shares of FAC Preferred Stock were outstanding, and (B) 836,216 shares of FAC
Common Stock were reserved for issuance pursuant to FAC's Dividend Reinvestment
and Stock Purchase Plan, 3,190,244 shares of FAC Common Stock were reserved for
issuance upon the exercise of stock options pursuant to the First American
Corporation 1991 Employee Stock Incentive Plan, the First American Corporation
STAR Award Plan and the First American Corporation 1993 Non-Employee Director
Stock Option Plan, (the "FAC Stock Plans"), 926,547 shares of FAC Common Stock
were reserved for transfer to the First American Corporation First Incentive
Reward Savings Thrift Plan (Section 401(k) Plan (the "FIRST Plan")) and
2,500,000 shares of FAC Preferred were reserved for issuance under the First
American Shareholder Rights Plan dated December 14, 1988 (the "FAC Rights
Agreement").
(ii) As of the date hereof, no Voting Debt of FAC
was issued or outstanding. All outstanding shares of FAC capital stock are,
and the shares of FAC Common Stock (A) to be issued pursuant to or as
specifically contemplated by this Agreement and (B) when issued in accordance
with this Agreement upon exercise of the HFB Stock Options, as the case may be,
will be validly issued, fully paid and nonassessable and not subject to
preemptive rights.
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(iii) As of the date of this Agreement, except for
this Agreement, FAC Stock Plans, and the FAC Rights Agreement, there are no
options, warrants, calls, rights, commitments or agreements of any character to
which FAC or any Subsidiary of FAC is a party or by which it is bound
obligating FAC or any Subsidiary of FAC to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or any Voting
Debt of FAC or of any Subsidiary of FAC or obligating FAC or any Subsidiary of
FAC to grant, extend or enter into any such option, warrant, call, right,
commitment or agreement.
(c) Authority. (i) FAC has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. FANB has all requisite corporate power and
authority to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of FAC. This Agreement has been duly executed and delivered by FAC
and constitutes a valid and binding obligation of FAC, enforceable in
accordance with its terms.
(ii) The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby will
not, (A) conflict with, or result in any Violation pursuant to any provision of
the charter or By-laws of FAC, FANB or any other Subsidiary of FAC or (B)
subject to obtaining or making the consents, approvals, orders, authorizations,
registrations, declarations and filings referred to in paragraph (iii) below,
result in any Violation of any loan or credit agreement, note, mortgage,
indenture, lease, Benefit Plan or other agreement, obligation, instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to FAC, FANB or any other Subsidiary
of FAC or their respective properties or assets which Violation would have a
material adverse effect on FAC and its Subsidiaries, taken as a whole.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity is
required by or with respect to FAC, FANB or any other Subsidiary of FAC in
connection with the execution and delivery of this Agreement or the
consummation by FAC of the transactions contemplated hereby, the failure to
obtain which would have a material adverse effect on FAC, except for (A) the
filing of applications with the Federal Reserve under the BHC Act and the FDIA
and with the OCC and the OTS and approval of same, (B) the filing with the SEC
of the S-4 in connection with this Agreement and the transactions contemplated
hereby and the obtaining from the SEC of such orders as may be required in
connection therewith, (C) such filings and approvals as are required to be made
or obtained under the securities or blue sky laws of various states in
connection with the transactions contemplated by this Agreement, (D) the filing
of the Articles of Merger with the Secretary of State of the State of Tennessee
and appropriate documents with the relevant authorities of other states in
which FAC is
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qualified to do business, (E) the State Banking Approvals and State Takeover
Approvals, (F) consents, authorizations, approvals, filings or exemptions in
connection with compliance with the applicable provisions of federal and state
securities laws relating to the regulation of broker-dealers or investment
advisers and federal commodities laws relating to the regulation of futures
commission merchants and the rules and regulations thereunder and of any
applicable industry self-regulatory organization, and the rules of NASDAQ, or
which are required under consumer finance, mortgage banking and other similar
laws, (G) notices under the HSR Act, and (H) filings, notifications and
approvals under state insurance laws and regulations.
(d) SEC Documents. FAC has made available to HFB a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by FAC with the SEC (other than reports filed
pursuant to Section 13(d) or 13(g) of the Exchange Act) since December 31, 1993
(the "FAC SEC Documents"), which are all the documents (other than preliminary
material and reports required pursuant to Section 13(d) or 13(g) of the
Exchange Act) that FAC was required to file with the SEC since such date. FAC
has made available to HFB true and complete copies of its most recent annual
and quarterly Consolidated Reports of Condition and Income ("Call Reports")
filed with the OCC. As of their respective dates, the Call Reports complied in
all material respects with the applicable regulatory requirements (including
regulatory accounting practices). As of their respective dates, the FAC SEC
Documents complied in all material respects with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC thereunder applicable to such FAC SEC Documents, and
none of the FAC SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of FAC
included in the FAC SEC Documents comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q of the
SEC or normal recurring year-end adjustments) and fairly present the
consolidated financial position of FAC and its consolidated Subsidiaries as at
the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended. All material agreements, contracts and other
documents required to be filed as exhibits to any of the FAC SEC Documents have
been so filed. To FAC's knowledge, there are no unasserted claims that are not
disclosed in the FAC SEC Documents that would reasonably be expected to have,
individually or in the aggregate, a material adverse effect on FAC.
(e) Information Supplied. None of the information
supplied pursuant to this Agreement or to be supplied by FAC for inclusion or
incorporation by reference
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in the S-4 (or other applicable form) will, at the time the S-4 is filed with
the SEC, at the time it becomes effective under the Securities Act, at the time
it is mailed to the shareholders of HFB in connection with the meeting of
shareholders to vote on the Merger and at all times subsequent to such mailing
up to and including the time of such meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. The S-4 will comply
as to form with all applicable requirements.
(f) Compliance with Applicable Laws. FAC and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities which are material to the operation of
the businesses of FAC and its Subsidiaries, taken as a whole (the "FAC
Permits"). FAC and its Subsidiaries are in compliance with the terms of the
FAC Permits and all applicable laws and regulations, except where the failure
so to comply would not have a material adverse effect on FAC. Except as
disclosed in the FAC SEC Documents filed prior to the date hereof, the
businesses of FAC and its Subsidiaries are not being conducted in violation of
any law, ordinance or regulation of any Governmental Entity, except for
possible violations which individually or in the aggregate do not, and, insofar
as reasonably can be foreseen, in the future will not, have a material adverse
effect on FAC. Except for routine examinations by Bank Regulators, as of the
date of this Agreement, to the knowledge of FAC, no investigation by any
Governmental Entity with respect to FAC or any of its Subsidiaries is pending
or threatened, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not have a material adverse effect on FAC.
(g) Litigation. As of the date of this Agreement, except
as disclosed in the FAC SEC Documents filed prior to the date of this
Agreement, there is no suit, action or proceeding pending or, to the knowledge
of FAC, threatened, against or affecting FAC or any Subsidiary of FAC that
would reasonably be expected to have, individually or in the aggregate, a
material adverse effect on FAC, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against FAC
or any Subsidiary of FAC having, or which would reasonably be expected to have,
any such effect.
(h) Absence of Certain Changes or Events. Except as
disclosed in the FAC SEC Documents filed prior to the date of this Agreement,
since December 31, 1993 there has not been any change or any event involving a
prospective change, in the business, assets, financial condition, prospects or
results of operations of FAC or any of its Subsidiaries which has had, or is
reasonably likely to have, a material adverse effect on FAC (other than as a
result of changes in banking laws or regulations of general applicability or
interpretations thereof, changes in generally accepted accounting principles or
regulatory accounting practices or interpretations thereof, changes in general
economic conditions including but not limited to, changes in interest rates,
and changes that could, under the circumstances, reasonably have
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been anticipated in light of disclosures made in writing by FAC to HFB prior to
execution of this Agreement).
(i) No Vote Required. Under Section 48-21-103 of the
TBCA, no vote of the stockholders of FAC is required in order to enter into
this Agreement or to consummate the Merger.
(j) Consideration. FAC has reserved or will reserve for
issuance sufficient shares of FAC Common Stock for issuance in the Merger;
however, it is FAC's current intention to repurchase up to 80% of such number
of shares prior to or substantially concurrent with the consummation of the
Merger pursuant to Rule 10b-18 of the SEC and in a manner which does not
prohibit FAC from entering into pooling transactions within two years from such
repurchases.
(k) Governmental Approvals and Other Conditions. FAC is
unaware of any reason why (i) the Requisite Regulatory Approvals (as defined in
Section 6.1(c) that are required to be obtained by FAC in connection with the
transactions contemplated herein should not be granted, or (ii) such Requisite
Regulatory Approvals should be subject to a condition which would have a
material adverse effect on FAC as contemplated in Section 6.2 (e) or (iii) any
of the conditions precedent as specified in Article VI to the obligations of
either FAC or HFB to consummate the transactions contemplated herein are
unlikely to be fulfilled within the applicable time period or periods required
for satisfaction of such condition or conditions.
(l) Taxes. FAC and each of its Subsidiaries have filed
all tax returns required to be filed by any of them and have paid (or FAC has
paid on their behalf), or have set up an adequate reserve for the payment of,
all taxes required to be paid as shown on such returns, and the most recent
financial statements contained in the FAC SEC Documents reflect an adequate
provision for current and deferred taxes payable by FAC and its Subsidiaries
accrued through the date of such financial statements, except in each case
where a failure to do so would not have a material adverse effect on FAC. No
deficiencies for any taxes have been proposed, asserted or assessed against FAC
or any of its Subsidiaries that are not adequately reserved for, except for
deficiencies that would not have a material adverse effect on FAC. Except with
respect to claims for refund, the Federal income tax returns of FAC and each of
its Subsidiaries consolidated in such returns have been examined by and settled
with the IRS, or the statute of limitations with respect to such years has
expired (and no waiver extending the statute of limitations has been requested
or granted), for all years through 1990. The Federal income tax returns of FAC
and each of its Subsidiaries consolidated in such returns for the years 1991
through 1993 are subject to audit by the IRS.
(m) Agreements with Bank Regulators. As of the date of
this Agreement, neither FAC nor any Subsidiary of it is a party to any written
agreement
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or memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any condition imposed in writing, or
is subject to any order or directive by, or is a recipient of any extraordinary
supervisory letter from, any Bank Regulator which restricts materially the
conduct of its business, or in any manner relates to its capital adequacy, its
credit policies or its management, nor has FAC been advised by any Bank
Regulator that it is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, decree, condition,
agreement, memorandum of understanding, extraordinary supervisory letter,
commitment letter or similar submission.
(n) Properties. Except as disclosed in the FAC SEC
Documents filed prior to the date of this Agreement, FAC or one of Subsidiaries
(i) has good, clear and marketable title to all the properties and assets which
are material to FAC's business on a consolidated basis and are reflected in the
latest audited balance sheet included in the FAC SEC Documents as being owned
by FAC or one of its Subsidiaries or acquired after the date thereof (except
properties sold or otherwise disposed of since the date thereof), free and
clear of all claims, liens, charges, security interests or encumbrances of any
nature whatsoever except (A) statutory liens securing payments not yet due, (B)
liens on assets of Subsidiaries of FAC incurred in the ordinary course of their
business and (C) such imperfections or irregularities of title, claims, liens,
charges, security interests or encumbrances as do not affect the use of the
properties or assets subject thereto or affected thereby or otherwise
materially impair business operations at such properties, in either case in
such a manner as to have a material adverse effect on FAC, and (ii) is the
lessee of all leasehold estates which are material to FAC's business on a
consolidated basis and are reflected in the latest audited financial statements
included in the FAC SEC Documents or acquired after the date thereof (except
for leases that have expired by their terms or as to which FAC has agreed to
terminate since the date thereof) and is in possession of the properties
purported to be leased thereunder and each such lease is valid without default
thereunder by the lessee or, to FAC's knowledge, the lessor, other than
defaults that would not have a material adverse effect on FAC.
(o) Allowance for Possible Loan Losses. The allowance
for possible loan losses shown on the statement of financial condition of FANB
as of December 31, 1994 is in the opinion of management of FAC consistent with
applicable regulations and adequate in all material respects to provide for
possible losses , net of recoveries relating to loans previously charged off,
on loans and leases outstanding, accrued interest receivable on nonperforming
loans as of December 31, 1994 and as of January 31, 1995 and as of the
Effective Time will be in the opinion of management of HFB, consistent with
applicable regulations and adequate in all material respects to provide for all
known and reasonably anticipated possible losses, net of recoveries relating to
loans previously charged off, on loans and leases outstanding and accrued
interest receivable on non-performing loans as of the Effective Time.
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ARTICLE IV
Covenants Relating to Conduct of Business
-----------------------------------------
4.1 Covenants of Both Parties. Unless prior written
consent of the other party shall have been obtained, and except as otherwise
expressly contemplated herein, prior to the Effective Time each of FAC and HFB
shall and shall cause each of its Subsidiaries to (a) operate its business only
in the usual, regular, and ordinary course, (b) preserve intact its business
organizations and assets and maintain its rights and franchises, and (c) take
no action which would materially (i) adversely affect the ability of any party
to obtain any consents required for the transactions contemplated hereby, or
(ii) adversely affect the ability of any party to perform its covenants and
agreements under this Agreement in all material respects and to consummate the
Merger; or (iii) prevent or impede the transactions contemplated herein from
qualifying as a reorganization under Section 368 of the Code; provided, that
the foregoing shall not prevent FAC or any of its Subsidiaries from acquiring
additional assets or businesses or discontinuing or disposing of any of its
assets or businesses if such action is, in the judgment of FAC, desirable in
the conduct of the business of FAC and its Subsidiaries so long as any of such
actions does not materially delay receipt of the Requisite Regulatory Approvals
(as defined herein) or adversely affect FAC's ability to consummate the Merger
or have a material adverse effect on FAC. Neither FAC nor HFB shall
intentionally take or cause to be taken any action, that would disqualify the
Merger as a "reorganization" within the meaning of Section 368(a) of the Code.
4.2 Covenants of HFB. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
HFB covenants and agrees that it will not do or agree or commit to do, or
permit any of its Subsidiaries to do or agree or commit to do, any of the
following without the prior written consent of the chief executive officer of
FAC or the president of FANB (which consent shall not be unreasonably
withheld):
(a) amend the Charter (other than the amendment
to Article XIV as contemplated hereby), Bylaws, or other governing
instruments of HFB or any Subsidiary; or
(b) incur, guarantee, or otherwise become
responsible for, any additional debt obligation or other obligation
for borrowed money (other than indebtedness of a HFB or any Subsidiary
thereof to another Subsidiary) except in the ordinary course of the
business of HFB and its Subsidiaries consistent with past practices,
or impose or suffer the imposition, on any share of capital stock held
by HFB or any Subsidiary of any lien or encumbrance or permit any such
lien or encumbrance to exist; or
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(c) repurchase, redeem, or otherwise acquire or
exchange, directly or indirectly, any shares, or any securities
convertible into any shares, of the capital stock of any HFB or any
Subsidiary, or declare or pay any dividend or make any other
distribution in respect of HFB's capital stock other than regular
quarterly cash dividends not in excess of $0.095 per share of HFB
Common Stock; or
(d) except for this Agreement, or pursuant to the
exercise of stock options outstanding as of the date hereof and
pursuant to the terms thereof in existence on the date hereof or
required by the terms of the HFB Stock Plans in amounts not to exceed
75,000 shares of HFB Common Stock between the date hereof and the
Effective Time, issue, sell, pledge, encumber, authorize the issuance
of, enter into any contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding,
any additional shares of HFB Common Stock or any other capital stock
of any HFB or any Subsidiary, or any stock appreciation rights, or any
option, warrant, conversion, or other right to acquire any such stock,
or any security convertible into any such stock; or
(e) adjust, split, combine, or reclassify any
capital stock of HFB or any Subsidiary or issue or authorize the
issuance of any other securities in respect of or in substitution for
shares of HFB capital stock (other than as permitted under Section
4.2(d) or sell, lease, mortgage, or otherwise dispose of or otherwise
encumber any shares of capital stock of any HFB Subsidiary or any
assets other than in the ordinary course of business for reasonable
and adequate consideration; or
(f) acquire direct or indirect control over, or
invest in equity securities of, any person (other than the Federal
Home Loan Bank of Cincinnati), other than in connection with
foreclosures in the ordinary course of business; or
(g) grant any increase in compensation or
benefits to the employees or officers of HFB or any Subsidiary except
as required by law or except as is consistent with FAC's current
matrix for salary increases; pay any bonus except pursuant to the
provisions of any applicable program or plan adopted by its Board of
Directors prior to the date of this Agreement; enter into or amend any
severance agreements with officers of HFB or any Subsidiary; grant any
increase in fees or other increases in compensation or other benefits
to directors of any HFB or any Subsidiary; or
(h) enter into or amend any employment contract
between HFB or any Subsidiary and any person that HFB or any
Subsidiary does not have the
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unconditional right to terminate without liability at any time on or
after the Effective Time; or
(i) adopt any new employee benefit plan or
program or make any material change in or to any existing employee
benefit plans or programs of any HFB or any Subsidiary except as
required by law, except as contemplated by Section 5.9 herein or
except with respect to the 1992 Plan and the 1994 Plan and the
Director Incentive Plan (A) to permit transfer of non-qualified
options to family members or non-profit charitable organizations or
(B) to permit exercise of such non-qualified options at any time
during the term thereof irrespective of service with HFB (or any
Subsidiary thereof) or any successor thereto; or make any
discretionary matching contributions or discretionary contributions to
any employee benefit plan of HFB or any Subsidiary thereof; or
(j) commence any litigation other than in
accordance with past practice, settle any litigation involving any
liability of HFB or any Subsidiary for money damages or restrictions
upon the operations of HFB or any Subsidiary, or, except in the
ordinary course of business, modify, amend, or terminate any material
contract or waive, release, compromise, or assign any material rights
or claims; or
(k) enter into or terminate any material contract
or make any change in any material lease or contract, other than
renewals of leases and contracts without material adverse changes of
terms or pursuant to Sections 4.2(g), (h), or (i) of this Agreement;
or
(l) except as contemplated by Section 5.16, change
its methods of accounting in effect at June 30, 1994, except as
required by changes in generally accepted accounting principles
concurred in by HFB's independent auditors or change its fiscal year.
Without limitation of the foregoing, the parties agree that from the
date of this Agreement through the earlier of the Effective Time or the
termination hereof, the terms of the employment agreements between HFB or a
Subsidiary thereof and its five senior officers in effect as of the date hereof
shall not be renewed or extended.
4.3 Covenants of FAC. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
FAC covenants and agrees that it will not, without the prior written consent of
the chief executive officer of HFB, amend the Charter or Bylaws of FAC or the
FAC Rights Agreement or other applicable governing documents, in each case, in
any manner which is adverse to, and discriminates against, the holders of HFB
Common Stock.
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4.4 Adverse Changes in Condition. Each of HFB and FAC
agrees to give written notice promptly to the other party upon becoming aware
of the occurrence or impending occurrence of any event or circumstance relating
to it or any of its Subsidiaries which (i) is reasonably likely to have,
individually or in the aggregate, a material adverse effect on it or (ii) would
cause or constitute a material breach of any of its representations,
warranties, or covenants contained herein, and to use its reasonable efforts to
prevent or promptly to remedy the same.
4.5 Reports. Each of FAC and HFB and its Subsidiaries
shall file all reports required to be filed by it with Regulatory Authorities
between the date of this Agreement and the Effective Time and shall deliver to
the other party copies of all such reports promptly after the same are filed.
If financial statements are contained in any such reports filed with the SEC or
any other Regulatory Authority, such financial statements will fairly present
the consolidated financial position of the entity filing such statements as of
the dates indicated and the consolidated results of operations, changes in
shareholders' equity, and cash flows for the periods then ended in accordance
with GAAP (subject in the case of interim financial statements to normal
recurring year-end adjustments that are not material). As of their respective
dates, such reports filed with Regulatory Authorities will comply in all
material respects with the securities laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with laws, rules and regulations applicable to such
reports.
4.6 Affirmative Covenants of HFB. HFB agrees to take
or cause to be taken commencing as soon as practicable following the execution
of this Agreement, and continuing thereafter as appropriate, the following
affirmative actions prior to the Effective Time:
(a) Coordination of HFBS' CRA program in
consultation with FAC's CRA officer for consistency purposes in transitioning
to FAC's program;
(b) Replacement of the missing securities
certificate issued in the original principal amount of $97,000; and
(c) Obtaining a Phase II environmental assessment
of HFB's Harriman, Tennessee property, and using its best efforts to obtain
clean closure with respect to the underground storage tanks previously removed
therefrom, from HFB's Fort Henry Drive property in Kingsport, Tennessee and
from HFB's formerly owned property in McMinnville, Tennessee;
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(d) Implementation of the plans to facilitate the
actions with respect to loans contemplated in Section 5.16 in accordance with
the plans previously provided by FAC to HFB.
Within ten (10) days after the end of each month commencing March 31,
1995 and continuing to the Effective Time, HFB will provide a brief written
description of the actions taken during the preceding month, together with its
then current estimate of the out-of-pocket costs and expenses incurred or
reasonably accruable to accomplish the above items.
4.7 No Solicitation. HFB will not authorize or
permit any officer, director, employee, investment banker, financial
consultant, attorney, accountant or other representative of HFB or any HFB
Subsidiary, directly or indirectly, to initiate contact with any person or
entity in an effort to solicit, initiate or encourage any Competing Transaction
(as defined in Section 7.3 herein). Except as the fiduciary duties of HFB's
Board of Directors may otherwise require, HFB will not authorize or permit any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of HFB or any HFB Subsidiary, directly or
indirectly, (A) to cooperate with, or furnish or cause to be furnished any
non-public information concerning its business, properties or assets to, any
person or entity in connection with any Competing Transaction; (B) to negotiate
any Competing Transaction with any person or entity; or (C) to enter into any
agreement, letter of intent or agreement in principle as to any Competing
Transaction. HFB will promptly give written notice to FAC upon becoming aware
of any Competing Transaction.
ARTICLE V
Additional Agreements
---------------------
5.1 Preparation of S-4 and the Proxy Statement.
(a) For purposes of (i) holding the HFB
shareholders' meeting to on vote on the Merger and other matters contemplated
herein, and (ii) registering the FAC Common Stock in connection with the Merger
with the SEC and with applicable state authorities, the parties hereto shall
cooperate in the preparation of the S-4, including the prospectus/proxy
statement satisfying all applicable requirements of applicable state laws, and
of the Securities Act and the Exchange Act and the rules and regulations
thereunder.
(b) FAC shall furnish such information concerning
FAC as is necessary in order to cause the S-4, insofar as it relates to FAC to
comply with Section 5.1(a) hereof. FAC agrees promptly to advise HFB if at any
time prior to the Effective Time any information provided by FAC in the S-4
becomes incorrect or incomplete in any material respect and to provide the
information needed to correct
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such inaccuracy or omission. FAC shall furnish HFB with such supplemental
information as may be necessary in order to cause such S- 4, insofar as it
relates to FAC, to comply with Section 5.1(a).
(c) HFB shall furnish FAC with such information
concerning HFB as is necessary in order to cause the S-4, insofar as it relates
to the HFB, to comply with Section 5.1(a) hereof. HFB agrees promptly to advise
FAC if at any time prior to the Effective Time any information provided by HFB
in the S-4 becomes incorrect or incomplete in any material respect and to
provide FAC with the information needed to correct such inaccuracy or omission.
HFB shall furnish FAC with such supplemental information as may be necessary in
order to cause the S-4, insofar as it relates to HFB, to comply with Section
5.1 (a).
(d) HFB shall file with the SEC the Proxy
Statement and FAC shall file with the SEC the S-4, in which the Proxy Statement
will be included. FAC shall use all reasonable efforts to have the S-4
declared effective under the Securities Act as promptly as practicable after
such filing. FAC shall also take any action (other than qualifying to do
business in any jurisdiction in which it is now not so qualified) required to
be taken under any applicable state securities laws in connection with the
issuance of FAC Common Stock in the Merger and FAC Common Stock upon the
exercise of the HFB Stock Options, and HFB shall furnish all information
concerning HFB and the holders of HFB Common Stock as may be reasonably
requested in connection with any such action. FAC shall advise HFB promptly
when the S-4 has become effective and of any supplements or amendments thereto,
and FAC shall furnish HFB with copies of all such documents.
5.2 Letter of HFB's Accountants. HFB shall use all
reasonable efforts to cause to be delivered to FAC a consent letter of Coopers
& Lybrand, HFB's independent auditors, dated a date within two business days
before the date on which the S-4 shall become effective and addressed to FAC,
in form and substance reasonably satisfactory to FAC, and in scope and
substance consistent with applicable professional standards for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4.
5.3 Letter of FAC's Accountants. FAC shall use all
reasonable efforts to cause to be delivered to HFB a consent letter of KPMG
Peat Marwick LLP, FAC's independent auditors, dated a date within two business
days before the date on which the S-4 shall become effective and addressed to
HFB, in form and substance reasonably satisfactory to HFB, and in scope and
substance consistent with applicable professional standards for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4.
5.4 Access to Information. Upon reasonable notice, HFB
and FAC shall each (and shall cause each of their respective Subsidiaries to)
afford to the
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officers, employees, accountants, counsel and other representatives of the
other, access, during normal business hours during the period prior to the
Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, each of HFB and FAC shall (and shall cause
each of their respective Subsidiaries to) make available to the other (a) a
copy of each report, schedule, registration statement and other document filed
or received by it during such period pursuant to the requirements of Federal
securities laws or Federal or state banking laws (other than reports or
documents which such party is not permitted to disclose under applicable law)
and (b) all other information concerning its business, properties and personnel
as such other party may reasonably request. The parties will hold any or other
such information which is nonpublic in confidence to the extent required by,
and in accordance with the Confidentiality Agreement dated December 15, 1994,
between HFB and FAC (the "Confidentiality Agreement"). HFB agrees to hold, and
to cause its agents and representatives to hold, all such information obtained
with respect to FAC and/or its Subsidiaries in confidence to the same degree as
required of FAC under the Confidentiality Agreement. No investigation by either
FAC or HFB shall affect the representations and warranties of the other, except
to the extent such representations and warranties are by their terms qualified
by disclosures made in writing made to such first party.
5.5 HFB Stockholders' Meeting. HFB shall call a meeting
of its stockholders to be held as promptly as practicable on a mutually
agreeable date for the purpose of voting upon the approval of this Agreement.
HFB will, through its Board of Directors, recommend to its stockholders
(subject to the fiduciary duties of the HFB Board of Directors and to the
receipt of a fairness opinion as provided herein), and each of the Directors
has individually agreed to vote his shares for, approval of this Agreement and
all related matters necessary to the consummation of the transactions
contemplated hereby including the amendment of the HFB Charter with respect to
Article XIV, Section (A) thereof. HFB and FAC shall coordinate and cooperate
with respect to the timing of such meeting and HFB shall use its best efforts
to hold such meeting as soon as practicable after the date on which the S- 4
becomes effective.
5.6 Legal Conditions to Merger. Each of HFB and FAC
shall, and shall cause its Subsidiaries to, use all reasonable efforts (i) to
take, or cause to be taken, all actions necessary to comply promptly with all
legal requirements which may be imposed on such party or its Subsidiaries with
respect to the Merger and to consummate the transactions contemplated by this
Agreement, subject to the appropriate vote of stockholders of HFB, and (ii) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity and or any other public or private third party which is required to be
obtained or made by such party or any of its Subsidiaries in connection with
the Merger, and the transactions contemplated by this Agreement. Each of HFB
and FAC will promptly cooperate with and furnish information to the
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other in connection with any such burden suffered by, or requirement imposed
upon, any of them or any of their Subsidiaries in connection with the
foregoing. FAC shall, as soon as practicable following execution of this
Agreement, prepare and file with the appropriate authorities such documents as
may be necessary in order to consummate the transactions contemplated hereby.
FAC agrees to use its best efforts to file such documents within 45 days of the
execution of this Agreement. HFB shall cooperate with FAC in the preparation,
execution and filing of such documents and in responding to any comments made
by any governmental authorities with respect to any such document. In this
connection, HFB agrees to provide comments to FAC (through counsel) regarding
such documents or in response to such comments within three business days
following receipt of such documents or comments.
5.7 Affiliates. Prior to the HFB shareholders meeting
regarding the Merger, HFB shall deliver to FAC a letter identifying all persons
who are, at the time this Agreement is submitted for approval to the
stockholders of HFB, "affiliates" of HFB for purposes of Rule 145 under the
Securities Act. HFB shall use all reasonable efforts to cause each person
named in the letter delivered by it to deliver to the other party prior to the
shareholders meeting a written "affiliates" agreement, in customary form,
restricting the disposition by such person of the FAC Common Stock to be
received by such person in the Merger.
5.8 NASDAQ Listing. FAC shall use all reasonable efforts
to cause the shares of FAC Common Stock to be issued in the Merger and the
shares of FAC Common Stock to be reserved for issuance upon exercise of HFB
Stock Options (as defined below) to be approved for listing on the NASDAQ
national market system prior to the Closing Date.
5.9 Transition of Certain Employee Benefit Plans;
Employment Matters.
(a) As soon as practicable after the execution of this
Agreement and Plan of Merger, HFB and FAC will cooperate to cause the Heritage
Federal Bank for Savings Employee Stock Ownership Plan and Trust (the "ESOP")
to be amended and other action taken in a manner reasonably acceptable to HFB
and FAC to provide (i) that each participant in the ESOP will become fully
vested in his or her ESOP account as of the Effective Time, (ii) that the ESOP
will terminate upon the Effective Time, (iii) that the outstanding exempt loan
to the ESOP will be repaid on or after the Effective Time with proceeds from
the sale of FAC Common Stock to be held in the Loan Suspense Account (as
defined in the ESOP) of the ESOP as a result of the conversion, pursuant to the
Merger, of HFB Common Stock into FAC Common Stock and (iv) that, pending such
sale and repayment, no additional employer contributions will be made to the
ESOP other than such contributions as may be required to make the quarterly
principal and interest payments due under the outstanding exempt loan. The
ESOP amendment and other action taken will provide that, upon the repayment of
the exempt loan, the remaining shares in the Loan Suspense Account will be
allocated (to
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the extent permitted by Section 415 of the Code and other applicable laws and
regulations) to ESOP participants (as determined under the terms of the ESOP).
As soon as practicable after the later of the Effective Time or the receipt of
a favorable determination letter from the IRS with respect to the qualification
of the ESOP upon its termination, HFB and FAC agree that participants in the
ESOP will receive lump sum distributions of their ESOP accounts and each ESOP
participant who becomes a participant in the FIRST Plan (as defined below) will
have the right to roll over his or her ESOP account into the First American
Corporation First Incentive Reward Savings Thrift Plan (the "FIRST Plan").
The amendments to the ESOP and actions related thereto will be
adopted conditioned upon the consummation of the Merger and upon receiving a
favorable determination letter from the IRS with regard to the continued
qualification of the ESOP after any required amendments and any private letter
ruling that FAC and HFB shall deem appropriate. FAC and HFB will cooperate in
submitting appropriate requests for such determination letter and ruling to the
IRS and will use their best efforts to seek the issuance of such letter and
ruling as soon as practicable following the date hereof. FAC and HFB will
adopt such additional amendments to the ESOP as may be reasonably required by
the IRS as a condition to granting such determination letter and ruling
provided that such amendments do not substantially change the terms outlined
herein.
Except as provided herein, HFB will make no further
contributions to the ESOP and will not cause the ESOP to make any further
payments on the exempt loan without the prior written approval of FAC. No
amendment or termination of, or distribution from, the ESOP or sale by the ESOP
of HFB Common Stock or FAC Stock will be made without the prior written
approval of FAC which shall not be unreasonably withheld and shall be given to
the extent HFB acts in accordance herewith.
(b) The other tax-qualified defined contribution and
defined benefit plans maintained by HFB or its Subsidiaries will be terminated
by HFB on or before the Effective Time, subject to the third paragraph of this
Section 5.9(b), (and FAC and HFB agree that participants in said plans who
become participants in the FIRST Plan shall be given the right to roll over
their accounts to the FIRST Plan) and the benefits thereunder distributed to
participants to the extent permitted under the Code and ERISA. To the extent
that such benefits may not be distributed to participants such plans will be
merged into corresponding FAC plans or will be maintained as a separate plans.
No such distribution of benefits will be made before the receipt of an
appropriate favorable determination letter from the IRS as to the effect of the
termination of the plan on the qualification of the plan involved. At or
immediately prior to the Effective Time, HFB or its Subsidiaries will, to the
extent permitted by applicable funding rules under the Code and ERISA,
contribute to each HFB Benefit Plan that is subject to Title I, subtitle B,
part 3 of ERISA any amount required to cause
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the fair market value of the plan assets of such plan to equal the plan
termination liabilities of such plan determined as of a date within thirty (30)
days of the Closing Date.
Employees of HFB and its Subsidiaries shall be eligible to
participate in the pension and welfare plans maintained by FAC after the
Effective Time, subject to the eligibility requirements of these plans. For
purposes of determining eligibility to participate in the qualified plans
maintained by FAC, employees of HFB or its Subsidiaries shall be credited with
service with HFB and its Subsidiaries to the extent credited under the
respective predecessor plans. Vesting service under the FIRST Plan will be in
accordance with the rules of the FIRST Plan governing vesting service for
employees of acquired employers and consistent with the current policies of FAC
in that regard. Employees of HFB and its Subsidiaries will participate in the
First American Corporation Master Retirement Plan (the "Retirement Plan") in
accordance with its terms. Such participants will be credited with prior
service with HFB and its Subsidiaries for eligibility and vesting purposes, but
with no prior benefit service, under the Retirement Plan. Subject to the
usual rules applicable to the vacation and short-term disability programs of
FAC, service with HFB and its Subsidiaries will be recognized in determining
the vacation and short-term disability benefits of employees of HFB and its
Subsidiaries after the Effective Time.
The tax qualified defined contribution and defined benefit
plan of HFB or its Subsidiaries (including the ESOP, the HFB Profit Sharing
Plan and the HFB Pension Plan) shall be maintained separately from FAC's
Benefit Plans through the date on which participants in said plans receive
final distributions of their benefits. FAC and HFB may agree on or before the
Effective Time to cause any HFB Benefit Plan in effect at the Effective Time
to remain in effect in lieu of a benefit plan maintained by FAC for an interim
period in order to coordinate the transition from such HFB Benefit Plans to FAC
plans in a fair, equitable and administratively reasonable manner.
FAC, HFB, HFB's Subsidiaries and the executive officers of
FAC, HFB or HFB's Subsidiaries will communicate with employees of HFB or its
Subsidiaries concerning the matters set forth in this Section 5.9 only through
mutually agreed upon communications. The actions prescribed by this Section
5.9 are all contingent upon obtaining appropriate determinations and rulings
from the IRS and, if necessary, other governmental agencies as to the effect of
such actions on the qualification of the plans involved and the compliance of
such actions with other applicable law. If appropriate determinations or
rulings satisfactory to the parties cannot be obtained, HFB and FAC will adopt
an alternative course of action which, as nearly as practicable, achieves the
same economic results as the actions outlined herein and for which appropriate
approval may be obtained.
(c) From and after the Effective Time, all HFB employees
who are terminated within one year as the result of the Merger will be eligible
for benefits
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available under FAC's reduction in force policy which currently include: (i) 30
days' notice, (ii) severance based on years of service (less than 1 year - one
week's pay; 1-10 years - one week's pay plus one week's pay for every year of
service; more than 10 years - 12 weeks' pay), (iii) continued paid health
benefits (less than 1 year - none, 1-10 years - three months, more than 10
years - six months), and (iv) outplacement assistance.
(d) From and after the Effective Time, FAC shall honor
the employment agreements between HFB and its five senior officers as of the
date hereof in accordance with their terms. Whether any individual officer
continues with FAC following the Effective Time will depend on the officer's
desire to stay with FAC and FAC's need for executive personnel. HFB will make
such officers available to FAC to negotiate economic packages with those
officers who stay with FAC.
5.10 Stock Options. For purposes of this Agreement the
term "HFB Stock Plans" means collectively the Heritage Federal Bancshares, Inc.
1992 Stock Option Plan (the "1992 Plan"), the Heritage Federal Bancshares, Inc.
1994 Stock Option Plan (the "1994 Plan"), the Heritage Federal Bancshares, Inc.
Incentive Compensation Plan for Senior Officers, the Heritage Federal Bank for
Savings Management Recognition Plan and the Heritage Federal Bancshares, Inc.
Incentive Compensation Plan for Non-Employee Directors (the "Director Incentive
Plan").
(a) At the Effective Time, each outstanding option to
purchase shares of HFB Common Stock (an "HFB Stock Option") issued pursuant to
the HFB Stock Plans shall be assumed by FAC. Each HFB Stock Option shall be
deemed to constitute an option to acquire, on the same terms and conditions as
were applicable under such HFB Stock Option and the plan under which it was
issued, the same number of shares of FAC Common Stock as the holder of such HFB
Stock Option would have been entitled to receive pursuant to the Merger had
such holder exercised such option in full immediately prior to the Effective
Time, at a price per share equal to (y) the aggregate exercise price for the
shares of HFB Common Stock otherwise purchasable pursuant to such HFB Stock
Option divided by (z) the number of full shares of FAC Common stock deemed
purchasable pursuant to such HFB Stock Option; provided, however, that in the
case of any option to which section 421 of the Code applies by reason of its
qualification under section 422 of the Code ("qualified stock options"), the
option price, the number of shares purchasable pursuant to such option and the
terms and conditions of exercise of such option shall be determined in order to
comply with section 424(a) of the Code.
(b) As soon as practicable after the Effective Time, FAC
shall deliver to the holders of HFB Stock Options appropriate notices setting
forth such holders' rights pursuant to the HFB Stock Plans and the agreements
evidencing the grants of such HFB Stock Options shall continue in effect on the
same terms and conditions (subject to the adjustments required by this Section
5.10 after giving effect to the
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Merger and the assumption by FAC as set forth above). FAC shall comply with
the terms of the HFB Stock Plans and ensure, to the extent required by, and
subject to the provisions of, such Plans, that HFB Stock Options which
qualified as incentive stock options prior to the Effective Time continue to
qualify as incentive stock options of FAC after the Effective Time.
(c) FAC shall take all corporate action necessary to
reserve for issuance a sufficient number of shares of FAC Common Stock for
delivery upon exercise of HFB Stock Options assumed by it in accordance with
this Section 5.10. As soon as practicable after the Effective Time, FAC shall
file a registration statement on Form S-3 or Form S-8, as the case may be (or
any successor or other appropriate forms), or another appropriate form with
respect to the shares of FAC Common Stock subject to such options and shall use
its best efforts to maintain the effectiveness of such registration statement
or registration statements (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as such options remain
outstanding.
5.11 Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby and thereby shall be paid by the party
incurring such expense, except that expenses incurred in connection with
printing and mailing the Proxy Statement and the S-4 shall be shared equally by
FAC and HFB.
5.12 Brokers or Finders. Except as disclosed to the other
party prior to the date hereof, each of FAC and HFB represents, as to itself,
its Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, except Trident
Financial Corporation, whose fees and expenses will be paid and expensed by HFB
prior to the Effective Time in accordance with HFB's agreement with such firm
(a copy of which has been delivered by HFB to FAC prior to the execution of
this Agreement), and each party agrees to indemnify the other party and hold
the other party harmless from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such first party or its affiliate.
5.13 Governance; Name. (a) FAC shall take action to cause
the persons who are serving as members of the Board of Directors of HFB
immediately prior to the Effective Time to be appointed to serve as advisory
directors of FANB as may be mutually agreed upon by FANB and such persons.
Subject to the recommendation of the Nominating Committee of the Board of
Directors of FAC and the approval of the full Board of Directors of FAC in
accordance with its By-Laws, the parties contemplate
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that one member of the Board of Directors of HFB immediately prior to the
Effective Time shall become a member of the Board of Directors of FAC following
the Merger.
(b) The name of the Surviving Corporation shall be First
American Corporation and the name of the Surviving Bank shall be First American
National Bank.
5.14 Indemnification: Directors' and Officers' Insurance.
(a) From and after the Effective Time, FAC shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer, director or
employee of HFB or any of its Subsidiaries (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses (including attorneys' fees),
liabilities or judgments, or amounts that are paid in settlement with the
approval of FAC (which approval shall not be unreasonably withheld), of or in
connection with any claim, action, suit, proceeding or investigation in which
an Indemnified Party is, or is threatened to be made a party or witness, based
in whole or in part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of HFB or any Subsidiary of
HFB, whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time ("Indemnified Liabilities"), in each case to the full extent HFB
would have been permitted under Tennessee or federal law in effect as of the
date hereof or as amended applicable to a time prior to the Effective Time, and
its charter and By-laws or the charter and by laws of the HFB Subsidiary, as
applicable, to indemnify such person. Without limiting the foregoing, in the
event any such claim, action, suit, proceeding or investigation is brought
against any Indemnified Party (whether arising before or after the Effective
Time), (i) any counsel retained by the Indemnified Parties for any period after
the Effective Time shall be reasonably satisfactory to FAC; (ii) after the
Effective Time, FAC shall pay all reasonable fees and expenses of such counsel
and such other fees and expenses as are reasonable for the Indemnified Parties
promptly as statements therefor are received; and (iii) after the Effective
Time, FAC will use all reasonable efforts to assist in the vigorous defense of
any such matter, provided that FAC shall not be liable for any settlement of
any claim effected without its written consent, which consent, however, shall
not be unreasonably withheld. Any Indemnified Party wishing to claim
indemnification under this Section 5.14, upon learning of any such claim,
action, suit, proceeding or investigation, shall notify FAC (but the failure so
to notify FAC shall not relieve it from any liability which it may have under
this Section 5.14 except to the extent such failure materially prejudices FAC).
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(b) From and after the Effective Time and for a period of
six years thereafter, FAC shall use its best efforts to maintain in effect
directors' and officers'
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liability insurance coverage which is at least as advantageous as to coverage
and amounts as maintained by HFB immediately prior to the Effective Time with
respect to claims arising from facts or events which occurred before the
Effective Time; provided, however, that FAC shall not be obligated to make
annual premium payments for such insurance to the extent such premiums exceed
1.5 times premiums paid as of the date hereof by HFB for such insurance.
Notwithstanding anything to the contrary contained elsewhere herein, FAC's
agreement set forth above shall be limited to cover claims only to the extent
that those claims are not covered under HFB's directors' and officers'
insurance policies (or any substitute policies permitted by this Section
5.14(b)).
(c) The provisions of this Section 5.14 are intended to
be for the benefit of, and shall be enforceable by, each Indemnified Party, and
each Indemnified Party's heirs and representatives.
5.15 Coordination of Dividends. HFB shall coordinate with
FAC the declaration of any dividends in respect of HFB Common Stock and the
record dates and payment dates relating thereto, it being the intention of HFB
and FAC that holders of HFB Common Stock shall not receive two dividends, or
fail to receive one dividend, for any single calendar quarter with respect to
their shares of HFB Common Stock and any shares of FAC Common Stock any such
holder received in exchange therefor in the Merger.
5.16 HFB Accruals and Reserves. Prior to the Closing
Date, HFB shall review and, to the extent determined necessary or advisable,
consistent with GAAP and the accounting rules, regulations and interpretations
of the SEC and its staff, modify and change its loan, accrual and reserve
policies and practices (including loan classifications and levels of reserves
and accruals and reserves to (i) reflect the Surviving Corporation's plans with
respect to the conduct of HFB's business following the Merger and (ii) make
adequate provision and accrue for the costs and expenses relating thereto
including without limitation expenses relating to taxes, stock option plans,
employment agreements, severance benefits and split dollar insurance premiums)
so as to be applied consistently on a basis with those of FAC. Prior to the
Closing, HFB also will adjust loan loss and OREO reserves as may be
appropriate, consistent with GAAP and the accounting rules, regulations and
interpretations of the SEC and its staff, in light of the then anticipated
post-Closing disposition of certain HFBS assets. The parties agree to
cooperate in preparing for the implementation of the adjustments contemplated
by this Section 5.16. Notwithstanding the foregoing, HFB shall not be
obligated to take in any respect any such action pursuant to this Section 5.16
(other than pursuant to the preceding sentence) unless and until FAC
acknowledges in writing that all conditions to its obligation to consummate the
Merger have been satisfied. But, upon such acknowledgement and on the Closing
Date, HFB will take such actions as are necessary to complete the payments,
expenses and adjustments contemplated by this Section.
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5.17 Bank Merger. The parties agree to use their
reasonable efforts between the date of this Agreement and the Closing to take
all actions necessary or desirable, including the filing of any regulatory
applications, so that the merger (the "Bank Merger") of HFBS with and into
FANB, with FANB being the surviving depository institution, will occur as soon
as possible after the Effective Time. As soon as practicable after the
execution and delivery of this Agreement, HFBS and FANB shall enter into a Bank
Plan of Merger, mutually agreeable to the parties.
5.18 Additional Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises of
either of the Constituent Corporations, the proper officers and directors of
each party to this Agreement shall take all such necessary action.
5.19 Enforcement of Agreements. Prior to the Effective
Time, HFB agrees to take any action that may be necessary, including seeking
injunctive or equitable relief, to enforce the provisions of certain agreements
between HFB (and/or Trident Financial Corporation as agent for HFB) and third
parties which agreements are substantially similar to the Confidentiality
Agreement.
5.20 Cooperation Generally. Between the date of this
Agreement and the Effective Time, FAC, HFB and their Subsidiaries shall use
their best efforts, and to take all actions necessary or appropriate, to
consummate the Merger and the other transactions contemplated by this Agreement
at the earliest practicable date.
ARTICLE VI
Conditions Precedent
--------------------
6.1 Conditions to Each Party's Obligation To Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the satisfaction prior to the Closing Date of the following
conditions:
(a) HFB Stockholder Approval. This Agreement shall have
been approved and adopted by the affirmative vote of the holders of a majority
of the outstanding shares of HFB Common Stock entitled to vote thereon.
(b) NASDAQ Listing. The shares of FAC Common Stock
issuable to HFB stockholders pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on the NASDAQ national market system.
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(c) Other Approvals. Other than the filing provided for
by Section 1.1, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed
by, any Governmental Entity (all the foregoing, "Consents") which are necessary
for the consummation of the Merger, other than Consents the failure to obtain
which would have no material adverse effect on the consummation of the Merger
or on the Surviving Corporation and its Subsidiaries, taken as a whole, shall
have been filed, occurred or been obtained (all such permits, approvals,
filings and consents and the lapse of all such waiting periods being referred
to as the "Requisite Regulatory Approvals") and all such Requisite Regulatory
Approvals shall be in full force and effect. FAC shall have received all state
securities or blue sky permits and other authorizations necessary to issue the
FAC Common Stock in exchange for HFB Common Stock and to consummate the Merger.
(d) S-4. The S-4 shall have become effective under the
Securities Act and shall not be the subject of any stop order or proceedings
seeking a stop order.
(e) No Injunctions or Restraints: Illegality. No
temporary restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or other legal restraint or
prohibition (an "Injunction") preventing the consummation of the Merger shall
be in effect, nor shall any proceeding by any Governmental Entity seeking any
of the foregoing be pending. There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger which makes the consummation of the Merger illegal.
6.2 Conditions to Obligations of FAC. The obligation of
FAC to effect the Merger is subject to the satisfaction of the following
conditions unless waived by FAC:
(a) Representations and Warranties: The representations
and warranties of HFB set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of another date) as of the
Closing Date as though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and FAC shall have received a certificate
signed on behalf of HFB by the President and Chief Executive Officer and by the
Chief Financial Officer of HFB to such effect.
(b) Performance of Obligations of HFB. HFB shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date (including without
limitation those of Section 5.16), and FAC shall have received a certificate
signed on behalf of HFB by
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the President and Chief Executive Officer and by the Chief Financial Officer of
HFB to such effect.
(c) Consents Under Agreements. HFB shall have obtained
the consent or approval of each person (other than the Governmental Entities
referred to in Section 6.1(c)) whose consent or approval shall be required in
order to permit the succession by the Surviving Corporation pursuant to the
Merger to any obligation, right or interest of HFB or any Subsidiary of HFB
under any loan or credit agreement, note, mortgage, indenture, lease, license
or other agreement or instrument, except those for which failure to obtain such
consents and approvals would not, individually or in the aggregate, have a
material adverse effect on the Surviving Corporation and its Subsidiaries taken
as a whole or upon the consummation of the transactions contemplated hereby.
(d) Opinions. FAC shall have received the opinion of
KPMG Peat Marwick LLP, FAC's independent auditors, dated as of the Effective
Time, to the effect that the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and that FAC and HFB will each be a party to that reorganization within the
meaning of Section 368(b) of the Code. FAC also shall have received the
opinions of Housley, Goldberg, Kantarian & Bronstein, and Wilson, Worley,
Gamble & Ward, PC, counsel to HFB, dated as of the Effective Time, in form
reasonably satisfactory to FAC, which shall cover the following matters:
(i) HFB and its Subsidiaries other than HFBS are
corporations duly organized, validly existing and in good standing under the
laws of the State of Tennessee;
(ii) HFBS is a federal savings bank duly
organized, validly existing, and in good standing under the laws of the United
States of America;
(iii) The Agreement and Plan of Merger has been
duly and validly authorized, executed and delivered by HFB (assuming that this
Agreement is a binding obligation of FAC) constitutes a valid and binding
obligation of HFB enforceable in accordance with its terms, subject as to
enforceability to applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and to
the application of equitable principles and judicial discretion;
(iv) The execution and delivery of this Agreement
and the consummation of the Merger and the Bank Merger have been duly and
validly authorized by the Boards of Directors of HFB and HFBS and no other
corporate action is necessary to authorize the Agreement or to consummate the
Merger and the Bank Merger by HFB or any Subsidiary thereof. To the actual
knowledge of such counsel,
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no consent or approval, which has not already been obtained, from any
governmental authority is required for execution and delivery by HFB of the
Agreement or any of the documents to be executed and delivered by HFB in
connection therewith and the consummation of the Merger and the Bank Merger;
(v) Immediately prior to the Effective Time (1)
the authorized capital stock of HFB consists of 8,000,000 shares of HFB Common
Stock (2) to our actual knowledge, there are no agreements or understandings by
HFB with respect to the voting, sale or transfer of any shares of capital stock
of HFB or any Subsidiary other than as contemplated by this Agreement; (3) HFBS
and each other Subsidiary of HFB is wholly owned by HFB, directly or
indirectly; and (4) all shares of HFB Common Stock outstanding were duly
authorized, and nonassessable and were free of the preemptive right of any
shareholder;
(vi) Neither the execution, delivery and
performance of this Agreement by HFB nor the consummation of the Merger and the
Bank Merger will (a) conflict with or result in a breach of any provision of
the respective charters, articles of incorporation or bylaws of HFB or any
Subsidiary (b) constitute or result in the breach of any term, condition,
provision of or constitute a default under, or give rise to any right of
termination, cancellation, or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of HFB
or any Subsidiary thereof pursuant to any note, bond, mortgage, indenture,
license, agreement, lease or other instrument or obligation included in the HFB
Disclosure Schedule to which HFB or any Subsidiary thereof is a party or by
which HFB or any Subsidiary thereof is bound or to which any of their
properties or assets may be subject, or (c) violate any order, judgment or
decree to which HFB or any Subsidiary thereof is a party or by which any of
them or any of their properties or assets is bound;
(vii) Except as set forth in the HFB Disclosure
Schedule, to the actual knowledge of such counsel, there is no litigation,
proceeding or governmental investigation pending or threatened against HFB or
any Subsidiary thereof, their properties, businesses or assets and neither HFB
nor any Subsidiary thereof has received any notification by any regulatory
agency asserting that it is not in compliance with any applicable laws,
statutes or regulations or that seeks to revoke any license, franchise, permit
or other governmental authorization which is necessary to conduct their
businesses as presently conducted.
Such opinion may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of HFB or HFBS or appropriate
government officials and (ii) incorporate, be guided by, and be interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
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(e) Burdensome Condition. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger by any Governmental Entity which, in connection
with the grant of a Requisite Regulatory Approval, imposes any requirement upon
FAC or its Subsidiaries to dispose of 10% or more of the assets or deposits of
HFB.
(f) No Material Adverse Change. There shall have been no
material adverse change in the business, financial condition, prospects or
results of operations or prospects of HFB or its Subsidiaries from that
reflected in the audited financial statements of HFB for the year ended June
30, 1994 and HFB or any of its Subsidiaries shall not have suffered any
substantial loss or damage to their respective properties, or assets whether or
not insured that would materially affect or impair the ability of HFB or its
Subsidiaries to conduct their business and operations except for such changes
that result from (i) changes in banking or thrift laws or regulations of
general applicability or interpretations thereof, (ii) changes in generally
accepted accounting principles or regulatory accounting principles or
interpretations thereof (iii) changes in general economic conditions including
changes in the general level of interest rates, (iv) changes effected on FAC's
request pursuant to Section 5.16 hereof; or (v) the settlement or disposition
of any litigation pending as of the date hereof and set forth on the HFB
Disclosure Schedule by HFB or any Subsidiary.
(g) Affiliate Agreements. FAC shall have received
written "affiliates" agreements, in customary form, as provided in Section 5.7
hereof.
(h) Accountants' Letter. FAC shall have received a
letter from Coopers & Lybrand, dated the Closing Date, in form and substance
satisfactory to FAC, stating in effect in respect of HFB and its Subsidiaries
that: (1) they have examined the consolidated financial statements of HFB as of
June 30, 1994, and June 30, 1995 and for each of the years then ended and have
made a limited review in accordance with the standards established by the
American Institute of Certified Public Accountants of the latest available
unaudited consolidated interim financial statements of HFB available after June
30, 1995; (2) on the basis of reading the latest available unaudited
consolidated interim financial statements of HFB; reading the minutes of the
meetings of the stockholders and the Board of Directors and committees thereof
of HFB for the period from June 30, 1995 to the Closing Date, and inquiries of
officers of HFB having responsibility for financial and accounting matters as
to whether the unaudited consolidated financial statements referred to in (1)
above are stated on a basis substantially consistent with that of the audited
consolidated financial statements as of June 30, 1994 and June 30, 1995 and for
the years then ended, nothing came to their attention which caused them to
believe that during the period from June 30, 1995 to a date specified not more
than three days prior to the date of the letter there were any changes in the
capital stock or the long term debt of HFB or any decreases in revenues, net
earnings or net assets of HFB have occurred or are expected to occur; and (3)
on the basis of (i) reading the latest
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available interim consolidated financial statements which are referred to above
and (ii) inquiries of certain officials of HFB having responsibility for
financial and accounting matters concerning whether the unaudited consolidated
interim financial statements referred to in (1) above are presented fairly,
nothing came to their attention which caused them to believe that the latest
available consolidated interim financial statements are not fairly presented in
conformity with generally accepted accounting principles ("GAAP") applied on a
basis consistent with that followed in the audited consolidated financial
statements dated June 30, 1994 and June 30, 1995 and for the years then ended.
(i) FAC shall have received a certificate of the chief
executive officer of HFB certifying to FAC immediately prior to the Effective
Time (1) the number of shares of HFB Common Stock and HFB Preferred Stock
issued and outstanding; (2) the number of options for HFB Common Stock
outstanding, and shares of restricted stock outstanding and (3) that no other
shares of capital stock or securities convertible into or evidencing the right
to purchase or subscribe for any shares of capital stock of HFB are outstanding
and there are no other outstanding warrants, calls, subscriptions, rights,
commitments, stock appreciation rights, phantom stock or similar rights or any
other agreements of any character obligating HFB or any Subsidiary thereof to
issue any shares of capital stock or securities convertible into or evidencing
the right to purchase such stock; and (4) no shares of HFB Common Stock are
held by HFB in treasury or by its Subsidiaries.
6.3 Conditions to Obligations of HFB. The obligation of
HFB to effect the Merger is subject to the satisfaction of the following
conditions unless waived by HFB:
(a) Representations and Warranties. The representations
and warranties of FAC set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations speak as of an earlier date) as of the Closing Date
as though made on and as of the Closing Date, except as otherwise contemplated
by this Agreement, and HFB shall have received a certificate signed on behalf
of FAC by the Chairman or the President or a Vice Chairman and by the Chief
Accounting Officer of FAC to such effect.
(b) Performance of Obligations of FAC. FAC shall have
performed in all material respects all obligations required to be performed by
them under this Agreement at or prior to the Closing Date, and HFB shall have
received a certificate signed on behalf of FAC by the Chairman, President and
Chief Executive Officer or a Vice Chairman and by the Chief Accounting Officer
of FAC to such effect.
(c) Consents Under Agreements. FAC shall have obtained
the consent or approval of each person (other than the Governmental Entities
referred to in Section
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6.1(c)) whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a material adverse effect on the
Surviving Corporation and its Subsidiaries, taken as a whole, or upon the
consummation of the transactions contemplated hereby.
(d) Opinions. HFB shall have received the opinions of
Coopers and Lybrand, independent auditors of HFB and Housley, Goldberg,
Kantarian & Bronstein, P.C., counsel to HFB, dated the Closing Date, to the
effect that (i) the Merger (including the Bank Merger) will be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code, and that FAC and HFB will each be a party to that
reorganization within the meaning of Section 368(b) of the Code; (ii) the
shareholders of HFB will not recognize any gain or loss to the extent that such
shareholders exchange shares of HFB Common Stock solely for shares of FAC
Common Stock in the Merger, (iii) the basis of the FAC Common Stock received by
an HFB shareholder who exchanges HFB Common Stock solely for FAC Common Stock
will be the same as the basis of the HFB Common Stock surrendered in exchange
therefor (subject to any adjustments required as the result of receipt of cash
in lieu of a fractional share of FAC Common Stock ), (iv) the holding period of
the FAC Common Stock received by a HFB shareholder receiving FAC Common Stock
will include the period during which the HFB Common Stock surrendered in
exchange therefor was held (provided that the HFB Common Stock of such HFB
shareholder was held as a capital asset at the Effective Time), and (v) cash
received by a HFB shareholder in lieu of a fractional share interest of FAC
Common Stock will be treated as having been received as a distribution in full
payment in exchange for the fractional share interest of FAC Common Stock which
such shareholder would otherwise be entitled to receive. HFB also shall have
received the opinions of Martin E. Simmons, Esq., General Counsel to FAC and of
outside counsel to FAC, dated as of the Effective Time, in form reasonably
satisfactory to HFB, which shall cover the following matters:
(i) FAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Tennessee;
(ii) FANB is a national banking association duly
organized, validly existing, and in good standing under the laws of the United
States of America;
(iii) The Agreement and Plan of Merger has been
duly and validly authorized, executed and delivered by FAC (assuming that this
Agreement is a binding obligation of HFB) constitutes a valid and binding
obligation of FAC enforceable in accordance with its terms, subject as to
enforceability to applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of
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creditors' rights generally and to the application of equitable principles and
judicial discretion;
(iv) The execution and delivery of this Agreement
and the consummation of the Merger and the Bank Merger have been duly and
validly authorized by the joint Board of Directors of FAC and FANB and no other
corporate action is necessary to authorize the Agreement or to consummate the
Merger and the Bank Merger by FAC or any Subsidiary thereof. To the actual
knowledge of such counsel, no consent or approval, which has not already been
obtained, from any governmental authority is required for execution and
delivery by FAC of the Agreement or any of the documents to be executed and
delivered by FAC in connection therewith and the consummation of the Merger and
the Bank Merger; and
(v) Immediately prior to the Effective Time (1)
the authorized capital stock of FAC consists of 50,000,000 shares of FAC Common
Stock and 2,500,000 shares of FAC Preferred Stock; and there were sufficient
shares of FAC Common Stock reserved for issuance to HFB shareholders upon
consummation of the Merger and the Bank Merger; and the shares of FAC Common
Stock to be issued to the holders of HFB Common Stock pursuant hereto have been
duly authorized and when issued will be non-assessable.
Such opinion may (i) expressly rely as to matters of fact upon
certificates furnished by appropriate officers of FAC or FANB or appropriate
government officials and (ii) incorporate, be guided by, and be interpreted in
accordance with, the Legal Opinion Accord of the ABA Section of Business Law
(1991).
(e) Fairness Opinion. HFB shall have received an opinion
of Trident Financial Corporation dated as of the date of the approval of this
Agreement by the HFB Board of Directors to the effect that the consideration to
be received by the holders of HFB Common Stock pursuant to this Agreement upon
the consummation of the Merger is fair to such shareholders from a financial
point of view.
(f) Receipt of Consideration. The Exchange Agent shall
acknowledge in writing to HFB that it is in receipt of (i) certificates
representing the aggregate number of shares of FAC Common Stock to be issued to
the shareholders of HFB hereunder and (ii) sufficient cash to pay for
fractional shares and restricted HFB stock as provided herein.
(g) No Material Adverse Change. There shall have been no
material adverse change in the business, financial condition, prospects or
results of operations or prospects of FAC or its Subsidiaries from that
reflected in the audited financial statements of FAC for the year ended
December 31, 1993 and FAC or any of its Subsidiaries shall not have suffered
any substantial loss or damage to their respective properties, or assets
whether or not insured that would materially affect or impair the
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ability of FAC or its Subsidiaries to conduct their business and operations
except for such changes that result from (i) changes in banking or thrift laws
or regulations of general applicability or interpretations thereof, (ii)
changes in generally accepted accounting principles or regulatory accounting
principles or interpretations thereof or (iii) changes in general economic
conditions including changes in the general level of interest rates.
(h) Accountants' Letter. HFB shall have received a
letter from Peat Marwick LLP, dated the Closing Date, in form and substance
satisfactory to HFB, stating in effect in respect of FAC and its Subsidiaries
that: (1) they have examined the consolidated financial statements of FAC as of
December 31, 1994, and December 31, 1993 and for each of the years then ended
and have made a limited review in accordance with the standards established by
the American Institute of Certified Public Accountants of the latest available
unaudited consolidated interim financial statements of FAC available after
December 31, 1994; (2) on the basis of reading the latest available unaudited
consolidated interim financial statements of FAC; reading the minutes of the
meetings of the stockholders and the Board of Directors and committees thereof
of FAC for the period from December 31, 1994 to the Closing Date, and inquiries
of officers of FAC having responsibility for financial and accounting matters
as to whether the unaudited consolidated financial statements referred to in
(1) above are stated on a basis substantially consistent with that of the
audited consolidated financial statements as of December 31, 1993 and December
31, 1994 and for the years then ended, nothing came to their attention which
caused them to believe that during the period from December 31, 1994 to a date
specified not more than three days prior to the date of the letter there were
any changes in the capital stock or the long term debt of FAC or any material
decreases in revenues, net earnings or net assets of FAC have occurred or are
expected to occur; and (3) on the basis of (i) reading the latest available
consolidated interim financial statements which are referred to above and (ii)
inquiries of certain officials of FAC having responsibility for financial and
accounting matters concerning whether the unaudited consolidated interim
financial statements referred to in (1) above are presented fairly, nothing
came to their attention which caused them to believe that the latest available
consolidated interim financial statements are not fairly presented in
conformity with GAAP applied on a basis consistent with that followed in the
audited consolidated financial statements dated December 31, 1993 and December
31, 1994 and for the years then ended.
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ARTICLE VII
Termination and Amendment
-------------------------
7.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after approval by the
shareholders of HFB:
(1) by mutual consent of FAC and HFB; or
(2) by either FAC or HFB if (i) the Merger shall not have
been consummated on or before January 31, 1996 (the "Termination Date")
provided the terminating party shall not have breached in any material respect
its obligations under this Agreement in a manner that proximately contributed
to the failure to consummate the Merger by such date, (ii) any governmental or
regulatory body, the consent of which is a condition to the obligations of FAC
and HFB to consummate the transactions contemplated hereby or by the Merger
Plan, shall have determined not to grant its consent and all appeals of such
determination shall have been taken and have been unsuccessful, or (iii) any
court of competent jurisdiction in the United States or any State shall have
issued an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment or decree shall have become final and nonappealable.
(3) By FAC:
(a) if any event shall have occurred as a result
of which any condition set forth in Sections 6.1 or 6.2 is no
longer capable of being satisfied; or
(b) if there has been a breach by HFB of any
representation or warranty contained in this Agreement which
would have or would be reasonably likely to have a material
adverse effect on the assets, liabilities, financial
condition, results of operations, business or prospects of HFB
and its Subsidiaries taken as a whole, or there has been a
material breach of any of the covenants or agreements set
forth in this Agreement on the part of HFB, which breach is
not curable, or, if curable, is not cured within 20 days after
written notice of such breach is given by FAC to HFB; or
(c) if HFB (or its Board of Directors) shall have
authorized, recommended, proposed or publicly announced its
intention to enter into a Competing Transaction (as
hereinafter defined) which has not been consented to in
writing by FAC; or
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(d) if the Board of Directors of HFB shall have
withdrawn or materially modified its authorization, approval
or recommendation to the stockholders of HFB with respect to
the Merger or this Agreement in a manner adverse to FAC or
shall have failed to make the favorable recommendation
required by Section 5.5; or
(e) if the Average Closing Price exceeds $36.50
(subject to adjustment, if any, in accordance with the last
sentence in Section 2.1(b) herein).
(4) By HFB:
(a) if any event shall have occurred as a result
of which any condition set forth in Sections 6.1 or 6.3 is no
longer capable of being satisfied (provided that nothing
herein shall require HFB to hold more than one meeting at
which a quorum is present pursuant to Section 5.5 herein); or
(b) if there has been a breach by FAC of any
representation or warranty contained in this Agreement which
would have or would be reasonably likely to have a material
adverse effect on the assets, liabilities, financial
condition, results of operations, business or prospects of FAC
and its Subsidiaries taken as a whole, or there has been a
material breach of any of the covenants or agreements set
forth in this Agreement on the part of FAC which breach is not
curable or, if curable, is not cured within 20 days after
written notice of such breach is given by HFB to FAC; or
(c) if the Average Closing Price is less than
$23.50 (subject to adjustment, if any, in accordance with the
last sentence in Section 2.1(b) herein).
For purposes of this Agreement, the term "Competing Transaction" means any of
the following involving HFB (other than the transactions contemplated by this
Agreement): (i) any merger, consolidation, share exchange, business
combination, or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 15% or more of the assets of
HFB in a single transaction or series of transactions to the same person,
entity or group; or (iii) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
7.2 Rights and Obligations upon Termination. If this
Agreement is terminated as provided herein, each party will redeliver all
documents, work papers, and other materials of any other party relating to the
transactions contemplated
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hereby, whether obtained before or after the execution hereof, to the party
furnishing the same including using its best efforts to obtain and redeliver
all such documents, work papers and materials, except to the extent previously
delivered to third parties in connection with the transactions contemplated
hereby, and all information received by any party hereto with respect to the
business of any other party shall not at any time be used for the advantage of,
or disclosed to third parties by, such party to the detriment of the party
furnishing such information; provided, however, that this Section 7.2 shall not
apply to any documents, work papers, material, or information which is a matter
of public knowledge or which heretofore has been or hereafter is published in
any publication for public distribution or filed as public information with any
governmental agency.
7.3 Fees and Expenses. HFB acknowledges that FAC has
spent, and will be required to spend, substantial time and effort in examining
the business, properties, affairs, financial condition and prospects of HFB and
its Subsidiaries, has incurred, and will continue to incur, substantial fees
and expenses in connection with such examination, the preparation of this
Agreement and the accomplishment of the transactions contemplated hereunder,
and will be unable to evaluate and, possibly, make investments in or acquire
other entities due to the limited number of personnel available for such
purpose and the constraints of time. Therefore, to induce FAC to enter this
Agreement,
(a) If FAC terminates this Agreement pursuant to:
(i) Section 7.1(3)(a) or (3)(b) by reason of the
failure to meet any condition contained in Section 6.2(a) or
(b) due to HFB's knowing and intentional misrepresentation or
knowing and intentional breach of warranty or breach of any
covenant or agreement and at the time of such knowing and
intentional misrepresentation or breach, HFB and/or a
Subsidiary thereof, had or had previously had between the date
hereof and such time, directly or indirectly, through any
officer, director, employee, agent, investment banker,
financial consultant, attorney, accountant or other
representative of HFB or any HFB Subsidiary, verbal or written
contact, dialogue or discussions with any third party
regarding a Competing Transaction;
(ii) Section 7.1(3)(d);
(iii) Section 7.1(3)(c) and within 12 months from
the date of termination a Competing Transaction is consummated
or HFB shall have entered into an agreement which if
consummated would constitute a Competing Transaction; or
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(b) if HFB terminates this Agreement pursuant to Section
7.1(4) because this Agreement did not receive the requisite vote of the HFB
stockholders and within 12 months from the date of termination a Competing
Transaction is consummated or HFB shall have entered into an agreement which if
consummated would constitute a Competing Transaction;
then HFB shall pay to FAC a fee in the amount of $4,500,000 (the "Fee"), which
amount is inclusive of the FAC Expenses, not as a penalty but as full and
complete liquidated damages. Upon payment of the Fee, HFB shall have no
further liability to FAC at law or equity. The Fee shall be payable to FAC
notwithstanding that any action taken by the Board of Directors of HFB which
may give rise to the obligation to pay the Fee may have been taken in
accordance with the fiduciary duties of the Board of Directors. Any payment
required pursuant to this Section 7.3 shall be made as promptly as practicable,
but in no event later than two business days after the date due and shall be
made by wire transfer of immediately available funds to an account designated
by FAC. In the event that FAC is entitled to the Fee, HFB shall also pay to FAC
interest at the rate of 6% per year on any amounts that are not paid when due,
plus all costs and expenses in connection with or arising out of the
enforcement of the obligation of HFB to pay the Fee or such interest.
(c) in the event that FAC terminates this Agreement
pursuant to Section 7.1(3) by reason of the failure to meet the conditions
contained in Section 6.2 (a) or (b) due to HFB's knowing or intentional
misrepresentation or knowing and intentional breach of warranty or breach of
any covenant or agreement, and HFB is not obligated to pay the Fee either at
such time or in the future, then HFB shall pay (but not as liquidated damages
and HFB shall not be relieved or released from any other damages or liabilities
hereunder) FAC on demand, in same day funds, all reasonable out-of-pocket
expenses and fees (including, without limitation, fees and expenses payable to
all investment banking firms and their respective agents and counsel, and all
fees of counsel, accountants, experts and consultants to FAC) actually incurred
by FAC or on its behalf in connection with the Merger and all transactions
contemplated by this Agreement but in no event more than $500,000;
(d) In the event that HFB terminates this Agreement
pursuant to Section 7.1(4) by reason of the failure to meet any condition
contained in Section 6.3 (a) or (b) due to FAC's knowing and intentional
misrepresentation or knowing and intentional breach of warranty or breach of
any covenant or agreement, then FAC shall pay (but not as liquidated damages
and FAC shall not be relieved or released from any other damages or liabilities
hereunder) HFB on demand, in same day funds, all reasonable out-of-pocket
expenses and fees (including, without limitation, fees and expenses payable to
all investment banking firms and their respective agents and counsel, and all
fees of counsel, accountants, experts and consultants to HFB) actually incurred
by HFB or on its behalf in connection with the Merger and all transactions
contemplated by this Agreement, but in no event more than $500,000;
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(e) In the event that FAC terminates this Agreement
pursuant to Section 7.1(3) by reason of the failure to meet the conditions
contained in Section 6.2 (e), and HFB is not obligated to pay the Fee either at
such time or in the future, then FAC shall pay HFB on demand, in same day
funds, the sum of $1,000,000 which amount is inclusive of the HFB Expenses, not
as a penalty but as full and complete liquidated damages. Upon payment of the
amount contemplated in this Section 7.3 (e), FAC shall have no further
liability to HFB at law or equity.
7.4 Effect of Termination. Except for such provisions of
this Agreement which by their terms expressly survive the termination hereof,
and the provisions of Sections 5.11, 8.8 7.2, 7.3, and this Section 7.4, which
shall survive any termination of this Agreement, in the event of the
termination of this Agreement pursuant to Section 7.1, this Agreement shall
forthwith become void and have no further effect, without any liability on the
part of any party hereto or its respective officers, directors or stockholders
except as set forth in this Article 7.
ARTICLE VIII
General Provisions
------------------
8.1 Nonsurvival of Representations, Warranties, and
Agreements. None of the representations, warranties and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time, except for those agreements and covenants which by
their terms apply or are intended to be performed in whole or in part after the
Effective Time.
8.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to FAC, to
First American Corporation
615 First American Center
Nashville, Tennessee 37237-0615
Attention: Dennis C. Bottorff, Chairman and Chief Executive Officer
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with a copy to
Martin E. Simmons, Esq.
Executive Vice President-Administration,
General Counsel and Secretary
606 First American Center
Nashville, Tennessee 37237-0606
and
(b) if to HFB, to
Heritage Federal Bancshares, Inc.
110 East Center Street
Kingsport, Tennessee 37662-0484
Attention: William E. Kreis, President and Chief Executive Officer
with a copy to
Housley, Goldberg, Kantarian & Bronstein, P.C.
Suite 700 1220 19th Street, N.W.
Washington, D.C. 20036
Attention: Leonard S. Volin, Esq.
8.3 Interpretation. When a reference is made in this
Agreement to Sections, Exhibits or Schedules, such reference shall be to a
Section of or Exhibit or Schedule to this Agreement unless otherwise indicated.
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation". The phrase "made available" in this Agreement
shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement, "the date hereof" and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
February 21, 1995.
8.4 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed
by each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries; Rights
of Ownership. This Agreement (including the documents and the instruments
referred to herein) (a) constitutes the entire agreement and supersedes all
prior agreements and
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understandings, both written and oral, among the parties with respect to the
subject matter hereof other than the Confidentiality Agreement which shall
remain in full force and effect, and (b) except as expressly provided herein,
is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder. The parties hereby acknowledge that, except as
hereinafter agreed upon in writing, no party shall have the right to acquire or
shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
8.6 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Tennessee, without regard
to any applicable conflicts of law.
8.7 Injunctive Relief; Limitations on Remedies. The
parties hereto acknowledge and agree that since a remedy at law for any breach
or attempted breach of the provisions hereof shall be inadequate, FAC shall be
entitled to specific performance and injunctive or other equitable relief in
case of any such breach or attempted breach, in addition to whatever other
remedies may exist at law. The parties hereto also waive any requirement for
the securing or posting of any bond in connection with the obtaining of any
such injunctive or other equitable relief. Each party further agrees that,
should any court or other competent authority hold any provision of this
Agreement or part hereof to be null, void or unenforceable, or order any party
to take any action inconsistent herewith or not to take any action required
herein, the other party shall not be entitled to specific performance of such
provision or part hereof or thereof or to any other remedy, including but not
limited to money damages, for breach hereof or thereof or of any other
provision of this Agreement or parts hereof as a result of such holding or
order. This provision is not intended to render null or unenforceable any
obligation hereunder that would be valid and enforceable if this provision were
not in this Agreement.
8.8 Publicity. Except as otherwise required by law or
the rules of NASDAQ, so long as this Agreement is in effect, neither HFB nor
FAC shall, or shall permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to
the transactions contemplated by this Agreement without the consent of the
other party, which consent shall not be unreasonably withheld.
8.9 Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
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8.10 Consents. For purposes of any provision of this
Agreement requiring, permitting or providing for the consent of FAC or HFB, the
written consent of the Chief Executive Officer of FAC or HFB, as the case may
be, shall be sufficient to constitute such consent.
8.11 Disclosures. No fact or event shall be deemed to
have been disclosed by one party to the other party for purposes of this
Agreement unless such fact or event is disclosed in a writing delivered to such
party.
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IN WITNESS WHEREOF, FAC and HFB have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of
February 21, 1995.
FIRST AMERICAN CORPORATION
BY: /s/ Dennis C. Bottorff
-----------------------------------
Dennis C. Bottorff
Chairman and Chief Executive Officer
Attest:
/s/ Mary C. Price
- --------------------------------------
Title: Assistant Secretary
--------------------------------
HERITAGE FEDERAL BANCSHARES, INC.
BY: /s/ William E. Kreis
-----------------------------------
William E. Kreis
President and Chief Executive Officer
Attest:
/s/ Richard Brumfield
- --------------------------------------
Title: /s/ Secretary
--------------------------------
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AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This AMENDMENT (the "Amendment") to the AGREEMENT AND PLAN OF MERGER dated
as of February 21, 1995 (the "Agreement"), between First American Corporation, a
Tennessee corporation ("FAC") and Heritage Federal Bancshares, Inc., a Tennessee
corporation ("HFB") is made and entered as of May 17, 1995.
WITNESSETH:
WHEREAS, the parties hereto have heretofore entered into the Agreement
which contemplated that the Merger of HFB with and into FAC would be accounted
for as a purchase; and
WHEREAS, FAC now desires to account for the Merger as a pooling and the
parties hereto desire to amend the Agreement as hereinafter set forth in order
to facilitate such accounting treatment.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
1. Section 4.2(i) is hereby amended to delete the following:
"except with respect to the 1992 Plan and the 1994 Plan and the Director
Incentive Plan (A) to permit transfer of non-qualified options to family
members or non-profit charitable organizations or (B) to permit exercise of
such non-qualified options at any time during the term thereof irrespective
of service with HFB (or any Subsidiary thereof) or any successor thereto"
so that Section 4.2(i) shall read in its entirety as follows:
(i) adopt any new employee benefit plan or program or make any material
change in or to any existing employee benefit plans or programs of any HFB
or any Subsidiary except as contemplated by Section 5.9 herein or except as
required by law; or make any discretionary matching contributions or
discretionary contributions to any employee benefit plan of HFB or any
Subsidiary thereof; or
2. Section 3.2(j) is hereby amended to delete the following:
"however, it is FAC's current intention to repurchase up to 80% of such number
of shares prior to or substantially concurrent with the consummation of the
Merger pursuant to Rule 10b-18 of the SEC and in a manner which does not
prohibit FAC from entering into pooling transactions within two years from such
repurchases"
so that Section 3.2(j) shall read in its entirety as follows:
(j) Consideration. FAC has reserved or will reserve for issuance sufficient
shares of FAC Common Stock for issuance in the Merger.
3. Section 5.9(a) is hereby amended by deleting its contents in its
entirety and adding the following:
FAC and HFB acknowledge that the Heritage Federal Bank for Savings Employee
Stock Ownership Plan and Trust (the "ESOP") has unallocated assets with a
fair market value exceeding the outstanding balance of the loan secured by
those assets. Without changing the existing vesting and allocation
provisions in the ESOP (or in any of FAC's qualified plans). the parties
intend that current employees of HFB will benefit from this investment.
Therefore, after the Effective Time and until all unallocated shares now
held by the ESOP are released from collateral pledge and allocated to
current HFB employees (the "100% Allocation Date"), the ESOP will be
continued as a separate plan for the benefit of current employees of HFB
eligible to participate therein in accordance with the ESOP's terms for so
long as a separate plan is legally permissible under the Internal Revenue
Code and the rules promulgated thereunder without causing disqualification
of the ESOP. If before the 100% Allocation Date, it becomes legally
impermissible under the Internal Revenue Code and the rules promulgated
thereunder to maintain the ESOP as a separate plan, to the extent legally
permissible under Internal Revenue Code
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qualification requirements, the assets now held by the ESOP shall continue
to be allocated only to current employees of HFB, until the 100% Allocation
Date.
4. HFB agrees that no holders of any options to purchase HFB Common Stock
shall be entitled to receive cash in lieu thereof.
5. Capitalized terms, not specifically defined herein shall have the
meanings ascribed to them in the Agreement.
6. This Amendment shall become effective retroactively to the execution of
the Agreement. Except as expressly provided above, all of the terms and
conditions of the Agreement shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, FAC and HFB have caused this Amendment to be signed by
their respective officers thereunto duly authorized, all as of May 17, 1995.
FIRST AMERICAN CORPORATION
BY: /s/ Dennis C. Bottorff
--------------------------------------------------------
Dennis C. Bottorff
Chairman and Chief Executive Officer
Attest:
/s/ Mary C. Price
- ---------------------------------------------------------
Title: Assistant Secretary
HERITAGE FEDERAL BANCSHARES, INC.
BY: /s/ William E. Kreis
--------------------------------------------------------
William E. Kreis
President and Chief Executive Officer
Attest:
/s/ Richard D. Brumfield
- ---------------------------------------------------------
Title: Secretary
A-2
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APPENDIX B
September 29, 1995
Board of Directors
Heritage Federal Bancshares, Inc.
4105 Fort Henry Drive
Kingsport, Tennessee 37663
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of shares of common stock (the "HFB Common Stock"), of
Heritage Federal Bancshares, Inc. ("Heritage") of the consideration to be
received by such shareholders in the proposed merger (the "Proposed Merger") of
Heritage with First American Corporation ("First American"), pursuant to the
Agreement and Plan of Merger dated February 21, 1995 and amended as of May 17,
1995 (the "Agreement").
As more specifically set forth in the Agreement, and subject to a number of
conditions and procedures described in the Agreement, in the Proposed Merger
each of the issued and outstanding shares of HFB Common Stock shall be converted
into the right to receive the number of shares of FAC Common Stock so as to be
equal in value to $28.00. The actual number of shares of FAC Common Stock to be
issued in exchange for the shares of HFB Common Stock (the "Exchange Ratio")
will be determined based on the closing price of FAC Common Stock during a
twenty-day period prior to closing of the Proposed Merger (the "Average Closing
Price"), provided that the Exchange Ratio shall not exceed 1.098 shares of FAC
Common Stock per share of HFB Common Stock and shall not be less than 0.8116
shares of FAC Common Stock per share of HFB Common Stock. First American may
terminate the Agreement if the Average Closing Price is greater than $36.50 per
share, and Heritage may terminate the Agreement if the Average Closing Price is
less than $23.50 per share. All unexercised options for the right to purchase
shares of HFB Common Stock will be converted into options for the right to
purchase shares of FAC Common Stock using the same Exchange Ratio as applicable
to the holders of HFB Common Stock.
Trident Financial Corporation ("Trident") is a financial consulting and
investment banking firm experienced in the valuation of business enterprises
with considerable experience in the valuation of thrift institutions. Since
1975, Trident has valued in excess of 300 thrift institutions in connection with
mutual-to-stock conversions, mergers and acquisitions, as well as other
transactions. Trident is not affiliated with Heritage or First American.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the Agreement; (ii) certain publicly
available information concerning Heritage, including the audited financial
statements of Heritage for each of the years in the three year period ended June
30, 1995; (iii) certain publicly available information concerning First
American, including the audited financial statements of First American for each
of the years in the three year period ended December 31, 1994 and unaudited
financial statements for the six months ended June 30, 1995; (iv) certain other
internal information, primarily financial in nature, concerning the business and
operations of Heritage and First American furnished to us by Heritage and First
American for purposes of our analysis; (v) information with respect to the
trading market for HFB Common Stock; (vi) information with respect to the
trading market for FAC Common Stock; (vii) certain publicly available
information with respect to other companies that we believe to be comparable to
Heritage and First American and the trading markets for such other companies'
securities; and (viii) certain publicly available information concerning the
nature and terms of other transactions that we consider relevant to our inquiry.
We have also met with certain officers and employees of Heritage and First
American to discuss the foregoing as well as other matters we believe relevant
to our inquiry.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available. We have not attempted
independently to verify any such information. We have not conducted a physical
inspection of the properties or facilities of Heritage or First American, nor
have we made or obtained any independent
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evaluations or appraisals of any of such properties or facilities. We did not
specifically evaluate Heritage's or First American's loan portfolio or the
adequacy of Heritage's or First American's reserves for possible loan losses.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current financial condition and results of operations of
Heritage and First American, including interest income, interest expense, net
interest income, net interest margin, interest sensitivity, non-interest
expenses, earnings, dividends, book value, return on assets, return on equity,
capitalization, the amount and type of non-performing assets and the reserve for
loan losses; (ii) the business prospects of Heritage and First American; (iii)
the economies in Heritage's and First American's market areas; (iv) the
historical and current market for HFB Common Stock and FAC Common Stock and for
the equity securities of certain other companies that we believe to be
comparable to Heritage and First American; and (v) the nature and terms of
certain other acquisition transactions that we believe to be relevant. We have
also taken into account our assessment of general economic, market, financial
and regulatory conditions and trends, as well as our knowledge of the thrift
industry, our experience in connection with similar transactions, and our
knowledge of securities valuation generally. Our opinion necessarily is based
upon conditions as they exist and can be evaluated on the date hereof. Our
opinion is, in any event, limited to the fairness, from a financial point of
view, of the consideration to be received by the holders of HFB Common Stock in
the Proposed Merger and does not address Heritage's underlying business decision
to effect the Proposed Merger.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received by the holders of HFB Common Stock in the Proposed
Merger is fair, as of the date hereof, from a financial point of view, to such
holders.
Very truly yours,
TRIDENT FINANCIAL CORPORATION
B-2
<PAGE> 173
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 48-18-501 through 48-18-507 of the Tennessee Business Corporation
Act ("TBCA") provide that a business corporation may indemnify directors and
officers against liabilities they may incur in such capacities provided certain
standards are met, including good faith and the belief that the particular
action is in the best interests of the corporation. In general, this power to
indemnify does not exist in the case of actions against a director or officer by
or in the right of the corporation if the person entitled to indemnification
shall have been adjudged to be liable to the corporation. A corporation is
required to indemnify directors and officers against expenses they may incur in
defending actions against them in such capacities if they are successful on the
merits or otherwise in the defense of such actions.
Section 48-18-507 of the TBCA provides that the foregoing provisions shall
not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled, consistent with public policy, pursuant to any
provision of a corporation's charter, bylaws, general or specific action of its
board of directors, or contract, provided that no indemnification may be made in
connection with any proceeding charging improper personal benefit to an officer
or director, where such officer or director is adjudged liable on the basis that
personal benefit was improperly received.
The charter of First American provides for the discretionary
indemnification of directors and officers in accordance with and to the full
extent permitted by the laws of Tennessee as in effect at the time of such
indemnification. The bylaws of First American provide that no indemnification of
an officer or director shall be made by First American (i) if a judgment or
other final adjudication adverse to such person establishes his liability for
intentional misconduct or knowing violation of the law or for unlawful
distributions, (ii) if a judgment or other final adjudication adverse to such
person for breach of a duty of loyalty to First American is based upon such
person's gaining in fact personal profit or advantage to which he was not
entitled, (iii) in a proceeding by or in the right of the corporation, for any
amounts if such person is adjudged liable to the corporation, or for any amounts
paid to First American in settlement of such a proceeding by such person or (iv)
in a proceeding by First American directly for expenses, unless such proceeding
is brought after a change in control of First American. First American has
purchased directors' and officers' liability insurance covering certain
liabilities which may be incurred by the officers and directors of First
American in connection with the performance of their duties.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
An index of exhibits appears at page II-5.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended ("Securities Act").
(b) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no
II-1
<PAGE> 174
more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Proxy
Statement pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to supply means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE> 175
SIGNATURES
Pursuant to the requirements of the Securities Act and of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Nashville,
State of Tennessee, on the 28th day of September, 1995.
FIRST AMERICAN CORPORATION
By /s/ DENNIS C. BOTTORFF
------------------------------------
Dennis C. Bottorff,
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ----------------------------- -------------------
<S> <C> <C>
PRINCIPAL OFFICERS:
/s/ DENNIS C. BOTTORFF Chairman, President, Chief September 28, 1995
- ----------------------------------------- Executive Officer and
Dennis C. Bottorff Director (Principal Executive
Officer)
/s/ MARTIN E. SIMMONS Executive Vice President -- September 28, 1995
- ----------------------------------------- Administration, General
Martin E. Simmons Counsel, Secretary and
Principal Financial Officer
/s/ M. JACK VANNATTA Executive Vice President and September 28, 1995
- ----------------------------------------- Principal Accounting Officer
M. Jack Vannatta
DIRECTORS:
/s/ SAMUEL E. BEALL, III* September 28, 1995
- -----------------------------------------
Samuel E. Beall, III
/s/ DENNIS C. BOTTORFF September 28, 1995
- -----------------------------------------
Dennis C. Bottorff
/s/ EARNEST W. DEAVENPORT, JR.* September 28, 1995
- -----------------------------------------
Earnest W. Deavenport, Jr.
/s/ REGINALD D. DICKSON* September 28, 1995
- -----------------------------------------
Reginald D. Dickson
/s/ T. SCOTT FILLEBROWN, JR.* September 28, 1995
- -----------------------------------------
T. Scott Fillebrown, Jr.
/s/ JAMES A. HASLAM II* September 28, 1995
- -----------------------------------------
James A. Haslam II
</TABLE>
II-3
<PAGE> 176
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ----------------------------- -------------------
<S> <C> <C>
/S/ MARTHA R. INGRAM* September 28, 1995
- -----------------------------------------
Martha R. Ingram
/s/ WALTER G. KNESTRICK* September 28, 1995
- -----------------------------------------
Walter G. Knestrick
/s/ GENE C. KOONCE* September 28, 1995
- -----------------------------------------
Gene C. Koonce
/s/ JAMES R. MARTIN* September 28, 1995
- -----------------------------------------
James R. Martin
/s/ ROBERT A. MCCABE, JR.* September 28, 1995
- -----------------------------------------
Robert A. McCabe, Jr.
/s/ WILLIAM O. MCCOY* September 28, 1995
- -----------------------------------------
William O. McCoy
/s/ DALE W. POLLEY September 28, 1995
- -----------------------------------------
Dale W. Polley
/s/ ROSCOE R. ROBINSON, M.D.* September 28, 1995
- -----------------------------------------
Roscoe R. Robinson, M.D.
- -----------------------------------------
James F. Smith, Jr.
/s/ CAL TURNER, JR.* September 28, 1995
- -----------------------------------------
Cal Turner, Jr.
/s/ TED H. WELCH* September 28, 1995
- -----------------------------------------
Ted H. Welch
/s/ DAVID K.WILSON* September 28, 1995
- -----------------------------------------
David K. Wilson
- -----------------------------------------
Toby S. Wilt
/s/ WILLIAM S. WIRE II September 28, 1995
- -----------------------------------------
William S. Wire II
</TABLE>
*By: /s/ MARTIN E. SIMMONS
-------------------------------------------------
Martin E. Simmons
As Attorney-in-Fact
II-4
<PAGE> 177
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit 2.1 Agreement and Plan of Reorganization, included as Appendix A to the
Prospectus/Proxy Statement which is a part of this Registration Statement.
Exhibit 2.2 Agreement (Amendment Agreement), included as Appendix A to the Prospectus/Proxy
Statement which is a part of this Registration Statement.
Exhibit 3.1 Charter of First American, as amended, incorporated herein by reference to
Exhibit 1.1 to First American's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1991 (Commission File No. 0-6198).
Exhibit 3.2 Bylaws of First American, as amended, incorporated herein by reference to
Exhibit 3.2 to First American's Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 0-6198).
Exhibit 4 Rights Agreement, dated December 14, 1988, between First American Corporation
and First American Trust Company, N.A., rights agent, incorporated herein by
reference to Exhibit 1 to First American's Current Report on Form 8-K dated
December 14, 1988.
Exhibit 5 Opinion of Martin E. Simmons, Esq., regarding validity of FAC Common Stock
being registered, filed herewith.
Exhibit 8 Opinion of Housley Goldberg Kantarian & Bronstein, P.C. as to certain tax
consequences of the Merger, filed herewith.
Exhibit 11 Calculation of earnings per share (previously filed as Exhibit 11 to First
American's Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
Exhibit 13.1 Heritage's Annual Report on Form 10-K for the fiscal year ended June 30, 1995,
filed herewith.
Exhibit 13.2 Heritage's Form 10-K/A-1 for the fiscal year ended June 30, 1995, filed
herewith.
Exhibit 15 Letter of KPMG Peat Marwick LLP re: unaudited interim financial information for
First American, filed herewith.
Exhibit 23.1 Consent of KPMG Peat Marwick LLP, independent accountants for First American,
filed herewith.
Exhibit 23.2 Consent of Coopers & Lybrand, L.L.P., independent accountants for Heritage,
filed herewith.
Exhibit 23.3 Consent of Martin E. Simmons, Esq., contained in the opinion filed as Exhibit 5
hereto.
Exhibit 23.4 Consent of Trident Financial Corporation, filed herewith.
Exhibit 23.5 Consent of Housley Goldberg Kantarian & Bronstein, P.C. contained in the
opinion filed as Exhibit 8 hereto, filed herewith.
Exhibit 24 Powers of Attorney of certain directors and officers of First American, filed
herewith.
Exhibit 99.1 Form of Proxy relating to HFB Common Stock, filed herewith.
Exhibit 99.2 Opinion of Trident Financial Corporation, included as Appendix B to the
Prospectus/Proxy Statement which is a part of the Registration Statement.
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5
[MARTIN E. SIMMONS LETTERHEAD]
September 28, 1995
First American Corporation
First American Center
Nashville, TN 37237
Re: 4,026,274 shares of the Common Stock, $5.00 Par Value Per Share,
of First American Corporation ("FAC")
Gentlemen:
The undersigned has participated in the preparation of a registration
statement on Form S-4 (the "Registration Statement") for filing with the
Securities and Exchange Commission with respect to shares of FAC's Common Stock
(the "Shares") which may be exchanged and issued by FAC pursuant to the terms
and conditions of an Agreement and Plan of Merger dated as of February 21, 1995
and amended May 17, 1995 by and between Heritage Federal Bancshares, Inc.
("Heritage") and FAC ("the Agreement").
For purposes of rendering the opinion expressed herein, the undersigned has
examined FAC's charter and all amendments thereto; FAC's bylaws and amendments
thereto; the Agreement and such of FAC's corporate records as the undersigned
has deemed necessary and material to rendering the undersigned's opinion. The
undersigned has assumed that all documents examined by the undersigned as
originals are authentic, that all documents submitted to the undersigned as
photocopies are exact duplicates of original documents, and that all signatures
on all documents are genuine.
Further, the undersigned is familiar with and has supervised all corporate
action taken in connection with the authorization of the issuance of the subject
securities pursuant to the Agreement.
Based upon and subject to the foregoing and subsequent assumptions,
qualifications and exceptions, it is the undersigned's opinion that the Shares
have been duly authorized and when issued by FAC in accordance with the
Agreement, the Shares will be legally issued, fully paid and nonassessable.
The opinion expressed above is limited by the following assumptions,
qualifications and expectations:
(a) The undersigned is licensed to practice law only in the States of
Tennessee and Virginia, and expresses no opinion with respect of the effect
of any laws other than those of the State of Tennessee and the United
States of America.
(b) The opinion stated herein is based upon the statutes, regulations,
rules, court decisions and other authorities existing and effective as of
the date of this opinion, and the undersigned undertakes no responsibility
to update or supplement said opinion in the event of or in response to any
subsequent changes in the law or said authorities, or upon the occurrence
after the date hereof of events or circumstances that, if occurring prior
to the date hereof, might have resulted in different opinion.
(c) This opinion has been rendered solely for the benefit of First
American Corporation and no other person or entity shall be entitled to
rely hereon without the express written consent of the undersigned.
(d) This opinion is limited to the legal matters expressly set forth
herein, and no opinion is to be implied or inferred beyond the legal
matters expressly so addressed.
<PAGE> 2
First American Corporation
September 28, 1995
Page 2
The undersigned hereby consents to the undersigned being named as a party
rendering a legal opinion under the caption "Legal Opinion" in the
Prospectus/Proxy Statement constituting part of the Registration Statement and
to the filing of this opinion with the Securities and Exchange Commission as
well as all state regulatory bodies and jurisdictions where qualification is
sought for the sale of the subject securities.
The undersigned is an officer of and receives compensation from FAC and is
therefore not independent from FAC.
Sincerely yours,
/s/ Martin E. Simmons
----------------------
Martin E. Simmons
<PAGE> 1
EXHIBIT 8
September 28, 1995
Heritage Federal Bancshares, Inc.
4105 Fort Henry Drive
Kingsport, Tennessee 37663
Gentlemen:
We have acted as special counsel to Heritage Federal Bancshares, Inc.
("Heritage"), a Tennessee corporation, in connection with the proposed merger
("Merger") of Heritage with and into First American Corporation ("First
American"), a Tennessee corporation, and the subsequent merger (the "Bank
Merger") of Heritage Federal Bank for Savings with and into First American
National Bank, a wholly-owned subsidiary of First American. Both the Merger
and the Bank Merger are pursuant to the Agreement and Plan of Merger dated as
of February 21, 1995, by and between First American and Heritage, as amended on
May 17, 1995 (collectively, the "Agreement"), and are described in the
Registration Statement on Form S-4 to be filed today by First American with the
Securities and Exchange Commission (the "Registration Statement"). Terms used
but not defined herein, whether capitalized or not, shall have the meaning
given to them in the Prospectus/Proxy Statement of Heritage and First American
included in the Registration Statement (the "Prospectus/Proxy Statement").
This opinion is being rendered pursuant to the requirements of Item 21(a) of
Form S-4 under the Securities Act of 1933, as amended (the "Securities Act").
For purposes of this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
(i) the Agreement, (ii) the Registration Statement, including the
Prospectus/Proxy Statement, and (iii) such other documents as we have deemed
necessary or appropriate in order to enable us to render the opinion below. In
our examination, we have assumed the genuineness of all signatures where due
execution and delivery are requirements to the effectiveness thereof, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents
submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such copies.
We have also assumed that the transactions contemplated by the
Agreement will be consummated strictly in accordance with the Agreement and as
described in the Prospectus/Proxy Statement, that the Merger will qualify as a
statutory merger under the applicable laws of the State of Tennessee, and that
the Bank Merger will qualify as a statutory merger under applicable federal
law. This opinion is subject to the receipt by this firm prior to the
Effective Time of certain written representations of Heritage and First
American.
Based upon and subject to the foregoing, the discussion contained in
the Prospectus/Proxy Statement under the caption "Certain Federal Income Tax
Consequences of the Merger," to the extent of legal conclusions enumerated
therein and except as otherwise indicated, expresses our opinion as to the
material federal income tax consequences of the Merger applicable to holders of
HFB Common Stock. You should be aware, however, that the discussion under the
caption "Certain Federal Income Tax Consequences of the Merger" in the
Prospectus/Proxy Statement represents our conclusions as to the application of
law existing as of the date hereof to the instant transactions. There can be
no assurance that contrary positions may not be taken by the Internal Revenue
Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the references to this firm under
the heading "Certain Federal Income Tax Consequences of the Merger" in the
Prospectus/Proxy Statement included therein. In giving such consent, we do not
hereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
HOUSLEY GOLDBERG
KANTARIAN & BRONSTEIN, P.C.
By: /s/ Leonard S. Volin
---------------------------
Leonard S. Volin
<PAGE> 1
EXHIBIT 13.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--- ---
Commission File No. 0-20000
HERITAGE FEDERAL BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1485034
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
110 EAST CENTER STREET, KINGSPORT, TENNESSEE 37660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 378-8000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of August 11, 1995, the aggregate market value of the 3,189,506 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $82.9 million based on the closing sales price of
$26.00 per share of the registrant's Common Stock on August 9, 1995. For
purposes of this calculation, it is assumed that directors, officers and
beneficial owners of more than 5% of the registrant's outstanding voting stock
are not affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Page 1 of ___ sequentially numbered pages
Exhibit Index at Sequentially Numbered Page ___
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
THE COMPANY. Heritage Federal Bancshares, Inc. (the "Company") was
incorporated in December 1991 under the laws of the State of Tennessee to become
a savings institution holding company with Heritage Federal Bank for Savings
("Heritage Federal" or the "Bank") as its subsidiary. On March 30, 1992, the
Bank converted from mutual to stock form as a wholly owned subsidiary of the
Company. In conjunction with the conversion and reorganization, the Company
issued 1,495,000 shares of its common stock, par value $1.00 per share (the
"Common Stock"), to the public and registered its Common Stock with the
Securities and Exchange Commission under the Securities Exchange Act of 1934. In
August 1993, the Company's Board of Directors approved a three-for-two stock
split, which was effected as a 50% stock dividend and in August 1994 the Board
approved a four-for-three stock split, effected as a 33% stock dividend.
The Company is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. Prior to its acquisition of the Bank, the Company
had no assets and no liabilities and engaged in no business activities. Since
the acquisition, the Company has not engaged in any significant activity other
than holding the stock of the Bank and operating the business of a savings bank
through the Bank. Accordingly, the information set forth in this report,
including financial statements and related data, relates primarily to the Bank
and its subsidiary.
The executive offices of the Company are located at 110 East Center
Street, Kingsport, Tennessee 37660, and its main telephone number is (615)
378-8000.
THE BANK. Heritage Federal is a federally-chartered stock savings bank.
The Bank was incorporated in 1930 as a Tennessee-chartered building and loan
association under the name "Kingsport Savings and Loan Association." The Bank
converted to a federally chartered savings and loan association in 1935 and
later adopted the name "Heritage Federal Savings and Loan Association." In 1989,
the Bank converted to a federally chartered mutual savings bank, adopting its
current name. At June 30, 1995, the Bank operated through 13 full-service
offices located in six counties in east Tennessee. As discussed below, the Bank
sold five branches located in middle Tennessee in fiscal year 1993.
The principal business of Heritage Federal consists of accepting
deposits from the general public through its branch offices and investing these
funds in loans secured by one- to four-family residential properties located in
the Bank's market areas. The Bank also maintains a substantial investment
portfolio and originates a limited amount of consumer, commercial and commercial
real estate loans secured by properties in its market areas. The Bank also
offers trust services, and sells title insurance through its wholly-owned
subsidiary.
As a federally chartered savings bank, the Bank's deposits are insured
by the Savings Association Insurance Fund ("SAIF"), which is administered by the
Federal Deposit Insurance Corporation ("FDIC"), up to applicable limits for each
depositor. The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Cincinnati, which is one of the 12 district banks comprising the FHLB System.
The Bank is subject to comprehensive examination, supervision and regulation by
the OTS and the FDIC. Such regulation is intended primarily for the protection
of depositors.
On August 7, 1992, the Bank sold its five branch offices in the middle
Tennessee area to Trans Financial Federal Savings Bank of Tennessee. Branches
included in the sale were located in Lebanon, Murfreesboro, Franklin,
McMinnville, and Cookeville, Tennessee. The Bank received a cash payment in the
transaction equivalent to the book value of the assets transferred plus $1
million. No loans were transferred as part of the sale, other than a small
amount secured by deposit accounts. Trans Financial Federal Savings Bank assumed
approximately $55 million in
2
<PAGE> 3
deposits and purchased all premises and equipment related to the branches. The
branch sale was pursuant to the Bank's plan to dispose of its less profitable
branches and to concentrate on increasing its market share in its primary
markets in East Tennessee. In conjunction with this sale, the Bank also wrote
off in fiscal year 1993 an additional $637,000 in excess of cost over fair value
of net assets acquired. An environmental assessment conducted in connection with
the sale of the branches revealed that one location has been contaminated by a
release of gasoline from an underground storage tank the Company believes is
located on an adjacent property. The Company believes the responsible parties
are financially capable of remediating the underground storage tank site and
affected adjacent properties, if required, under the oversight of the State of
Tennessee, Division of Underground Storage Tanks, in accordance with the
Division's clean-up standards. Based on all known information, Heritage Federal
expects no third-party liability in this matter and has agreed to indemnify
Trans Financial from such liability.
In August 1993, the Bank, through its wholly-owned subsidiary, Citizens
Financial Corporation ("Citizens Financial") entered into an agreement with
third-party vendors to sell annuities and securities. The arrangement is one in
which the third-party vendors provide all personnel and other resources to sell
the annuities and securities and Citizens Financial leases space to the
third-party vendors. Citizens Financial received a percentage of the commissions
related to the sale of those products and did not assume any risk or any expense
other than as to certain supplies and office equipment. This arrangement
continued throughout most of fiscal year 1995.
The Bank's executive offices are located at 110 East Center Street,
Kingsport, Tennessee 37660 and its main telephone number is (615) 378-8000.
MERGER WITH FIRST AMERICAN CORPORATION
On February 21, 1995, the Bank entered into an Agreement and Plan of
Merger ("the Agreement") to merge with First American Corporation ("First
American"), a Tennessee bank holding company. Under the terms of the Agreement,
First American will acquire all of the outstanding shares of the Common Stock
and the Company's shareholders will receive $28.00 in value of shares of First
American common stock, such value to be based upon the average closing price of
the First American common stock for the 20 trading days ending on and including
the third day immediately preceding the effective time of the merger. The number
of shares of First American common stock to be exchanged in the merger cannot
exceed 1.098 shares or be less than 0.8116 shares. The Company has the
unilateral right to terminate the Agreement if First American's market price
drops below $23.50 and First American has the unilateral right to terminate the
Agreement if its market price exceeds $36.50. The Company is also permitted
under the Agreement to continue paying its quarterly cash dividend in the amount
of $0.095 per share but dividends in the last quarter prior to closing must be
coordinated with First American's dividend policy to avoid receipt by the
Company's shareholders of either two dividends or no dividends in any calendar
quarter. The Agreement also provides for the payment by the Company of a $4.5
million termination fee to First American under certain circumstances as well as
other lesser payments between the parties if the merger is not consummated for
other reasons.
LENDING ACTIVITIES
General. Heritage Federal originates loans through its offices located
in Sullivan, Washington, Carter, Hawkins, Anderson, Roane and, prior to their
sale on August 7, 1992, also originated loans through its now-sold branches
located in Wilson, Rutherford, Williamson, Warren and Putnam counties, all of
which are in Tennessee. The principal lending activity of the Bank is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential properties in each
of its primary market areas. Conventional mortgage loans are fixed-rate or
adjustable-rate mortgage loans which are not insured or guaranteed by federal
agencies. At June 30, 1995, such loans totaled $241.8 million, or 79.4% of the
Bank's gross loan portfolio. The Bank also makes conventional mortgage loans for
the purpose of constructing one- to four-family residences and loans to
construct commercial and multi-family real estate. At June 30, 1995,
conventional one- to four-family construction loans totaled $5.2 million,
commercial construction loans totaled $1.6 million and multi-
3
<PAGE> 4
family real estate construction loans totaled $0.2 million. In addition to
conventional loans, the Bank has originated limited amounts of residential
mortgage loans insured by the Federal Housing Administration ("FHA") or
guaranteed by the Veterans Administration ("VA"). At June 30, 1995, such loans
totaled $0.8 million. The Bank also originates consumer loans on a direct basis
and some small commercial loans.
The Bank has sought to reduce its exposure to changes in interest rates
by matching more closely the effective maturities or repricings of its
interest-sensitive assets and liabilities. In accordance with the Bank's
interest rate risk policy, management has emphasized the origination and/or
purchase of adjustable-rate mortgages and mortgage-backed securities,
intermediate-term fixed-rate mortgages, and short-term consumer loans. However,
because of generally declining interest rate levels during the past four fiscal
years, there has been increased consumer interest in fixed-rate loans. In order
to maintain market share under these changing conditions, the Bank began to
originate fixed-rate loans for potential resale to secondary market investors
and for its portfolio. In all cases, originations of long-term fixed-rate
mortgages are underwritten according to guidelines of the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association. Since
February 1994, higher interest rates have slowed the trend toward fixed-rate
lending and have created renewed interest in adjustable-rate loan balances.
However, because of the moderate rise in mortgage rates during most of the
Bank's fiscal year ended June 30, 1995, the adjustable-rate component of the
Bank's portfolio of mortgage loans and mortgage-backed securities increased only
marginally to 68%, with fixed-rate loans comprising 32% as compared to the
portfolio mix at June 30, 1994, of 67% and 33%, respectively. The portfolio mix
at June 30, 1992 was 53% and 47%, respectively.
4
<PAGE> 5
Set forth below is selected data relating to the composition of the
Bank's loan portfolio by type of loan on the dates indicated. As of June 30,
1995, the Bank had no concentrations of loans exceeding 10% of total loans other
than as disclosed below.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1995 1994 1993
------------------ --------------------- --------------------
Amount % Amount % Amount %
-------- ------ -------- ------ -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Construction (1)........................ $ 7,045 2.3% $ 11,220 3.5% $ 11,175 3.3%
One- to four-family residential (1)..... 241,756 79.4 253,790 79.9 281,796 83.2
Multi-family residential................ 8,552 2.8 7,714 2.4 6,237 1.9
Non-residential and other............... 24,101 7.9 24,563 7.7 19,633 5.8
-------- ----- -------- ----- -------- -----
Total............................... 281,454 92.4 297,287 93.5 318,841 94.2
-------- ----- -------- ----- -------- -----
Consumer loans:
Loans on deposits....................... 2,224 0.7 2,430 0.8 2,508 0.7
Home improvement loans (2).............. 994 0.3 1,541 0.5 1,925 0.6
Education loans......................... 6 -- 10 -- 14 --
Automobile.............................. 906 0.3 768 0.2 803 0.2
Other (2)............................... 9,259 3.0 8,114 2.6 8,290 2.5
-------- ----- -------- ----- -------- -----
Total............................... 13,389 4.3 12,863 4.1 13,540 4.0
-------- ----- -------- ----- -------- -----
Commercial................................ 10,093 3.3 7,597 2.4 6,224 1.8
-------- ----- -------- ----- -------- -----
Total loans......................... 304,936 100.0% 317,747 100.0% 338,605 100.0%
===== ===== =====
Less:
Loans in process........................ (3,169) (3,849) (5,598)
Discounts and other..................... (1,907) (2,919) (3,524)
Loan loss allowances.................... (2,327) (2,279) (2,388)
------ -------- --------
Total............................... $297,533 $308,700 $327,095
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------
1992 1991
------------------ --------------------
Amount % Amount %
--------- ------ -------- -----
<S> <C> <C> <C> <C>
Real estate loans:
Construction (1)........................ $ 10,609 2.9% $ 7,731 2.1%
One- to four-family residential (1)..... 302,409 81.9 299,572 80.0
Multi-family residential................ 9,838 2.7 12,338 3.3
Non-residential and other............... 23,338 6.2 28,266 7.5
-------- ----- -------- -----
Total............................... 346,194 93.7 347,907 92.9
-------- ----- -------- -----
Consumer loans:
Loans on deposits....................... 3,608 1.0 3,973 1.1
Home improvement loans (2).............. 2,628 0.7 4,160 1.1
Education loans......................... 26 -- 129 --
Automobile.............................. 1,168 0.3 1,623 0.4
Other (2)............................... 9,270 2.5 10,029 2.7
-------- ----- -------- -----
Total............................... 16,700 4.5 19,914 5.3
-------- ----- -------- -----
Commercial................................ 6,487 1.8 6,823 1.8
-------- ----- -------- -----
Total loans......................... 369,381 100.0% 374,644 100.0%
===== =====
Less:
Loans in process........................ (4,880) (3,628)
Discounts and other..................... (4,248) (5,111)
Loan loss allowances.................... (2,338) (1,926)
-------- --------
Total............................... $357,915 $363,979
======== ========
</TABLE>
- ----------------------------
(1) Includes loans held for sale.
(2) Restated for current and prior years due to reclassification.
5
<PAGE> 6
The following table sets forth certain information as of June 30, 1995
regarding the dollar amount of loans maturing in the Bank's portfolio, including
scheduled repayments of principal, based on contractual terms to maturity.
Demand loans, loans having no schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. The table below does not
include any estimate of prepayments, which significantly shorten the average
life of all mortgage loans and may cause the Bank's actual repayment experience
to differ from that shown below.
<TABLE>
<CAPTION>
Due after
Due in One Year Total
One Year Through Due after Outstanding
or Less Five Years Five Years June 30, 1995
-------- ---------- ---------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Real estate mortgage . . . . . $34,462 $121,827 $118,120 $274,409
Real estate-construction . . . 7,045 -- -- 7,045
Consumer . . . . . . . . . . . 10,318 2,774 297 13,389
Commercial . . . . . . . . . . 5,938 2,139 2,016 10,093
------- -------- -------- --------
Total . . . . . . . . . . $57,763 $126,740 $120,433 $304,936
======= ======== ======== ========
</TABLE>
The following table sets forth as of June 30, 1995 the dollar amount of
the loans maturing subsequent to the year ending June 30, 1996 between those
with predetermined interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates Total
------------- ---------------- --------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage . . . . . . . . . . $67,204 $172,743 $239,947
Consumer . . . . . . . . . . . . . . . . 2,000 1,071 3,071
Commercial . . . . . . . . . . . . . . . 2,274 1,881 4,155
------- -------- --------
Total . . . . . . . . . . . . . . . $71,478 $175,695 $247,173
======= ======== ========
</TABLE>
One- to Four-Family Real Estate Lending. The Bank's primary lending
activity is the origination of conventional loans secured by owner-occupied,
one- to four-family residential properties. To a lesser extent, the Bank
originates FHA-insured and VA- guaranteed loans secured by such properties. The
purchase price for most such properties has been between $50,000 and $250,000.
At June 30, 1995, approximately $241.8 million, or 79.4% of the Bank's gross
loan portfolio consisted of loans secured by one- to four-family residential
real properties which were primarily owner-occupied, detached single-family
residences located in the Bank's primary market area.
The Bank's conventional mortgage loan originations are generally for
terms of 15 to 30 years, amortized on a monthly basis, with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans at their option without penalty. Conventional
residential mortgage loans granted by the Bank customarily contain "due-on-sale"
clauses which permit the Bank to accelerate the indebtedness upon transfer of
ownership of the mortgaged property. Additionally, loans insured by the FHA
after December 1989 or guaranteed by the VA after March 1988 contain due-on-sale
clauses. Due-on-sale clauses are an important means of imposing assumption fees
and increasing the rate on existing mortgage loans during periods of rising
interest rates and increasing the turnover of mortgage loans in the Bank's
portfolio.
6
<PAGE> 7
The Bank's lending policies generally limit the maximum loan-to-value
ratio on mortgage loans secured by owner-occupied properties to 95% of the
lesser of the appraised value or purchase price, with the condition that private
mortgage insurance is required on loans with loan-to-value ratios in excess of
80%. The maximum loan-to-value ratios on mortgage loans secured by non-
owner-occupied properties and/or used for refinancing purposes are from 75% to
80%.
Heritage Federal began originating conventional adjustable-rate
residential mortgage loans in the early 1980s and principally originates
five-year fixed/one-year adjustable-rate mortgage loans with rate adjustments
indexed to the weekly average rate of U.S. Treasury securities adjusted to a
constant one-year maturity (the "One-Year Treasury Index"). Following the first
five-year, fixed-rate term, the rates at which interest accrues on these
mortgages are adjustable once a year with limitations on adjustments of two
percentage points per adjustment period and 5.00 percentage points over the life
of the loan. The Bank's loan portfolio also includes a limited amount of loans
with variable rates tied to other indices and loans which have both longer and
shorter adjustment periods. The Bank has a small amount of loans which provide
for negative amortization, in which the loan payments may at times be
insufficient to pay the interest then due and the unpaid interest is added to
the outstanding loan balance so the principal increases rather than decreases as
payments are made. Heritage Federal originated $23.5 million of adjustable-rate,
one- to four-family mortgage loans during the year ended June 30, 1995.
There are unquantifiable credit risks resulting from potential
increased costs to the borrower as a result of repricing of adjustable-rate
mortgage loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower. Further, the adjustable-rate
mortgages originated by the Bank generally provide for initial rates of interest
below the rates which would apply were the index used for pricing applied
initially. These discounted loans may be subject to increased risk of
delinquency or default when the higher, fully-indexed rate of interest
subsequently comes into effect, replacing the lower initial rate. In addition,
although adjustable-rate mortgage loans allow the Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limitations. Accordingly, there can be no assurance that yields on
the Bank's adjustable-rate mortgages will adjust sufficiently to compensate for
increases in the Bank's cost of funds.
Heritage Federal also originates conventional fixed-rate mortgage loans
on one- to four-family residential properties. All fixed-rate loans are
underwritten according to either FHLMC and FNMA guidelines, utilizing their
approved documents, so that the loans qualify for sale in the secondary mortgage
market, or pursuant to FHA or VA requirements, so that such loans will either be
insured by the FHA or partially guaranteed by the VA. Heritage Federal
originated $5.2 million in fixed-rate, one- to four-family mortgage loans during
the year ended June 30, 1995 and such loans amounted to $70.9 million or 23.2%,
of the Bank's loan portfolio at June 30, 1995.
Construction Lending. Heritage Federal engages in construction lending,
involving loans to qualified borrowers for construction of one- to four-family
residential properties and, on a limited basis, involving commercial and
multi-family properties. These properties are primarily located in the Bank's
market area. At June 30, 1995, the Bank's loan portfolio included $7.0 million
of loans secured by properties under construction (including $0.2 million in
commercial real estate construction loans and $1.6 million in multi-family real
estate construction loans), most of which were construction/permanent loans
structured to become permanent loans upon the completion of construction. 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 inspections warrant. Construction/permanent loans have either
fixed- or adjustable-rates and are underwritten in accordance with the same
terms and requirements as the Bank's permanent mortgages, except the loans
generally provide for disbursement in stages during a construction period of up
to twelve months, during which period the borrower is required to make monthly
payments of accrued interest on the outstanding loan balance. Interim
construction loans generally have fixed interest rates, terms of up to twelve
months and a maximum loan-to-value ratio of 80%. Borrowers must satisfy all
credit requirements which
7
<PAGE> 8
would apply to the Bank's permanent mortgage loan financing for the subject
property. If the borrower obtains mortgage insurance for the portion of the loan
in excess of 80% of collateral value, construction/permanent loans may be made
up to a maximum loan-to-value ratio of 90%.
Loans involving construction financing present a greater level of risk
than loans for the purchase of existing homes because loan funds are advanced
upon the security of the project under construction, which is of uncertain value
prior to the completion of construction. The Bank's risk of loss on a
construction loan is dependent primarily upon the accuracy of the initial
estimate of the property's value at completion of construction or development
and the estimated cost (including interest) of completion. If the estimate of
completed cost proves to be inaccurate, the borrower may be required to
contribute additional equity to the project. If the borrower is unable to do so,
the Bank may be required to advance funds beyond the amount originally
committed. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project having a
value that is insufficient to ensure full repayment of the loan.
Commercial and Multi-Family Real Estate Lending. Heritage Federal has
historically engaged in a limited amount of commercial and multi-family real
estate lending. This lending has involved loans principally secured by apartment
buildings, churches and healthcare facilities. At June 30, 1995, the Bank's
commercial and multi-family real estate loan portfolio totaled $32.7 million and
included $3.7 million in loans secured by churches, $8.6 million in loans
secured by multi-family property and $20.4 million in loans secured by office
and retail buildings and other non-residential property. Generally, these loans
are made on an adjustable-rate basis for a period of 25 years or less on a
loan-to-value ratio of 80% or less, indexed to the One Year Treasury Index and
secured by properties located within the market area of the Bank.
The largest single commercial real estate loan at June 30, 1995, was a
$4.2 million loan secured by a medical office building in Kingsport, Tennessee
and guaranteed by a major hospital. The next three largest loans at June 30,
1995 are secured by a shopping center in the amount of $2.3 million, an
apartment complex in the amount of $2.1 million and a church with a balance of
$1.8 million.. All properties securing the Bank's commercial and multi-family
real estate loans are inspected by the Bank's lending personnel prior to the
loan's inception. The Bank also obtains appraisals on each such property in
accordance with applicable regulations.
Loans secured by commercial and multi-family real estate generally are
larger and involve greater risks than one- to four-family residential mortgage
loans. Because payments on loans secured by such properties are often dependent
on successful operation or management of the properties, repayment of such loans
may be subject, to a greater extent, to adverse conditions in the real estate
market or the economy. The Bank seeks to minimize these risks in a variety of
ways, including limiting the loans to one borrower in conformity with OTS
regulations and strictly scrutinizing the financial condition of the borrower,
the quality of the collateral and the management of the property securing the
loan. The Bank also obtains loan guarantees from financially capable parties.
Consumer Lending. The Bank's consumer loans generally have shorter
terms to maturity or repricing and higher interest rates than the long-term,
fixed-rate mortgage loans that constitute a substantial part of the Bank's loan
portfolio. The Bank's consumer loans primarily comprise automobile loans, loans
secured by second mortgages on residences, savings account loans, unsecured term
notes and installment loans. At June 30, 1995, the Bank's consumer loans totaled
approximately $13.4 million or 4.3% of the Bank's gross loan portfolio.
Automobile loans are secured by both new and used cars and are
generally limited to 80% of this "sticker price" or purchase price, whichever is
lower, or the loan value as published by the National Automobile Dealers
Association. Automobile loans are only made to the borrower-owners on a direct
basis. New cars are financed for a period of up to 60 months while used cars are
financed for 42 months or less. Collision insurance and vendor single interest
coverage, which insures the title to the Bank, are required on all automobile
loans.
8
<PAGE> 9
Home equity loans, also referred to as second mortgage loans, are
generally made on the security of residences on which the Bank has a first
mortgage, normally do not exceed 89% of the appraised value of the residence
less the outstanding principal of the first mortgage, and generally have terms
of up to five years. Second mortgage loans for five or fewer years may have
fixed interest rates, and loans for more than five years have annually
adjustable interest rates indexed to the One-Year Treasury Index with a
limitation on adjustment of five percentage points above the initial interest
rate over the life of the loan. The maximum term of a second mortgage loan
generally does not exceed 15 years. At June 30, 1995, total outstanding second
mortgage loans amounted to $7.9 million, or 2.6% of the Bank's gross loan
portfolio. Home equity lines of credit which require no monthly repayment of
principal are restricted to a five year maturity. Because the borrower can
borrow up to the entire amount of the credit line at any time during its term,
annual financial statements are required and reviewed to determine the continued
creditworthiness of the borrower. Longer-term second mortgages require monthly
payments of principal and interest.
The Bank makes savings account loans for up to 90% of the depositor's
savings account balance. The interest rate is normally 2% above the rate paid on
the savings account, and the account must be pledged as collateral to secure the
loan. Savings account loans are payable on demand. At June 30, 1995, total loans
on savings accounts were $2.2 million, or 0.7% of the Bank's gross loan
portfolio. The Bank also offers credit cards.
Consumer loans entail a greater risk to the Bank than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or secured by rapidly depreciable assets such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance because of the greater
likelihood of damage, loss or depreciation. Any 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 job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral. At June 30, 1995, $47,000, or 0.4% of the
consumer loan portfolio was past due 90 days or more.
Commercial Lending. As a federally chartered savings institution, the
Bank is authorized to invest up to 10% of its assets in commercial loans not
secured by real property. Heritage Federal offers a variety of business loans,
including farm loans, equipment loans, inventory loans and occasionally letters
of credit. At June 30, 1995, the total commercial loan portfolio was $10.1
million, or 3.3% of the Bank's gross loan portfolio. The largest commercial
non-real estate loan is secured by the inventory and accounts receivable of a
retail business, in the amount of $643,000. Commercial loans are primarily
offered as an accommodation to existing customers and are only offered on a
secured basis. Unlike residential mortgage loans, which generally are made on
the basis of the borrower's ability to make repayment from employment and other
income and which are secured by real property whose value tends to be easily
ascertainable, commercial loans typically are made based upon the cash flow of
his or her business and are generally secured by business assets, such as
accounts receivable, equipment and inventory. As a result, the availability of
funds for the payment of commercial loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loan may
depreciate over time, occasionally cannot be appraised with as much precision as
residential real estate, and may fluctuate in value based on the success of the
business.
Loan 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 and previous and present borrowers.
Consumer loan applicants are primarily present depositors or mortgage borrowers.
Mortgage loans are originated in all of the Bank's offices and are processed and
serviced at the Bank's main office in Kingsport. Applications for fixed-rate,
one- to four-family real estate loans are underwritten and closed based on FHLMC
and
9
<PAGE> 10
FNMA standards, and other loan applications are underwritten and closed based on
the Bank's own loan guidelines. Residential and commercial mortgage loans are
required to have title searches, title insurance, and fire and extended coverage
insurance.
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 fee appraiser approved by the Bank.
The Board of Directors of the Bank has the responsibility and authority
for general supervision over the loan policies of the Bank. Under the Bank's
lending policies, Vice Presidents currently have the authority to approve
residential mortgages in amounts up to $203,150, secured consumer loans up to
$100,000, and unsecured consumer loans for up to $25,000. The Senior Vice
President for Branch Administration is authorized to approve secured loans in
amounts up to $200,000 and unsecured loans up to $100,000. The President and the
Executive Vice President may approve secured loans up to $300,000 and unsecured
loans up to $200,000. All other loans must be considered for approval by the
Loan Committee of the Board of Directors. Branch managers and loan officers may
approve loans in amounts up to $25,000 for secured loans and $10,000 for
unsecured loans.
Loan applicants are promptly notified of the decision of the Bank.
Interest rates on approved loans are subject to change if the loan is not funded
within 60 days after approval. If an approved loan is not funded within the 60
days, management contacts the applicant to determine the loan's status. It has
been management's experience that substantially all approved loans are funded.
Loan Originations, Purchases and Sales. Loan originations decreased
37.1% during fiscal year 1995 to $51,536,000 compared with $81,902,000 in fiscal
year 1994 due to: a declining consumer demand for adjustable-rate mortgage
loans, which are the Bank's principal source of loan originations; increased
competition in the mortgage origination business; a general slowdown in new home
construction; and a general decline in the volume of residential loan
refinancings. Net loans receivable declined 3.6% to $297,533,000 at June 30,
1995, compared with $308,700,000 at June 30, 1994. This change reflected the net
repayment of loans, which slowed significantly during fiscal 1995 from the
year-earlier period due to higher market rates and moderating refinancing
activity, in excess of new loan originations. As a matter of policy, the Bank is
not active in the secondary markets with respect to both purchasing and/or
selling loans; however, loans may be sold in order to better manage the Bank's
interest rate risk or for other specific business purposes. In such cases, loans
are generally sold with servicing rights retained in order to maintain the
Bank's customer relationships. At June 30, 1995, the Bank was servicing $7.8
million in loans for others.
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") provides that the loans-to-one-borrower limits applicable to
national banks apply to savings associations in the same manner and to the same
extent. Previously, the Bank was generally authorized to make loans to one
borrower, including related entities, in an amount equal to the lesser of 10% of
deposits or 100% of regulatory capital. Under the new limits, with certain
limited exceptions, loans and extensions of credit to a person outstanding at
one time generally shall not exceed 15% of the unimpaired capital and surplus of
the savings association. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of unimpaired capital and
surplus. At June 30, 1995, the Bank had no lending relationship in excess of the
new loans-to-one borrower limits.
Under OTS regulations which became effective March 19, 1993, savings
associations must adopt and maintain written policies that establish appropriate
limits and standards for extensions of credit that are secured by liens or
interests in real estate or are made for the purpose of financing permanent
improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards, including
loan-to-value limits that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency Guidelines
for Real Estate Lending Policies (the "Interagency Guidelines") that have been
adopted by the federal bank regulators.
10
<PAGE> 11
The Interagency Guidelines, among other things, call upon depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by raw land, the supervisory loan-to-value limit is 65% of the value of
the collateral; (ii) for land development loans (i.e., loans for the purpose of
improving unimproved property prior to the erection of structures), the
supervisory limit is 75%; (iii) for loans for the construction of commercial,
multi-family or other nonresidential property, the supervisory limit is 80%;
(iv) for loans for the construction of one-to-four family properties, the
supervisory limit is 85%; and (v) for loans secured by other improved property
(e.g., farmland, completed commercial property and other income-producing
property including non-owner-occupied, one-to-four family property), the limit
is 85%. Although no supervisory loan-to-value limit has been established for
owner-occupied, one-to-four family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that equals
or exceeds 90% at origination, an institution should require appropriate credit
enhancement in the form of either mortgage insurance or readily marketable
collateral.
The Interagency Guidelines state that it may be appropriate in
individual cases to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one-to-four family residential properties should not exceed 30% of total
capital. The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the U.S. government and its
agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of a state government, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured without
the advancement of new funds, loans that are renewed, refinanced or restructured
in connection with a workout, loans to facilitate sales of real estate acquired
by the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
The following table sets forth certain information with respect to the
loan origination and sale activity of the Bank during the periods indicated.
There were no loans purchased during fiscal years 1995, 1994, or 1993.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1995 1994 1993
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction loans:
One- to four-family . . . . . . . . . . . . . . . $ 9,906 $ 10,305 $ 16,640
Multi-family . . . . . . . . . . . . . . . . . . -- 1,763 --
Non-residential and other . . . . . . . . . . . . 220 877 1,224
Permanent loans:
One- to four-family . . . . . . . . . . . . . . . 18,845 40,829 31,007
Multi-family . . . . . . . . . . . . . . . . . . 104 1,559 --
Non-residential and other . . . . . . . . . . . . 1,184 8,489 900
Consumer loans . . . . . . . . . . . . . . . . . . 16,384 15,270 12,841
Commercial loans . . . . . . . . . . . . . . . . . 4,893 2,810 1,724
-------- -------- --------
Total loans originated . . . . . . . . . . . . . $ 51,536 $ 81,902 $ 64,336
======== ======== ========
Loan repayments . . . . . . . . . . . . . . . . . . . . $ 64,347 $102,760 $ 95,112
======== ======== ========
Net increase (decrease) in gross loan portfolio . . . . $(12,811) $(20,858) $(30,776)
======== ======== ========
</TABLE>
11
<PAGE> 12
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 rates reflect factors such as general interest rate
levels, the supply of money available to the savings 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 Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to interest earned on loans, Heritage Federal receives fees
for servicing loans for others. Loan servicing fees usually are charged as a
percentage (between 0.25% and 0.65%) of the balance of the loans being serviced.
During the year ended June 30, 1995, the Bank reported loan servicing fee income
of $47,840 and at June 30, 1995 the Bank was servicing $7.8 million in loans for
others. In addition to loan servicing fees, the Bank receives fees in connection
with loan commitments and originations, loan modifications, late payments,
changes of property ownership 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, sold and purchased, which in turn are dependent
upon the prevailing mortgage interest rates and their effect on the demand for
loans in the markets served by the Bank.
To the extent that loans are originated or acquired for the portfolio,
Statement of Financial Accounting Standards ("SFAS") No. 91 limits immediate
recognition of loan origination or acquisition fees as revenues and requires
that such income (net of certain deferred loan origination or acquisition costs)
be recognized over the estimated lives of the related loans as an adjustment to
yield. SFAS No. 91 thus limits the amount of revenue that may be recognized by
Heritage Federal at the time it originates or acquires loans. At June 30, 1995,
the Bank had $0.9 million of net loan fees that had been deferred and were being
recognized as income over the estimated lives of the related loans.
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a monthly basis. After residential mortgage loans become past
due more than 90 days, the Bank generally establishes an allowance in the amount
of uncollected interest. Commercial and multi-family real estate loans generally
are placed on non-accrual status if the loan becomes past due more than 90 days,
or management concludes that payment in full is not likely. Consumer loans are
charged off, or a reserve for any expected loss is established, after they
become more than 120 days past due. Loans are charged off when management
concludes that they are uncollectible.
The Bank's collection procedures provide that when a loan becomes past
due 30 days, the borrower is contacted either by telephone or by letter, 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.
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 the unpaid loan balance or
its fair market value. Any required write-down of the loan to its fair market
value upon foreclosure is charged against the allowance for loan losses.
12
<PAGE> 13
The following table sets forth information with respect to the Bank's
non-performing loans and other problem assets at the dates indicated. At the
dates indicated, there were no accruing loans which were contractually past due
90 days or more as to principal or interest payments.
<TABLE>
<CAPTION>
At June 30
-------------------------------------------------------------
1995 1994 1993 1992 1991
----- ---- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis: (1)
Residential . . . . . . . . . . . . . $ 178 $375 $ 506 $ 519 $1,277
Non-residential and other . . . . . . -- 42 675 -- 90
Consumer and commercial . . . . . . . 47 48 97 672 613
----- ---- ------ ------ ------
Total . . . . . . . . . . . . . . 225 465 1,278 1,191 1,980
Other non-performing assets (2) . . . . 643 531 625 1,500 1,789
----- ---- ------ ------ ------
Total non-performing assets . . . $ 868 $996 $1,903 $2,691 $3,769
===== ==== ====== ====== ======
Non-performing loans as a
percentage of total loans . . . . . . 0.08% 0.15% 0.38% 0.32% 0.54%
===== ==== ====== ====== ======
Non-performing assets as a
percentage of total assets . . . . . 0.16% 0.19% 0.37% 0.50% 0.74%
===== ==== ====== ====== ======
</TABLE>
- ---------------
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely. The Bank
has generally established an allowance for uncollectible interest,
which is netted with the accrued interest receivable, for those
mortgage loans that are 90 days past due. The allowance for
uncollectible interest is established in an amount equal to all
interest previously accrued. The allowance for uncollectible interest
on past due loans amounted to $28,611, $26,863, $43,112, $92,328 and
$179,675 at June 30, 1995, 1994, 1993, 1992 and 1991, respectively.
(2) Other non-performing assets represents property acquired by the Bank
through foreclosure or repossession, in-substance foreclosure, and
other repossessed collateral as well as restructured loans.. Real
estate properties acquired through loan foreclosure and loans
foreclosed in substance are initially recorded at the lower of the
related loan balance, less any specific allowance for loss, or fair
value at the date of foreclosure. Real estate acquired in settlement of
loans is carried at the lower of cost or net realizable value. At June
30, 1995, the Bank's only real estate acquired in settlement of loans
was fully reserved.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as "substandard" or "doubtful" require the institution to establish
general allowances for loan losses. If an asset or portion thereof is classified
as "loss," the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified as
"loss," or charge off such amount. An asset which does not currently warrant
classification but which possesses weaknesses or deficiencies deserving close
attention is required to be designated as "special mention." Currently, general
loss allowances established to cover possible losses related to assets
classified "substandard" or "doubtful" may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation of the Bank --
Regulatory Capital Requirements." OTS examiners may disagree with the insured
institution's classifications and amounts reserved. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. The Bank has determined that at June 30, 1995 it had
$2.0 million in assets classified as "substandard," no assets classified as
"doubtful" and $0.3 million in assets classified as "loss." The Bank did not
have any assets designated as "special mention" at June 30, 1995.
13
<PAGE> 14
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. The allowance for loan losses is based on,
among other things, the Bank's and the industry's historical loan loss
experience, management's evaluation of economic conditions and management's
regular reviews of delinquencies and loan portfolio quality. The Bank increases
its allowance for loan losses by charging provisions for possible loan losses
against the Bank's income.
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.
The OTS, along with the other federal banking regulators, has adopted a
joint policy statement on the adequacy of general valuation allowances
applicable to all federally-insured depository institutions. The policy
statement provides that the primary responsibility for judging the adequacy of
general valuation allowances lies with management. Examiners will evaluate the
methodology and process used by management to establish such allowances. In
addition, examiners will judge the adequacy of the allowance by calculating
whether the allowance is at least equal to the following percentages of assets:
(i) the amount of estimated credit losses estimated to result over the next
twelve months from unclassified and Special Mention assets based on annual net
charge-offs experienced during the previous two or three years; (ii) 15% of
Substandard assets; and (iii) 50% of Doubtful assets.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established its existing allowances for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby adversely affecting the Bank's financial condition and earnings.
Because of the wide market area served by the Bank and the strong
employment base in its two major markets, the general economic problems facing
the country are generally much less pronounced in the areas served by the Bank.
Moreover, the sale during fiscal year 1993 of the middle Tennessee branches,
which were located in an area characterized by real estate values which had
declined after significant appreciation in the 1980s and a rise in personal
bankruptcies, has allowed the Bank to focus its efforts on its more profitable
branches located in its two remaining service areas. While the Bank did retain
the loans associated with the middle Tennessee branches, management believes
that appropriate reserves have been established against these loans, and
originations in that area have ceased.
For fiscal years 1995, 1994 and 1993, the Bank provided approximately
$82,000, $487,300 and $595,000, respectively, for loan losses. Total charge-offs
decreased to $39,800 during fiscal year 1995 from $600,058 during fiscal year
1994 and $558,300 during fiscal year 1993. At June 30, 1995, the allowance for
possible loan losses represented 1,034.22 % of total non-accrual loans and loans
past due more than 90 days compared to 490.03% and 186.9% at June 30, 1994 and
1993, respectively.
14
<PAGE> 15
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . . . . $2,279 $2,388 $2,338 $1,926 $ 532
Loans charge-off: ------ ------ ------ ------ ------
Real estate mortgage
One- to four-family . . . . . . . . (6) (9) -- (15) (2)
Commercial (1) . . . . . . . . . . -- (495) -- (99) --
Consumer . . . . . . . . . . . . . . (28) (64) (143) (130) (13)
Commercial . . . . . . . . . . . . . (6) (32) (415) (100) (90)
------ ------ ------ ------ ------
Total charge-offs . . . . . . . . (40) (600) (558) (344) (105)
------ ------ ------ ------ ------
Recoveries:
One- to four-family . . . . . . . . . -- -- 8 -- --
Consumer . . . . . . . . . . . . . . 6 4 5 7 3
------ ------ ------ ------ ------
Total recoveries . . . . . . . . 6 4 13 7 3
------ ------ ------ ------ ------
Net loans charged-off . . . . . . . . . (34) (596) (545) (337) (102)
------ ------ ------ ------ ------
Provision for possible loan losses . . 82 487 595 749 1,496
------ ------ ------ ------ ------
Balance at end of period . . . . . . . $2,327 $2,279 $2,388 $2,338 $1,926
====== ====== ====== ====== ======
Ratio of allowance for loan
losses to gross loans (2) . . . . . . 0.76% 0.72% 0.71% 0.63% 0.51%
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans outstanding during period . . . 0.01% 0.19% 0.16% 0.09% 0.03%
====== ====== ====== ====== ======
</TABLE>
- --------------------
(1) Includes multi-family, non-residential and other real estate.
(2) Before deductions for loans in process, unamortized discount and loan
loss allowances.
15
<PAGE> 16
The following table sets forth the breakdown of the 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 June 30,
------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- ---------------------------- -----------------------------
% of % of % of
Loans Loans Loans
in Each % of in Each % of in Each % of
Category Allowance Category Allowance Category Allowance
to Total to Total to Total to Total to Total to Total
Amount Loans(1) Loans(1) Amount Loans(1) Loans(1) Amount Loans(1) Loans(1)
------ -------- --------- ------ -------- -------- ------ -------- ---------
(Dollars in thousands)
Real estate mortgage:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family (2) . . . . . . . $1,224 79.33% 0.39% $1,224 79.87% 0.39% $1,117 83.22% 0.33%
Commercial (3) . . . . . . . . . . . -- 10.71 -- -- 10.16 -- 146 7.64 0.04
Construction (4) . . . . . . . . . . -- 2.31 -- -- 3.53 -- -- 3.30 --
Consumer . . . . . . . . . . . . . . 1,087 4.34 0.36 1,030 4.05 0.32 933 4.00 0.28
Commercial . . . . . . . . . . . . . 16 3.31 0.01 25 2.39 0.01 192 1.84 0.06
------ ------ ---- ------ ------ ---- ------ ------ ----
Total allowance for loan losses . . $2,327 100.00% 0.76% $2,279 100.00% 0.72% $2,388 100.00% 0.71%
====== ====== ==== ====== ====== ==== ====== ====== ====
<CAPTION>
At June 30,
----------------------------------------------------------
1992 1991
--------------------------- ---------------------------
% of % of
Loans Loans
in Each % of in Each % of
Category Allowance Category Allowance
to Total to Total to Total to Total
Amount Loans(1) Loans(1) Amount Loans(1) Loans(1)
------ -------- -------- ------ -------- --------
(Dollars in thousands)
Real estate mortgage:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family (2) . . . . . . . $ 901 81.87% 0.24% $ 719 79.96% 0.19%
Commercial (3) . . . . . . . . . . . -- 8.98 -- -- 10.84 --
Construction (4) . . . . . . . . . . -- 2.87 -- -- 2.06 --
Consumer . . . . . . . . . . . . . . 1,225 4.52 0.33 830 5.32 0.22
Commercial . . . . . . . . . . . . . 212 1.76 0.06 377 1.82 0.10
------ ------ ---- ------ ------ ----
Total allowance for loan losses . . $2,338 100.00% 0.63% $1,926 100.00% 0.51%
====== ====== ==== ====== ====== ====
</TABLE>
- --------------------
(1) Before deductions for loans in process, unamortized discount and loan
loss allowances.
(2) Includes loans held for sale.
(3) Includes multi-family, non-residential and other real estate.
(4) Includes residential and commercial construction loans.
16
<PAGE> 17
INVESTMENT ACTIVITIES
Heritage Federal is required under federal regulations to maintain a
minimum amount of liquid assets, which can be invested in specified short-term
securities, and is also permitted to make certain other investments. See
"Regulation of the Bank -- Liquidity Requirements." It has generally been
Heritage Federal's policy to maintain a liquidity portfolio in excess of the
amount required to satisfy regulatory requirements and the Bank's average daily
liquidity ratio of 19.25% for the month of June 1995 exceeded the 5% regulatory
requirement. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives, management's judgment as to the
attractiveness of the yields then available in relation to other opportunities,
its expectations of the level of yield that will be available in the future and
its projections as to the short-term demand for funds to be used in the Bank's
loan origination and other activities.
The general objectives of Heritage Federal's investment policy are to
(1) protect Heritage Federal's depositor resources, (2) maintain liquidity
levels to meet the operational needs of the Bank and applicable regulatory
requirements, (3) reduce credit risk by investing in high quality, diverse
investments, (4) serve as a hedge against significant interest rate shifts, (5)
contribute to earnings in a stable and dependable manner without compromising
the goals of liquidity and safety, and (6) provide collateral for pledging
needs. The Bank's investment activities are conducted by the investment officer
and senior management and supervised by the Board of Directors. An investment
policy has been adopted by the Board which provides for maintenance of the
investment portfolio for the purpose of providing earnings and ensuring a
minimum liquidity reserve. In accordance with the investment policy, management
has primarily invested in U.S. Treasury debt securities backed by the full faith
and credit of the United States, debt obligations issued by U.S.
government-sponsored enterprises ("GSE's") such as the Federal National Mortgage
Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"),
mortgage-backed securities issued by FNMA, FMLMC, or guaranteed by the
Government National Mortgage Association ("GNMA"), federal funds sold, and
interest-bearing deposits in other banks. General obligation and bank-qualified
bonds of municipalities within the market areas served by the Bank and which are
considered to possess acceptable credit and limited default risk are also
considered for investment. In addition, the Bank also invests in collateralized
mortgage obligations ("CMOs") when management determines that such obligations
represent appropriate investment vehicles. At June 30, 1995, the Bank had CMO
balances of approximately $14.9 million, representing approximately 7.2% of the
total investment portfolio. At June 30, 1995, fixed-rate CMOs amounted to
approximately $4.0 million, consisting principally of such types meeting the
regulatory definition of non-high risk mortgage derivatives. Adjustable-rate
CMOs totaled approximately $10.9 million at June 30, 1995, funded principally by
a floating-rate advance from the FHLB of Cincinnati.
Although mortgage-backed securities yield from 60 to 100 basis points
less than whole loans, they present substantially lower credit risk and are more
liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Because the Bank receives regular payments of principal
and interest from its mortgage-backed securities, these investments provide more
consistent cash-flows than investments in other debt securities which generally
only pay principal at maturity. Mortgage- backed securities also help the Bank
meet certain definitional tests for favorable treatment under federal banking
and tax laws. See "Regulation of the Bank -- Qualified Thrift Lender Test" and
"Taxation."
Mortgage-backed securities, however, expose the Bank to certain unique
risks. In a declining rate environment, accelerated prepayments of loans
underlying these securities expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds. In the event the
mortgage-backed security has been funded with an interest-bearing liability with
a maturity comparable to the original estimated life of the mortgage-backed
security, the Bank's interest rate spread could be adversely affected.
Conversely, in a rising interest rate environment, the Bank may experience a
lower than estimated rate of repayment on the underlying mortgages, effectively
extending the estimated life of the mortgage-backed security and exposing the
Bank to the risk that it may be required to fund the asset with a liability
bearing a higher rate of interest. The Bank seeks to minimize the effect of
extension risk by focusing on investments in adjustable-rate and/or relatively
short-term (five to seven year maturity) balloon types of mortgage-backed
securities.
17
<PAGE> 18
During 1992, the Federal Financial Institutions Examination Council
("FFIEC") issued a policy, which has since been adopted by all principal
regulatory authorities, regarding the suitability of investment in certain
mortgage derivative securities, including CMOs. This policy establishes a three
part risk measurement test for fixed-rate, and a one part test for
floating-rate, derivative instruments. Securities failing any one of the tests
are deemed to be "unsuitable" investments and must be transferred into a
"trading" portfolio reported at market value. At June 30, 1995, all of the
Bank's securities included in its investment portfolio met the criteria
established by the policy for continued classification as suitable investments.
The Board of Directors of the Bank has authorized a trading account in
an amount not to exceed $8,000,000 for the purpose of taking advantage of
favorable short-term market conditions. The Bank's investment policy specifies
that securities traded within this account must be U.S. Treasury or agency
obligations, and losses may not exceed the lesser of $10,000 per trade or
$25,000 per month. The trading account is administered by the Chief Financial
Officer and the Investment Manager. Securities positions in the trading account
are reported to the Board of Directors on a monthly basis. During the year ended
June 30, 1995, no securities were traded. At June 30, 1995, there were no
securities held in the trading account. It is anticipated that any future
activity in the trading account will involve medium-term U.S. Treasury Notes or
GNMA mortgage-backed securities.
The Bank adopted on a prospective basis SFAS No. 115 at the beginning
of fiscal year 1995, and in doing so, designated a portion of its investment
portfolio as available for sale. Securities designated as available for sale
consist of U. S. Treasury notes with laddered maturities, amounting to
approximately $20,000,000 in principal face value at June 30, 1995. The fair
value of these securities at June 30, 1995, with unrealized gains or losses, net
of taxes, of approximately $84,000 reflected as a separate component of
stockholders' equity, totaled $20,213,000. At that date, available for sale
securities had a weighted average life of approximately 1.1 years. The Bank
anticipates the available for sale portion of its investment portfolio will be
maintained as necessary in order to satisfy its liquidity needs. In the event
funds are needed for deposit account withdrawals, loan demand or other liquidity
purposes, these securities could be liquidated. For additional information, see
Note 3 of Notes to Consolidated Financial Statements.
The following table sets forth the book value of the Bank's investment
portfolio at the dates indicated. At June 30, 1995, the market value of the
Bank's investment portfolio was $206.1 million.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment and mortgage-backed securities:
Available for sale *
U.S. government obligations . . . . . . . . . . . . $ 20,213 $ -- $ --
Held to maturity
U.S. government and agency securities . . . . . . . 71,686 75,182 72,322
Collateralized mortgage obligations . . . . . . . . 14,942 5,615 8,851
Mortgage-backed securities . . . . . . . . . . . . . 83,995 92,558 60,089
Other investments:
Federal funds sold . . . . . . . . . . . . . . . . . 7,000 3,000 9,075
Equity securities . . . . . . . . . . . . . . . . . -- -- 8,000
Interest-earning deposits . . . . . . . . . . . . . 5,593 2,295 4,022
FHLB stock . . . . . . . . . . . . . . . . . . . . . 4,057 3,808 3,628
-------- -------- --------
Total investments . . . . . . . . . . . . . . . $207,486 $182,458 $165,987
======== ======== ========
</TABLE>
- ---------------
* The Bank implemented SFAS No. 115 during the first quarter of fiscal
year 1995. Available-for-sale securities are shown at estimated market
value at June 30, 1995. All investments in fiscal years 1994 and 1993
were classified in accordance with management's positive intent to hold
such investments to maturity.
18
<PAGE> 19
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment portfolio at
June 30, 1995.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years
------------------- ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted
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>
Investment and mortgage-backed securities:
Available for sale (1)
U.S. government
obligations.......................... $ 7,072 6.20% $13,141 6.47% $ -- -- % $ -- -- %
Held to maturity
Collateralized mortgage
obligations........................... -- -- 748 6.85 2,032 6.33 12,162 7.68
U.S. government and
agency securities (2)................. 5,048 6.64 40,391 5.98 24,247 6.76 2,000 7.88
Mortgage-backed securities.............. 919 8.07 15,137 6.02 5,716 6.40 62,223 6.13
Other investments:
Federal funds sold...................... 7,000 6.05 -- -- -- -- -- --
Interest-earning deposits
and certificates of
deposit............................... 5,593 5.95 -- -- -- -- -- --
FHLB stock.............................. -- -- -- -- -- -- 4,057 6.63
------- ------- ------- --------
Total............................... $25,632 6.26% $69,417 6.09% $31,995 6.67% $ 80,442 6.43%
======= ======= ======= ========
<CAPTION>
At June 30,
-------------------------------
Total Investment Portfolio
-------------------------------
Weighted
Carrying Market Average
Value Value Yield
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Investment and mortgage-backed securities:
Available for sale (1)
U.S. government
obligations.......................... $ 20,213 $ 20,213 6.38%
Held to maturity
Collateralized mortgage
obligations........................... 14,942 15,333 7.45
U.S. government and
agency securities (2)................. 71,686 70,925 6.34
Mortgage-backed securities.............. 83,995 83,012 6.15
Other investments:
Federal funds sold...................... 7,000 7,000 6.05
Interest-earning deposits
and certificates of
deposit............................... 5,593 5,593 5.95
FHLB stock.............................. 4,057 4,057 6.63
-------- --------
Total............................... $207,486 $206,133 6.33%
======== ========
</TABLE>
- ---------------------
(1) All values shown for available for sale securities are estimated
market values at June 30, 1995.
(2) Yields on tax-exempt obligations have been computed on a
tax-equivalent basis.
19
<PAGE> 20
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition to
deposits, Heritage Federal derives funds from loan principal and interest
repayments, maturities of investment securities and interest payments thereon.
Although loan repayments are a relatively stable source of funds, 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, or on a longer term
basis for general operational purposes.
DEPOSITS. The Bank attracts deposits principally from within its
primary market areas by offering a variety of deposit instruments, including
checking accounts, money market accounts, regular savings accounts, retirement
savings plans, and certificates of deposit which range in maturity from seven
days to four years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. Heritage Federal
generally reviews its deposit mix and pricing on a weekly basis. In determining
the characteristics of its deposit accounts, Heritage Federal considers the
rates offered by competing institutions, funds acquisition and liquidity
requirements, growth goals, and federal regulations. The Bank does not accept
brokered deposits due to the volatility and rate sensitivity of such deposits.
Heritage Federal competes for deposits with other institutions in its
market areas by offering deposit instruments that are competitively priced and
providing customer service through convenient and attractive offices,
knowledgeable and efficient staff, and hours of service that meet customers'
needs. To provide additional convenience, Heritage Federal maintains Automatic
Teller Machines at branches through which customers can gain access to their
accounts at any time.
Heritage Federal began offering commercial demand deposit accounts in
1981 in order to attract local businesses to the Bank. Commercial account
customers are encouraged to use the Bank for all of their banking activities.
Such accounts totaled $25.7 million, or 5.7% of total deposits, at June 30,
1995.
20
<PAGE> 21
Deposits in the Bank as of June 30, 1995 were represented by the
various programs described below.
<TABLE>
<CAPTION>
Interest Minimum Minimum Balances Percentage of
Rate Term Category Amount (in thousands) Total Savings
- -------- ------- -------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C>
2.25% None NOW and Demand Accounts (1) $ 100 $ 66,983 14.91%
2.75% None Passbook Savings 10 68,433 15.23%
3.31% None Money Market Deposit Accounts 2,500 17,845 3.97%
2.50% None Super NOW Accounts 2,500 7,514 1.67%
-------- ------
Total $160,775 35.78%
-------- ------
Certificates of Deposit
2.34% 7-31 Day Fixed-Term, Fixed-Rate $ 2,500 $ 574 0.13%
2.51% 31-92 Day Fixed-Term, Fixed-Rate 2,500 340 0.08%
3.10% 92-181 Day Fixed-Term, Fixed-Rate 2,500 661 0.15%
4.06% 6 Month Fixed-Term, Fixed-Rate 2,500 31,789 7.07%
5.96% 7 Month Fixed-Term, Fixed-Rate 2,500 28,625 6.37%
4.91% 12 Month Fixed-Term, Fixed-Rate 1,000 28,687 6.38%
5.89% 13 Month Fixed-Term, Fixed-Rate 1,000 61,729 13.74%
5.27% 18 Month Fixed-Term, Fixed-Rate 1,000 9,548 2.12%
5.54% 24 Month Fixed-Term, Fixed-Rate 1,000 12,963 2.88%
5.35% 30 Month Fixed-Term, Fixed-Rate 1,000 27,254 6.07%
5.39% 36 Month Fixed-Term, Fixed-Rate 1,000 9,013 2.01%
5.89% 48 Month Fixed-Term, Fixed-Rate 1,000 23,852 5.31%
4.52% 12 Month IRA Fixed-Term (Variable) 25 6,698 1.49%
5.80% Jumbo (2) Fixed-Term, Fixed-Rate 100,000 17,251 3.84%
5.91% Other Fixed-Term, Fixed-Rate 10,000 29,559 6.58%
-------- ------
Total certificates $288,543 64.22%
-------- ------
Total deposits $449,318 100.00%
======== ======
</TABLE>
- --------------------
(1) Includes non-interest-bearing demand accounts.
(2) Reflects certificates of deposits greater than $100,000.
21
<PAGE> 22
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>
At June 30, 1995 At June 30, 1994 At June 30, 1993
----------------------------- ------------------------------- --------------------
Increase Increase
(Decrease) (Decrease)
% of from Prior % of from Prior % of
Balance Deposits Year Balance Deposits Year Balance Deposits
------- -------- ---------- ------- -------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Now and demand accounts (1) . . . . . $ 66,983 14.91% $ (6,084) $ 73,067 16.21% $ 4,998 $ 68,069 14.80%
Jumbo certificates (2) . . . . . . . 17,251 3.84 7,986 9,265 2.06 1,298 7,967 1.73
Super NOW and Money Market Deposit
Accounts . . . . . . . . . . . . . 25,359 5.64 (9,693) 35,052 7.78 (1,362) 36,414 7.92
Passbook and regular savings . . . . 68,433 15.23 (23,008) 91,441 20.28 4,874 86,567 18.82
7-181 day certificates . . . . . . . 1,575 0.36 (1,265) 2,840 .63 (373) 3,213 0.70
6 month certificates . . . . . . . . 31,789 7.07 (30,690) 62,479 13.85 (8,214) 70,693 15.36
7 month certificates . . . . . . . . 28,625 6.37 28,625 -- -- -- -- --
12 month certificates . . . . . . . . 28,687 6.38 (21,652) 50,339 11.17 (3,826) 54,165 11.78
13 month certificates . . . . . . . . 61,729 13.74 61,729 -- -- -- -- --
18 month certificates . . . . . . . . 9,548 2.12 (2,253) 11,801 2.62 302 11,499 2.50
30 month certificates . . . . . . . . 27,254 6.07 (6,706) 33,960 7.52 (5,005) 38,965 8.47
Negotiable . . . . . . . . . . . . . 29,559 6.58 (1,539) 31,098 6.90 322 30,776 6.69
Other . . . . . . . . . . . . . . . . 52,526 11.69 3,049 49,477 10.98 (2,188) 51,665 11.23
-------- ------ -------- -------- ------ ------- -------- ------
Total . . . . . . . . . . . . . . $449,318 100.00% $ (1,501) $450,819 100.00% $(9,174) $459,993 100.00%
======== ====== ======== ======== ====== ======= ======== ======
</TABLE>
- --------------------
(1) Includes non-interest-bearing demand accounts.
(2) Reflects certificates of deposits greater than $100,000.
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 June 30,
---------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------ -------------------------- ----------------------------
Interest- Interest- Interest-
Bearing Bearing Bearing
Demand Savings Time Demand Savings Time Demand Savings Time
Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits Deposits
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average balance . . . . . $92,440 $79,116 $262,357 $100,423 $91,075 $262,928 $90,336 $82,091 $280,539
Average rate . . . . . . 2.53% 2.75% 4.69% 2.35% 2.80% 4.16% 2.79% 3.35% 4.85%
</TABLE>
22
<PAGE> 23
The following table sets forth the time deposits in the Bank classified
by rates as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------
Rate 1995 1994 1993
---------- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
4.00% and under . . . . . . . . . . . . . . . . $ 15,415 $145,247 $151,753
4.01% - 6.00% . . . . . . . . . . . . . . . . 178,065 99,393 89,517
6.01% - 8.00% . . . . . . . . . . . . . . . . 94,592 6,171 25,515
8.01% - 9.50% . . . . . . . . . . . . . . . . 471 448 2,043
9.51% - 11.50% . . . . . . . . . . . . . . . . -- -- --
11.51% and above . . . . . . . . . . . . . . . -- -- 115
-------- -------- --------
$288,543 $251,259 $268,943
======== ======== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1995.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- ------------
(In thousands)
<S> <C>
Three months or less . . . . . . . . . . $13,970
Over three through six months . . . . . 8,965
Over six through twelve months . . . . . 17,226
Over twelve months . . . . . . . . . . . 7,690
-------
Total . . . . . . . . . . . . . . . $47,851
=======
</TABLE>
The following table sets forth the Bank's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . . . . . . . . . . . . $1,359,160 $1,394,825 $1,407,913
Withdrawals . . . . . . . . . . . . . . . . . . . . . . 1,374,786 1,417,582 1,460,702
---------- ---------- ----------
Net decrease before interest credited . . . . . . . . (15,626) (22,757) (52,789)
Interest credited . . . . . . . . . . . . . . . . . . . 14,125 13,583 15,853
---------- ---------- ----------
Net increase (decrease) in savings deposits . . . . . $ (1,501) $ (9,174) $ (36,936)
========== ========== ==========
</TABLE>
The net decrease in deposits before and after interest credited for
the year ended June 30, 1993 primarily reflects the Bank's sale, on August 7,
1992, of its five branch offices in the middle Tennessee area. The buyer, Trans
Financial Federal Savings Bank, assumed approximately $55 million in deposits.
The Bank's deposits in its other thirteen remaining branches increased
approximately 4.0% during fiscal year 1993. During fiscal year 1994, the Bank's
deposits declined 2.0%. Management believes the decline in deposits during
fiscal year 1994 was primarily attributable to the disintermediation behavior of
retail customers in a period of relatively low market interest rates. With
savings rates being the lowest offered by banks in many years, some depositors
sought higher yields. Alternative investment vehicles such as annuities and
mutual funds assumed a greater prominence in the marketplace, with investments
in such vehicles rising significantly during the period in spite of an upward
trend in interest rates during the second half of fiscal year 1994. During
fiscal year 1995, deposits declined $1.5 million, or .3%. Monetary policy
restraint by the Federal Reserve caused interest rates to move higher throughout
most of the fiscal year. With higher market interest rates prevailing, interest
rate differentials between transaction accounts
23
<PAGE> 24
(such as NOW accounts and regular savings) and certificates of deposit reached
greater levels than those seen in the previous two years. This prompted a
considerable movement of depositor funds from lower interest-bearing accounts to
higher-yielding deposit products. This environment created increased competition
among financial institutions as many interest-rate-sensitive deposit customers
sought the best yields available in the marketplace. In response to
high-yielding alternative investment vehicles offered by the Bank's competition,
the Bank began offering seven- and 13-month certificates of deposit accounts in
July, 1994. Rates offered on these products were very competitive in relation to
other comparable investments available to deposit customers. This pricing
strategy allowed the Bank to retain the majority of its maturing
interest-sensitive deposits during the fiscal year, as well as minimizing its
marginal interest expense.
BORROWINGS. Savings deposits historically have been the primary source
of funds for the Bank's lending, investment, and general operating 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. The FHLB of Cincinnati functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, Heritage Federal is required to
own stock in the FHLB of Cincinnati and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. Heritage Federal may obtain advances from
the FHLB of Cincinnati subject to underwriting approval. The Bank currently has
approval for a cash management advance in the amount of $25.0 million, which can
be accessed immediately should the need arise. The Bank has executed a blanket
pledge of its mortgage loan portfolio as collateral for all outstanding advances
from the FHLB. The Bank had approximately $18.1 million of advances outstanding
at June 30, 1995, and these advances were obtained for the purpose of increasing
the Bank's net interest income through the funding of additional purchases of
mortgage-backed securities and CMO's.
TRUST ACTIVITIES
The Bank has offered personal trust services since 1985. The Bank acts
as trustee for discretionary and non-discretionary accounts. The Bank's trust
activities include the administration of estates and testamentary trusts, acting
as trustee for profit-sharing plans and self-directed individual retirement
accounts, and acting in a variety of other fiduciary and custodial capacities.
At June 30, 1995, the Bank's Trust Department had $26.2 million in assets under
management.
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Heritage Federal is permitted to
invest an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city and community development purposes. Under such limitations, as of
June 30, 1995 Heritage Federal was authorized to invest up to approximately
$15.5 million in the stock of or loans to subsidiaries, including the additional
1% investment for community inner-city and community development purposes.
Heritage Federal may currently invest up to 50% of its regulatory capital in
conforming first mortgage loans to subsidiaries in which it owns 10% or more of
the capital stock.
The Bank's only service corporation is Citizens Financial, in which its
investment was $1.8 million at June 30, 1995. The activities of Citizens
Financial are currently not significant. Citizens Financial's principal activity
is that of a title insurance agency. Approximately 80% of its policies are
generated by the Bank's lending activity, with the remainder related to local
attorneys' activities and national referrals. Citizens Financial is an agent of
Ticor Title Insurance Company and Old Republic National Title Insurance Company.
In August 1993, Citizens Financial entered into a three-year agreement with
third-party vendors under which the vendors sold annuities and securities in the
thirteen branch offices of the Bank and Citizens Financial will leased space to
the vendors. Citizens Financial received a percentage of the commissions related
to the sale of those products and did not assume any related risk or expense,
except as to certain supplies and office equipment. The sales operations
commenced at the end of September 1993. This arrangement continued throughout
most of fiscal year 1995.
24
<PAGE> 25
SAIF-insured savings institutions such as Heritage Federal must give
the FDIC and the Director of the OTS 30 days prior notice before establishing or
acquiring a new subsidiary, or commencing any new activity through an existing
subsidiary. Both the FDIC and the Director of the OTS have authority to order
termination of subsidiary activities determined to pose a risk to the safety or
soundness of the institution. In addition, recently adopted capital requirements
require savings institutions to deduct the amount of their investments in and
extensions of credit to subsidiaries engaged in activities not permissible to
national banks from capital in determining regulatory capital compliance. The
activities of Citizens Financial are permissible for national banks.
EMPLOYEES
As of June 30, 1995, the Company and its subsidiary had 159 full-time
and 17 part-time employees, none of whom was represented by a collective
bargaining agreement.
COMPETITION
The Bank faces strong competition both in originating real estate and
other loans and in attracting deposits. The Bank competes for real estate and
other loans principally on the basis of interest rates and the loan fees it
charges, the types of loans it originates and the quality of services it
provides to borrowers. Its primary competition in originating real estate loans
comes from other savings institutions, credit unions and mortgage bankers making
loans secured by real estate located in the Bank's market areas. Commercial
banks, credit unions, and finance companies provide vigorous competition in
consumer lending.
The Bank attracts all its deposits through its branch offices primarily
from the communities in which those branch offices are located. Consequently,
competition for deposits is principally from other savings institutions,
commercial banks, credit unions and brokers in these communities. Heritage
Federal competes for deposits and loans by offering a variety of deposit
accounts at competitive rates, a wide array of loan products, convenient
business hours and branch locations, a commitment to outstanding customer
service and a well-trained staff. In addition, the Bank believes it has
developed strong relationships with local businesses, realtors, and the public
in general giving it an excellent image in the community.
Management believes its primary market to be the city of Kingsport and
the immediately surrounding area. Management believes that the Bank is the
fourth largest depository institution in this market with approximately 13.2% of
the aggregate deposits. In Oak Ridge, the Bank's second leading market, the Bank
holds approximately 7.2% of the deposits, making it the seventh largest
depository institution, fourth largest non-credit union depository institution,
and the largest savings institution in this market.
REGULATION OF THE BANK
GENERAL. As a savings association, Heritage Federal is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with various federal regulatory requirements. The OTS will
periodically examine the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct examinations of SAIF
members. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these regulatory
requirements are referred to below or appear elsewhere herein.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of twelve district Federal Home Loan Banks subject to supervision
and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home
Loan Banks provide a central credit facility primarily for member institutions.
As a member of the FHLB of Cincinnati, the Bank is required to acquire and hold
shares of capital stock in the FHLB of Cincinnati in an amount at least equal to
1% of the aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Cincinnati, whichever is greater. The
FHLB of Cincinnati serves as a reserve or central bank for its
25
<PAGE> 26
member institutions within its assigned district. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Cincinnati.
Long-term advances may only be made for the purpose of providing funds for
residential housing finance. See "Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain mutual
funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. The Bank is also required to maintain average daily
balances of short-term liquid assets at a specified percentage (currently 1%) of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term ratios of the Bank for
the month ended June 30, 1995 were 19.25% and 5.07%, respectively.
QUALIFIED THRIFT LENDER TEST. A savings association that does not meet
the Qualified Thrift Lender test ("QTL Test") must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a Qualified Thrift Lender, it must cease any activity, and not
retain any investment not permissible for a national bank and immediately repay
any outstanding FHLB advances (subject to safety and soundness considerations).
Effective January 1, 1992, the QTL Test was amended to require that
Qualified Thrift Investments represent 65% of portfolio assets rather than 70%
as required after July 1, 1992. Under OTS implementing regulations, portfolio
assets are defined as total assets less intangibles, the value of property used
by a savings association in its business and liquidity investments in an amount
not exceeding 20% of assets. OTS regulations define Qualified Thrift Investments
to include, among other things, loans that were made to purchase, refinance,
construct, improve or repair domestic residential housing, home equity loans,
mortgage-backed securities, FHLB, FHLMC or FNMA stock and, subject to a 5% of
assets limitation, loans for personal, family. household or education purposes.
Qualified Thrift Investments do not include any intangible asset. Subject to a
20% of portfolio assets limit, savings associations are able to treat as
Qualified Thrift Investments 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas.
A savings association that was not subject to penalties for failure to
maintain Qualified Thrift Lender status as of June 30, 1991 shall be deemed a
Qualified Thrift Lender so long as its percentage of Qualified Thrift
Investments continues to equal or exceed 65% in at least nine out of each 12
months. For the period from January 1, 1992 until December 31, 1992, a savings
association ceased to be a Qualified Thrift Lender if its percentage of
Qualified Thrift Investments as measured by monthly averages fell below 65% for
four or more months. Beginning January 1, 1993, a savings association will cease
to be a Qualified Thrift Lender when its percentage of Qualified Thrift
Investments as measured by monthly averages over the immediately preceding
12-month period falls below 65% for four or more months. A savings association
that fails to maintain Qualified Thrift Lender status will be permitted to
requalify once, and if it fails the QTL Test a second time, it will become
immediately subject to all penalties as if all time limits on such penalties had
expired.
Since the Bank was not subject to sanctions for failure to comply with
the QTL Test as of June 30, 1991, it will remain in compliance until its monthly
average percentage of Qualified Thrift Investments to portfolio assets falls
below 65% for four or more months as measured by monthly averages over the
preceding 12-month period. At June 30, 1995, the Bank's QTL ratio was 84.84 %.
26
<PAGE> 27
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings association subsidiaries of savings and loan
holding companies are required to give the OTS 30 days prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by the Bank. Under these regulations, a savings association that,
immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Association") is generally permitted without OTS
approval to make capital distributions during a calendar year in the amount
equal to the higher of (i) 75% of its net income over the most recent
four-quarter period or (ii) up to 100% of its net income to date during the
calendar year plus an amount that would reduce by one-half the amount by which
its total capital to assets ratio exceeded its fully phased-in capital
requirement to assets ratio at the beginning of the calendar year. A savings
association with total capital in excess of current minimum capital requirements
but not in excess of the fully phased-in requirements (a "Tier 2 Association")
is permitted to make capital distributions without OTS approval of up to 75% of
its net income for the previous four quarters, less dividends already paid for
such period depending on the savings association's level of risk-based capital.
A savings association that fails to meet current minimum capital requirements (a
"Tier 3 Association") is prohibited from making any capital contributions
without the prior approval of the OTS. Tier 1 Associations that have been
notified by the OTS that they are in need of more than normal supervision will
be treated as either a Tier 2 or Tier 3 Association. At June 30, 1995, the Bank
was a Tier 1 Association.
The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. After consultation with the FDIC, the OTS
may permit a savings association to repurchase, redeem, retire or otherwise
acquire shares or ownership interests if the repurchase, redemption, retirement
or other acquisition: (i) is made in connection with the issuance of additional
shares or other obligations of the institution in at least an equivalent amount;
and (ii) will reduce the institution's financial obligations or otherwise
improve the institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See "Taxation." The Company
intends to make full use of this favorable tax treatment afforded to the Bank
and the Company and does not contemplate use of any earnings of the Bank in a
manner which would limit the Bank's bad debt deduction or create federal tax
liabilities.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "-- Prompt Corrective Regulatory
Action." Core capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related surplus,
minority interests in the equity accounts of fully consolidated subsidiaries,
certain nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill."
Qualifying supervisory goodwill is defined generally as goodwill
resulting from the acquisition, merger, consolidation, purchase of assets or
other business combination (if such transaction occurred on or before April 12,
1989) with or of: (i) a savings association the fair market value of the assets
of which were less than the fair market value of its liabilities at the date of
acquisition; (ii) a problem institution which includes savings associations that
27
<PAGE> 28
failed to meet their regulatory capital requirements or otherwise posed
supervisory concerns; or (iii) a savings association which was subject to
regulatory controls. Qualifying supervisory goodwill must be amortized on a
straight-line basis over the shorter of 20 years or the amortization period
previously in effect. Only eligible savings associations are permitted to
include qualifying supervisory goodwill in their capital calculations. An
eligible savings association is an association determined by the Director of OTS
to have competent management, to be in substantial compliance, as certified by
its board of directors, with all applicable statutes, regulations, orders, and
written agreements and directives, and to have management that has not engaged
in insider dealing, speculative practices or other activities that have
jeopardized or may jeopardize the savings association's safety capital. Unless
otherwise determined or notified by the Director of OTS, savings associations
will be deemed to be eligible savings associations for purposes of including
qualifying supervisory goodwill in core capital. Prior to January 1, 1992, the
maximum amount of qualifying supervisory goodwill included in core capital could
not exceed 1.5% of adjusted total assets with the applicable percentage
declining to 0% after December 31, 1994. The excess of cost over fair value of
net assets acquired resulting from the Bank's acquisitions in the early 1980s is
treated as qualifying supervisory goodwill.
Tangible capital is given the same definition as core capital but does
not include qualifying supervisory goodwill and is reduced by the amount of all
the savings association's intangible assets with only a limited exception for
purchased mortgage servicing rights and purchased credit card relationships.
Both core and tangible capital are further reduced by an amount equal to savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible to national banks other than subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities and
subsidiary depository institutions or their holding companies. Investments in
and extensions of credit to such subsidiaries as of April 12, 1989, to the
extent still outstanding, however, were not required to be deducted from core
and tangible capital until July 1, 1990. Thereafter, an increasing percentage of
such investments will be deducted from core and tangible capital until June 30,
1995 when such investments must be fully netted. As of June 30, 1995, the Bank
had no investments in or extensions of credit to subsidiaries engaged in
activities not permitted to national banks.
"Adjusted total assets" are a savings association's total assets as
determined under generally accepted accounting principles ("GAAP"), increased by
certain goodwill amounts and by a pro-rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments in such subsidiaries
against capital, as well as a pro-rated portion of the assets of other
subsidiaries for which deduction is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of savings association's investments in
subsidiaries that must be deducted from capital under the capital rules and, for
purposes of the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core and supplementary capital are reduced by the amount
of capital instruments held by other depository institutions pursuant to
reciprocal arrangements and, after July 1, 1990, by an increasing percentage of
the savings association's high loan-to-value ratio land loans and
non-residential construction loans, and certain equity investments not otherwise
deducted from core and tangible capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equals the sum of each asset and the credit-equivalent amount of
each off-balance sheet item after being multiplied by an assigned risk weight.
Under the OTS risk- weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80% are assigned a
risk weight of 50%. Consumer and residential construction loans are assigned a
risk weight of 100%. Mortgage-backed securities and other debt securities
issued, or fully guaranteed as to principal and interest, by U.S. Government
agencies are assigned a 20% risk weight. Cash and U.S. Government securities
backed by the full faith and credit of the U.S. Government are given a 0% risk
weight.
28
<PAGE> 29
The table below presents the Bank's capital position at June 30, 1995,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
Percent
of
Amount Assets *
------- --------
(Dollars in thousands)
<S> <C> <C>
Tangible capital ........................ $51,514 9.77%
Tangible capital requirement ............ 7,909 1.50
------- -----
Excess ................................ $43,605 8.27%
======= =====
Core capital ............................ $51,961 9.85%
Core capital requirement ................ 15,832 3.00
------- -----
Excess ................................ $36,129 6.85%
======= =====
Risk-based capital ...................... $54,208 25.00%
Risk-based capital requirement .......... 17,345 8.00
------- -----
Excess ................................ $36,863 17.00%
======= =====
</TABLE>
- --------------------
* Based upon adjusted total assets of $527.3 million for purposes of the
tangible capital requirement, $527.7 million for purposes of the core
capital requirement, and risk-weighted assets of $217.0 million for
purposes of the risk-based capital requirement.
The Director of OTS must restrict the asset growth of savings
associations not in regulatory capital compliance, subject to a limited
exception for growth not exceeding interest credited. In addition, savings
associations not in full compliance with capital standards then applicable would
be subject to a capital directive which may include such restrictions, including
restrictions on the payment of dividends and on compensation, as deemed
appropriate by the Director of OTS. Institutions not in capital compliance must,
within 60 days thereafter, submit a capital plan to the OTS District Director
for approval explaining in detail its proposed strategies for raising capital
and for accomplishing its overall objective, and the institution may
concurrently apply for an exemption from a capital directive. The Director of
OTS is directed to treat as an unsafe and unsound practice any material failure
by a savings association to comply with a capital plan or capital directive. The
sanctions and penalties that could be imposed range from restrictions on
branching or on the activities of the institution, to restrictions on the
ability to obtain FHLB advances, to termination of insurance of accounts
following appropriate proceedings, to the appointment of a conservator or
receiver. A savings association not in full compliance with the capital
standards could apply for a limited exemption from sanctions. If the exemption
is granted, the savings association would still remain subject to restrictions
on growth.
OTS staff policies specify that savings associations failing any one of
their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, associations that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
association's operations and does not significantly increase the risk profile of
the savings association.
29
<PAGE> 30
In addition to requiring generally applicable capital standards for
savings associations, the Director of OTS may establish the minimum level of
capital for a savings association at such amount or at such ratio of
capital-to-assets as the Director determines to be necessary or appropriate for
such association in light of the particular circumstances of the association.
The Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner as
an order issued by the FDIC.
Under FIRREA, the capital standards applicable to savings associations
must be no less than those applicable to national banks. On September 17, 1990,
the Office of the Comptroller of the Currency ("OCC") announced the adoption,
effective December 31, 1990, of regulations implementing more stringent core
capital requirements for national banks. The OCC regulations establish a new
minimum core capital ratio of 3% for the most highly rated banks, with at least
an additional 100 to 200 basis point "cushion" amount of additional capital
required on a case-by-case basis, considering the quality of risk management
systems and the overall risk in individual banks.
The OTS has recently adopted an amendment to its risk-based capital
requirements that, effective September 30, 1994, required savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. A savings institution's interest rate risk will be measured in
terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution will be considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk will be required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the "interest rate
risk component") equal to one-half the difference between the institution's
measured interest rate risk and the normal level of interest rate risk,
multiplied by the economic value of its total assets.
The OTS will calculate the sensitivity of a savings institution's net
portfolio value based on data submitted by the institution in a schedule to its
quarterly Thrift Financial Report and using the interest rate risk measurement
model adopted by the OTS. The amount of the interest rate risk component, if
any, to be deducted from a savings institution's total capital will be based on
the institution's Thrift Financial Report filed three quarters earlier. The Bank
does not expect that this regulation will require it to reduce its capital
materially for purposes of determining compliance with its risk-based capital
requirement.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory
30
<PAGE> 31
demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings association is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.
Effective December 19, 1992, the federal banking regulators, including
the OTS, adopted regulations implementing the prompt corrective action
provisions of FDICIA. Under such regulations, the federal banking regulators
will measure a depository institution's capital adequacy on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings association
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" savings association is a savings association that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings association has a composite 1 CAMEL rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association
has a composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a savings association that has: (i) a total risk-based capital
ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than
3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings association is defined as a savings association that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights. The OTS may reclassify a well
capitalized savings association as adequately capitalized and may require an
adequately capitalized or undercapitalized association to comply with the
supervisory actions applicable to associations in the next lower capital
category if the OTS determines, after notice and an opportunity for a hearing,
that the savings association is in an unsafe or unsound condition or that the
association has received and not corrected a less-than- satisfactory rating for
any CAMEL rating category. The Bank is classified as "well-capitalized" under
the new regulations.
31
<PAGE> 32
The table below presents the Bank's capital position at June 30, 1995,
relative to its various minimum regulatory capital requirements under the prompt
corrective regulations.
<TABLE>
<CAPTION>
Percent
of
Amount Assets *
------- --------
(Dollars in thousands)
<S> <C> <C>
Tangible equity . . . . . . . . . . . . . . . . . . . . $51,514 9.77%
Tangible equity requirement . . . . . . . . . . . . . . 10,546 2.00
------- -----
Excess . . . . . . . . . . . . . . . . . . . . . . . $40,968 7.77%
======= =====
Tier 1 or leverage capital . . . . . . . . . . . . . . $51,961 9.85%
Tier 1 or leverage capital requirement . . . . . . . . 21,109 4.00
------- -----
Excess . . . . . . . . . . . . . . . . . . . . . . . $30,852 5.85%
======= =====
Tier 1 risk-based capital . . . . . . . . . . . . . . . $51,961 23.97%
Tier 1 risk-based capital requirement . . . . . . . . . 8,673 4.00
------- -----
Excess . . . . . . . . . . . . . . . . . . . . . . . $43,288 19.97%
======= =====
Risk-based capital . . . . . . . . . . . . . . . . . . $54,208 25.00%
Risk-based capital requirement . . . . . . . . . . . . 17,345 8.00
------- -----
Excess . . . . . . . . . . . . . . . . . . . . . . . $36,863 17.00%
======= =====
</TABLE>
- --------------------
* Based upon adjusted total assets for purposes of the tangible equity and
Tier 1 or leverage capital requirements, and risk-weighted assets for
purposes of the Tier 1 risk-based and risk- based capital requirements.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines went into effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to regulatory sanctions. Management believes that the
Bank already meets substantially all the standards adopted in the interagency
guidelines, and therefore does not believe that implementation of these
regulatory standards will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the Federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July 10,
1995, the Federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and
32
<PAGE> 33
earnings. Under the proposed guidelines a savings institution should maintain
systems, commensurate with its size and the nature and scope of its operations,
to identify problem assets and prevent deterioration in those assets as well as
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves. Management believes that the asset
quality and earnings standards, in the form proposed by the banking agencies,
would not have a material effect on the Bank's operations.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percent 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 achieve 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 -- using the same percentage criteria as under
the prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." 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. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The assessment rate for SAIF-insured institutions ranges from
0.23% of deposits for well capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C.
The FDIC has recently amended the risk-based assessment schedule to
significantly lower the deposit insurance assessment rate for most commercial
banks and other depository institutions with deposits insured by the Bank
Insurance Fund ("BIF") effective during the semi-annual period after the BIF
achieves its designated reserve ratio of 1.25% of BIF-insured deposits. Under
the new BIF assessment schedule, the assessment rates of BIF-insured
institutions will range from 0.31% of insured deposits for undercapitalized
BIF-institutions in supervisory Subgroup C to 0.04% of deposits for
well-capitalized institutions in supervisory Subgroup A, which constitute over
90% of BIF-insured institutions. The FDIC has indicated that it believes that
the BIF achieved the statutorily-designated reserve ratio during the quarter
ended June 30, 1995 and will refund any excess premiums paid by BIF-insured
institutions as soon as the reserve ratio is confirmed. The FDIC does not
anticipate that the assessment rate for SAIF-insured institutions in even the
lowest risk-based premium category will fall below the current 0.23% of insured
deposits before the year 2002 absent a recapitalization of the SAIF. The new BIF
assessment schedule would result in a substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members and could place SAIF-insured
savings associations such as the Bank at a significant competitive disadvantage
to BIF-insured institutions.
Congress and the Administration are currently discussing various
proposals for the recapitalization of the SAIF. These proposals include the
payment of a one-time special assessment by SAIF-insured institutions in an
amount equal to at least 0.85% of their insured deposits. Based on the Bank's
total deposits at June 30, 1995, such a payment could be $3.8 million or higher.
No prediction can be made as to what action, if any, will be taken to
recapitalize the SAIF or as to the final form or timing of any such action.
SAIF members are generally prohibited from converting to the status of
BIF members, or merging with or transferring assets to a BIF member before the
date on which the SAIF first meets or exceeds the designated reserve ratio. The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the
33
<PAGE> 34
transaction involves an insubstantial portion of the deposits of each
participant. In addition, mergers, transfers of assets and assumptions of
liabilities may be approved by the appropriate bank regulator so long as deposit
insurance premiums continue to be paid to the SAIF for deposits attributable to
the SAIF members plus an adjustment for the annual rate of growth of deposits in
the surviving bank without regard to subsequent acquisitions. Each depository
institution participating in a SAIF-to-BIF conversion transaction is required to
pay an exit fee to SAIF and an entrance fee to BIF. A savings association that
adopts a commercial bank or savings bank charter prior to the date on which the
SAIF first meets or exceeds the designated reserve ratio must remain a SAIF
member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings associations,
the FDIC will take into account whether the savings association is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, a thrift institution must maintain average daily reserves in a manner
sufficient to satisfy its reserve requirements on reservable liabilities. For
reservable liabilities exceeding $4.2 million, the institution must maintain
reserves of 3% on balances up to $54.0 million. On balances exceeding $54.0
million, the reserve requirement increases to 10%. Because required reserves are
maintained in the form of vault cash or in a non-interest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of June 30, 1995, the
Bank met its reserve requirements.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution'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 savings association 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 savings association.
Savings associations are also subject to the restrictions contained in
Section 22(h) 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 savings association and
certain affiliated interests of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
34
<PAGE> 35
association'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 savings association, 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. Section 22(h) also prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Savings associations are further subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. Section 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval for such extensions of credit 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. Section 1972 (i) 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, and (ii) 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.
REGULATION OF THE COMPANY
GENERAL. The Company is a unitary savings and loan holding company
within the meaning of the Home Owners' Loan Act. As such, the Company is
registered with the OTS and subject to OTS regulations, examinations,
supervision and reporting requirements.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company
presently intends to operate the Company as a unitary savings and loan holding
company. There are generally no restrictions on the activities of a unitary
savings and loan holding company. However, if the director of OTS determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings association, the
Director of OTS may impose such restrictions as deemed necessary to address such
risk and limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings association. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
association subsidiary of such a holding company fails to meet the QTL Test,
then such unitary holding company shall also presently become subject to the
activities restrictions applicable to multiple holding companies and unless the
savings association requalifies as a Qualified Thrift Lender within one year
thereafter, register as, and become subject to, the restrictions applicable to a
bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions.
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<PAGE> 36
The Home Owners' Loan Act, as amended by FIRREA, provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not a savings association shall commence or continue for a limited period of
time after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity, upon prior notice to, and no objection by the
OTS, other than (i) furnishing or performing management services for a
subsidiary savings association, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing, or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by the
Federal Savings and Loan Insurance Corporation by regulation as of March 5, 1987
to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the Director of OTS by regulation prohibits or limits such
activities for savings and loan holding companies. Those activities described in
(vii) above must also be approved by the Director of OTS prior to being engaged
in by a multiple holding company.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS, up to 15% of the
voting shares of an under-capitalized savings association pursuant to a
"qualified stock issuance" without that savings association being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings association and transactions between the savings association and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
Tennessee law authorizes the acquisition of a savings association with
its principal place of business in Tennessee, or a savings and loan holding
company with its principal place of business in Tennessee and which is not
controlled by any other savings and loan holding company, by an out-of-state
savings and loan holding company or out-of-state savings association, subject to
approval of the Tennessee Commissioner of Financial Institutions. An
"out-of-state savings and loan holding company" is a savings and loan holding
company with its principal place of business in a state other than Tennessee and
which is not controlled by any other savings and loan holding company. The
Tennessee Commissioner may only approve such an acquisition if the laws of the
state in which the out-of-state savings and loan holding company or out-of-state
savings association has its principal place of business both (i) allow Tennessee
savings associations and Tennessee savings and loan holding companies to acquire
savings associations and savings and loan holding companies in that state and
(ii) allow the Tennessee savings association or Tennessee savings and loan
holding company which is being acquired to acquire the out-of-state savings
association or out-of-state savings and loan holding company seeking to make the
acquisition.
36
<PAGE> 37
The OTS has recently amended its regulations to permit federal
associations to branch in any state or states of the United States and its
territories. Except in supervisory cases or when interstate branching is
otherwise permitted by state law or other statutory provision, a federal
association may not establish an out-of-state branch unless (i) the federal
association qualifies as a "domestic building and loan association" under
Section 7701(a)(19) of the Internal Revenue Code and the total assets
attributable to all branches of the association in the state would qualify such
branches taken as a whole for treatment as a domestic building and loan
association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve
Board to approve an application by a bank holding company to acquire control of
any savings association. Pursuant to rules promulgated by the Federal Reserve
Board, owning, controlling or operating a savings association is a permissible
activity for bank holding companies if the savings association engages only in
deposit-taking activities and lending and other activities that are permissible
for bank holding companies. In approving such an application, the Federal
Reserve Board may not impose any restriction on transactions between the savings
association and its holding company affiliates except as required by Sections
23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act.
TAXATION
GENERAL. The Company files a consolidated federal income tax return
with the Bank and the Bank's subsidiary based upon a fiscal year ending June 30.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur.
FEDERAL AND STATE INCOME TAXATION. Savings institutions are subject to
the provisions of the Internal Revenue Code of 1986, as amended (the "Code") in
the same general manner as other corporations. However, institutions such as the
Bank which meet certain definitional tests and other conditions prescribed by
the Code may benefit from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and nonqualifying loans, which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
The Bank has generally elected to use the method which has resulted in
the greatest deductions for federal income tax purposes. Under the experience
method, the bad debt deduction for an addition to the reserve for qualifying
real property loans is an amount determined under a formula based generally on
the bad debts actually sustained by a savings institution over a period of
years. Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans is computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years
37
<PAGE> 38
beginning after 1986. The allowable deduction under the percentage of taxable
income method (the "percentage bad debt deduction") for taxable years beginning
before 1987 was scaled downward in the event that less than 82% of the total
dollar amount of the assets of an institution were within certain designated
categories. When the percentage method bad debt deduction was lowered to 8%, the
82% qualifying assets requirement was lowered to 60%. For all taxable years,
there is no deduction in the event that less than 60% of the total dollar amount
of the assets of an institution falls within such categories. Moreover, in such
case, the Bank could be required to recapture, generally over a period of up to
four years, its existing bad debt reserve. As of June 30, 1995, more than the
required amount of the Bank's total assets fell within such category.
The bad debt deduction under the percentage of taxable income method is
subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not exceed the amount necessary to
increase the balance of such reserve at the close of the taxable year to 6% of
such loans outstanding at the end of the taxable year. Further, the addition to
the reserve for losses on qualifying real property loans cannot exceed the
amount which, when added to that year's addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12% of total deposits
or withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. Finally, the
percentage bad debt deduction under the percentage of taxable income method is
reduced by the deduction for losses on nonqualifying loans.
To the extent (i) a savings bank's reserve for losses on qualifying
real property loans under the percentage of income method exceeds the amount
that would have been allowed under the experience method and (ii) a savings bank
makes distributions to stockholders (including distributions in redemption,
dissolution or liquidation) that are considered to result in withdrawals from
that excess bad debt reserve, then the amounts considered withdrawn will be
included in the savings bank's taxable income. The amount that would be deemed
withdrawn from such reserves upon such distribution and which would be subject
to taxation at the savings bank level at the normal corporate tax rate would be
an amount that, when reduced by taxes on such amount, would equal the amount
actually distributed. Dividends paid out of a savings bank's current or
accumulated earnings and profits as calculated for federal income tax purposes,
however, will not be considered to result in withdrawals from its bad debt
reserves to the extent of such earnings and profits. Dividends in excess of a
savings bank's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation of a
savings bank will be considered to come from its loss reserve. The Bank
qualifies under provisions of the Internal Revenue Code which permit it to
deduct from income an allowance for bad debts based on approximately 8% of
taxable income before such deduction, or actual chargeoffs. As of June 30, 1995,
the Company has taken aggregate bad debt deductions of approximately $4,647,000
for income tax purposes under the percentage of taxable income method for which
no provisions for federal income tax have been made in the financial statements.
This amount may be used only for absorbing losses for tax purposes. It is not
related to amounts of losses actually anticipated and the additions thereto have
not been charged against income.
Earnings appropriated to the Bank's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to stockholders (including distributions made on dissolution or
liquidation) unless the Bank includes the amount in taxable income, together
with the amount deemed necessary to pay the resulting federal income tax.
For taxable years beginning after December 31, 1986, the Code imposes
an alternative minimum tax at a rate of 20%. The alternative minimum tax
generally applies to a base of regular taxable income plus certain tax
preferences ("alternative minimum taxable income" or "AMTI") and is payable to
the extent such AMTI exceeds an exemption amount. The Code provides that an item
of tax preference is the excess of the bad debt deduction allowable for a
taxable year pursuant to the percentage of taxable income method over the amount
allowable under the experience method. The other items of tax preference that
constitute AMTI include (a) tax-exempt interest on newly-issued (generally,
issued on or after August 8, 1986) private activity bonds other than certain
qualified bonds and (b) for taxable years including 1987 through 1989, 50% of
the excess of (i) the taxpayer's pre-tax adjusted net book income over (ii) AMTI
(determined without regard to this latter preference and prior to reduction by
net
38
<PAGE> 39
operating losses). For taxable years beginning after 1989, this latter
preference has been replaced by 75% of the excess (if any) of (i) adjusted
current earnings as defined in the Code, over (ii) AMTI (determined without
regard to this preference and prior to reduction by net operating losses). For
any taxable year beginning after 1986, net operating losses can offset no more
than 90% of AMTI. Certain payments of alternative minimum taxes may be used as
credits against regular tax liabilities in future years.
In addition to the Bank's federal income tax liability, the State of
Tennessee imposes an excise tax on savings institutions at the rate of 6% of net
taxable income, which is computed based on federal taxable income subject to
certain adjustments. The State of Tennessee also imposes franchise and privilege
taxes on savings institutions which, in the case of the Bank, have not
constituted significant expense items.
For additional information regarding taxation, see Note 11 to the Notes
to Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
Accounting for Income Taxes. Through June 30, 1993, the Company
followed SFAS No. 96, "Accounting for Income Taxes." SFAS 96 requires the asset
and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS No. 96, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
In February 1992, the FASB issued SFAS No. 109, "Accounting for Income
Taxes." This statement supersedes both Accounting Principles Board ("APB")
Opinion No. 11 and SFAS No. 96, the previous authoritative literature on income
tax accounting. It also supersedes the guidance of APB No. 23 on the tax
treatment of savings institution bad debt reserves. SFAS No. 109 calculates
taxes on the asset and liability method; thus requiring recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been recognized in the financial statements or tax return. This
statement's emphasis on the balance sheet is consistent with SFAS No. 96, but is
a change from APB Opinion No. 11's emphasis on the expense calculation. Under
SFAS No. 109, the tax expense or benefit in the statement of income will be the
current tax liability plus the change in the deferred tax liabilities and assets
occurring during the year. SFAS No. 109 changes the treatment of loan loss
provisions in the calculation of taxes. Tax bad debt reserves that arose prior
to 1988 require recognition of deferred tax liabilities only if it becomes
apparent that those temporary differences will reverse in the foreseeable
future. Other differences between financial and tax reserves will create
temporary differences for which deferred tax assets or liabilities will be
computed. SFAS No. 109 is effective for fiscal years beginning after December
15, 1992. The Company adopted SFAS No. 109 in the quarter ended September 30,
1993. The adoption resulted in the recognition of a deferred tax asset, recorded
as a cumulative effect increase to net income of $764,000. See Note 1 of the
Notes to Consolidated Financial Statements.
Accounting for Impaired Loans. The FASB issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which amended SFAS No. 5,
"Accounting for Contingencies," and SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." SFAS No. 114, as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure," requires the use of the discounted cash flow method for
measuring impairment of loans when it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. If expedient, the creditor may use a loan's observable market price
or the fair value of any collateral. The Bank adopted SFAS No.114 on a
prospective basis as of July 1, 1993 for the fiscal year ending June 30, 1994.
The adoption of SFAS No. 114 did not have a material effect on the Bank's
financial position or results of operations.
39
<PAGE> 40
Accounting for Investments. In June 1993, the FASB also issued SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 requires debt and equity securities to be classified into one of three
categories: (i) held to maturity, (ii) available for sale or (iii) trading.
Securities held to maturity are limited to debt securities that the holder has
the positive intent and the ability to hold to maturity; these securities are
reported at amortized cost. Securities held for trading are limited to debt and
equity securities that are held principally to be sold in the near term; these
securities are reported at fair value, and unrealized gains and losses are
reflected in earnings. Securities held as available for sale consist of all
other securities; these securities are reported at fair value, and unrealized
gains and losses are not reflected in earnings but are reflected as a separate
component of stockholders' equity. Under SFAS No. 115, securities that could be
sold in the future because of changes in interest rates or other factors may not
be classified as held to maturity. SFAS No. 115 is effective for years beginning
after December 15, 1993. At June 30, 1995 the carrying value of the Bank's held
to maturity portfolio of investment and mortgage-backed securities exceeded the
market value by approximately $1.35 million. Gross unrealized gains on
securities available for sale were approximately $136,000. The Company adopted
SFAS 115 during the fiscal year ended June 30, 1995. The Company designated its
entire laddered maturity portfolio of U.S. Treasury Notes as available for sale.
At June 30, 1995, these securities had a weighted average life of approximately
1.1 years with a face amount of $20 million. The Company maintains the available
for sale portion of the investment portfolio as necessary in order to satisfy
its liquidity needs. In the event funding is needed for loan originations,
deposit account withdrawals, or other liquidity purposes, these securities could
be liquidated.
40
<PAGE> 41
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Bank's offices at June 30, 1995. The Bank owns all of
its offices except as indicated.
<TABLE>
<CAPTION>
Total
Year Deposits
Opened/ at June Total Net Book Value at Approximate
Acquired 30, 1995 Investment June 30, 1995 Square Footage
-------- -------- ---------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
MAIN OFFICE:
110 East Center Street
Kingsport 1930 $128,595 $3,310 $757 26,432
BRANCH OFFICES:
Colonial Heights Office
4105 Fort Henry Drive
Kingsport 1972 36,394 1,730 834 27,000
Fort Henry Drive Office
2060 Fort Henry Drive
Kingsport 1974 49,399 776 331 7,813
Mount Carmel Office
130 West Main Street
Mount Carmel 1975 22,657 346 169 2,912
Kings-Giant Office (1)
199 West Stone Drive
Kingsport 1975 23,299 269 75 1,920
Johnson City Office
1907 North Roan Street
Johnson City 1978 38,516 2,394 1,293 36,000
Elizabethton Office (1)
301 Broad Street
Elizabethton 1980 11,081 654 351 3,920
East Stone Drive Office
2240 East Stone Drive
Kingsport 1987 11,815 646 429 3,290
Boones Creek Office
4718 Kingsport Highway
Gray 1984 14,947 281 156 2,900
</TABLE>
(Table continues on following page)
41
<PAGE> 42
<TABLE>
<CAPTION>
Total
Year Deposits
Opened/ at June Total Net Book Value at Approximate
Acquired 30, 1995 Investment June 30, 1995 Square Footage
-------- -------- ---------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Oak Ridge Office
101 N. Rutgers Avenue
Oak Ridge 1981 63,110 2,250 1,081 15,984
Clinton Office
134 W. Broad Street
Clinton 1981 20,739 354 142 2,600
Harriman Office
South Roan Street
Harriman 1981 21,663 471 208 2,200
West Oak Ridge Office
21 Jefferson Avenue
Oak Ridge 1988 7,103 557 403 3,290
OTHER PROPERTY:
Administrative Offices
Heritage Plaza
220 Broad Street
Kingsport 1985 N/A 738 436 34,584
Old Loan Processing Building (2)
2098 Fort Henry Drive
Kingsport 1975 N/A 66 33 1,500
Original Colonial Heights
Branch Office
109 Colonial Heights
Kingsport 1972 N/A 151 88 3,700
</TABLE>
- --------------------
(1) Leased property.
(2) Owned by Citizens Financial, the Bank's wholly-owned subsidiary, and
leased to the Bank.
In January 1980, Heritage Federal leased a parcel of land from an
unrelated third party on which the Bank constructed its Elizabethton branch
office. The lease agreement requires payments of $1,100 per month beginning
January, 1980 and ending on December 31, 1999. The original principal balance of
this lease was approximately $129,000. The balance remaining on June 30, 1995
was $119,173.
42
<PAGE> 43
The Elizabethton property noted above is accounted for as a capital
lease. The lease on the Johnson City office through the Industrial Revenue Board
of Johnson City expired in August 1993 and the Bank exercised the purchase
option for the building. The lease on the Elizabethton office expires in
December 1999, and also includes an option to purchase the leased property for
$110,000 at maturity.
The Bank also owns a mainframe computer system with an original cost of
approximately $824,700 and a zero net book value at June 30, 1995. Additionally,
the Bank owns an identical computer system which it was given by its supplier
and which it uses as an emergency back-up system. The backup computer system was
obtained by the Bank to comply with OTS regulatory requirements for disaster
recovery plans. Other than for the preparation of its quarterly interest rate
risk estimates, certain asset and liability valuations pursuant to SFAS No. 107,
and monthly investment portfolio accounting, the Bank does not utilize the
services of any outside data processing center. At June 30, 1995, the net book
value of the Bank's premises, furniture, fixtures and equipment was
approximately $6.8 million. See Note 8 of Notes to Consolidated Financial
Statements for further information.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is a party to various legal proceedings
incident to its business. Except as set forth below, there are no material legal
proceedings to which the Company, the Bank or its subsidiary is a party or to
which any of their property is subject.
The Bank is a defendant in a lawsuit brought by an employee on June 29,
1994 in a Tennessee state court alleging unlawful discrimination in connection
with a reduction in the employee's duties and change in title as part of the
Bank's restructuring of senior management positions during 1991 and 1992. The
lawsuit seeks total damages of $6 million plus attorney's fees and costs. The
Bank is vigorously contesting this claim. Based on the advice of counsel,
Heritage Federal believes that the possibility of the Bank's sustaining a
material adverse judgment related to such claims is remote.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 1995.
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<PAGE> 44
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
MATTERS
The Common Stock trades on The Nasdaq Stock Market under the symbol
"HFBS." As of August 11, 1995, there were 3,189,506 shares of the Common Stock
outstanding, held by approximately 1,040 stockholders of record, excluding
beneficial owners in nominee or street name. The table below sets forth the
quarterly high and low stock prices as quoted on The Nasdaq Stock Market for
fiscal years 1995 and 1994, adjusted for stock splits. Stock price data on The
Nasdaq Stock Market reflect interdealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 1994
----------------- ---------------------
Quarter Ended: High Low High Low
-------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
September 30 . . . . . . . . . . $23 $16 11/16 $15 1/2 $13
December 31 . . . . . . . . . . . $23 1/2 $16 1/2 $15 3/4 $14 1/4
March 31 . . . . . . . . . . . . $27 $17 $17 1/4 $14 5/8
June 30 . . . . . . . . . . . . . $27 $24 $18 1/4 $16 1/8
</TABLE>
Under the Agreement with First American, the Company cannot pay a
dividend on its Common Stock other than regular quarterly cash dividends not in
excess of $0.095 per share, but dividends in the last quarter prior to closing
must be coordinated with First American's dividend policy to avoid the receipt
of either no dividends or two dividends during such quarter. The following table
sets forth the cash dividends per share declared by the Company on the Common
Stock during fiscal years 1995 and 1994, adjusted for stock splits.
<TABLE>
<CAPTION>
Quarter Ended: 1995 1994
-------------- ------- -------
<S> <C> <C>
September 30 . . . . . . . . $0.0950 $ --
December 31 . . . . . . . . . 0.0950 0.0825
March 31 . . . . . . . . . . 0.0950 0.0825
June 30 . . . . . . . . . . . 0.0950 0.0825
</TABLE>
The declaration and payment of dividends is at the sole discretion of
the Company's Board of Directors and the amount, if any, depends upon the
earnings, financial condition and capital needs of the Company and the Bank as
well as certain federal banking laws and regulations to which the Company and
the Bank are subject. The ability of the Bank to pay cash dividends to the
Company on its capital stock is subject to, among other matters, the
restrictions set forth in federal statutes and regulations. See "Item 1.
Business -- Regulation of the Bank." In September 1993, the Company effected a
three-for-two stock split. In October 1993, the Company's Board of Directors
approved the payment of regular quarterly cash dividends on the Common Stock.
The initial quarterly rate was set at $.0825 per share, adjusted for the
Company's four-for-three stock split declared on July 20, 1994. Concurrent with
the declaration of that stock split, the Board of Directors also increased the
quarterly dividend rate to $.095 per share, payable on both old and new shares.
44
<PAGE> 45
ITEM 6. SELECTED FINANCIAL DATA
The following summary of selected condensed consolidated financial
information and other data of the Company is qualified in its entirety by
reference to the detailed information and consolidated financial statements
thereto.
<TABLE>
<CAPTION>
//
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
FINANCIAL POSITION AT JUNE 30,
<S> <C> <C> <C> <C> <C>
Assets ................................................ $528,169 $515,888 $519,459 $540,478 $506,706
Cash and investment securities (1) .................... 128,719 95,702 113,251 117,638 113,138
Loans receivable, net (2) ............................. 297,533 308,700 327,095 357,915 363,979
Mortgage-backed securities ............................ 83,995 92,558 60,089 41,174 4,107
Excess cost over fair value of net assets
acquired and other intangibles, net (3) ............ 780 1,270 1,863 3,231 4,132
Deposits .............................................. 449,318 450,819 459,993 496,929 484,395
Other borrowed funds (4) .............................. 18,122 10,468 10,887 1,259 89
Obligations under capital leases ...................... 119 120 221 322 423
Stockholders' equity (5) .............................. 53,774 48,503 41,853 35,578 16,337
OPERATING RESULTS FOR YEAR ENDED JUNE 30,
Interest income ....................................... $ 35,979 $ 35,550 $ 39,066 $ 44,291 $ 46,932
Interest expense ...................................... 17,798 16,487 19,305 27,782 33,412
Provision for loan losses ............................. 82 487 595 749 1,496
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ... 18,099 18,576 19,166 15,760 12,024
Gain (loss) on sales of interest-earning assets ....... -- -- -- 364 35
Gain on sale of branches .............................. -- -- 1,000 -- --
Other noninterest income .............................. 2,755 2,484 2,110 2,270 2,386
Amortization of excess of cost over
fair value of net assets acquired (6) ............... 423 525 1,302 853 990
Other noninterest expense ............................. 11,818 10,829 11,510 10,820 10,099
-------- -------- -------- -------- --------
Income before income tax expense ...................... 8,613 9,706 9,464 6,721 3,356
Income tax expense (7) ................................ 3,146 3,502 3,952 2,540 2,244
-------- -------- -------- -------- --------
Income before cumulative effect of
change in accounting principle ...................... 5,467 6,204 5,512 4,181 1,112
Cumulative effect at July 1, 1993 of
change in accounting for income taxes (8) ........... -- 764 -- -- --
-------- -------- -------- -------- --------
Net income ............................................ $ 5,467 $ 6,968 $ 5,512 $ 4,181 $ 1,112
======== ======== ======== ======== ========
Net income per share (9) .............................. $ 1.58 $ 2.07 $ 1.67 $ 1.36 N/A
Dividends per share ................................... $ .38 $ .25 -- -- --
Average common shares and common stock
equivalents outstanding (9) ......................... 3,464 3,372 3,309 3,071 --
OTHER DATA AS OF AND FOR YEAR ENDED JUNE 30,
Average interest rate spread .......................... 3.32% 3.54% 3.79% 3.23% 2.88%
Net yield on average interest-earning assets .......... 3.67% 3.79% 4.03% 3.36% 2.86%
Return on average total assets ........................ 1.05% 1.32% 1.07% 0.80% 0.22%
Return on average equity .............................. 10.70% 15.33% 14.23% 17.72% 6.76%
Equity as a percent of year-end total assets .......... 10.18% 9.40% 8.06% 6.58% 3.22%
Dividend payout ratio (10) ............................ 22.11% 12.65% -- -- --
Tangible equity as a percent of year-end total assets . 10.03% 9.16% 7.70% 5.98% 2.41%
Other noninterest expense (excluding amortization of
intangibles) as a percent of average total assets ... 2.28% 2.05% 2.23% 2.08% 1.99%
Ratio of non-performing 11 assets to total assets ..... 0.16% 0.19% 0.37% 0.50% 0.74%
Ratio of allowance for loan losses to gross loans ..... 0.76% 0.72% 0.71% 0.63% 0.51%
Ratio of allowance for loan losses to non-accrual loans
and loans past due more than 90 days ................ 1034.07% 490.03% 186.86% 196.33% 97.26%
Ratio of allowance for loan losses to non-performing
assets .............................................. 268.18% 228.72% 125.49% 86.89% 51.10%
Number of (at end of period):
Real estate loans outstanding ....................... 5,870 6,322 7,132 7,992 8,301
Savings accounts .................................... 52,614 54,026 55,531 63,744 65,545
Banking offices (12) ................................ 13 13 13 18 18
</TABLE>
45
<PAGE> 46
(1) Cash and investment securities consists of cash, interest-earning
deposits in other banks, federal funds sold, certificates of deposit,
and investment securities.
(2) Includes loans held for sale.
(3) Excess of cost over fair value of net assets acquired has been restated
in accordance with SFAS No. 72 for each period presented.
(4) Other borrowed funds includes advances from the FHLB of Cincinnati.
Also includes obligation of the Employee Stock Ownership Plan ("ESOP")
of Heritage Federal until its refinancing in January 1995.
(5) Represents retained earnings only prior to fiscal year 1992.
(6) Excess of cost over fair value of net assets acquired and the related
amortization expense have been restated in accordance with SFAS No. 72
for each period presented.
(7) During 1992, Heritage Federal entered into transactions involving its
portfolio of FHLB stock. These resulted in the realization of capital
gains for income tax purposes that were offset by capital loss
carryforwards from prior years. As a result, in accordance with SFAS
No. 96, deferred tax liabilities were reduced by $469,000 during the
year ended June 30, 1992. The Bank's effective tax rates for fiscal
years 1995, 1994, 1993, 1992 and 1991 were 36.5%, 36.1%, 41.8%, 37.8%
and 66.9%, respectively. See Note 11 of Notes to Consolidated Financial
Statements.
(8) During the first quarter of fiscal year 1994, Heritage adopted SFAS No.
109, "Accounting for Income Taxes". The cumulative effect of this
change in accounting principle on prior periods added $764,000 or $.22
per share to net income for that fiscal year.
(9) Pro forma primary earnings per share for fiscal year 1992 are
calculated by dividing net earnings by 3,071,000 shares of the Common
Stock issued at conversion and common stock equivalents, which include
certain stock options.
(10) Based on net income before cumulative change in accounting principle.
(11) Non-performing assets are composed of loans over 90 days delinquent,
restructured loans and real estate owned.
(12) All of Heritage Federal's offices are full-service offices. The lower
number of banking offices since 1992 reflects the August 1992 sale of
five branches.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL. On March 30, 1992, Heritage Federal converted from mutual to
stock form and became a wholly owned subsidiary of Heritage. The sole operations
of Heritage consist of those of Heritage Federal and its subsidiary, Citizens
Financial Corporation ("Citizens Financial").
The principal business of Heritage Federal consists of accepting
deposits from the general public through its branches and investing these funds
in loans secured by one- to four-family residential properties located in its
market areas. Heritage Federal also maintains a substantial investment portfolio
and originates consumer loans and limited amounts of commercial and commercial
real estate loans secured by properties in its market areas. Additionally,
Heritage Federal offers trust services and through Citizens Financial sells
title insurance. In August 1993, Citizens Financial began to sell annuities and
securities from Heritage Federal's locations via an arrangement with a
third-party vendor, and this arrangement continued throughout most of fiscal
year 1995.
Heritage Federal's net income is dependent primarily on its net
interest income, which is the difference between interest earned on its loans
and investments and the interest paid on interest-bearing liabilities. The net
income of Heritage Federal also is affected by the generation of noninterest
income such as commissions, income from trust activities, service charges and
other fees, rental income, and gains or losses on the sale of loans and
investment securities. In addition, net income is affected by the level of
operating expenses, the amount of loan loss reserves set aside each year, and
the amount of income tax expense.
46
<PAGE> 47
Heritage Federal's operations, as with those of the entire thrift
industry, are significantly affected by prevailing economic conditions,
competition, and the monetary and fiscal policies of governmental agencies.
Lending activities are influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, and the availability of
funds. Deposit flows and costs of funds are influenced by prevailing market
rates of interest, primarily on competing investments, account maturities, and
the levels of personal income and savings in the market area.
ASSET/LIABILITY MANAGEMENT. Net interest income, the primary component
of Heritage Federal's net income, arises from both the difference between the
yield on interest-earning assets and the cost of interest-bearing liabilities,
and the relative amounts of such assets and liabilities. In the early 1980s,
Heritage Federal's primary interest-earning assets, like those of most thrift
institutions at the time, consisted of long-term, fixed-rate mortgages.
Conversely, its liabilities were principally short-term deposits that were
highly sensitive to interest rate changes. Consequently, during the early 1980s,
as general interest rate levels rose, the interest rates on Heritage Federal's
loans and securities did not reprice as quickly to higher levels as did the
rates on its deposits. As a result, Heritage Federal's interest rate spread was
adversely affected during that time.
Heritage Federal has sought to reduce its exposure to changes in
interest rates by matching more closely the effective maturities or repricings
of its interest-sensitive assets and liabilities. In accordance with Heritage
Federal's interest rate risk policy, management has emphasized the origination
and/or purchase of adjustable-rate mortgages and mortgage-backed securities,
intermediate-term fixed-rate mortgages, medium-term U.S. agency and
government-sponsored enterprise ("GSE") notes, and short-term consumer loans.
Because of generally moderate interest rate levels during the past three years,
however, there has been increased consumer interest in fixed-rate loans. In
order to maintain market share under these changing conditions, Heritage Federal
began to originate fixed-rate loans for potential resale to secondary market
investors and for its portfolio. In all cases, originations of long-term,
fixed-rate mortgages are underwritten according to guidelines of the Federal
Home Loan Mortgage Corporation ("the FHLMC") and the Federal National Mortgage
Association ("the FNMA"). Since February 1994, higher interest rates have slowed
the trend toward fixed-rate lending and have created renewed interest in
adjustable-rate loans, enabling Heritage Federal to again increase the mix of
adjustable-rate loans in its overall loan balances as compared with the fiscal
year ended June 30, 1992. However, because of the moderate rise in mortgage
rates during most of Heritage Federal's fiscal year ended June 30, 1995, the
adjustable-rate component of Heritage Federal's portfolio of mortgage loans and
mortgage-backed securities increased only marginally to 68%, with fixed-rate
loans comprising 32% as compared to the portfolio mix at June 30, 1994, of 67%
and 33%, respectively. The portfolio mix at June 30, 1992, was 53% and 47%,
respectively.
In addition, Heritage Federal manages its interest rate risk in part by
maintaining a substantial portfolio of short-term investments. The weighted
average life of its investment portfolio at June 30, 1995, was approximately 3.9
years.
INTEREST RATE SENSITIVITY ANALYSIS. As a result of Heritage Federal's
interest rate risk management policy and management's strategy emphasizing the
origination of short-term and/or adjustable-rate mortgages, Heritage Federal's
excess of interest-bearing liabilities over interest-earning assets maturing or
repricing within one year (i.e., its "one-year gap") at June 30, 1995, was
estimated to be $49,523,000 or a negative 9.38% of total assets versus
$47,844,000 or a negative 9.27% at June 30, 1994. This marginal increase in
negative gap position primarily reflected the moderate increase in market
interest rates during most of fiscal year 1995 that resulted in the shifting
behavioral pattern of deposit customers' preference for higher-yielding,
longer-term certificate of deposit accounts, versus lower-yielding,
transaction-type accounts such as demand and passbook savings accounts. The
changing composition of liability accounts resulted in a lower amount of
liability sensitivity to short-term interest rate fluctuations at June 30, 1995,
compared with the previous fiscal year. This was functionally mirrored by a
similar reduction of short-term loans receivable/mortgage-backed securities
balances, thereby resulting in a minimal change in Heritage Federal's one-year
gap position. The increase in market interest rates during fiscal year 1995 also
continued the slowdown in the rate of loan prepayments, extending the duration
of Heritage Federal's loans and mortgage-backed securities. Management considers
its one-year gap to represent an acceptable balance between reducing Heritage
Federal's interest rate risk and enhancing its interest rate spread. However, as
a result of Heritage Federal's negative one-year gap, Heritage Federal's net
interest income would be adversely affected by increases in prevailing interest
rates.
47
<PAGE> 48
The following table sets forth the interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1995, which
are expected to mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Over
Three Three Months Over One Over Five Over Ten Over
Months Through Through Through Through Twenty
or Less One Year Five Years Ten Years Twenty Years Years Total
-------- ------------ ---------- --------- ------------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net .................. $ 54,628 $ 86,410 $ 130,374 $21,408 $ 4,713 $ 0 $297,533
Mortgage-backed securities ............. 23,153 33,045 18,089 5,054 3,008 1,646 83,995
Investment securities .................. 14,276 11,768 55,209 25,157 431 0 106,841
Federal funds sold ..................... 7,000 0 0 0 0 0 7,000
Interest-earning deposits .............. 5,593 0 0 0 0 0 5,593
FHLB stock ............................. 0 0 0 0 0 4,057 4,057
-------- --------- --------- ------- ------- ------- --------
Total ................................ 104,650 131,223 203,672 51,619 8,152 5,703 505,019
-------- --------- --------- ------- ------- ------- --------
INTEREST-BEARING LIABILITIES:
Total NDA deposits ..................... 9,434 23,605 48,728 0 0 0 81,767
Passbook savings ....................... 5,132 14,955 48,346 0 0 0 68,433
Certificates of deposit ................ 72,823 148,158 67,463 99 0 0 288,543
Other borrowed money ................... 10,687 602 3,683 3,150 119 0 18,241
-------- --------- --------- ------- ------- ------- --------
Total ................................ 98,076 187,320 168,220 3,249 119 0 456,984
-------- --------- --------- ------- ------- ------- --------
INTEREST SENSITIVITY GAP ............... $ 6,574 $ (56,097) $ 35,452 $48,370 $ 8,033 $ 5,703 $ 48,035
======== ========= ========= ======= ======= ======= ========
CUMULATIVE INTEREST SENSITIVITY
GAP .................................. $ 6,574 $ (49,523) $ (14,071) $34,299 $42,332 $48,035 $ 48,035
======== ========= ========= ======= ======= ======= ========
RATIO OF INTEREST-EARNING ASSETS TO
INTEREST-BEARING LIABILITIES ......... 106.70% 70.05% 121.07% 1588.77% 6850.42% 0.00% 110.51%
======== ========= ========= ======= ======= ======= ========
RATIO OF CUMULATIVE INTEREST SENSITIVITY
GAP TO TOTAL ASSETS .................. 1.24% -9.38% -2.66% 6.49% 8.01% 9.09% 9.09%
======== ========= ========= ======= ======= ======= ========
</TABLE>
The table is based on a number of assumptions regarding the future
annual prepayment rate for Heritage Federal's various categories of loans and
mortgage-backed securities and the attrition rate of certain deposits.
Certain shortcomings are inherent in the method of analysis presented
in the table above. The data provided to Heritage Federal by its independent
consultant are derived from information reported by savings institutions in
urban areas in Tennessee. Use of other data derived from non-urban or
non-Tennessee savings institutions could lead to materially different results.
Although certain assets and liabilities may have similar maturities or periods
of repricing, they may react in different degrees to changes in market interest
rates. The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types of assets and liabilities may lag behind changes in market
interest rates. Certain assets, such as adjustable-rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. In the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. The ability of borrowers to service their debt may
decrease in the event of an interest rate increase.
48
<PAGE> 49
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS AND RATES. The following
table sets forth information regarding average balances of interest-earning
assets and interest-bearing liabilities, as well as the weighted average yields
earned on Heritage Federal's assets and the weighted average interest rates paid
on Heritage Federal's liabilities, together with the net yield on
interest-earning assets for the past three fiscal years. Non-accrual loans have
been included in the average balances of loans receivable.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ------- ------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net ........... $305,124 $ 24,771 8.12% $314,336 $25,449 8.10% $342,583 $30,221 8.82%
Investment securities ........... 90,970 5,561 6.11% 87,649 5,042 5.75% 79,995 5,152 6.44%
Mortgage-backed securities ...... 87,805 5,034 5.73% 86,056 4,539 5.27% 48,977 3,075 6.28%
Federal funds sold .............. 3,256 172 5.28% 6,708 203 3.03% 8,409 302 3.59%
Interest-earning deposits ....... 3,767 192 5.10% 4,721 135 2.86% 6,266 160 2.55%
FHLB stock ...................... 3,919 249 6.35% 3,705 182 4.91% 3,540 156 4.41%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets . 94,841 35,979 7.27% 503,175 35,550 7.07% 489,770 39,066 7.97%
Non-interest-earning assets ..... 23,538 23,993 26,022
-------- -------- --------
Total assets .................. $518,379 $527,168 $515,792
======== ======== ========
INTEREST-BEARING LIABILITIES:
Demand accounts ................. $ 92,440 $ 2,339 2.53% $100,423 $ 2,361 2.35% $ 90,336 $ 2,517 2.79%
Passbook savings ................ 79,116 2,176 2.75% 91,075 2,551 2.80% 82,091 2,747 3.35%
Certificates of deposit ......... 262,357 12,315 4.69% 262,928 10,934 4.16% 280,539 13,610 4.85%
Other borrowed money ............ 16,651 968 5.81% 12,255 641 5.23% 8,631 431 4.99%
-------- -------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities ................ 450,564 17,798 3.95% 466,681 16,487 3.53% 461,597 19,305 4.18%
Non-interest-bearing liabilities* 16,719 15,034 15,454
-------- -------- --------
Total liabilities ............. 467,283 481,715 477,051
Stockholders' Equity ............ 51,096 45,453 38,741
-------- -------- --------
Total liabilities and
stockholders' equity ....... $518,379 $527,168 $515,792
======== ======== ========
NET INTEREST INCOME ............. $ 18,181 $19,063 $19,761
======== ======= =======
INTEREST RATE SPREAD ............ 3.32% 3.54% 3.79%
====== ====== ======
NET YIELD ON INTEREST-EARNING
ASSETS ....................... 3.67% 3.79% 4.03%
====== ====== ======
RATIO OF INTEREST-EARNING ASSETS
TO INTEREST-BEARING LIABILITIES 109.83% 107.82% 106.10%
====== ====== ======
</TABLE>
* Includes average non-interest-bearing demand deposits of $9,060,000,
$10,940,000 and $8,609,000 during fiscal years 1995, 1994 and 1993,
respectively.
49
<PAGE> 50
RATE/VOLUME ANALYSIS. The table below sets forth certain information
regarding changes in interest income and interest expense of Heritage Federal
for the periods indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes attributable to:
(1) changes in volume (changes in volume multiplied by old rate); and (2)
changes in rate (change in rate multiplied by old volume). Changes in
rate-volume (changes in rate multiplied by changes in volume) are allocated
between changes in volume and changes in rate on a proportional basis. Average
balances are derived from daily balances.
<TABLE>
<CAPTION>
1995 vs. 1994 1994 vs. 1993
------------------------------ -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------ -------------------------------
Volume Rate Total Volume Rate Total
------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable, net ............... $(748) $ 70 $ (678) $(2,389) $(2,383) $(4,772)
Investment securities ............... 196 323 519 468 (578) (110)
Mortgage-backed securities .......... 94 401 495 2,021 (557) 1,464
Federal funds sold .................. (136) 105 (31) (56) (43) (99)
Interest-earning deposits ........... (32) 89 57 (43) 18 (25)
FHLB stock .......................... 11 56 67 8 18 26
===== ======= ======= ======= ======= =======
Total interest-earning assets .... $(615) $ 1,044 $ 429 $ 9 $(3,525) $(3,516)
===== ======= ======= ======= ======= =======
INTEREST EXPENSE:
Total NDA deposits .................. $(195) $ 173 $ (22) $ 263 $ (419) $ (156)
Passbook savings .................... (330) (45) (375) 281 (477) (196)
Certificates of deposit ............. (24) 1,405 1,381 (817) (1,859) (2,676)
----- ------- ------- ------- ------- -------
Total deposits ................... (549) 1,533 984 (273) (2,755) (3,028)
Other borrowed money ................ 249 78 327 189 21 210
----- ------- ------- ------- ------- -------
Total interest-bearing liabilities (300) 1,611 1,311 (84) (2,734) (2,818)
===== ======= ======= ======= ======= =======
Change in net interest income ......... $(315) $ (567) $ (882) $ 93 $ (791) $ (698)
===== ======= ======= ======= ======= =======
</TABLE>
FINANCIAL CONDITION. Heritage Federal's total assets increased 2.4% to
$528,169,000 at June 30, 1995, compared with $515,888,000 at June 30, 1994. This
change primarily reflected an increase in investment securities and cash and
cash equivalents from year to year, offset in part by a decline in loans
receivable and mortgage-backed securities.
Heritage Federal adopted on a prospective basis Statement of Financial
Accounting Standard ("SFAS") No. 115 at the beginning of fiscal year 1995, and
in doing so, designated a portion of its investment portfolio as available for
sale. Securities designated as available for sale consist of U. S. Treasury
notes with laddered maturities, amounting to approximately $20,000,000 in
principal face value at June 30, 1995. The fair value of these securities at
June 30, 1995, with unrealized gains or losses, net of taxes, of approximately
$84,000 reflected as a separate component of stockholders' equity, totaled
$20,213,000. At that date, available for sale securities had a weighted average
life of approximately 1.1 years. Heritage Federal anticipates the available for
sale portion of its investment portfolio will be maintained as necessary in
order to satisfy its liquidity needs. In the event funds are needed for deposit
account withdrawals, loan demand or other liquidity purposes, these securities
could be liquidated.
Cash and cash equivalents increased 46.8% to $21,878,000 or 4.1% of
total assets at June 30, 1995, from $14,906,000 or 2.9% of total assets at June
30, 1994.
Net loans receivable declined 3.6% to $297,533,000 at June 30, 1995,
compared with $308,700,000 at June 30, 1994. This change reflected the net
repayment of loans, which slowed significantly during fiscal 1995 from the
year-earlier period due to higher market rates and moderating refinancing
activity, in excess of new loan originations, which declined to $51,536,000 in
fiscal year 1995 compared with $81,902,000 in fiscal year 1994 due
50
<PAGE> 51
to a declining consumer demand for adjustable-rate mortgage loans, which are
Heritage Federal's principal source of loan originations; increased competition
in the mortgage origination business; a general slowdown in new home
construction; and a general decline in the volume of residential loan
refinancings.
The cash inflow from the net repayment of loans during fiscal year 1995
together with the proceeds of matured and called investment securities were
invested primarily in GSE debt obligations issued by the FHLMC, the FNMA, and
the FHLB System. Terms of these securities were more favorable than investments
in mortgage-backed securities, because of shorter terms and competitive yields
and had risk characteristics consistent with Heritage Federal's philosophy on
interest rate risk. During fiscal year 1994, investable cash flows were deployed
primarily toward purchases of adjustable-rate mortgage-backed securities as part
of Heritage Federal's interest rate risk management in a lower rate environment.
By investing in mortgage-backed securities, Heritage Federal was able to obtain
higher yields than those available on other government and agency securities
with similar repricing characteristics at the time. Because borrowers on the
mortgages underlying such securities generally have the right to prepay their
loans without penalty, however, mortgage-backed securities expose Heritage
Federal to the risk that the security will prepay at a faster-than-anticipated
rate in a declining rate environment. Conversely, in a rising rate environment,
borrowers may prepay at a slower rate, effectively extending the maturity of
these securities and also compressing Heritage Federal's net interest spread as
its cost of funds rises. Heritage Federal seeks to avoid these risks by
investing in adjustable-rate, mortgage-backed securities. Heritage Federal
invests solely in mortgage-backed securities issued by the government-sponsored
enterprises such as the FNMA and the FHLMC, or guaranteed by the Government
National Mortgage Association ("GNMA"). These securities include fixed- and
adjustable-rate collateralized mortgage obligations, sometimes included in the
definition of mortgage derivatives, but which do not meet the regulatory
definition of high risk derivatives.
Investments and mortgage-backed securities increased 10.1% to
$190,835,000 at June 30, 1995, from $173,354,000 as of June 30, 1994.
Investments totaled $106,841,000 at the end of fiscal year 1995, or
approximately 20.2% of Heritage Federal's total assets at June 30, 1995,
compared with $80,796,000 or 15.7% of total assets at June 30, 1994. Heritage
Federal's investment in mortgage-backed securities declined to $83,995,000 at
June 30, 1995, from $92,558,000 as of June 30, 1994. Adjustable-rate products
comprised 60.4% and 59.4% of total mortgage-backed securities as of the end of
fiscal years 1995 and 1994, respectively. Collateralized mortgage obligations
("CMOs") at June 30, 1995, and 1994 totaled $14,942,000 and $5,615,000,
respectively. The increase in CMO balances was funded primarily by the proceeds
of an advance obtained from the FHLB of Cincinnati. These securities offered a
favorable yield differential over the cost of the advance, thereby generating
additional net interest income for Heritage Federal during the fiscal year.
Heritage Federal's deposits declined 0.3% during fiscal year 1995 to
$449,318,000 from $450,819,000 as of June 30, 1994. Heritage Federal relied both
upon advances from the FHLB of Cincinnati and internally generated earnings
during fiscal year 1995 to help fund its increase in interest-earning assets.
Advances from the FHLB totaled $18,122,000 at June 30, 1995, compared with
$9,587,000 at June 30, 1994. The increase in borrowings from the FHLB of
Cincinnati during fiscal year 1995 was used toward the purchase of CMOs.
RESULTS OF OPERATIONS. Net income for fiscal year 1995 decreased 21.5%
to $5,467,000 or $1.58 per share from $6,968,000 or $2.07 per share in fiscal
year 1994. All per share amounts have been adjusted for a four-for-three stock
split declared in July 1994 and a three-for-two stock split declared in August
1993. Heritage's earnings for fiscal year 1994 included $764,000 in
non-recurring income attributable to the adoption of the new standard for
accounting for income taxes. Net income before adoption of the new accounting
standard declined $737,000, or 11.9%, from fiscal year 1994. Heritage's lower
earnings for fiscal year 1995 reflected primarily a decline in net interest
income before provision for loan losses and an increase in noninterest expense,
which more than offset a lower provision for loan losses in fiscal year 1995 and
slightly higher noninterest income.
51
<PAGE> 52
Net income for fiscal year 1994, excluding the impact of the adoption of
a new accounting standard for income taxes, increased 12.6% from the $5,512,000
or $1.67 per share reported in fiscal year 1993. In general, the increase in
fiscal year 1994 compared with fiscal year 1993 reflected a reduction in the
provision for loan losses and lower noninterest expense, which more than offset
a decline in net interest income and total non-interest income.
Net Interest Income. Net interest income declined 4.6% to $18,181,000 in
fiscal year 1995 from $19,063,000 in fiscal year 1994. Net interest income for
fiscal year 1994 declined 3.5% from $19,761,000 in fiscal year 1993.
The three-year period ended June 30, 1995, reflected a generally
favorable interest rate environment, although a number of rate increases
implemented by the Federal Reserve beginning in February 1994 resulted in higher
rate levels in the last half of fiscal year 1994 and much of fiscal year 1995.
Reflecting this increase midway through fiscal year 1994, Heritage Federal's
average interest rate spread in fiscal year 1995 declined to 3.32% from 3.54% in
fiscal year 1994 and 3.79% in fiscal year 1993.
Heritage Federal's net yield on average interest-earning assets declined
to 3.67% in fiscal 1995 from 3.79% in fiscal year 1994, again reflecting
increases in interest rates throughout most of fiscal year 1995. Heritage
Federal's net yield declined in fiscal year 1994 from 4.03% in fiscal year 1993.
Heritage Federal's average interest-earning assets decreased 1.7% to
$494,841,000 in fiscal year 1995 from $503,175,000 in fiscal year 1994,
reflecting primarily a decline in net loans receivable. Interest-earning assets
in fiscal year 1994 increased 2.7% from $489,770,000 during fiscal year 1993,
due in general to an increase during the year in investment and mortgage-backed
securities.
During the three-year period ended June 30, 1995, however, Heritage
Federal steadily increased its ratio of interest-earning assets to
interest-bearing liabilities to 109.8% during fiscal year 1995 from 107.8% in
fiscal year 1994 and 106.1% in fiscal year 1993. Heritage Federal achieved this
increase primarily by increasingly funding its activities with its net earnings
rather than liabilities. Likewise, the average yields on interest-earning assets
for fiscal years 1995, 1994 and 1993 were 7.27%, 7.07% and 7.97%, respectively.
The increase in average yields during the most recent fiscal year reflects
increases in yields on mortgage-backed securities and adjustable-rate mortgage
loans.
Because of the increase in Heritage Federal's average yield on its
interest-earning assets from fiscal year 1994 to fiscal year 1995, and the
increasing ratio of interest-earning assets to interest-bearing liabilities,
interest income increased to $35,979,000 in fiscal year 1995 from $35,550,000 in
fiscal year 1994. Interest income in fiscal year 1993 totaled $39,066,000.
Reflecting the same interest rate trends, interest expense increased to
$17,797,000 in fiscal year 1995 from $16,487,000 in fiscal year 1994. Interest
expense in fiscal year 1993 totaled $19,305,000. The increase during fiscal year
1995 reflects the increase in the average cost of interest-bearing liabilities
as a result of the general rise in market rates as well as Heritage Federal's
continued reliance on higher-costing FHLB advances and certificates of deposit
as funding sources. As with the yields on interest-earning assets, costs on
interest-bearing liabilities fell in fiscal year 1994 and increased in fiscal
year 1995. The average cost of interest-bearing liabilities over the past three
years was 3.95% in fiscal year 1995, 3.53% in fiscal year 1994 and 4.18% in
fiscal year 1993.
Average interest-bearing liabilities declined to $450,564,000 in fiscal
year 1995 compared with $466,681,000 in fiscal year 1994, reflecting primarily a
decrease in lower-costing demand and passbook savings accounts due to greater
competition from other investment vehicles. Average interest-bearing liabilities
for fiscal year 1994, however, increased from $461,597,000 during fiscal year
1993 as funds flowed into passbook accounts during a period of lower interest
rates.
52
<PAGE> 53
Provision for Loan Losses. For fiscal years 1995, 1994, and 1993,
Heritage Federal provided $82,000, $487,000 and $595,000, respectively, for loan
losses. The allowance for loan losses is increased by charges against income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on Heritage Federal's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers' ability to repay, estimated value of any underlying
collateral, and current economic conditions. While management believes that it
has established the allowance in accordance with generally accepted accounting
principles and has taken into account the views of its regulators and the
current economic environment, there can be no assurance that in the future
Heritage Federal's regulators or its economic environment will not require
further increases in the allowance.
The decline in the amount provided for loan losses in fiscal year 1995
reflected a significant improvement in Heritage Federal's non-performing assets.
At June 30, 1995, the allowance for possible loan losses represented 1034.07% of
total non-accrual loans and loans past due more than 90 days. This compared with
490.03% at June 30, 1994, and 186.86% as of June 30, 1993. At June 30, 1995,
1994 and 1993, Heritage Federal's ratio of allowance for loan losses to
non-performing assets, including real estate owned, was 268.18%, 228.72% and
125.49%, respectively.
Noninterest Income. Noninterest income totaled $2,755,000 in fiscal year
1995, $2,484,000 in fiscal year 1994, and $3,110,000 in fiscal 1993. The higher
amount in fiscal year 1993 reflected a gain of $1,000,000 on the sale of five
branches during the year. Noninterest income, other than gains or losses on the
sale of the branches and interest-earning assets, increased moderately over the
three-year period ended June 30, 1995, aggregating $2,755,000, $2,484,000 and
$2,110,000 in fiscal years 1995, 1994 and 1993, respectively, reflecting
primarily an increase in other ancillary services such as checking fee income
and fee income from the sale of securities and annuities.
Noninterest Expense. Noninterest expense totaled $12,242,000 in fiscal
1995, $11,354,000 in fiscal year 1994, $12,813,000 in fiscal year 1993. The
increase in noninterest expense in fiscal year 1995 reflected higher
compensation and benefits expense, due to normal salary increases for personnel
and greater benefit costs, and because of the revision to certain compensation
plans in fiscal year 1994 which became effective during fiscal year 1995. The
decline in noninterest expense during fiscal year 1994 was due primarily to the
decrease in amortization expense associated with the excess of cost over fair
value of net assets acquired (i.e., goodwill) compared with fiscal year 1993,
during which a portion of the goodwill was written off because of Heritage
Federal's sale of the related assets. The decline also reflected lower
compensation-related expenses, due to revisions in certain compensation plans
during the year, along with lower communications and other office expense and
real estate owned expense and provisions.
Income Taxes. The effective income tax rates for fiscal years 1995, 1994
and 1993 were 36.5%, 36.1% and 41.8%, respectively, compared with the maximum
statutory corporate income tax rate of 38.0% during those periods. The higher
effective tax rate in fiscal year 1993 reflected tax on the gain on the sale of
five branches during the first quarter; the write-off of goodwill associated
with those branches was not tax deductible. Effective at the beginning of fiscal
year 1994, Heritage adopted SFAS No. 109, Accounting for Income Taxes, on a
prospective basis. The cumulative effect of this new accounting standard on
prior periods added $764,000 or $.22 per share to net income for fiscal year
1994.
IMPACT OF NEW ACCOUNTING STANDARDS. In December 1991, the Financial
Accounting Standards Board ("the FASB") issued SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. SFAS No. 107 requires disclosures of
information about the fair value of all financial instruments. Such disclosure
is effective for fiscal years ending after December 15, 1992. Heritage adopted
SFAS No. 107 for the fiscal year ended June 30, 1993.
Heritage adopted SFAS No. 109, Accounting for Income Taxes, on a
prospective basis during the first quarter of fiscal year 1994. The cumulative
effect of this new accounting standard on prior periods added $764,000 or $.22
per share to net income for fiscal year 1994.
53
<PAGE> 54
The FASB issued SFAS No. 114, Accounting by Creditors for Impairment of
a Loan, which amended SFAS No. 5, Accounting for Contingencies, and SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings. SFAS No.
114, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure, requires the use of the discounted
cash flow method for measuring impairment of loans when it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. If expedient, the creditor may use a loan's
observable market price or the fair value of any collateral.
Heritage adopted SFAS No. 114 on a prospective basis as of July 1, 1993
for the fiscal year ending June 30, 1994. The adoption of SFAS No. 114 did not
have a material effect on Heritage's financial position or results of
operations.
The FASB issued SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, which supersedes SFAS No. 12, Accounting for Certain
Marketable Securities and amends SFAS No. 65, Accounting for Certain Mortgage
Banking Activities. SFAS No. 115 became effective for fiscal years beginning
after December 15, 1993. SFAS No. 115 requires investments in certain debt and
equity securities to be classified into three categories -- held to maturity,
available for sale, or trading. Securities classified into the held to maturity
category will be accounted for at cost, adjusted for amortization of premiums
and discounts. Securities in the remaining two categories will be carried at
market value, with changes in the market value of securities available for sale
being accounted for as changes in stockholders' equity and changes in the market
value of trading account securities being recognized in income.
Heritage adopted SFAS No. 115 on a prospective basis in the first
quarter of fiscal year 1995. The adoption of SFAS No. 115 did not have a
material effect on Heritage's financial position.
LIQUIDITY AND CAPITAL RESOURCES. Heritage Federal's principal sources of
funds for operations are deposits from its primary market areas, principal and
interest payments on loans and mortgage-backed securities, and proceeds from
maturing investment securities. Additionally, Heritage Federal may borrow funds
from the FHLB of Cincinnati or sell loans in order to increase liquidity.
Heritage Federal's deposits declined 0.3% during fiscal year 1995 to
$449,318,000 from $450,819,000 as of June 30, 1994. During fiscal year 1995,
Heritage Federal increased its advances from the FHLB of Cincinnati for the
purpose of increasing its net interest income through the purchase of additional
CMOs. Advances from the FHLB of Cincinnati totaled $18,122,000 at June 30, 1995,
compared with $9,587,000 at June 30, 1994.
Heritage Federal must satisfy three capital standards, as set by the
Office of Thrift Supervision (the "OTS"). These standards include a ratio of
core capital to adjusted total assets of 3.0%, a tangible capital standard
expressed as 1.5% of total adjusted assets, and a combination of core and
"supplementary" capital equal to 8.0% of risk-weighted assets. The OTS recently
finalized regulations that add an interest rate risk component to capital
requirements under certain circumstances. Heritage Federal does not expect that
this regulation will require it to reduce its capital materially for purposes of
determining compliance with its risk-based capital requirement. In addition, the
OTS has recently adopted regulations that impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than 8.0%,
a ratio of Tier 1 capital (or core capital) to risk-weighted assets of less than
4.0%, or a ratio of Tier 1 capital to adjusted total assets of less than 4.0%
(or 3.0% if the institution receives the highest rating under the OTS
examination rating system).
Heritage Federal presently exceeds all capital requirements as currently
promulgated. At June 30, 1995, Heritage Federal had tangible, core, Tier 1 to
risk-weighted assets, and risk-based capital ratios of 9.77%, 9.85%, 23.97%, and
25.00%, respectively.
54
<PAGE> 55
The following table reconciles Heritage Federal's net worth at June 30,
1995, under generally accepted accounting principles to regulatory capital
requirements:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS (UNAUDITED)
-----------------------------------------------------------------------------------------
GAAP TANGIBLE TIER 1/CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$52,378,000 $52,378,000 9.93% $52,378,000 9.92% $52,378,000 24.16%
===========
Add:
General valuation
allowances -- -- -- -- 2,247,000 1.03%
Deduct:
Goodwill 780,000 -0.15% 333,000 -0.06% 333,000 -0.15%
Unrealized gains on
Available for sale
securities 84,000 -0.01% 84,000 -0.01% 84,000 -0.04%
----------- ---- ----------- ---- ----------- -----
Regulatory
capital--computed 51,514,000 9.77% 51,961,000 9.85% 54,208,000 25.00%
Minimum capital
requirement 7,909,000 1.50% 15,832,000 3.00% 17,345,000 8.00%
----------- ---- ----------- ---- ----------- -----
Regulatory capital--excess $43,605,000 8.27% $36,129,000 6.85% $36,863,000 17.00%
=========== ==== =========== ==== =========== =====
</TABLE>
Heritage Federal must maintain liquidity ratios at certain regulatory
levels. Regulations specify the types of assets that qualify for liquidity,
which generally include cash, federal funds sold, certificates of deposit and
qualifying types of U.S. Treasury and agency securities, and other investments
having maturities of five years or less. Such investments serve as a source of
funds upon which Heritage Federal may rely to meet deposit withdrawals and for
other short-term needs. The required levels of such liquidity are calculated on
a "liquidity base" consisting of net withdrawable accounts plus borrowings due
in one year or less. Presently, Heritage Federal is required to maintain total
liquid assets as described above of at least 5% of its liquidity base.
Short-term liquid assets (maturing in one year or less) may not be less than 1%
of Heritage Federal's liquidity base.
In recent years, Heritage Federal has maintained higher levels of
liquid assets than required by regulation. Management believes that the
liquidity levels maintained are adequate to meet potential deposit outflows,
loan demand and normal operations. Its short-term ratios were 5.07%, 3.30% and
5.36% at June 30, 1995, 1994 and 1993, respectively. Total liquidity ratios were
19.25%, 16.24% and 20.59%, respectively, for the same periods.
At June 30, 1995, Heritage Federal had outstanding commitments to
originate loans totaling $1,733,000, excluding $3,492,000 in approved but unused
home equity lines of credit. Management believes that Heritage Federal's sources
of funds are sufficient to fund all of its outstanding commitments.
IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial
statements and notes thereto, presented herein, have been prepared in accordance
with generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
consideration of the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
Heritage Federal's operations. Unlike most industrial companies, however, nearly
all the assets and liabilities of Heritage Federal are monetary. As a result,
interest rates have a greater impact on Heritage Federal's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
//
55
<PAGE> 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
56
<PAGE> 57
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Heritage Federal Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Heritage Federal Bancshares, Inc. and Subsidiary as of June 30, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Heritage Federal
Bancshares, Inc. and Subsidiary at June 30, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for securities and income taxes in 1995 and
1994, respectively.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 1, 1995
57
<PAGE> 58
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,285,434 $ 9,610,848
Interest-earning deposits in financial institutions 5,592,680 2,295,206
Federal funds sold 7,000,000 3,000,000
------------ ------------
Total cash and cash equivalents 21,878,114 14,906,054
Securities available-for-sale 20,213,195 -
Securities held-to-maturity:
U.S. government and agencies and collateralized mortgage
obligations - approximate market value of $86,258,000 86,627,642 -
Mortgage-backed securities - approximate market value of
$83,012,000 83,994,659 -
Investment securities - approximate market value of
$78,754,000 - 80,796,409
Mortgage-backed securities - approximate market
value of $88,397,000 - 92,557,813
Loans receivable, net 297,533,313 308,699,625
Interest receivable 3,666,307 3,446,516
Real estate owned, net of allowance for losses of $211,771
and $262,322 at June 30, 1995 and 1994, respectively - 531,275
Premises and equipment, net 6,785,895 6,676,464
Investment in Federal Home Loan Bank stock, at cost 4,057,300 3,807,700
Excess of cost over fair value of net assets acquired and
other intangibles, net 780,132 1,270,127
Deferred income taxes 897,514 1,457,138
Other assets 1,735,008 1,738,951
------------ ------------
$528,169,079 $515,888,072
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
58
<PAGE> 59
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $449,317,977 $450,818,608
Advances from Federal Home Loan Bank 18,121,921 9,587,083
Advances from borrowers for taxes and insurance 4,027,987 3,990,598
Accrued expenses and other liabilities 2,927,221 2,107,869
Employee Stock Ownership Plan obligation - 880,885
------------ ------------
474,395,106 467,385,043
Commitments and contingencies (Notes 2, 3, 5, 12, 15, 16, 18 and 21)
Stockholders' equity:
Preferred stock of $1.00 par value, authorized 2,000,000
shares; none issued or outstanding - -
Common stock of $1.00 par value, 8,000,000 shares
authorized; issued and outstanding - 3,186,158 at June 30,
1995 and 3,172,826 at June 30, 1994 (Note 19) 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings-substantially restricted 35,070,071 30,813,111
Unrealized appreciation on available-for-sale securities,
net of tax of $51,530 in 1995 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
------------ ------------
53,773,973 48,503,029
------------ ------------
$528,169,079 $515,888,072
============ ============
</TABLE>
59
<PAGE> 60
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ----
<S> <C> <C> <C>
Interest income:
Loans $24,770,777 $25,448,506 $30,220,709
Securities available-for-sale 1,361,695 - -
Securities held-to-maturity:
U.S. government and agencies and collateralized
mortgage obligations 4,199,355 - -
Mortgage backed securities 5,034,437 - -
Investments - 5,041,697 5,151,660
Mortgage-backed securities - 4,539,140 3,074,851
Other interest-earning assets 612,630 521,327 619,111
----------- ----------- -----------
Total interest income 35,978,894 35,550,670 39,066,331
----------- ----------- -----------
Interest expense:
Deposits 16,829,466 15,846,768 18,873,962
Other borrowed money 968,030 640,513 431,042
----------- ----------- -----------
Total interest expense 17,797,496 16,487,281 19,305,004
----------- ----------- -----------
Net interest income 18,181,398 19,063,389 19,761,327
Provision for loan losses 82,247 487,346 595,140
----------- ----------- -----------
Net interest income after provision
for loan losses 18,099,151 18,576,043 19,166,187
----------- ----------- -----------
Noninterest income:
Loan fees and service charges 1,826,140 1,574,221 1,426,069
Other operating income 928,831 909,600 684,393
Gain on sale of branches - - 1,000,000
----------- ----------- -----------
Total noninterest income 2,754,971 2,483,821 3,110,462
----------- ----------- -----------
Noninterest expense:
Compensation and benefits 6,198,938 5,306,228 5,713,579
Occupancy and equipment 1,124,528 1,089,392 1,130,840
Communications and other office expenses 1,510,758 1,371,648 1,543,704
Regulatory and other insurance premiums 1,180,955 1,196,911 1,090,247
Computer processing 636,232 597,360 570,524
Real estate owned expenses, including provision
for loss (87,398) 55,744 270,340
Other operating costs 1,254,716 1,211,057 1,191,916
Amortization of excess of cost over fair value of
net assets acquired 422,873 525,336 1,301,646
----------- ----------- -----------
Total noninterest expense $12,241,602 $11,353,676 $12,812,796
=========== =========== ===========
</TABLE>
(continued)
60
<PAGE> 61
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income before income tax expense and
change in method of accounting for
income taxes $8,612,520 $9,706,188 $9,463,853
Income tax expense 3,145,666 3,501,963 3,951,634
---------- ---------- ----------
Net income before change in method
of accounting for income taxes 5,466,854 6,204,225 5,512,219
Cumulative effect of change in method
of accounting for income taxes - 764,255 -
---------- ---------- ----------
Net income $5,466,854 $6,968,480 $5,512,219
========== ========== ==========
Earnings per share:
Net income before change in method of
accounting for income taxes $1.58 $1.85 $1.67
Cumulative effect of change in method of
accounting for income taxes - .22 -
----- ----- -----
Earnings per share (Note 19) $1.58 $2.07 $1.67
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
61
<PAGE> 62
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
unrealized
depreciation
Retained on certain
Common stock Additional earnings- marketable
------------ paid-in substantially equity
Shares Amount capital restricted securities
------ ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1992 1,495,000 $1,495,000 $14,553,290 $ 20,703,246 -
Net income - - - 5,512,219 -
Proceeds from issuance of common
stock 42,468 42,468 445,915 - -
Implementation of Management
Recognition Plan, including
issuance of common stock 44,850 44,850 880,181 - -
Three for two stock split 791,159 791,159 - (791,159) -
Increases in fair value of shares held by
Management Recognition Plan
through award date - - 140,156 - -
Amortization of unearned compensation
of Management Recognition Plan - - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - - -
--------- ---------- ----------- ----------- -----
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306 -
========= ========== =========== =========== =====
</TABLE>
<TABLE>
<CAPTION>
Employee Unearned
Stock compensation of
Ownership Management
Plan Recognition
obligation Plan Total
---------- ---- -----
<S> <C> <C> <C>
Balances at June 30, 1992 $(1,173,388) - $35,578,148
Net income - - 5,512,219
Proceeds from issuance of common
stock - - 488,383
Implementation of Management
Recognition Plan, including
issuance of common stock - (925,031) -
Three for two stock split - - -
Increases in fair value of shares held by
Management Recognition Plan
through award date - (140,156) -
Amortization of unearned compensation
of Management Recognition Plan - 154,009 154,009
Reduction of Employee Stock
Ownership Plan obligation 120,348 - 120,348
----------- --------- -----------
Balances at June 30, 1993 $(1,053,040) $(911,178) $41,853,107
=========== ========= ===========
</TABLE>
(continued)
62
<PAGE> 63
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
unrealized
depreciation
Retained on certain
Additional earnings- marketable
Common stock paid-in substantially equity
Shares Amount capital restricted securities
------ ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306 -
Net income - - - 6,968,480 -
Proceeds from issuance of common
stock, including effect of three
for two stock split 6,143 6,143 88,553 (1,419) -
Cash dividend paid on common
stock at $.25 per share - - - (785,050) -
Four for three stock split 793,206 793,206 - (793,206) -
Amortization of unearned compensation
of Management Recognition Plan - - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - - -
--------- ---------- ----------- ----------- -----
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111 -
========= ========== =========== =========== =====
</TABLE>
<TABLE>
<CAPTION>
Employee Unearned
Stock compensation of
Ownership Management
Plan Recognition
obligation Plan Total
---------- ---- -----
<S> <C> <C> <C>
Balances at June 30, 1993 $(1,053,040) $(911,178) $41,853,107
Net income - - 6,968,480
Proceeds from issuance of common
stock, including effect of three
for two stock split - - 93,277
Cash dividend paid on common
stock at $.25 per share - - (785,050)
Four for three stock split - - -
Amortization of unearned compensation
of Management Recognition Plan - 201,060 201,060
Reduction of Employee Stock
Ownership Plan obligation 172,155 - 172,155
----------- --------- -----------
Balances at June 30, 1994 $ (880,885) $(710,118) $48,503,029
=========== ========= ===========
</TABLE>
(continued)
63
<PAGE> 64
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
unrealized
Retained appreciation
Additional earnings- on available-
Common stock paid-in substantially for-sale
Shares Amount capital restricted securities
------ ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111 -
Net income - - - 5,466,854 -
Adoption of change in accounting
for securities, net of tax - - - - (44,843)
Proceeds from issuance of common
stock, including effect of four
for three stock split 13,332 13,332 122,226 (1,269) -
Cash dividend paid on common
stock at $.38 per share - - - (1,208,625) -
Tax benefit from exercise of stock
options - - 67,800 - -
Tax benefit from Management
Recognition Plan - - 211,370 - -
Change in unrealized appreciation,
net of tax - - - - 128,922
Amortization of unearned compensation
of Management Recognition Plan - - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - - -
--------- ---------- ----------- ----------- --------
Balances at June 30, 1995 3,186,158 $3,186,158 $16,509,491 $35,070,071 $ 84,079
========= ========== =========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
Employee Unearned
Stock compensation of
Ownership Management
Plan Recognition
obligation Plan Total
---------- ---- -----
<S> <C> <C>
Balances at June 30, 1994 $(880,885) $(710,118) $48,503,029
Net income - - 5,466,854
Adoption of change in accounting
for securities, net of tax - - (44,843)
Proceeds from issuance of common
stock, including effect of four
for three stock split - - 134,289
Cash dividend paid on common
stock at $.38 per share - - (1,208,625)
Tax benefit from exercise of stock
options - - 67,800
Tax benefit from Management
Recognition Plan - - 211,370
Change in unrealized appreciation,
net of tax - - 128,922
Amortization of unearned compensation
of Management Recognition Plan - 355,057 355,057
Reduction of Employee Stock
Ownership Plan obligation 160,120 - 160,120
--------- --------- -----------
Balances at June 30, 1995 $(720,765) $(355,061) $53,773,973
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
64
<PAGE> 65
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480 $ 5,512,219
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in method of
accounting for income taxes - (764,255) -
Amortization of:
Excess of cost over fair value of net assets acquired 422,873 525,336 1,301,646
Discounts and premiums on securities 536,232 952,346 534,952
Deferred loan origination fees (505,384) (381,771) (60,562)
Loan discounts (753,527) (900,468) (1,056,576)
Provision for loan losses and losses on real estate 83,298 560,337 846,965
Gain on sale of branches - - (1,000,000)
Recognition of Management Recognition Plan expense 355,057 201,060 154,009
Recognition of ESOP expense 160,120 172,155 120,348
Dividends received in stock of Federal Home Loan Bank (249,600) (179,900) (156,100)
Deferred income taxes and charge in-lieu of taxes 787,264 16,554 260,000
Depreciation and amortization of premises and equipment 534,605 505,748 558,126
Increase in unearned compensation of Management
Recognition Plan - - (925,031)
Decrease (increase) in:
Other assets 71,065 28,116 4,851
Accrued interest receivable (219,791) 329,588 265,059
Increase (decrease) in:
Accrued expenses and other liabilities 820,568 (496,008) 650,624
------------ ------------ ------------
Total adjustments 2,042,780 568,838 1,498,311
------------ ------------ ------------
Net cash provided by operating activities 7,509,634 7,537,318 7,010,530
------------ ------------ ------------
Cash flows from investing activities:
Net repayments of loans 12,298,111 19,119,421 30,619,553
Principal receipts on mortgage-backed securities 8,289,568 15,847,363 9,069,390
Purchases of available-for-sale securities (3,984,063) - -
Proceeds from maturities of available-for-sale securities 6,035,681 - -
Purchases of securities held-to-maturity (64,990,375) - -
Proceeds from maturities of securities held-to-maturity 36,767,292 - -
Purchases of mortgage-backed securities - (48,754,748) (28,186,079)
Purchases of investment securities, certificates of deposit
and term federal funds sold - (49,295,935) (65,860,242)
Proceeds from maturities of investment securities and
certificates of deposit - 57,157,839 44,279,779
Proceeds from sales of foreclosed real estate 575,089 91,281 795,102
Purchases of Federal Home Loan Bank stock - - (3,400)
Cash and cash equivalents transferred in sale of branches - - (51,318,038)
Purchases of premises and equipment, net (644,036) (458,083) (501,176)
------------ ------------ ------------
Net cash used by investing activities $ (5,652,733) $ (6,292,862) $(61,105,111)
============ ============ ============
</TABLE>
(continued)
65
<PAGE> 66
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years ended June 30, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $(1,500,631) $ (9,174,309) $ 17,878,579
Net increase (decrease) in mortgage escrow funds 37,389 (30,602) (358,953)
Lease payments for obligations under capital leases (1,216) (101,100) (100,996)
Repayment of ESOP obligation (880,885) (172,155) (120,348)
Advances (repayments) from the Federal Home Loan Bank 8,534,838 (246,605) 9,748,028
Net proceeds from issuance of common stock 134,289 93,277 1,413,414
Dividends paid (1,208,625) (785,050) -
----------- ------------ ------------
Net cash provided (used) by financing activities 5,115,159 (10,416,544) 28,459,724
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,972,060 (9,172,088) (25,634,857)
Cash and cash equivalents at beginning of year 14,906,054 24,078,142 49,712,999
----------- ------------ ------------
Cash and cash equivalents at end of year $21,878,114 $ 14,906,054 $ 24,078,142
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payments made during the period for:
Interest $17,666,029 $ 16,503,090 $ 19,262,868
Income taxes $ 2,389,500 $ 3,289,871 $ 3,967,122
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Real estate foreclosures and related transfers $44,865 $70,627 $172,183
======= ======= ========
</TABLE>
The Company sold certain branches during 1993. In conjunction with that
transaction, assets sold, liabilities transferred and gain recognized were as
follows:
<TABLE>
<S> <C>
Deposits transferred $54,814,922
Premises and equipment sold, net (2,122,622)
Share loans sold (550,468)
Accrued interest and other liabilities transferred 176,206
Gain on sale (1,000,000)
-----------
Cash and cash equivalents transferred $51,318,038
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
66
<PAGE> 67
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Heritage Federal Bancshares, Inc. (the Company)
and its wholly-owned subsidiary, Heritage Federal Bank for Savings (the
Bank) and the Bank's wholly-owned subsidiary, Citizens Financial
Corporation. All significant intercompany balances and transactions are
eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents consist of federal funds sold, cash on hand, and due from
banks. Cash and due from banks includes interest-bearing deposits of
$5,592,680 and $2,295,206 at June 30, 1995 and 1994, respectively. Federal
funds sold included in cash equivalents have maturities ranging from one
to 14 days. The Bank maintained cash reserves required by the Federal
Reserve Bank amounting to $3,168,000 and $4,720,000 as of June 30, 1995
and 1994, respectively.
INVESTMENT SECURITIES - Effective July 1, 1994, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain
Investments in Debt and Equity Securities. Investments in certain debt and
equity securities are classified as either Held-to-Maturity (reported at
amortized cost), Trading (reported at fair value with unrealized gains and
losses included in earnings), or Available-for-Sale (reported at fair
value with unrealized gains and losses excluded from earnings and reported
as a separate component of shareholders' equity).
Premiums and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
Prior to the adoption of SFAS 115, investment securities were those
securities held for investment purposes which management determined they
had the ability and intent to hold to maturity. Investment securities were
stated at cost adjusted for amortization of premiums and accretion of
discounts.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities. These securities, which have been classified as
held-to-maturity in 1995, are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and
discounts are amortized using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Gains and losses on the sale of securities are determined using the
specific identification method.
67
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS RECEIVABLE - Loans receivable are stated at unpaid principal
balances, net of discounts, deferred loan origination fees, and the
allowance for loan losses.
Unearned discounts on mortgage loans purchased are amortized to interest
income using the interest method over the estimated average lives of the
loans.
The allowance for loan losses is increased by charges against income and
decreased by chargeoffs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current economic conditions. While
management believes that it has established the allowance in accordance
with generally accepted accounting principles and has taken into account
the views of its regulators and the current economic environment, there
can be no assurance that in the future the Bank's regulators or its
economic environment will not require further increases in the allowance.
Uncollectible interest on loans that are contractually 90 days or more
past due or where management has determined that such amounts may be
uncollectible is charged off or an allowance is established. The allowance
is established by a charge against interest income equal to all interest
previously accrued, and income is subsequently recognized only to the
extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments
returns to normal, in which case the loan is returned to accrual status.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114 (Statement 114), Accounting by Creditors for
Impairment of a Loan, which amended Statement 5, Accounting for
Contingencies, and Statement 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings.
Statement 114, as amended by Statement of Financial Accounting Standards
No. 118 (Statement 118), Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosure, requires the use of the discounted
cash flow method for measuring impairment of loans when it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. If expedient, the creditor may
use a loan's observable market price or the fair value of any collateral.
The Company adopted Statement 114 on a prospective basis as of July 1,
1993 for the fiscal year ending June 30, 1994. The adoption of Statement
114 did not have a material affect on the Company's financial position or
results of operations.
DISCOUNTS ON LOANS ACQUIRED THROUGH MERGERS - Discounts on loans acquired
through mergers are accreted into income principally on the interest
method over the remaining contractual terms of the respective loans,
adjusted for expected prepayments.
68
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS - Loan fees are
accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 91. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized in the statement
of income using the interest method over the contractual life of the
loans, adjusted for estimated prepayments based on the Bank's historical
prepayment experience. Commitment fees and costs relating to commitments
whose likelihood of exercise is remote are recognized over the commitment
period on a straight-line basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise is recognized over the life of the
loan as an adjustment of yield. The Bank ceases amortization of net
deferred fees on loans which are contractually 90 days or more past due or
where management has determined that such amounts may be uncollectible.
REAL ESTATE OWNED - Real estate properties acquired through loan
foreclosure or deed in lieu of foreclosure and properties classified as in
substance foreclosures are initially recorded at the lower of the related
loan balance, less any specific allowance for loss, or fair value at the
date of foreclosure. Costs subsequently incurred relating to development
and improvement of property are capitalized, whereas costs relating to
holding property are expensed. In substance foreclosed properties are
those properties where the borrower retains title but has little or no
remaining equity in the property considering its fair value; where
repayment can only be expected to come from the operation or sale of the
property; and where the borrower has effectively abandoned control of the
property or it is doubtful that the borrower will be able to rebuild
equity in the property. Property acquired by deed in lieu of foreclosure
results when a borrower voluntarily transfers title to the Bank in full
settlement of the related debt in an attempt to avoid foreclosure.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated fair value.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the related
assets. Amortization is computed on the straight-line method over the term
of the lease or the life of the assets, whichever is shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLES - The Bank is amortizing the excess of cost over fair value of
net assets acquired (goodwill) through business combinations at a constant
rate when applied to the interest-earning assets, through June 1996, which
is the estimated remaining life of the long-term interest-earning assets.
During 1993, $637,000 of goodwill relating to the branches sold was
written-off. Other intangibles amounting to $447,482 and $514,604 at June
30, 1995 and 1994, respectively, consist of value related to a branch
network acquired in 1981, which is being amortized straight line through
2001; value assigned to the management in place in the 1981 acquisition,
which is being amortized straight line over the remaining service life of
the managers through 2001; and value assigned to core deposits acquired in
1986, which is being amortized straight line through 1996.
TRUST ASSETS - Assets held by the Bank in trust capacities are not
included in the accompanying consolidated statements of financial
condition, because such items are not assets of the Bank.
69
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME TAXES - Effective July 1, 1993, the Company adopted the provisions
of the Financial Accounting Standards Board Statement No. 109 (Statement
109), Accounting for Income Taxes, on a prospective basis for the fiscal
year ending June 30, 1994. The adoption of Statement 109 resulted in an
increase of the Company's deferred income tax asset of $764,255. Prior to
that date, the Company followed Statement of Financial Accounting
Standards No. 96, Accounting for Income Taxes (Statement 96). Statements
109 and 96 require the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences
between the financial carrying amounts and the tax bases of existing
assets and liabilities. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER
On March 30, 1992, the Bank converted from a mutual savings bank to a
capital stock savings bank. The Bank issued all of its outstanding capital
stock to Heritage Federal Bancshares, Inc., a holding company for Heritage
Federal Bank for Savings. Heritage Federal Bancshares, Inc. consummated a
public offering of 2,990,000 shares of common stock (after giving effect
to stock splits) which generated net proceeds of $16,048,290 after
conversion costs totaling $1,144,210. The Bank received 99% of the net
proceeds in exchange for the stock it issued to the holding company.
At the time of conversion, the Bank established a liquidation account in
an amount equal to the Bank's net worth for the benefit of eligible
account holders at the time of conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced
their eligible deposits, and shall cease upon the closing of the accounts,
and shall never be increased. In the event of liquidation of the Bank,
such person shall be entitled, after all payments to creditors, to a
distribution from the liquidation account before any distribution to
stockholders.
Federal regulations adopted by the Office of Thrift Supervision (OTS)
impose certain limitations on the payment of dividends and other capital
distributions, including stock repurchases, by the Bank. Based upon
current OTS regulations and its capital structure at June 30, 1995, the
Bank may make capital distributions during a year up to the greater of (i)
100% of its net earnings to date during the calendar year plus an amount
equal to one-half of the amount by which its total capital-to-assets ratio
exceeded its fully phased-in capital-to-assets ratio at the beginning of
the calendar year or (ii) 75% of its net income during the most recent
four-quarter period. At June 30, 1995, approximately $19,850,000 was
available for payment of dividends from the Bank to the Company under the
above mentioned OTS restrictions. Capital distributions by the Bank are
further subject to 30-day advance written notice to the OTS.
The Company's charter authorizes 2,000,000 shares of preferred stock of
the Company, of $1.00 par value. The Company's charter expressly vests in
the Board of Directors of the Company the authority to issue the preferred
stock in one or more series and to determine, to the extent permitted by
law prior to the issuance of the preferred stock (or any series of the
preferred stock), the relative rights, limitations, and preferences of the
preferred stock or any such series.
70
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER, continued
In February 1995, the Company entered into a merger agreement with First
American Corporation (FAC). All of the outstanding shares of the Company
stock will be exchanged for common shares of FAC in a transaction that
will be accounted for as a pooling of interest. The transaction is
expected to be consummated during the Company's second fiscal quarter.
3. SECURITIES
At June 30, 1995, securities have been classified in the consolidated
financial statements according to management's intent. The carrying amount
of securities and their approximate market values at June 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations $ 20,077,586 $ 139,223 $ 3,614 $ 20,213,195
============ ========== ========== ============
Held-to-maturity:
U.S. government and agencies $ 71,685,619 $ 307,843 $1,068,462 $ 70,925,000
Collateralized mortgage
obligations 14,942,023 484,692 93,715 15,333,000
------------ ---------- ---------- ------------
86,627,642 792,535 1,162,177 86,258,000
------------ ---------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates 49,076,676 189,729 623,405 48,643,000
FNMA Certificates 12,826,298 14,157 205,455 12,635,000
FHLMC Certificates 22,091,685 71,897 429,582 21,734,000
------------ ---------- ---------- ------------
83,994,659 275,783 1,258,442 83,012,000
------------ ---------- ---------- ------------
$170,622,301 $1,068,318 $2,420,619 $169,270,000
============ ========== ========== ============
</TABLE>
71
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. SECURITIES, continued
Investment securities and mortgage-backed securities at June 30, 1994 were
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Book Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agencies $ 75,181,904 $270,072 $2,102,976 $ 73,349,000
Collateralized mortgage
obligations 5,614,505 7,370 216,875 5,405,000
------------ -------- ---------- ------------
80,796,409 277,442 2,319,851 78,754,000
------------ -------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates 52,390,756 10,508 2,866,264 49,535,000
FHLMC Certificates 25,810,401 58,079 823,480 25,045,000
FNMA Certificates 14,356,656 4,520 544,176 13,817,000
------------ -------- ---------- ------------
92,557,813 73,107 4,233,920 88,397,000
------------ -------- ---------- ------------
$173,354,222 $350,549 $6,553,771 $167,151,000
============ ======== ========== ============
</TABLE>
Debt securities at June 30, 1995 will mature on the following schedule:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------ ----------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 7,048,291 $ 7,072,000 $ 5,966,753 $ 6,017,000
Due after one year through
five years 13,029,295 13,141,195 56,275,626 55,467,000
Due after five years through
ten years - - 31,994,678 31,742,000
Due after ten years - - 76,385,244 76,044,000
----------- ----------- ------------ ------------
$20,077,586 $20,213,195 $170,622,301 $169,270,000
=========== =========== ============ ============
</TABLE>
The amortized cost and approximate market value of mortgage-backed
securities at June 30, 1995, by contractual maturities are shown in the
above table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
The weighted average interest yield for all securities was approximately
6.35% at June 30, 1995 and 5.69% at June 30, 1994.
Investment securities carried in the consolidated statements of financial
condition at $23,850,000 and $19,760,000 as of June 30, 1995 and 1994,
respectively, were pledged to secure public deposits.
72
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans secured by first mortgages on real estate:
Principal balances:
One to four single family residential $239,624,145 $251,144,767
Construction loans, gross commitment 7,044,838 11,219,927
Partially guaranteed by VA or insured by FHA 804,254 998,812
Other conventional 32,549,777 32,177,760
Other 1,431,052 1,746,064
------------ ------------
281,454,066 297,287,330
Less:
Discounts on loans acquired through mergers 1,013,821 1,767,348
Allowance for loan losses 1,222,676 1,222,676
Undisbursed portion of construction loans 2,436,442 3,732,820
Net deferred loan origination fees 871,853 1,192,445
------------ ------------
Total first mortgage loans 275,909,274 289,372,041
------------ ------------
Consumer and other loans:
Principal balances:
Secured by deposits 2,224,023 2,429,921
Education 6,216 10,213
Home equity and second mortgage 13,050,389 10,600,812
Credit card 535,134 595,452
Other consumer and commercial 7,666,405 6,823,118
------------ ------------
23,482,167 20,459,516
Less:
Net deferred loan origination fees (costs) 21,894 (39,945)
Allowance for loan losses 1,103,992 1,055,962
Loans-in-process 732,242 115,915
------------ ------------
Total consumer and other loans 21,624,039 19,327,584
------------ ------------
Loans receivable, net $297,533,313 $308,699,625
============ ============
Weighted average contractual yield 8.18% 7.38%
==== ====
</TABLE>
73
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. LOANS RECEIVABLE, continued
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,278,638 $2,387,673 $2,338,314
Provisions charged against income 82,247 487,346 595,140
Chargeoffs, net of recoveries (34,217) (596,381) (545,781)
---------- ---------- ----------
Balance at end of year $2,326,668 $2,278,638 $2,387,673
========== ========== ==========
</TABLE>
The following is a summary of the principal balances of loans on
nonaccrual status and loans past due ninety days or more:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans contractually past due 90 days or more
and/or on nonaccrual status:
Residential $178,000 $271,000
Consumer and commercial 47,000 194,000
-------- --------
$225,000 $465,000
======== ========
</TABLE>
During the years ended June 30, 1995, 1994, and 1993, interest income of
approximately $17,000, $22,000, and $106,000, respectively, was not
recorded related to loans accounted for on a nonaccrual basis.
In the ordinary course of business, the Bank makes loans to directors and
officers and their related interests. Loans to directors and officers and
their related interests are as follows:
<TABLE>
<S> <C>
Balance at June 30, 1993 $1,640,199
Advances 702,860
Repayments (346,402)
----------
Separation of officer with loans (43,363)
Balance at June 30, 1994 1,953,294
Advances 381,926
Repayments (545,673)
----------
Balance at June 30, 1995 $1,789,547
==========
</TABLE>
74
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. LOANS RECEIVABLE, continued
The Bank offers an unsecured $100,000 line of credit to each of its seven
non-employee directors. Amounts outstanding against line of credit
agreements with the two directors who have accepted the credit line were
$99,878 and $99,971 at June 30, 1995 and 1994, respectively. The directors
may retain their lines of credit after they leave the board, so long as
they continue to meet the normal credit requirements of the Bank.
As of June 30, 1995, the Company had impaired loans, as defined by SFAS
Statement No. 114, aggregating $2,111,000, on which specific reserves of
$70,000 had been recorded.
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The approximate unpaid
principal balances of these loans were $7,821,000 and $9,905,000 at June
30, 1995 and 1994, respectively.
6. INTEREST RECEIVABLE
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Securities available-for-sale $ 352,072 $ -
Securities held-to-maturity 1,533,030 -
Investment securities - 1,255,288
Mortgage-backed securities - 488,815
Loans receivable 1,781,205 1,702,413
---------- ----------
$3,666,307 $3,446,516
========== ==========
</TABLE>
7. REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $262,322 $284,947 $ 201,330
Provision charged against income 1,051 72,991 251,825
Chargeoffs (51,602) (95,616) (168,208)
-------- -------- ---------
Balance at end of year $211,771 $262,322 $ 284,947
======== ======== =========
</TABLE>
75
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 1,587,801 $ 1,540,381
Office buildings and leasehold improvements 8,935,532 8,831,100
Furniture, fixtures, and equipment 4,363,695 5,526,720
Automobiles 105,765 93,017
----------- -----------
14,992,793 15,991,218
Less accumulated depreciation and amortization 8,206,898 9,314,754
----------- -----------
Premises and equipment, net $ 6,785,895 $ 6,676,464
=========== ===========
</TABLE>
9. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 10,574,976 2.4% $ 8,395,930 1.9%
Demand and NOW accounts at 2.25% 56,407,635 12.5 64,671,094 14.3
SuperNow at 2.50% 7,514,508 1.7 10,916,498 2.4
Money market at 3.31% 17,844,834 4.0 24,135,360 5.4
Passbook savings at 2.75% 68,433,425 15.2 91,440,876 20.3
------------ ----- ------------ -----
160,775,378 35.8 199,559,758 44.3
------------ ----- ------------ -----
Certificates of deposit:
2.00 to 2.50% $ 1,016,523 .2 $ 1,466,043 .3
2.51 to 3.00% 701,623 .2 2,367,612 .5
3.01 to 3.50% 2,850 .0 85,027,440 18.9
3.51 to 4.00% 13,693,624 3.0 56,385,354 12.5
4.01 to 4.50% 53,029,316 11.8 38,661,139 8.6
4.51 to 5.00% 56,907,063 12.7 27,079,048 6.0
5.01 to 5.50% 33,348,110 7.4 18,379,993 4.1
5.51 to 6.00% 34,780,123 7.8 15,273,215 3.4
6.01 to 6.50% 52,314,919 11.6 1,246,910 .3
6.51 to 7.00% 39,678,704 8.8 2,320,911 .5
7.01 to 7.50% 2,376,130 .5 1,123,279 .2
7.51 to 8.00% 222,920 .1 1,480,020 .3
8.01 to 8.50% 296,088 .1 286,531 .1
8.51 to 9.00% 99,110 .0 92,491 .0
9.01 to 9.50% 75,496 .0 68,864 .0
------------ ----- ------------ -----
288,542,599 64.2 251,258,850 55.7
------------ ----- ------------ -----
$449,317,977 100.0% $450,818,608 100.0%
============ ===== ============ =====
</TABLE>
76
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. DEPOSITS, continued
The aggregate amount of jumbo certificates of deposit with a minimum
denomination greater than $100,000 was $17,250,670 and $9,264,566 at June
30, 1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year ending June 30
<S> <C>
1996 $221,752,925
1997 41,336,160
1998 16,498,383
Later 8,955,131
------------
$288,542,599
============
</TABLE>
Interest expense on deposits for the years ended June 30, 1995, 1994 and
1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Demand, Money Market, NOW, and SuperNOW $ 2,338,807 $ 2,361,347 $ 2,517,330
Passbook savings 2,175,733 2,550,798 2,746,998
Time deposits 12,314,926 10,934,623 13,609,634
----------- ----------- -----------
$16,829,466 $15,846,768 $18,873,962
=========== =========== ===========
</TABLE>
77
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Variable rate advance which reprices monthly based on the
one month London Interbank Offering Rate (LIBOR) plus 5
basis points (6.1203% at June 30, 1995), with interest
only due monthly, and principal due on October 14, 2004 $10,000,000 $ -
8.1% fixed rate advance payable in monthly principal and
interest payments of $865 through February, 2006 74,005 78,207
6.0% fixed rate advance payable in monthly principal and
interest payments of $45,830, due through November 1,
2002
3,256,279 4,265,337
Variable rate advance which reprices monthly based on the
one month London Interbank Offering Rate (LIBOR) (6.0625%
at June 30, 1995), with interest only due monthly, and
principal due on November 14, 1997 492,000 536,000
5.15% fixed rate advance payable in monthly principal and
interest payments of $53,400, due through October 1, 2003 4,299,637 4,707,539
----------- ----------
$18,121,921 $9,587,083
=========== ==========
</TABLE>
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $27,279,181 at June 30, 1995.
11. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $2,358,402 $3,485,409 $3,691,634
Deferred 654,476 (47,280) (268,381)
Charge-in-lieu of taxes 262,227 248,529 528,381
Change in effective tax rate on
temporary differences (129,439) (184,695) -
---------- ---------- ----------
$3,145,666 $3,501,963 $3,951,634
========== ========== ==========
</TABLE>
Included in the above are state income taxes of $393,037, $457,561, and
$473,310 in 1995, 1994, and 1993, respectively.
78
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. INCOME TAXES, continued
The differences between income tax expense and the expected amounts
computed by applying the federal income tax rate to income before income
tax expense are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Income tax expense
at statutory rate $2,928,257 34.0% $3,300,104 34.0% $3,217,710 34.0%
Increases (decreases) in
tax resulting from:
Interest on tax-free
investments (25,442) (.3) (23,708) (.2) (34,565) (.4)
Purchase method of
accounting in
conjunction with
mergers 143,777 1.7 178,614 1.8 435,221 4.6
Change in effective rate on
temporary differences (129,439) (1.5) (184,695) (1.9) - -
Other, net (30,891) .1 (44,053) (.5) 20,883 .2
State income taxes, net
of Federal benefit 259,404 2.5 275,701 2.9 312,385 3.4
---------- ---- ---------- ---- ---------- ----
Actual income tax expense $3,145,666 36.5% $3,501,963 36.1% $3,951,634 41.8%
========== ==== ========== ==== ========== ====
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
as measured by tax laws and regulations. The sources of these temporary
differences are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Excess of book over tax basis of equipment $(288,614) $ (221,276)
Discounts on loans acquired through mergers 385,252 616,765
Allowance for loan losses 450,075 783,880
Federal Home Loan Bank stock (288,221) (177,595)
Deferred loan fees (125,159) 187,354
Deferred compensation 833,322 290,202
Unrealized appreciation on available-for-sale securities (51,530) -
Other (17,611) (22,192)
--------- ----------
$ 897,514 $1,457,138
========= ==========
</TABLE>
79
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. INCOME TAXES, continued
The Bank qualifies under provisions of the Internal Revenue Code which
permit it to deduct from income an allowance for bad debts based on
approximately 8% of taxable income before such deduction, or actual
chargeoffs. As of June 30, 1995, the Company has taken aggregate bad debt
deductions of approximately $4,647,000 for income tax purposes under the
percentage of taxable income method for which no provisions for federal
income tax have been made in the financial statements. This amount may be
used only for absorbing losses for tax purposes. It is not related to
amounts of losses actually anticipated and the additions thereto have not
been charged against income.
12. COMPENSATION AND BENEFITS
PENSION PLAN
Substantially all employees of the Bank and its subsidiary are covered by
a noncontributory defined benefit pension plan. The plan calls for
benefits to be paid to all eligible employees at retirement based
primarily upon years of service with the Bank and compensation paid in the
five consecutive years when earnings were the greatest within the ten year
period preceding retirement. Plan assets consist primarily of fixed income
and equity securities and money market instruments.
The following sets forth the funded status of the plan as of June 30, 1995
and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $2,112,692 $1,981,368
Nonvested benefits 57,092 60,645
---------- ----------
Accumulated benefit obligations $2,169,784 $2,042,013
========== ==========
Projected benefit obligations $3,167,095 $3,110,004
Fair value of assets held in the plan 2,697,472 2,631,386
---------- ----------
Fair value of plan assets under projected
benefit obligations (469,623) (478,618)
Net unrecognized loss from past experience
different than assumed 817,537 960,278
Unrecognized prior service cost (119,620) 43,730
Unrecognized net asset as of July 1, 1987 (253,209) (274,309)
---------- ----------
Prepaid (accrued) pension cost $ (24,915) $ 251,081
========== ==========
</TABLE>
The change in projected benefit obligations resulted from additions for
such factors as interest on the beginning balance and current year service
cost, less distributions to participants.
80
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. COMPENSATION AND BENEFITS, continued
Pension expense for the years ended June 30, 1995, 1994, and 1993,
includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost of the current period $ 128,817 $ 110,807 $ 116,232
Interest cost on the projected benefit obligations 230,242 202,372 179,720
Actual return on assets held in the plan (192,957) 36,410 (34,726)
Net amortization and deferral (48,877) (307,182) (251,987)
--------- --------- ---------
$ 117,225 $ 42,407 $ 9,239
========= ========= =========
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligations is 8.0%, the assumed rate of increase in future compensation
levels is 5.0%, and the expected long-term rate of return on assets is
9.5%. The Bank uses the straight-line method of amortization of
unrecognized gains and losses.
THRIFT AND PROFIT SHARING PLAN
The Bank has a thrift and profit sharing plan for substantially all
employees who have completed at least one year of service. The plan has
been amended to comply with the regulations of the Tax Equity and Fiscal
Responsibility Act, Code Section 401(k), the Retirement Equity Act of
1984, the Deficit Reduction Act of 1984, the Tax Reform Act of 1986, and
the Revenue Reconciliation Act of 1993.
Under these regulations, the Bank agrees to match an employee's
contribution equal to 5% of the employee's salary, although the employee
may contribute up to 10%. The expense for this plan for the years ended
June 30, 1995, 1994, and 1993 was approximately $154,000, $128,000 and
$116,000, respectively.
81
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Heritage Federal Bancshares, Inc.
(parent company only) as of June 30, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Condensed Balance Sheets
Assets
Cash $ 724,287 $ 1,044,132
Investment in subsidiary 33,841,080 29,147,192
Other assets 56,321 7,796
----------- -----------
Total assets $34,621,688 $30,199,120
=========== ===========
Liabilities
Accounts payable $ 105,591 $ 73,082
Employee Stock Ownership Plan obligation - 880,885
----------- -----------
Total liabilities 105,591 953,967
----------- -----------
Stockholders' Equity
Common stock 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings 15,812,195 11,555,235
Net unrealized appreciation on available-for-sale securities 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
----------- -----------
Total stockholders' equity 34,516,097 29,245,153
----------- -----------
Total liabilities and stockholders' equity $34,621,688 $30,199,120
=========== ===========
</TABLE>
82
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. PARENT COMPANY FINANCIAL INFORMATION, continued
Condensed Statements of Income
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenue:
Equity in earnings of subsidiary $ 6,043,382 $ 7,484,815
Loan interest income 30,837 -
----------- -----------
Total revenue 6,074,219 7,484,815
----------- -----------
Expenses
Management fees 572,340 636,442
Legal fees 237,039 143,167
Other 154,339 80,949
----------- -----------
Total expenses 963,718 860,558
----------- -----------
Income before income taxes 5,110,501 6,624,257
Income tax benefit (356,353) (344,223)
----------- -----------
Net income $5,466,854 $ 6,968,480
=========== ===========
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary (6,043,382) (7,484,815)
Increase (decrease) in other liabilities 32,507 (77,337)
----------- -----------
Net cash used by operating activities (544,021) (593,672)
----------- -----------
Cash flows from investing activities:
Dividends from subsidiary 2,000,000 2,000,000
Advances to ESOP (720,765) -
Decrease in other assets 19,277 43,246
----------- -----------
Net cash provided by investing activities 1,298,512 2,043,246
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 134,289 93,277
Dividend payments (1,208,625) (785,050)
----------- -----------
Net cash used by financing activities (1,074,336) (691,773)
----------- -----------
Net increase (decrease) in cash (319,845) 757,801
Cash at beginning of year 1,044,132 286,331
----------- -----------
Cash at end of year $ 724,287 $ 1,044,132
=========== ===========
</TABLE>
83
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
14. CITIZENS FINANCIAL CORPORATION
Summarized financial information of the Bank's wholly-owned service
corporation, Citizens Financial Corporation, is as follows:
<TABLE>
<CAPTION>
June 30,
--------
1995 1994
---- ----
<S> <C> <C>
Balance Sheets
Assets $1,842,612 $1,758,357
========== ==========
Accrued expenses and other liabilities $ 54,175 $ 117,204
Capital stock, paid-in capital and retained earnings 1,788,437 1,641,153
---------- ----------
$1,842,612 $1,758,357
========== ==========
</TABLE>
Statements of Earnings
<TABLE>
<CAPTION>
Years ended June 30,
--------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income $301,775 $310,776 $181,202
Expenses 154,491 155,956 100,573
-------- -------- --------
Net earnings $147,284 $154,820 $ 80,629
======== ======== ========
</TABLE>
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the statements of financial condition. The contract
or notional amounts of these instruments reflect the extent of involvement
the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making these commitments and conditional obligations as it does for
on-balance-sheet instruments.
84
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK, continued
Outstanding lines of credit balances were $1,682,944 and $1,685,212 at
June 30, 1995 and 1994, respectively. Commitments to originate or purchase
loans were approximately $1,733,000 and $5,195,000 at June 30, 1995 and
1994, respectively. The commitments exclude approved, but unused, home
equity lines of credit of $3,492,558 and $3,523,810 in 1995 and 1994,
respectively. The commitments to originate or purchase loans at June 30,
1995, were composed of variable rate loans of $1,204,000 and fixed rate
loans of $529,000. The fixed rate loans had interest rates ranging from
6.5% to 9.25%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include trade accounts
receivable; property, plant, and equipment; and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. At June 30, 1995, the
unused amount of letters of credit issued totaled $212,602.
Most of the Bank's business activity is with customers located within the
state of Tennessee. A majority of the loans are collateralized by
residential or commercial real estate or other personal property. The
loans are expected to be repaid from cash flow or proceeds from the sale
of selected assets of the borrowers. The Bank grants residential,
consumer, and commercial loans to customers throughout the eastern portion
of the state of Tennessee.
85
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATION
In conjunction with converting to a stock ownership form, the Company and
the Bank established an Employee Stock Ownership Plan (ESOP), under which
the Bank makes annual contributions to a trust for the benefit of eligible
employees. To be eligible, an employee must be 21 years of age and have
completed at least one year of service. The contributions may be in the
form of cash, other property, or common shares of the Company. The amount
of the annual contribution is at the discretion of the Board of Directors
of the Bank. Initially, the ESOP acquired 209,300 shares of the Company's
common stock financed by $1,203,475 in borrowings by the ESOP. The Board
of Directors intends to contribute to the Plan an amount equal to the
required principal and interest payments related to the ESOP loan.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Company. The new loan, which has essentially the same terms as the
prior borrowing, is payable in quarterly principal payments of $30,087
plus interest at the lender's base rate through March 30, 2002. At June
30, 1995, the loan bore interest at 9.00%. The plan is noncontributory and
there is no past service liability. The principal balance of the ESOP loan
was $720,765 at June 30, 1995 and $880,885 at June 30, 1994. The Company
is using the dividends paid on unallocated shares held by the ESOP to
reduce the outstanding debt. The financial statements for the years ended
June 30, 1995, 1994 and 1993 include compensation expense of $91,241,
$120,348 and $120,348 and interest expense of $37,592, $63,613 and
$74,407, respectively, related to the ESOP.
The ESOP debt agreement contains certain affirmative financial covenants
related to the Bank's operations and financial position. The Bank is in
compliance with all such covenants.
In prior years, the Company had guaranteed the repayment of the ESOP debt
to the outside lender and, accordingly, recorded the debt on its balance
sheet with a corresponding contra-equity account.
Future minimum principal payments due to the Company related to the
Employee Stock Ownership Plan obligation are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
<S> <C>
1996 $120,348
1997 120,348
1998 120,348
1999 120,348
2000 120,348
Thereafter 119,025
--------
$720,765
========
</TABLE>
86
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the
years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1995:
Interest income $8,640,565 $8,959,429 $9,074,420 $9,304,480
Interest expense 4,049,674 4,338,990 4,468,926 4,939,906
---------- ---------- ---------- ----------
Net interest income 4,590,891 4,620,439 4,605,494 4,364,574
Provision for loan losses 20,591 2,501 30,920 28,235
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,570,300 4,617,938 4,574,574 4,336,339
---------- ---------- ---------- ----------
Other income 719,009 682,585 701,777 651,600
General and administrative expenses 3,112,009 3,143,617 3,104,945 2,881,031
---------- ---------- ---------- ----------
Income before income taxes 2,177,300 2,156,906 2,171,406 2,106,908
Income tax expense 769,853 689,759 798,920 887,134
---------- ---------- ---------- ----------
Net income $1,407,447 $1,467,147 $1,372,486 $1,219,774
========== ========== ========== ==========
Net income per share $0.41 $0.43 $0.39 $0.35
===== ===== ===== =====
1994:
Interest income $9,181,104 $8,986,173 $8,679,829 $8,703,564
Interest expense 4,309,713 4,198,871 3,997,124 3,981,573
---------- ---------- ---------- ----------
Net interest income 4,871,391 4,787,302 4,682,705 4,721,991
Provision for loan losses 216,652 212,519 45,295 12,880
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,654,739 4,574,783 4,637,410 4,709,111
---------- ---------- ---------- ----------
Other income 556,673 586,449 702,434 638,265
General and administrative expenses 3,049,639 3,021,942 2,415,619 2,866,476
---------- ---------- ---------- ----------
Income before income taxes 2,161,773 2,139,290 2,924,225 2,480,900
Income tax expense 863,870 828,453 969,150 840,490
---------- ---------- ---------- ----------
Net income before accounting change 1,297,903 1,310,837 1,955,075 1,640,410
Accounting change 764,255 - - -
---------- ---------- ---------- ----------
Net income after accounting change $2,062,158 $1,310,837 $1,955,075 $1,640,410
========== ========== ========== ==========
Net income per share $.61 $.39 $.58 $.49
==== ==== ==== ====
</TABLE>
87
<PAGE> 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. STOCK OPTION AND AWARD PLANS
1992 STOCK OPTION PLAN
The Company has adopted a stock option plan for the benefit of employees of
the Bank and nonemployee directors of the Company. The number of shares of
common stock authorized and awarded under the 1992 stock option plan was
299,000, equal to 10% of the total number of shares issued in the Company's
public offering. The option exercise price of $5.75 per share is equal to
100% of the fair market value of the common stock on the date of grant. The
option term is ten years. Options issued to employees of the Bank in
connection with the conversion became exercisable over a three year period
ending in March 1995. Options issued to nonemployee directors of the
Company are immediately exercisable. During 1993, a former director
exercised options for 14,950 shares at an exercise price of $5.75 per
share. During 1994, 2,728 options were exercised at an exercise price of
$5.75 per share. During 1995, 8,377 options were exercised at an exercise
price of $5.75 per share.
MANAGEMENT RECOGNITION PLAN (MRP)
The Bank issued 89,700 shares of common stock to a MRP Trust created during
1993. All of these shares, with a market value of $1,065,187 on the date of
award, have been awarded to certain executive officers as restricted stock
which will vest over the three year period ending March 1996. Compensation
expense in the amount of $355,057, $201,060 and $154,009 was recognized
during 1995, 1994 and 1993, respectively, related to these awards. The plan
contains provisions providing for forfeiture of unvested shares in the
event of termination, and vesting in the event of death, disability,
retirement or a change in control.
The shares issued to the MRP Trust have been recorded as outstanding
shares, and the unvested portion has been recorded as unearned compensation
through a contra-equity account.
INCENTIVE COMPENSATION PLANS
The Company has established an incentive compensation plan for certain
officers. The plan provides for annual cash bonuses, restricted stock
awards and stock options based upon base annual compensation and certain
operating results. For the year ended June 30, 1995, compensation in the
aggregate amount of $510,228 was recorded, including awards of 3,348 shares
of common stock which will vest over three years and options on 14,350
shares of common stock exercisable at $13.00 related to discounted option
plans. In 1994, the compensation recorded under these plans aggregated
$442,464, including awards of 5,073 shares of common stock which will vest
over three years and 30,735 options on shares of common stock exercisable
at $8.72 related to discounted option plans. In 1993, the compensation
recorded under these plans aggregated $404,463 including awards of 5,672
shares of common stock. In addition, in 1995, 1994 and 1993 participants
were granted stock options for 6,696 shares exercisable at $26.00 per
share, 10,149 shares exercisable at $17.44 per share, and 11,352 shares
exercisable at $14.25 per share, respectively.
88
<PAGE> 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. STOCK OPTION AND AWARD PLANS, continued
The Company has established an incentive compensation plan for nonemployee
directors. This unfunded plan provides benefits in the form of performance
stock options for shares of common stock. The number of shares received,
exercisable at 50% of the fair market value on the date of the grant, is
determined based on the amount of director fees deferred during the year by
each director. Director compensation recorded for 1995 related to this plan
amounted to $177,250, representing 13,635 shares at an exercise price of
$13.00 per share. Director compensation recorded for 1994 related to this
plan amounted to $134,650, representing 15,446 shares at an exercise price
of $8.72 per share.
In 1994, the Company adopted a new Director Option Plan that was approved
by the shareholders at the Annual Meeting in October. The plan provides for
automatic grants to each director of options to purchase 4,000 shares of
common stock annually at the fair market value on the date of the grant. At
June 30, 1995, no options had been exercised and 28,000 options are
exercisable at $20.25 per share and 28,000 options are exercisable at
$15.19 per share.
19. EARNINGS PER SHARE
On July 20, 1994, Heritage Federal Bancshares, Inc. declared a four for
three stock split for all shares outstanding as of August 5, 1994, to be
paid on August 26, 1994, to be effected as a stock dividend. On August 18,
1993, Heritage Federal Bancshares, Inc. declared a three for two stock
split for all shares outstanding as of September 8, 1993 to be effected as
a stock dividend. This stock split was paid September 30, 1993. All
references to the outstanding number of shares and earnings per share
amounts have been restated to reflect the splits.
Stock options are regarded as common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
Following are weighted average shares outstanding for computation of
earnings per share for 1995, 1994, and 1993 after adjusting for stock
splits:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Shares issued and outstanding 3,179,737 3,171,216 3,099,422
Common stock equivalents computed by
the treasury stock method-options 284,079 200,856 209,633
--------- --------- ---------
3,463,816 3,372,072 3,309,055
========= ========= =========
</TABLE>
89
<PAGE> 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
20. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 (Statement 107)
requires disclosures of the estimated fair value of an entity's financial
instrument assets and liabilities. For the Company, as for most financial
institutions, the great bulk of its assets and liabilities are considered
financial instruments as defined in Statement 107. However, many of such
instruments lack an available trading market, as characterized by a
willing buyer and seller engaging in an exchange transaction. Also, it is
the Company's general practice and intent to hold its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, the Company used estimations and present value calculations to
prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is concerned
that there may not be reasonable comparability between institutions due to
the wide range of permitted assumptions and methodologies in the absence
of active markets. This lack of uniformity gives rise to a high degree of
subjectivity in estimating financial instrument fair values.
Fair values have been estimated using data which management considered the
best available, and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies
and resulting fair values, and recorded carrying amounts at June 30, 1995
and 1994, were as follows:
Cash and cash equivalents are by definition short-term and do not
present any unanticipated credit issues. Therefore, the carrying
amount is a reasonable estimate of fair value. The estimated fair
values of securities are provided in Note 3 to the financial
statements. These are based on quoted market prices, when available.
If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
The fair value of the net loan portfolio has been estimated using
present value cash flow discounted at an interest rate adjusted for
servicing costs and giving consideration to estimated prepayment risk
and credit loss factors.
<TABLE>
<CAPTION>
1995 1994
------------------------------- ------------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
1 - 4 family mortgages $247,984,000 $247,238,858 $259,692,000 $261,813,285
Consumer 23,226,000 23,482,167 20,214,000 20,459,516
Non-Residential 33,969,000 34,215,208 33,906,000 35,474,045
------------ ------------ ------------ ------------
$305,179,000 $304,936,233 $313,812,000 $317,746,846
============ ============ ============ ============
</TABLE>
90
<PAGE> 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
20. FAIR VALUES OF FINANCIAL INSTRUMENTS, continued
Fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand),
totaling $160,775,378 and $199,559,758 in 1995 and 1994, respectively.
Under Statement 107, the fair value of deposits with no stated
maturity is equal to the amount payable on demand. Therefore, the fair
value estimates for these products do not reflect the benefits that
the Bank receives from the low-cost, long-term funding they provide.
These benefits are significant. There is no material difference
between the carrying amount of deposit liabilities with stated
maturities and their estimated fair value since the majority of the
liabilities mature within one year.
The fair value of certificates of deposits and advances from the
Federal Home Loan Bank is estimated by discounting the future cash
flows using the current rates offered for similar deposits and
advances with the same remaining maturities. The carrying value and
estimated fair values of certificates of deposit and Federal Home Loan
Bank advances at June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Certificates of deposits:
Carrying amount $288,542,599 $251,258,850
Estimated fair value $290,144,000 $252,205,000
Advances from Federal Home Loan Bank:
Carrying amount $18,121,921 $9,587,083
Estimated fair value $17,852,000 $8,992,000
</TABLE>
In 1994, there was no material difference between the carrying amount and
estimated fair value of the obligation to the Employee Stock Ownership
Plan because it bore interest at a variable rate equivalent to a current
market rate.
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $3,415,944 in 1995 and
$6,880,212 in 1994, which are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
The Company's remaining assets and liabilities are not considered
financial instruments.
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA),
which was signed into law in 1989, imposed stringent capital requirements
upon savings institutions. In addition, FIRREA included provisions for
changes in the federal regulatory structure for savings institutions
including a new deposit insurance system, increased deposit premiums and
restricted investment activities with respect to noninvestment grade
corporate debt and certain other investments. FIRREA also increased the
required ratio of housing-related assets in order to qualify as a
qualified thrift lender under federal regulations.
91
<PAGE> 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT, continued
The Bank must satisfy three capital standards, as set by the Office of
Thrift Supervision ("the OTS"). These standards include a ratio of core
capital to adjusted total assets of 3.0%, a tangible capital standard
expressed as 1.5% of total adjusted assets, and a combination of core and
"supplementary" capital equal to 8.0% of risk-weighted assets. The OTS
recently finalized regulations that add an interest rate risk component to
capital requirements under certain circumstances. The Bank does not expect
that this regulation will require it to reduce its capital materially for
purposes of determining compliance with its risk-based capital
requirement. In addition, the OTS has recently adopted regulations that
impose certain restrictions on savings associations that have a total
risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital
(or core capital) to risk-weighted assets of less than 4.0%, or a ratio of
Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the
institution receives the highest rating under the OTS examination rating
system).
92
<PAGE> 93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth each director of the Company, his name,
age as of June 30, 1995, the year he first became a director of the Company's
principal subsidiary, Heritage Federal, and the expiration of his current term
as a director of the Company. All such persons were initially appointed as
directors in 1992 in connection with the incorporation and organization of the
Company. Each director of the Company is also a member of the Board of Directors
of the Bank.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED CURRENT
AGE AS DIRECTOR TERM
OF JUNE OF THE TO
NAME 30, 1995 BANK EXPIRE
---- -------- ---- ------
<S> <C> <C> <C>
Sam H. Anderson, Jr. 67 1991 1997
John C. Bracy 61 1986 1997
Clyde W. Craven 60 1989 1995
Robert C. Fox 73 1982 1996
William E. Kreis 48 1991 1996
Thomas E. LaGuardia, Jr. 67 1973 1996
Richard A. Manahan 56 1990 1997
C. Mack Patton 53 1984 1995
</TABLE>
The principal occupation of each director of the Company for the last
five years is set forth below.
SAM H. ANDERSON, JR. is Chairman of the Board. He is also Chairman of
the Board of Anderson Ford, Inc., an automobile and truck dealership located in
Kingsport, Tennessee. He is also president or chairman of the board of four
other automobile dealerships located in east Tennessee and southwest Virginia.
Mr. Anderson is also president of a real estate concern, an insurance agency, a
vehicle leasing corporation, and an advertising firm. He served as chairman of
the boards of the Holston Valley Hospital Foundation and the Greater Kingsport
Chamber of Commerce Foundation and is currently a member of the board of
directors of the Holston Valley Life Insurance Co., Inc., a director and member
of the executive committee of the Holston Valley Hospital and Medical Center,
and for 24 years served as Commissioner of the Tennessee Motor Vehicle
Commission. He also served as chairman of the Kingsport Chamber of Commerce
Railroad Property Revitalization Project, and as director of the YMCA.
93
<PAGE> 94
JOHN C. BRACY is currently Vice President, Secretary and General
Counsel of Eastman Chemical Company. Mr. Bracy is also Secretary of Eastman
Chemical Canada, Inc.; Eastman Chemical Espana S.A.; Eastman Chemical Europe,
Middle East, and Africa, Ltd.; Eastman Chemical Ltd; Eastman Chemical Mexicana,
S.A. de C.V.; Eastman International Management Company; Mustang Pipeline
Company; Petmex Mexicana, S.A. de C.V.; and Pinto Pipeline Company of Texas. In
addition, he is a Director of Eastman Chemical Foreign Sales Corporation. He is
past president and a past board member of the Ridgefields Country Club, Inc. and
Ridgefields Properties, Inc., and is currently a member of First Baptist Church,
Kingsport, Tennessee. He is a member of the Kingsport Bar Association, American
Bar Association, American Corporate Counsel Association, American Society of
Corporate Secretaries, Chemical Manufacturers Association, and The Conference
Board. He is a member of the Georgia Bar, Florida Bar, New York Bar, and
Tennessee Bar.
CLYDE W. CRAVEN is chairman of the board and chief executive officer of
ICS, a computer, environmental and engineering services company located in Oak
Ridge, Tennessee, a position he has held since 1988. Prior to assuming this
position, he was chairman of the board and chief executive officer of ISI, an
engineering and computer services company, from 1985 to 1988. Dr. Craven is also
president of Polaris Travel, a travel agency, a position he has held since 1978.
He is a member of the Oak Ridge Rotary Club, the board of directors of the Oak
Ridge Chamber of Commerce, the East Tennessee Economic Development Council,
Technology 2020, and the Oak Ridge Industrial Development Board, and is a deacon
of Central Baptist Church.
ROBERT C. FOX is a self-employed contractor, home builder and land
developer, and has been involved with such activities since 1953. Mr. Fox is a
member of the Board of Trustees of Carson-Newman College and has previously
served as the Vice Chairman of the Board of Trustees and as chairman of its
Athletic Committee and its Pension Fund Committee. He is also a member of the
Melton Hill Regional Industrial Development Association and has served on the
advisory committee of the East Tennessee Development Boards for Housing. Also,
Mr. Fox has served on the University of Tennessee Development Council.
WILLIAM E. KREIS is President and Chief Executive Officer of the Bank,
positions he assumed in 1991, and President and Chief Executive Officer of the
Company, positions he assumed in 1992. Prior to assuming his current positions,
he was Senior Vice President of the Bank from 1984 to 1991. Mr. Kreis is
currently a director of Holston Valley Health Care, Inc., Holston Valley Health
Care Foundation, East Tennessee State University Foundation, and the Kingsport
Area Chamber of Commerce Foundation. He is a member of the Advisory Board to the
Chair of Banking at East Tennessee State University and serves as a member of
the University of Tennessee, Knoxville Chancellor's Associates. He is also a
past director of the Kingsport Center of Opportunity, the Downtown Kingsport
Association, Northeast State Technical Community College Foundation, the United
Way of Kingsport, the Kingsport Chamber of Commerce, Junior Achievement of
Kingsport, and Central Appalachia Services.
THOMAS E. LAGUARDIA, JR., is currently retired and formerly was
chairman of a family owned grocery chain. He has served as president of Holston
Valley Health Care, Inc., and president of Holston Valley Hospital Medical
Center. He is a member of the Holston Valley Foundation Assessment Committee,
St. Dominic's Finance Board and the Duke Medical Center Cancer Advisory Board.
RICHARD A. MANAHAN is currently Vice President for University
Advancement at East Tennessee State University. Since 1981 he served as Vice
President for Administration and Development, Vice President for Finance and
Administration and Executive Assistant to the President. He is also Executive
Director of the University Foundation and a tenured Professor of Accountancy, as
well as a Professor of Educational Leadership and Policy Analysis at East
Tennessee State. Dr. Manahan has authored several articles and presentations at
national meetings. He is past Chairman of the Board of Directors of the Johnson
City/Washington County Area Chamber of Commerce and has served as its Treasurer
and Chairman-elect. Dr. Manahan also sits on the boards of various
organizations, including the Johnson City Area United Way, Inc., the Dawn of
Hope Development Center, the Tennessee Board of Nursing, and serves as Vice
Chairman of the Johnson City Development Authority. He is also a member of the
Executive Board of the Boy Scouts of America - Sequoyah Council, the
Secretary-Treasurer of the Health, Education and Housing Facilities Board of
Johnson City, a member of Munsey Memorial United Methodist Church, Johnson
94
<PAGE> 95
City, Tennessee, and a past member of the Illinois State University Alumni
Association and the National Center for Quality - Tri- Cities. He is a member of
the Appalachian Chapter of the Tennessee Society of Certified Public
Accountants, the American Institute of Certified Public Accountants, and the
Tennessee, Virginia and Illinois Societies of Certified Public Accountants. He
has also been associated with Illinois State University, Illinois Board of
Regents, Radford University, Alexander Grant and Company (a national accounting
firm), and Springfield Marine Bank.
C. MACK PATTON is a physician practicing since 1974 in Kingsport with
Urology Associates of Kingsport. Dr. Patton has served on the board of directors
of the Ridgefields Country Club, Heritage National Health Plan of Tennessee,
Holston Valley Hospital and the Kingsport Independent Practice Association. He
is also a member of First Baptist Church where has served as a deacon and as a
member and Chairman of the Finance Committee.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following information is supplied with respect to executive
officers of the Company who are not directors. There are no arrangements or
understandings pursuant to which any of the executive officers were selected as
an officer, and no executive officer is related to any other director or officer
of the Company by blood, marriage or adoption.
<TABLE>
<CAPTION>
Name and Age* Position
- ------------- --------
<S> <C>
Richard D. Brumfield, 52 Executive Vice President and Secretary
Don R. Osborne, 48 Senior Vice President and Assistant Secretary
William F. Richmond, 46 Senior Vice President, Chief Financial Officer and Treasurer
</TABLE>
- --------------------
* Age as of June 30, 1995.
The principal occupation of each such executive officer is set forth
below.
RICHARD D. BRUMFIELD is Executive Vice President and Secretary of the
Company and the Bank. He has been employed by the Bank in various capacities
since 1970 and has served in his current position with the Bank since 1986 and
with the Company since 1991. Mr. Brumfield is also a past member of the Board of
Directors of the Holston Valley Hospital and Medical Center and has served on
its audit and nominating committees. He is also a past director of the Greater
Kingsport United Way. He presently serves on the Business and Management
Technologies Committee of Northeast State Technical Community College and on the
Credit Committee of the Tennessee Bankers Association.
DON R. OSBORNE is Senior Vice President and Assistant Secretary of the
Company and the Bank. Mr. Osborne has been employed by the Bank in various
capacities since 1982 and has held his current position since 1991 with the
Company and the Bank. He is active in the Kingsport Chamber of Commerce, the
Finance Committee of the Colonial Heights Presbyterian Church, the Masonic
Lodge, the Greater Kingsport United Way, and the MIS Advisory Board of Northeast
State Community College. He also served with the Kingsport Center of
Opportunity, Kingsport Mental Health Center and Parent Teachers Association of
Sullivan County Schools.
95
<PAGE> 96
WILLIAM F. RICHMOND is Senior Vice President, Chief Financial Officer
and Treasurer of the Company and is Senior Vice President and Chief Financial
Officer of the Bank. Mr. Richmond joined the Bank as its Controller in April
1985, became its Senior Vice President/Finance in June 1991, and also was
elected Treasurer in October 1991. He has held his position with the Company
since its formation in 1991. He is a member of the Rotary Club of
Kingsport-Downtown and served as campaign chairman of the Commercial Firms
Division for the 1993-1994 Greater Kingsport United Way Campaign. Mr. Richmond
is a past member of the Greater Kingsport United Way Allocation and Admission
Committee, and the boards of directors of the Boys Club of Greater Kingsport,
the Kingsport Center of Opportunity, and the Greater Kingsport YMCA. He is a
licensed Certified Public Accountant in Virginia and Tennessee and is also a
Certified Financial Planner.
STATEMENTS OF BENEFICIAL OWNERSHIP
Based solely on the Company's review of the copies of initial
statements of beneficial ownership and reports of changes in beneficial
ownership, which it has received in the past fiscal year or with respect to the
past fiscal year or written representations from such persons that no annual
report of changes in beneficial ownership was required, the Company believes
that all persons subject to such reporting requirements during the 1995 fiscal
year have complied with such reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for
each of the last three fiscal years awarded to or earned by (i) the Chief
Executive Officer, and (ii) the four highest paid executive officers of the
Company other than the Chief Executive Officer whose respective salary and bonus
earned in fiscal year 1995 exceeded $100,000 for services rendered in all
capacities to the Company and its subsidiary.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL COMPENSATION AWARDS(1)
------------------- -----------------------
OTHER RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL ANNUAL STOCK UNDERLYING COMPENS-
POSITION YEAR SALARY BONUS(2) COMPENSATION(3) AWARDS(4) OPTIONS(5) ATION (6)
- ------------------ ---- ------ -------- --------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
WILLIAM E. KREIS 1995 $177,300 107,876 $ -- $ 26,962 2,074 $ 22,650 (7)
PRESIDENT AND CHIEF 1994 154,000 -- -- 29,830 17,106 17,817
EXECUTIVE OFFICER 1993 131,800 104,500 -- 292,444 3,668 16,718
RICHARD D. BRUMFIELD 1995 116,100 30,508 -- 15,262 3,521 17,690 (8)
EXECUTIVE VICE PRESIDENT 1994 110,250 59,052 -- 18,454 3,810 14,080
AND SECRETARY 1993 104,600 70,490 -- 239,177 2,472 14,118
DON R. OSBORNE 1995 112,700 -- -- 15,002 5,767 15,879 (9)
SENIOR VICE PRESIDENT 1994 98,450 -- -- 16,625 9,534 11,571
AND ASSISTANT SECRETARY 1993 89,300 59,850 -- 148,105 2,100 11,079
WILLIAM F. RICHMOND 1995 87,750 23,207 -- 11,596 2,677 11,802(10)
SENIOR VICE PRESIDENT, 1994 80,250 26,933 -- 13,466 4,633 9,255
CHIEF FINANCIAL OFFICER 1993 73,650 50,540 -- 190,513 1,772 9,110
AND TREASURER
</TABLE>
(Footnotes on following page)
96
<PAGE> 97
- --------------------
(1) Awards under the Officer Incentive Plan are allocated to the year for
which award was earned, although effective dates for such awards were
after the end of the fiscal year.
(2) Bonus amounts in fiscal years 1995 and 1994 have been reduced by the
amounts foregone at the election of the named executive officers in
accordance with the Officer Incentive Plan. Such bonus amounts were
instead paid in the form of discounted stock options which are
reflected in the table as Long-Term Compensation.
(3) Does not include certain fringe benefits, the value of which did not
exceed $50,000 or 10% of salary for any named executive officer.
(4) Reflects fair market value at date of grant of shares of restricted
stock awarded pursuant to the Company's MRP and Officer Incentive Plan.
For fiscal year 1995, 1,037, 587, 577, and 446 restricted shares of
Common Stock were earned by Messrs. Kreis, Brumfield, Osborne and
Richmond, respectively, under the Officer Incentive Plan which were
awarded effective July 11, 1995. For fiscal year 1994, 1,710, 1,058,
953, and 772 restricted shares of Common Stock were earned by Messrs.
Kreis, Brumfield, Osborne and Richmond, respectively, under the Officer
Incentive Plan which were awarded effective July 20, 1994. For fiscal
year 1993, 1,833, 1,236, 1,049 and 885 restricted shares of Common
Stock were earned as restricted stock awards under the Officer
Incentive Plan by Messrs. Kreis, Brumfield, Osborne and Richmond,
respectively. Such shares of restricted stock were awarded effective
July 20, 1993 and vest ratably over a period of three years from the
date of grant. During fiscal year 1993, 22,425, 18,657, 11,212, and
14,980 shares of Common Stock were also granted as restricted stock
awards under the MRP to Messrs. Kreis, Brumfield, Osborne and Richmond,
respectively. The shares granted under the MRP vest through March 30,
1996, assuming continued employment with the Company. At June 30, 1995,
44,846 of such shares were vested. Dividends will be payable on all the
foregoing shares of restricted stock if and to the extent paid on the
Common Stock generally. As of June 30, 1995, Messrs. Kreis, Brumfield,
Osborne and Richmond had been awarded a total of 25,968, 20,951, 13,214
and 16,637 shares of restricted stock under the MRP and the Officer
Incentive Plan (not including fiscal year 1995 awards whose effective
date of grant was after June 30, 1995). Based on the fair market value
of the Common Stock on such date, the aggregate values of such shares
of restricted stock were $688,152, $555,202, $350,171 and $440,881,
respectively.
(5) Award amounts in each case have been adjusted for the three-for-two
stock split effected through a stock dividend paid September 30, 1993
and the four-for-three stock split effected through a stock dividend
paid August 26, 1994. Includes options for 2,074, 1,174, 1,154 and 892
shares of the Common Stock granted at an exercise price of $26.00 under
the Officer Incentive Plan in July 1995 to Messrs. Kreis, Brumfield,
Osborne and Richmond, respectively, based on the Company's performance
during fiscal year 1995. Also includes options to acquire -0-, 2,347,
4,613 and 1,785 shares granted in July 1995 at an exercise price of
$13.00 per share to Messrs. Kreis, Brumfield, Osborne and Richmond at
their election in lieu of a cash bonus under the Officer Incentive
Plan. The aggregate exercise price of such options was reduced by the
amount of cash bonus foregone. Includes options for 3,421, 2,117, 1,907
and 1,544 shares of the Common Stock granted at an exercise price of
$17.44 under the Officer Incentive Plan in July 1994 to Messrs. Kreis,
Brumfield, Osborne and Richmond, respectively, based on the Company's
performance during fiscal year 1994. Also includes options to acquire
13,685, 1,693, 7,627 and 3,089 shares granted in July 1994 at an
exercise price of $8.72 per share to Messrs. Kreis, Brumfield, Osborne
and Richmond at their election in lieu of a cash bonus under the
Officer Incentive Plan. The aggregate exercise price of such options
was reduced by the amount of cash bonus foregone. For fiscal year 1993,
reflects options to acquire 3,668, 2,472, 2,100 and 1,772 shares
granted with an exercise price of $14.25 per share to Messrs. Kreis,
Brumfield, Osborne and Richmond, respectively, in July 1993 pursuant to
the Officer Incentive Plan.
(6) Reflects the Company's contributions to the employee's account in the
401(k) Plan and in the ESOP, and the dollar value of premiums paid by
the Company for the term life insurance equivalent of split-dollar life
insurance for the benefit of the employee.
(7) Includes $8,817 in 401(k) Plan contributions by the Company, $12,147 in
ESOP contributions by the Company, and $1,686 of term life insurance
premium-equivalent payments.
(8) Includes $5,100 in 401(k) Plan contributions by the Company, $9,375 in
ESOP contributions by the Company, and $3,215 of term life insurance
premium-equivalent payments.
(9) Includes $4,990 in 401(k) Plan contributions by the Company, $9,027 in
ESOP contributions by the Company, and $1,862 of term life insurance
premium-equivalent payments.
(10) Includes $4,373 in 401(k) Plan contributions by the Company, $7,055 in
ESOP contributions by the Company, and $374 of term life insurance
premium-equivalent payments.
97
<PAGE> 98
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grants of
stock options under the Officer Incentive Plan to the Company's Chief Executive
Officer and each other executive officer of the Company whose salary and bonus
in fiscal year 1995 exceeded $100,000 for services rendered in all capacities to
the Company and its subsidiaries. The table shows options earned or elected in
lieu of cash bonuses under the Officer Incentive Plan during fiscal year 1995
and awarded effective July 11, 1995.
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
------------------------------------------------------- ----------
% of Total
Number of Options
Securities Granted to Market
Underlying Employees Price on Grant Date
Options in Fiscal Exercise Date of Expiration Present
Name Granted (1) Year Price Grant Date Value
----------- --------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
WILLIAM E. KREIS 2,074 9.85% $26.00 $ 26.00 7/05 $ 24,390 (2)
RICHARD D. BRUMFIELD 1,174 5.58 26.00 26.00 7/05 13,806 (2)
2,347 11.15 13.00 26.00 7/05 38,138 (2)
DON R. OSBORNE 1,154 5.48 26.00 26.00 7/05 13,571 (2)
4,613 21.92 13.00 26.00 7/05 74,961 (2)
WILLIAM F. RICHMOND 892 4.24 26.00 26.00 7/05 10,489 (2)
1,785 8.48 13.00 26.00 7/05 29,006 (2)
</TABLE>
- --------------------
(1) All options were vested as of date of grant. To the extent not already
exercisable, the options generally will become immediately exercisable
in the event of a change in control of the Company, generally defined
as the acquisition of beneficial ownership of 25% or more of the
Company's voting securities by any person or group of persons.
(2) Represents the present value of the option at the date of grant, as
determined using the Black-Scholes option pricing model. In calculating
the present value of the option grant, the following assumptions were
utilized: (i) the current market price of the underlying Common Stock
at the date of grant was $26.00; (ii) the continuously compounded
risk-free rate of return expressed on an annual basis was 6.25%; (iii)
the risk of the underlying Common Stock, measured by the standard
deviation of the continuously compounded annual rate of return of the
Common Stock, was 30%; and (iv) dividends on the underlying Common
Stock increase at an annual rate of 5%. The foregoing assumptions are
used for illustrative purposes only. No assurance can be given that
actual experience will correspond to the assumptions utilized.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth each exercise of stock options during
fiscal year 1995 by each of the named executive officers and the fiscal year-end
value of unexercised in-the-money options. The table does not reflect options
earned during fiscal year 1995 pursuant to the Officer Incentive Plan but
granted after the fiscal year end.
<TABLE>
<CAPTION>
VALUE OF SECURITIES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT FY-END (#)(1) OPTIONS AT FY-END ($)(2)
EXERCISE REALIZED ----------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William E. Kreis . . . . . -- -- 74,594 -- $1,436,011 --
Richard D. Brumfield . . . -- -- 43,598 -- 853,870 --
Don R. Osborne . . . . . . -- -- 34,060 -- 643,950 --
William F. Richmond . . . . -- -- 34,972 -- 683,383 --
</TABLE>
- -----------------------
(1) Consists of options granted under the Option Plan and Officer Incentive
Plan.
(2) Based on the aggregate fair market value of the shares of Common Stock
underlying the options at June 30, 1995 less the aggregate exercise
price. For purposes of this calculation, the fair market value per
share of the Common Stock at fiscal year end is assumed to be equal to
the average of the high and low price on June 30, 1995 as reported on
The Nasdaq Stock Market ($26.50 per share). Unexercised options are
considered "in-the-money" if the exercise price is less than fair
market value of the underlying Common Stock. All options granted to the
named executive officers are currently in the money.
98
<PAGE> 99
PENSION PLAN
The following table illustrates the maximum estimated annual benefits
payable upon retirement pursuant to the Bank's defined benefit pension plan (the
"Pension Plan") based upon the pension plan formula for specified average final
compensation and specified years of service.
<TABLE>
<CAPTION>
YEARS OF SERVICE
AVERAGE FINAL ------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$100,000 . . . . . . . $20,290 $27,053 $33,816 $40,579 $47,342
$125,000 . . . . . . . 25,465 33,953 42,441 50,929 59,417
$150,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
$175,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
$200,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
$225,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
$250,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
$275,000 . . . . . . . 30,640 40,853 51,066 61,279 71,492
</TABLE>
Benefits are hypothetical amounts only. Currently, the maximum annual
benefit payable under the Pension Plan is $118,800. Also, average final
compensation in excess of $150,000 is not covered under the Pension Plan.
"Average final compensation," which is based upon the average annual salary (as
defined) for the five consecutive years of highest salary during the final ten
years of employment, is based upon compensation that would appear under the
"Salary" and "Bonus" columns of the Summary Compensation Table. As of June 30,
1995, Messrs. Kreis, Brumfield, Osborne and Richmond had 23, 25, 13 and 11 years
of credited service, respectively, under the Pension Plan. Benefits set forth in
the preceding table are computed as a ten-year-certain life annuity and are not
subject to any deduction for Social Security or other offset amounts.
EMPLOYMENT AGREEMENTS
The Bank entered into employment agreements on August 26, 1992, with
Messrs. Kreis, Brumfield, Osborne and Richmond, which replaced their severance
agreements earlier commenced on March 31, 1992. The employment agreements have a
term of thirty-six months. On each anniversary date from the date of
commencement of the agreements, the terms of employment may be extended for an
additional one-year period beyond the then effective expiration date upon a
determination by the Board of Directors that performance of the employee has met
the required standards and that such agreements should be extended. Each
agreement will be terminated upon death. The agreements provide that the Bank's
obligations under such agreements shall terminate if the employee is removed
from his position or permanently prohibited from participating in the Bank's
affairs by regulatory order; if the Bank is placed in conservatorship,
receivership or other custodianship by regulatory authorities; if the Bank
enters into an agreement to receive federal financial assistance; or if the Bank
is the subject of an approved supervisory merger. Termination of such
obligations shall not, however, affect any vested rights of the Bank or the
employees. No payments shall be made under the agreements, in any case, if the
employee's employment terminates for "just cause" as defined in the agreements,
or if the Bank is not in compliance with its fully phased-in capital
requirements at the time of the employee's termination or would not be in
compliance after making such payments. The employment agreements also provide
that the Bank's obligations thereunder will be suspended if the employee is
suspended and/or temporarily prohibited by federal regulatory authorities from
participating in the Bank's affairs. Further, if the charges against such
employee giving rise to such suspension or prohibition are subsequently
dismissed, the Bank's Board of Directors may, in its discretion, pay the
employee all or part of the compensation otherwise payable while the employment
agreement was suspended and reinstate any or all of its obligations under the
employment agreement.
The employment agreements contain provisions stating that in the event
of the involuntary termination of employment not for cause, as defined, in
connection with, or within 12 months after, any change in control of the Bank or
the Company, the employee will be paid an amount equal to the sum of the
employee's base salary in effect on the date of the change in control and the
base salary the employee would have received over the remainder of the term of
the agreement. In no event will such payments exceed the difference between (i)
2.99 times the average
99
<PAGE> 100
annual compensation he received during the five-year period immediately prior to
the date of change in control and (ii) the sum of all other severance payments
received by the employee on account of the change in control. An employee's
severance benefits will be paid, at the employee's option, either within 30 days
of termination or over the lesser of 36 months or the remaining term of the
agreement. "Control" generally refers to the acquisition by any person or entity
of the ownership or power to vote more than 25% of the Bank's or Company's
voting stock, or the control of the election of a majority of the Bank's or
Company's Directors, or the exercise of a controlling influence over the
management or policies of the Bank or Company. The employment agreements also
provide for a similar lump sum payment to be made to the employees in the event
of voluntary termination of employment upon the occurrence, or within 90 days
thereafter, of certain specified events following any change in control, unless
consented to in advance by the employee in writing, including (i) requiring the
employee to perform his principal executive functions more than 35 miles from
the Bank's current primary office, (ii) the failure of the Bank or the Company
to maintain existing employee benefit plans, including material fringe benefits,
stock option and retirement plans, (iii) assigning duties and responsibilities
to the employee which are other than those normally associated with his position
with the Bank; or (iv) a material diminution of the employee's authority and
responsibility with the Bank. In addition to such events, Mr. Kreis' agreement
provides for lump sum payments upon the occurrence of the following events (or
within 90 days thereafter) after a change in control: (i) requiring that he
report to a person or persons other than the Bank's Board of Directors; or (ii)
a failure to elect or re-elect him to the Board of Directors of the Bank or the
Company. If the employee is terminated at any time with or without cause, except
for the reasons set forth above, the employee shall not be entitled to any
severance benefits under the employment agreement. The aggregate payments that
would be made to Messrs. Kreis, Brumfield, Osborne and Richmond, assuming the
termination of employment under the foregoing circumstances at June 30, 1995 and
without regard to other severance payments would have been approximately
$523,600, $369,300, $340,600 and $280,900, respectively.
DIRECTORS' COMPENSATION
Each non-employee member of the Board of Directors of the Company
receives a $6,000 annual retainer. Each non-employee member of the Board of
Directors of the Bank receives a fee of $1,000 for each Board meeting, provided
that a member will not be paid for more than two meetings not attended. The
Chairman of the Board receives a fee of $1,350 for each Board meeting attended.
Non-employee directors also receive a fee of $350 for each committee meeting
attended.
INCENTIVE COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS. Non-employee
directors of the Company also participate in the Incentive Compensation Plan for
Non-Employee Directors (the "Director Incentive Plan"), the purposes of which
are to attract and retain the best available non-employee directors for the
Company, to compensate non-employee directors for the increased responsibility
associated with the Bank's conversion to stock form, and to provide additional
equity incentives. Executive officers and other employees of the Company may not
participate in the Director Incentive Plan.
The Director Incentive Plan is administered by a committee (the
"Director Incentive Plan Committee") consisting of all the members of the Bank's
Compensation Committee. The Director Incentive Plan is unfunded and benefits are
payable only in the form of discounted non-incentive options to acquire the
Common Stock. Under the Director Incentive Plan, non-employee directors may
elect to forego all or a portion of their director fees for the coming fiscal
year and instead receive options having an exercise price equal to 50% of the
fair market value of the Common Stock on the date of grant. The number of
options granted to a director is determined such that the aggregate discount on
options granted is equal to the amount of director fees foregone. For fiscal
year 1995, Directors Anderson, Bracy, Craven, Fox, LaGuardia, Manahan and Patton
received discounted options to acquire 2,069, 1,758, 1,958, 1,781, 2,042, 1,881
and 2,146 shares of the Common Stock, respectively, in lieu of director fees
under the Director Incentive Plan. For fiscal year 1996, each non-employee
director will receive cash instead of discounted options and thus will not defer
their director fees beginning in July 1995.
100
<PAGE> 101
DIRECTOR OPTION PLAN. The Board of Directors has reserved 160,000
authorized but unissued shares of the Common Stock for issuance pursuant to
options issued under Heritage Federal Bancshares, Inc. 1994 Stock Option Plan
for Non-Employee Directors (the "Director Option Plan"). Under the Director
Option Plan, non-employee directors of the Company and its affiliates will
receive automatic annual grants of options to purchase 4,000 shares of the
Common Stock each. On February 16, 1994, each non-employee director was granted
options for 4,000 shares of the Common Stock at an exercise price of $15.19 per
share with respect to fiscal year 1994 and on August 17, 1994, each nonemployee
director was granted options to acquire 4,000 shares of the Common Stock at an
exercise price of $20.25 per share with respect to fiscal year 1995 and received
a grant of options for 4,000 shares of the Common Stock at an exercise price of
$27.50 on July 1, 1995 with respect to fiscal year 1996. Each nonemployee
director will receive an automatic grant of options for 4,000 shares on the
first day of each fiscal year thereafter. In each case, the exercise price was
equal to the fair market value of the Common Stock on the date of grant. Each of
the Options has a term of ten years. All such grants were immediately vested and
exercisable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 11, 1995, the most recent
practicable date, certain information as to the Common Stock beneficially owned
by (i) any person or group of persons who is known to Heritage to be the
beneficial owner of more than 5% of the Common Stock, and (ii) each of
Heritage's directors, each of Heritage's executive officers who are not
directors and by all of Heritage's directors and by all of Heritage's directors
and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND PERCENT OF
NATURE OF SHARES OF
BENEFICIAL COMMON STOCK
BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING(2)
---------------- -------------- --------------
<S> <C> <C>
Heritage Federal Bank for Savings
Employee Stock Ownership Plan and
Trust
110 East Center Street
Kingsport, Tennessee 37660 209,300 (3) 6.56%
Heritage Federal Bank for Savings
Profit Sharing Plan
110 East Center Street
Kingsport, Tennessee 37660 288,713 (4) 9.10%
Directors:
Sam H. Anderson, Jr. 88,159 2.74%
John C. Bracy 58,333 1.81%
Clyde W. Craven 63,245 (5) 1.96%
Robert C. Fox 74,780 (6) 2.32%
William E. Kreis 138,707 (7) 4.25%
Thomas E. LaGuardia, Jr. 51,003 1.58%
Richard A. Manahan 47,770 (8) 1.48%
C. Mack Patton 73,260 (9) 2.27%
Named Executive Officers
who are not Directors:
Richard D. Brumfield 122,003 (10) 3.77%
Don R. Osborne 118,320 (11) 3.66%
William F. Richmond 66,159 (12) 2.05%
All Directors and Executive Officers
as a Group (11 persons) 901,739 (13) 24.86%
</TABLE>
(Footnotes on following page)
101
<PAGE> 102
- ---------------
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, a person is deemed to be the beneficial owner, for purposes of
this table, of any shares of the Common Stock over which he or she has
or shares voting or investment power with respect to such security or
has a right to acquire beneficial ownership at any time within 60 days
from August 11, 1995. As used herein, "voting power" is the power to
vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares. Except as otherwise
noted, ownership is direct and the named beneficial owners exercise
sole voting and investment power over the indicated shares of the
Common Stock. Includes 33,455, 33,345, 34,227, 33,198, 76,668, 33,614,
33,792, 34,260, 47,119, 39,827 and 37,649 shares which Messrs.
Anderson, Bracy, Craven, Fox, Kreis, LaGuardia, Manahan, Patton,
Brumfield, Osborne and Richmond have the right to acquire within 60
days of August 11, 1995 pursuant to stock options.
(2) In calculating the percentage of shares outstanding for a named person
or group, the number of shares outstanding includes any shares of
Common Stock which the person or group has the right to acquire within
60 days of August 11, 1995.
(3) Consists of allocated and unallocated shares of the Common Stock held
in trust for the benefit of participating employees over which the ESOP
may be deemed to have shared voting and dispositive power. The ESOP is
administered by a committee consisting of Directors Robert C. Fox and
William E. Kreis and Vice President Jeffrey S. Little (the "ESOP
Trustees") The ESOP Trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of the participating
employees. Unallocated shares and allocated shares for which no timely
direction is received must be voted as directed by the ESOP Trustees,
as directed by the Board of Directors. The ESOP Trustees and Heritage
Federal disclaim beneficial ownership over the shares of the Common
Stock held by the ESOP.
(4) Consists of shares of the Common Stock held in trust for the benefit of
participating employees over which the Heritage Federal Bank for
Savings Profit Sharing Plan (the "401(k) Plan") may be deemed to have
shared voting and dispositive power. The Plan Trustee votes shares as
directed by participants, and otherwise as directed by Heritage Federal
in its capacity as Plan Administrator and over which the Bank disclaims
beneficial ownership.
(5) Includes 7,588 shares held in a defined benefit pension plan of which
Dr. Craven serves as trustee and thereby exercises voting power over
such shares, and 3,676 shares held in spouse's IRA.
(6) Includes 5,265 shares held in individual retirement account ("IRA") and
2,649 shares held in spouse's IRA. Does not include shares held by the
ESOP of which he is a trustee and over which he disclaims beneficial
ownership.
(7) Includes 20,491 shares in Mr. Kreis' account in the Bank's 401(k)
Profit Sharing Plan (the "401(k) Plan"); 4,484 shares allocated to his
account in the Heritage Federal Bank for Savings ESOP, and 10,263
shares of restricted shares of the Common Stock ("restricted stock")
granted to Mr. Kreis pursuant to the Heritage Federal Bank for Savings
Management Recognition Plan and Trust (the "MRP") and the Officer
Incentive Plan over which Mr. Kreis exercises voting power. Does not
include shares held by the ESOP of which he is a trustee and over which
he disclaims beneficial ownership.
(8) Includes 12,773 shares held in IRA and 509 shares held in spouse's IRA.
(9) Includes 3,800 shares held in IRA.
(10) Includes 40,930 shares in Mr. Brumfield's account in the 401(k) Plan;
3,426 shares allocated to his account in the ESOP; and 7,923 shares
granted to Mr. Brumfield as restricted stock awards pursuant to the MRP
and the Officer Incentive Plan, over which Mr. Brumfield exercises
voting power.
(11) Includes 17,026 shares in Mr. Osborne's account in the 401(k) Plan;
3,073 shares allocated to his account in the ESOP; and 5,299 shares
granted to Mr. Osborne as restricted stock awards pursuant to the MRP
and the Officer Incentive Plan, over which Mr. Osborne exercises voting
power.
(12) Includes 5,546 shares in Mr. Richmond's account in the 401(k) Plan;
2,481 shares allocated to his account in the ESOP; and 6,249 shares
granted to Mr. Richmond as restricted stock awards pursuant to the MRP
and the Officer Incentive Plan, over which Mr. Richmond exercises
voting power.
(13) Includes shares held by certain directors and officers as custodians
under Uniform Transfer to Minors Acts, by their spouses and children,
and for the benefit of certain directors and officers under IRAs as set
forth above. Includes 83,993 shares held in the 401(k) Plan and 13,464
shares allocated to the accounts of executive officers in the ESOP, the
voting of which shares such officers have the power to direct. Also
includes 29,734 shares of restricted stock granted to the executive
officers pursuant to the MRP and the Officer Incentive Plan. Does not
include 125,350 unallocated shares held by the ESOP, the voting of
which is directed by the ESOP Trustees as directed by the Board of
Directors. Includes 104,650 shares, 47,241 shares and 84,000 shares
which directors have the right to purchase pursuant to stock options
granted under the Option Plan, Director Incentive Plan, and 1994 Stock
Option Plan for Non-Employee Directors, respectively. Also includes
142,129 shares and 59,134 shares which executive officers have the
right to purchase pursuant to stock options granted under the Option
Plan and the Officer Incentive Plan, respectively.
102
<PAGE> 103
(c) Changes in Control
Information regarding arrangements, the operation of which may at
a subsequent date result in a change in control of the Company, is
contained in the section captioned "Merger with First American
National Corporation" under Part I hereof and is incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, the Bank's loans to directors and executive officers must be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, loans above the
greater of $25,000 or 5% of the Bank's capital and surplus (i.e., up to
$2,618,910 at June 30, 1995) to such persons must be approved in advance by a
disinterested majority of the Board of Directors. The Bank has a policy of
offering loans to officers and directors and employees in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. These loans do not involve more than the normal risk of
collectibility or present other unfavorable features. In addition, it has been
the practice to approve a $100,000 personal line of credit for each director.
Beyond that, officers and directors may only borrow for housing, personal
consumer loans, education or loans secured by savings accounts. Directors, from
the time of their election, and officers have not been permitted to borrow from
the institution for outside business purposes. Loans outstanding to directors
and executive officers during fiscal year 1995 were made at the prevailing
interest rates and on terms available to other customers of the Bank.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements. The following financial statements are
included under Item 8 hereof.
Independent Accountants' Report
Consolidated Statements of Financial Condition as of June 30, 1995
and 1994
Consolidated Statements of Income for the Years Ended June 30,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended June 30,
1995, 1994 and 1993
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. The following financial statement
schedules are filed herewith:
None.
103
<PAGE> 104
(3) Exhibits. The following is a list of exhibits filed as part of
this Annual Report on Form 10-K and is also the Exhibit Index.
<TABLE>
<CAPTION>
Page in
Sequentially
No. Exhibits Numbered Copy
---- -------- -------------
<S> <C> <C>
2(a) Agreement and Plan of Merger, dated as of February 21, 1995
between First American Corporation and Heritage Federal
Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
(b) Amendment dated May 17, 1995 to Agreement and Plan of Merger dated
February 21, 1995 between First American Corporation and Heritage
Federal Bancshares, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3(a) Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
(b) Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
10(a) Management Recognition Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
(b) Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
(c) Form of Employment Agreements between Heritage Federal Bank for Savings
and William E. Kreis, Richard D. Brumfield, Don R. Osborne and
William F. Richmond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
(d) Revised Form of Agreement for Split Dollar Insurance Program . . . . . . . . . . . . . . . . . . . .
(e) Heritage Federal Bancshares, Inc. Incentive Compensation Plan for Senior
Officers, as amended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ****
(f) Heritage Federal Bancshares, Inc. Incentive Compensation Plan for
Non-Employee Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ****
(g) Heritage Federal Bancshares, Inc. 1994 Stock Option Plan for
Non-Employee Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ****
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Consent of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
- ---------------
* Incorporated by reference to Exhibit 2 to the Company's Current Report
on Form 8-K filed February 23, 1995
** Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-44674).
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1992.
**** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended June 30, 1994.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year covered by this report on
Form 10-K.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated herein
by reference.
(d) Financial Statements and Financial Statement Schedules Excluded
From Annual Report. There are no other financial statements and financial
statement schedules which were excluded from the Annual Report to stockholders
pursuant to Rule 14a- 3(b)(1) which are required to be included herein.
104
<PAGE> 105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HERITAGE FEDERAL BANCSHARES, INC.
August 18, 1995 By: /s/ William E. Kreis
--------------------------------------
William E. Kreis
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ William E. Kreis August 18, 1995
- -----------------------------------------------
William E. Kreis
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William F. Richmond August 18, 1995
- -----------------------------------------------
William F. Richmond
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Sam H. Anderson August 18, 1995
- -----------------------------------------------
Sam H. Anderson, Jr.
Chairman of the Board
(Director)
/s/ John C. Bracy August 18, 1995
- -----------------------------------------------
John C. Bracy
(Director)
/s/ Clyde W. Craven August 18, 1995
- -----------------------------------------------
Clyde W. Craven
(Director)
/s/ Robert C. Fox August 18, 1995
- -----------------------------------------------
Robert C. Fox
(Director)
/s/ Thomas E. LaGuardia, Jr. August 18, 1995
- -----------------------------------------------
Thomas E. LaGuardia, Jr.
(Director)
/s/ Richard A. Manahan August 18, 1995
- -----------------------------------------------
Richard A. Manahan
(Director)
/s/ C. Mack Patton August 18, 1995
- -----------------------------------------------
C. Mack Patton
(Director)
<PAGE> 106
EXHIBIT 2(b)
<PAGE> 107
AMENDMENT TO
AGREEMENT AND PLAN OF MERGER
This AMENDMENT (the "Amendment") to the AGREEMENT AND PLAN OF MERGER
dated as of February 21, 1995 (the "Agreement"), between First American
Corporation, a Tennessee corporation ("FAC") and Heritage Federal Bancshares,
Inc., a Tennessee corporation ("HFB") is made and entered as of May 17, 1995.
W I T N E S S E T H :
WHEREAS, the parties hereto have heretofore entered into the
Agreement which contemplated that the Merger of HFB with and into FAC would be
accounted for as a purchase; and
WHEREAS, FAC now desires to account for the Merger as a pooling and
the parties hereto desire to amend the Agreement as hereinafter set forth in
order to facilitate such accounting treatment.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
1. Section 4.2(i) is hereby amended to delete the following:
"except with respect to the 1992 Plan and the 1994 Plan and the
Director Incentive Plan (A) to permit transfer of non-qualified
options to family members or non-profit charitable organizations or
(B) to permit exercise of such non-qualified options at any time
during the term thereof irrespective of service with HFB (or any
Subsidiary thereof) or any successor thereto"
so that Section 4.2(i) shall read in its entirety as follows:
(i) adopt any new employee benefit plan or program or make any
material change in or to any existing employee benefit plans or
programs of any HFB or any Subsidiary except as contemplated by
Section 5.9 herein or except as required by law; or make any
discretionary matching contributions or discretionary contributions
to any employee benefit plan of HFB or any Subsidiary thereof; or
2. Section 3.2(j) is hereby amended to delete the following:
<PAGE> 108
"however, it is FAC's current intention to repurchase up to 80% of
such number of shares prior to or substantially concurrent with the
consummation of the Merger pursuant to Rule 10b-18 of the SEC and in
a manner which does not prohibit FAC from entering into pooling
transactions within two years from such repurchases"
so that Section 3.2(j) shall read in its entirety as follows:
(j) Consideration. FAC has reserved or will reserve for issuance
sufficient shares of FAC Common Stock for issuance in the Merger.
3. Section 5.9(a) is hereby amended by deleting its contents in
its entirety and adding the following:
FAC and HFB acknowledge that the Heritage Federal Bank for Savings
Employee Stock Ownership Plan and Trust (the "ESOP") has unallocated
assets with a fair market value exceeding the outstanding balance of
the loan secured by those assets. Without changing the existing
vesting and allocation provisions in the ESOP (or in any of FAC's
qualified plans), the parties intend that current employees of HFB
will benefit from this investment. Therefore, after the Effective
Time and until all unallocated shares now held by the ESOP are
released from collateral pledge and allocated to current HFB
employees (the "100% Allocation Date"), the ESOP will be continued as
a separate plan for the benefit of current employees of HFB eligible
to participate therein in accordance with ESOP's terms for so long as
a separate plan is legally permissible under the Internal Revenue
Code and the rules promulgated thereunder without causing
disqualification of the ESOP. If before the 100% Allocation Date, it
becomes legally impermissible under the Internal Revenue Code and the
rules promulgated thereunder to maintain the ESOP as a separate plan,
to the extent legally permissible under Internal Revenue Code
qualification requirements, the assets now held by the ESOP shall
continue to be allocated only to current employees of HFB, until the
100% Allocation Date.
4. HFB agrees that no holder of any options to purchase HFB Common
Stock shall be entitled to receive cash in lieu thereof.
5. Capitalized terms, not specifically defined herein shall have
the meanings ascribed to them in the Agreement.
6. This Amendment shall become effective retroactively to the
execution of the Agreement. Except as expressly provided above, all of the
terms and conditions of the Agreement shall remain unchanged and in full force
and effect.
IN WITNESS WHEREOF, FAC and HFB have caused this Amendment to be
<PAGE> 109
signed by their respective officers thereunto duly authorized, all as of May 17,
1995.
[FIRST AMERICAN CORPORATION CORPORATE SEAL]
FIRST AMERICAN CORPORATION
BY: /s/ Dennis C. Bottorff
------------------------
Dennis C. Bottorff
Chairman and Chief Executive Officer
Attest:
Mary C.
- ----------------------------
Title: Assistant Secretary
----------------------
HERITAGE FEDERAL BANCSHARES, INC.
BY:
-------------------------
William E. Kreis
President and Chief Executive Officer
Attest:
- ----------------------------
Title:
----------------------
<PAGE> 110
EXHIBIT 10(d)
<PAGE> 111
SPLIT DOLLAR AGREEMENT
THIS AGREEMENT, made and entered into this ________ day of ________
1994, between HERITAGE FEDERAL BANK FOR SAVINGS, a Corporation chartered under
the laws of the United States, with its principal office located in the State of
Tennessee (hereinafter referred to as the "Employer", and _____________________,
an individual residing in the State of Tennessee (hereinafter referred to as the
"Employee").
WHEREAS, the Employee is a valuable employee of the Employer; and
WHEREAS, the Employee wishes to provide life insurance protection for
his/her family in the event of his/her death, under a life insurance policy
insuring his/her life (hereinafter referred to as the "Policy"); and
WHEREAS, the Employer is willing to assist in the payment of the
Policy premiums; and
WHEREAS, the Employer will retain the ownership of the Policy in
order to secure the payment of the cash value of the Policy to it as
reimbursement for premiums advanced by it;
NOW, THEREFORE, the parties hereto mutually agree:
PURCHASE OF POLICY
The Employer has purchased or will purchase the Policy from the Canada Life
Assurance Company or Canada Life Insurance Company of New York (the applicable
company to be hereinafter called "Insurer") in the total face amount of
$____________, ________________, such Policy being more fully described in
Exhibit "A" attached hereto and made a part hereof.
The parties agree that, as between them, the policy shall be subject to the
terms of this agreement and to the terms of the endorsement to such Policy
filed or to be filed with the Insurer (hereinafter referred to as the
"Endorsement").
POLICY OWNERSHIP
The Employer shall be the owner of the Policy, and may exercise all rights
granted to the owner by the terms of the Policy, except as otherwise provided
herein and in the Endorsement.
RIGHT TO DESIGNATE BENEFICIARY
The Employee shall have the right to designate a beneficiary or beneficiaries to
receive Policy death proceeds as well as the right to elect and change a
payment option for such beneficiaries, but subject always to any right or
interest which the Employer may have in such proceeds as provided in this
Agreement or in the Endorsement.
PREMIUM PAYMENTS
The Employer shall pay the entire policy premium billed by the insurer on or
before the due date for each premium due date on the policy.
1
<PAGE> 112
DISABILITY WAIVER OF PREMIUMS
Notwithstanding any other provision in this agreement to the contrary, if the
Policy contains a disability waiver of premium provision, the Employee shall pay
all premiums attributable to such provision, and any premium waived shall be
considered as having been paid by the Employee.
DEATH PROCEEDS
Upon the death of the Employee, the Employer shall make prompt arrangements to
obtain the Policy death proceeds. The Employer shall retain a portion of such
death proceeds equal to the Premiums Paid by it under this agreement or, if
greater, the Cash Surrender Value of the Policy. For purposes of this section
entitled "Death Proceeds" and the section entitled "Termination of Agreement",
"Cash Surrender Value" shall refer to the amount of cash surrender value
existing within the Policy immediately prior to the death of the Policy insured,
net of any Policy surrender charges. For purposes of computing the Employer's
share under this section entitled, "Death Proceeds" and under the section
entitled "Termination of Agreement", the term "Premiums Paid" shall mean total
premiums paid by the Employer less any outstanding Policy indebtedness incurred
by the Employer, including any interest due on such indebtedness, and by other
amounts taken from the Policy by the Employer, including amounts received in the
form of withdrawals, partial surrenders or dividend payments. The balance of
the death proceeds, if any, shall be paid to the beneficiary or beneficiaries
designated by the Employee in accordance with the Endorsement.
TERMINATION OF AGREEMENT
This agreement shall terminate immediately upon the termination of the
Employee's employment (other than by reason of his/her death). The Employer may
terminate this agreement by written notice to the Employee with such termination
to be effective as of the date of such notice; provided, however, that in the
event of a change in control of Heritage Federal Bancshares, Inc. the parent
corporation of the Employer, the Employer may not elect to terminate this
agreement except upon termination of the Employee's employment for a just cause.
"Just Cause" shall mean termination because of the Employee's personal
dishonesty, incompetency, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation, other than traffic violations or
similar offenses, or final cease-and-desist order. The term "control" shall
refer to the ownership, holding, or power to vote more than 25% of the Bank's or
Parent's voting stock, the control of the election of a majority of the Bank's
or Parent's directors, or the exercise of a controlling influence over the
management or policies of Heritage Federal Bancshares, Inc. by any person or by
persons acting as a group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934. The term "person" means an individual other than the
Employee or a corporation, partnership, trust, association, joint venture, pool,
syndicate, sole proprietorship, unincorporated organization or any other form of
entity not specifically listed herein.
No termination of this agreement shall affect or impair any party's right to
Policy proceeds as such rights exist immediately prior to such termination.
Upon termination of this agreement for any reason specified in this section
entitled "TERMINATION OF AGREEMENT", the Employee shall have a thirty (30) day
option to receive from the Employer an absolute assignment of the Policy in
exchange for
2
<PAGE> 113
a dollar amount equal to: (i) the Cash Surrender Value of the Policy or (ii)
the aggregate of Premiums Paid by the Employer, whichever is greater. Should
the Employee fail to exercise such option within the allowable period, the
Employer shall become the sole owner of all rights in the Policy and may deal
with the Policy as it, in its sole discretion, deems appropriate. The Employee
shall timely take all necessary measures to enable the Employer to enforce any
such right.
LIMITATION OF INSURER LIABILITY
In the event of the death of the insured under the Policy, the Insurer shall be
fully discharged from its obligations under the Policy by payment of the Policy
death proceeds to the Employer, to the beneficiary or beneficiaries named in the
Endorsement, or to any or all such persons or parties by joint check.
In the event that the Policy lapses or is surrendered during the life of the
insured under the Policy, the Insurer shall be fully discharged from its
obligation under the Policy by payment of the entire cash surrender value to the
employer.
The Insurer shall not be obligated to inquire as to the division or distribution
of any monies payable under this agreement. In no event shall the Insurer be
considered a party to this Agreement. No provision of this agreement shall in
any way be construed as affecting the obligations of the Insurer as provided in
the Policy or the Endorsement.
The following procedures shall govern benefit claims by the Employee or his/her
beneficiary(ies). For purposes of the split dollar life insurance plan
established by this agreement, the Claims Manager shall be Heritage Federal Bank
For Savings.
The Employee or his/her beneficiary(ies) shall make a claim for benefits by
giving written notice of such claim to the Claims Manager, who shall promptly
file the appropriate claim information with the Insurer.
If for any reason a claim for benefits is denied in whole or part, written
notice of such decision shall be furnished to the claimant within ninety (90)
days after receipt of the claim by the Claims Manager. Such notice shall
provide the following information:
(1) The specified reason or reasons for the denial;
(2) Specific reference to pertinent plan provisions on which the
denial is based;
(3) A description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(4) An explanation of the plan's Review Procedure described below.
If notice of the claim denial is not furnished within ninety (90) days of the
date a claim is made, the claim shall be deemed denied and the claimant shall
proceed to the Review Procedure described below.
This procedure is established to provide the claimant a reasonable opportunity
to appeal a denied claim and obtain a full and fair review.
3
<PAGE> 114
Upon denial of a claim, the claimant or his/her duly authorized representative
may:
(1) Request a review upon written application to the Claims
Manager;
(2) Review pertinent documents; and
(3) Submit issues and comments in writing.
A request for review must be made in writing by the claimant or his/her duly
authorized representative within sixty (60) days after receipt by the claimant
of written notification of denial of a claim.
A decision on review of a denied claim shall be made promptly by the Claims
Manager. Ordinarily this will be within sixty (60) days after the Claims
Manager's receipt of a request for review. Special circumstances may require an
extension of the time for processing, in which case a decision shall be rendered
as soon as possible, but not later than ninety (90) days after receipt of a
request for review. The Claims manager, in his/her discretion, may conduct a
hearing on the denied claim.
The decision on review shall be in writing and shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, as well as specific references to the pertinent plan provisions on
which the decision is based.
For purposes of the Employee Retirement Income Security Act of 1974 (ERISA), the
Employer will be the Named Fiduciary and Plan Administrator of the split dollar
insurance plan for which this agreement is hereby designated the written plan
instrument. The Employer may authorize a person or group of persons to fulfill
the responsibilities of the Employer as Plan Administrator.
The Named Fiduciary and/or the Plan Administrator may employ others to render
advice with regard to its responsibilities under this plan.
The Named Fiduciary may allocate fiduciary responsibilities to others and may
exercise any other powers necessary for the discharge of its duties to the
extent that the exercise of such powers does not conflict with the employee
Retirement Income Security Act of 1974 (ERISA).
PARTIES BOUND
This agreement shall be binding upon and inure to the benefit of the Employer
and its successors and assigns, and the Employee, his/her successors, assigns,
heirs, executors, administrators and beneficiaries.
NOTICES, CONSENTS AND DEMANDS
Any notice, consent or demand under this agreement shall be in writing, and
shall be signed by the party giving or making same. Such notice, consent or
demand shall be sent by United States certified mail, postage prepaid and
addressed to such party's last known address as shown on the records of the
Employer. The date of such mailing shall be deemed the date of such notice,
consent or demand.
FUNDING POLICY
The Funding Policy for this Split Dollar arrangement shall be:
4
<PAGE> 115
(a) To maintain the policy in force by paying the premiums when due as
billed by the insurer.
(b) Dividends declared by the Insurer on the policy will be applied to
purchase additional paid-up insurance on the life of the Employee.
(c) The Employer has established and funded a separate fund for payment
of future premiums on the Employee's policy until termination of this agreement.
If the Employee's employment is terminated prior to any change in control as
defined herein, then the Employee's allocated share from this separate fund
shall belong to the Employer. In the event of a change in control and
termination of Employee's employment for any reason other than just cause then
the Employer agrees that the Employee's allocated portion of the separate fund
shall be paid to the Employee. In the event of a change in control and
termination of the Employee for just cause then the Employee's allocated share
of the separate fund shall belong to the Employer. Subject to the terms of this
agreement the Employer agrees that this separate fund shall be used solely to
pay future premiums on the Employee's policies included in the Employers Split
Dollar Life Insurance arrangement.
(d) Notwithstanding any of the provisions herein provided, if an
Employee is terminated for just cause then all rights in the Employee's policy
included in this Split Dollar Life Insurance Arrangement shall be forfeited by
the Employee and the policy of such terminated Employee shall belong to the
Employer.
INTERPRETATION
When appropriate in this agreement, words used in the singular shall include the
plural (and vice versa) and words used in the masculine shall include the
feminine (and vice versa). The section captions used in this agreement are for
organizational purposes only and shall have no determinative effect upon the
rights and duties created hereunder.
GOVERNING LAW
This agreement shall be governed by and construed in accordance with the laws of
the State of Tennessee.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the
day and year first above written.
HERITAGE FEDERAL BANK FOR SAVINGS
BY
-------------------------------
TITLE
--------------------------
"EMPLOYER"
- ---------------------------------
"EMPLOYEE"
5
<PAGE> 116
EXHIBIT A
<TABLE>
<CAPTION>
Life Insurance Life Insurance Policy Identification Face
Company Name Plan Name Number Amount
- -------------- -------------- --------------------- -----
<S> <C> <C> <C>
The Canada Life Heritage Federal Bank 2638 290 $130,000
Assurance Co. Split dollar Plan
</TABLE>
6
<PAGE> 117
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PARENT
Heritage Federal Bancshares, Inc.
<TABLE>
<CAPTION>
State or Other
Jurisdiction of Percentage
Subsidiaries (1) Incorporation Ownership
- ---------------- --------------- ----------
<S> <C> <C>
Heritage Federal Bank for Savings United States 100%
Subsidiary of Heritage Federal Bank for Savings (1)
- ---------------------------------------------------
Citizens Financial Corporation Tennessee 100%
</TABLE>
- ------------------
(1) The assets, liabilities, and operations of the subsidiaries are included in
the consolidated financial statements contained in Item 8 of this Form
10-K.
<PAGE> 118
EXHIBIT 23
<PAGE> 119
[COOPERS & LYBRAND LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Heritage Federal Bancshares, Inc.:
We consent to the incorporation by reference in the registration statements of
Heritage Federal Bancshares, Inc. on Forms S-8 (File No. 33-46285, File No.
33-56160 and File No. 33-85482) of our report dated August 1, 1995, on our
audits of the consolidated financial statements of Heritage Federal Bancshares,
Inc. as of June 30, 1995 and 1994, and for the years ended June 30, 1995, 1994,
and 1993, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P
---------------------------
Knoxville, Tennessee
August 17, 1995
<PAGE> 1
EXHIBIT 13.2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K/A-1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- ---------------
Commission File No. 0-20000
-------
HERITAGE FEDERAL BANCSHARES, INC.
---------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TENNESSEE 62-1485034
- --------------------------------- ---------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
110 EAST CENTER STREET, KINGSPORT, TENNESSEE 37660
- --------------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 378-8000
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of August 11, 1995, the aggregate market value of the 3,189,506 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $82.9 million based on the closing sales price of
$26.00 per share of the registrant's Common Stock on August 9, 1995. For
purposes of this calculation, it is assumed that directors, officers and
beneficial owners of more than 5% of the registrant's outstanding voting stock
are not affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Page 1 of sequentially numbered pages
---
Exhibit Index at Sequentially Numbered Page
---
<PAGE> 2
This Form 10-K/A-1 is being filed to amend Item 8, "Financial
Statements and Supplementary Data."
2
<PAGE> 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
56
<PAGE> 4
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Heritage Federal Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Heritage Federal Bancshares, Inc. and Subsidiary as of June 30, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Heritage Federal
Bancshares, Inc. and Subsidiary at June 30, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for securities and income taxes in 1995 and
1994, respectively.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
August 1, 1995
57
<PAGE> 5
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1995 and 1994
______________________________________
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,285,434 $ 9,610,848
Interest-earning deposits in financial institutions 5,592,680 2,295,206
Federal funds sold 7,000,000 3,000,000
------------ ------------
Total cash and cash equivalents 21,878,114 14,906,054
Securities available-for-sale 20,213,195 -
Securities held-to-maturity:
U.S. government and agencies and collateralized mortgage
obligations - approximate market value of $86,258,000 86,627,642 -
Mortgage-backed securities - approximate market value of
$83,012,000 83,994,659 -
Investment securities - approximate market value of
$78,754,000 - 80,796,409
Mortgage-backed securities - approximate market
value of $88,397,000 - 92,557,813
Loans receivable, net 297,533,313 308,699,625
Interest receivable 3,666,307 3,446,516
Real estate owned, net of allowance for losses of $211,771
and $262,322 at June 30, 1995 and 1994, respectively - 531,275
Premises and equipment, net 6,785,895 6,676,464
Investment in Federal Home Loan Bank stock, at cost 4,057,300 3,807,700
Excess of cost over fair value of net assets acquired and
other intangibles, net 780,132 1,270,127
Deferred income taxes 897,514 1,457,138
Other assets 1,735,008 1,738,951
------------ ------------
$528,169,079 $515,888,072
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Facing Page 58
<PAGE> 6
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $449,317,977 $450,818,608
Advances from Federal Home Loan Bank 18,121,921 9,587,083
Advances from borrowers for taxes and insurance 4,027,987 3,990,598
Accrued expenses and other liabilities 2,927,221 2,107,869
Employee Stock Ownership Plan obligation - 880,885
------------ ------------
474,395,106 467,385,043
Commitments and contingencies (Notes 2, 3, 5, 12, 15, 16, 18 and 21)
Stockholders' equity:
Preferred stock of $1.00 par value, authorized 2,000,000
shares; none issued or outstanding - -
Common stock of $1.00 par value, 8,000,000 shares
authorized; issued and outstanding - 3,186,158 at June 30,
1995 and 3,172,826 at June 30, 1994 (Note 19) 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings-substantially restricted 35,070,071 30,813,111
Unrealized appreciation on available-for-sale securities,
net of tax of $51,530 in 1995 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
------------ ------------
53,773,973 48,503,029
------------ ------------
$528,169,079 $515,888,072
============ ============
</TABLE>
58
<PAGE> 7
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1995, 1994 and 1993
_____________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $24,770,777 $25,448,506 $30,220,709
Securities available-for-sale 1,361,695 - -
Securities held-to-maturity:
U.S. government and agencies and collateralized
mortgage obligations 4,199,355 - -
Mortgage backed securities 5,034,437 - -
Investments - 5,041,697 5,151,660
Mortgage-backed securities - 4,539,140 3,074,851
Other interest-earning assets 612,630 521,327 619,111
----------- ----------- -----------
Total interest income 35,978,894 35,550,670 39,066,331
----------- ----------- -----------
Interest expense:
Deposits 16,829,466 15,846,768 18,873,962
Other borrowed money 968,030 640,513 431,042
----------- ----------- -----------
Total interest expense 17,797,496 16,487,281 19,305,004
----------- ----------- -----------
Net interest income 18,181,398 19,063,389 19,761,327
Provision for loan losses 82,247 487,346 595,140
----------- ----------- -----------
Net interest income after provision
for loan losses 18,099,151 18,576,043 19,166,187
----------- ----------- -----------
Noninterest income:
Loan fees and service charges 1,826,140 1,574,221 1,426,069
Other operating income 928,831 909,600 684,393
Gain on sale of branches - - 1,000,000
----------- ----------- -----------
Total noninterest income 2,754,971 2,483,821 3,110,462
----------- ----------- -----------
Noninterest expense:
Compensation and benefits 6,198,938 5,306,228 5,713,579
Occupancy and equipment 1,124,528 1,089,392 1,130,840
Communications and other office expenses 1,510,758 1,371,648 1,543,704
Regulatory and other insurance premiums 1,180,955 1,196,911 1,090,247
Computer processing 636,232 597,360 570,524
Real estate owned expenses, including provision
for loss (87,398) 55,744 270,340
Other operating costs 1,254,716 1,211,057 1,191,916
Amortization of excess of cost over fair value of
net assets acquired 422,873 525,336 1,301,646
----------- ----------- -----------
Total noninterest expense $12,241,602 $11,353,676 $12,812,796
----------- ----------- -----------
</TABLE>
(continued)
59
<PAGE> 8
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
Years ended June 30, 1995, 1994 and 1993
_____________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income before income tax expense and
change in method of accounting for
income taxes $8,612,520 $9,706,188 $9,463,853
Income tax expense 3,145,666 3,501,963 3,951,634
---------- ---------- ----------
Net income before change in method
of accounting for income taxes 5,466,854 6,204,225 5,512,219
Cumulative effect of change in method
of accounting for income taxes - 764,255 -
---------- ---------- ----------
Net income $5,466,854 $6,968,480 $5,512,219
========== ========== ==========
Earnings per share:
Net income before change in method of
accounting for income taxes $ 1.58 $ 1.85 $ 1.67
Cumulative effect of change in method of
accounting for income taxes - .22 -
---------- ---------- ----------
Earnings per share (Note 19) $ 1.58 $ 2.07 $ 1.67
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
60
<PAGE> 9
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
<TABLE>
<CAPTION>
Net
unrealized
depreciation
Retained on certain
Additional earnings- marketable
Common stock paid-in substantially equity
Shares Amount capital restricted securities
------ ------ ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1992 1,495,000 $1,495,000 $14,553,290 $20,703,246 -
Net income - - - 5,512,219 -
Proceeds from issuance of common
stock 42,468 42,468 445,915 - -
Implementation of Management
Recognition Plan, including
issuance of common stock 44,850 44,850 880,181 - -
Three for two stock split 791,159 791,159 - (791,159) -
Increases in fair value of shares held by
Management Recognition Plan
through award date - - 140,156 - -
Amortization of unearned compensation
of Management Recognition Plan - - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - - -
--------- ---------- ----------- ----------- ----
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306 -
========= ========== =========== =========== ====
<CAPTION>
Employee Unearned
Stock compensation of
Ownership Management
Plan Recognition
obligation Plan Total
---------- ---- -----
<S> <C> <C> <C>
Balances at June 30, 1992 $(1,173,388) - $35,578,148
Net income - - 5,512,219
Proceeds from issuance of common
stock - - 488,383
Implementation of Management
Recognition Plan, including
issuance of common stock - (925,031) -
Three for two stock split - - -
Increases in fair value of shares held by
Management Recognition Plan
through award date - (140,156) -
Amortization of unearned compensation
of Management Recognition Plan - 154,009 154,009
Reduction of Employee Stock
Ownership Plan obligation 120,348 - 120,348
----------- --------- -----------
Balances at June 30, 1993 $(1,053,040) $(911,178) $41,853,107
=========== ========= ===========
</TABLE>
(continued)
61
<PAGE> 10
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
<TABLE>
<CAPTION>
Retained
Additional earnings-
Common stock paid-in substantially
Shares Amount capital restricted
------- ------ ------- ----------
<S> <C> <C> <C> <C>
Balances at June 30, 1993 2,373,477 $2,373,477 $16,019,542 $25,424,306
Net income - - - 6,968,480
Proceeds from issuance of common
stock, including effect of three
for two stock split 6,143 6,143 88,553 (1,419)
Cash dividend paid on common
stock at $.25 per share - - - (785,050)
Four for three stock split 793,206 793,206 - (793,206)
Amortization of unearned compensation
of Management Recognition Plan - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - -
--------- --------- ---------- ----------
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111
========= ========= ========== ==========
<CAPTION>
Net
unrealized
depreciation Employee Unearned
on certain Stock ompensation of
marketable Ownership Management
equity Plan Recognition
securities obligation Plan Total
---------- ---------- ---- -----
<S> <C> <C> <C> <C>
Balances at June 30, 1993 - $(1,053,040) $(911,178) $41,853,107
Net income - - - 6,968,480
Proceeds from issuance of common
stock, including effect of three
for two stock split - - - 93,277
Cash dividend paid on common
stock at $.25 per share - - - (785,050)
Four for three stock split - - - -
Amortization of unearned compensation
of Management Recognition Plan - - 201,060 201,060
Reduction of Employee Stock
Ownership Plan obligation - 172,155 - 172,155
--- --------- -------- ----------
Balances at June 30, 1994 $ - $ (880,885) $(710,118) $48,503,029
=== ========= ======== ==========
</TABLE>
(continued)
62
<PAGE> 11
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 1995, 1994 and 1993
________________________________________
<TABLE>
<CAPTION>
Retained
Common Stock Additional earnings-
------------ paid-in substantially
Shares Amount capital restricted
------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balances at June 30, 1994 3,172,826 $3,172,826 $16,108,095 $30,813,111
Net income - - - 5,466,854
Adoption of change in accounting
for securities, net of tax - - - -
Proceeds from issuance of common
stock, including effect of four
for three stock split 13,332 13,332 122,226 (1,269)
Cash dividend paid on common
stock at $.38 per share - - - (1,208,625)
Tax benefit from exercise of stock
options - - 67,800 -
Tax benefit from Management
Recognition Plan - - 211,370 -
Change in unrealized appreciation,
net of tax - - - -
Amortization of unearned compensation
of Management Recognition Plan - - - -
Reduction of Employee Stock
Ownership Plan obligation - - - -
--------- --------- ---------- ----------
Balances at June 30, 1995 3,186,158 $3,186,158 $16,509,491 $35,070,071
========= ========= ========== ==========
<CAPTION>
Net Employee Unearned
unrealized Stock compensation of
appreciation Ownership Management
on available- Plan Recognition
for-sale obligation Plan Total
---------- ---------- ---- -----
<S> <C> <C> <C> <C>
Balances at June 30, 1994 $ - $(880,885) $(710,118) $48,503,029
Net income - - - 5,466,854
Adoption of change in accounting
for securities, net of tax (44,843) - - (44,843)
Proceeds from issuance of common
stock, including effect of four
for three stock split - - - 134,289
Cash dividend paid on common
stock at $.38 per share - - - (1,208,625)
Tax benefit from exercise of stock
options - - - 67,800
Tax benefit from Management
Recognition Plan - - - 211,370
Change in unrealized appreciation,
net of tax 128,922 - - 128,922
Amortization of unearned compensation
of Management Recognition Plan - - 355,057 355,057
Reduction of Employee Stock
Ownership Plan obligation - 160,120 - 160,120
---------- --------- --------- -----------
Balances at June 30, 1995 $ 84,079 $(720,765) $(355,061) $53,773,973
========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
63
<PAGE> 12
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 1995, 1994 and 1993
________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480 $ 5,512,219
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in method of
accounting for income taxes - (764,255) -
Amortization of:
Excess of cost over fair value of net assets acquired 422,873 525,336 1,301,646
Discounts and premiums on securities 536,232 952,346 534,952
Deferred loan origination fees (505,384) (381,771) (60,562)
Loan discounts (753,527) (900,468) (1,056,576)
Provision for loan losses and losses on real estate 83,298 560,337 846,965
Gain on sale of branches - - (1,000,000)
Recognition of Management Recognition Plan expense 355,057 201,060 154,009
Recognition of ESOP expense 160,120 172,155 120,348
Dividends received in stock of Federal Home Loan Bank (249,600) (179,900) (156,100)
Deferred income taxes and charge in-lieu of taxes 787,264 16,554 260,000
Depreciation and amortization of premises and equipment 534,605 505,748 558,126
Increase in unearned compensation of Management
Recognition Plan - - (925,031)
Decrease (increase) in:
Other assets 71,065 28,116 4,851
Accrued interest receivable (219,791) 329,588 265,059
Increase (decrease) in:
Accrued expenses and other liabilities 820,568 (496,008) 650,624
----------- ----------- ------------
Total adjustments 2,042,780 568,838 1,498,311
----------- ----------- ------------
Net cash provided by operating activities 7,509,634 7,537,318 7,010,530
----------- ----------- ------------
Cash flows from investing activities:
Net repayments of loans 12,298,111 19,119,421 30,619,553
Principal receipts on mortgage-backed securities 8,289,568 15,847,363 9,069,390
Purchases of available-for-sale securities (3,984,063) - -
Proceeds from maturities of available-for-sale securities 6,035,681 - -
Purchases of securities held-to-maturity (64,990,375) - -
Proceeds from maturities of securities held-to-maturity 36,767,292 - -
Purchases of mortgage-backed securities - (48,754,748) (28,186,079)
Purchases of investment securities, certificates of deposit
and term federal funds sold - (49,295,935) (65,860,242)
Proceeds from maturities of investment securities and
certificates of deposit - 57,157,839 44,279,779
Proceeds from sales of foreclosed real estate 575,089 91,281 795,102
Purchases of Federal Home Loan Bank stock - - (3,400)
Cash and cash equivalents transferred in sale of branches - - (51,318,038)
Purchases of premises and equipment, net (644,036) (458,083) (501,176)
----------- ---------- ------------
Net cash used by investing activities $(5,652,733) $(6,292,862) $(61,105,111)
----------- ----------- ------------
</TABLE>
(continued)
64
<PAGE> 13
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years ended June 30, 1995, 1994 and 1993
________________________________________
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $(1,500,631) $(9,174,309) $17,878,579
Net increase (decrease) in mortgage escrow funds 37,389 (30,602) (358,953)
Lease payments for obligations under capital leases (1,216) (101,100) (100,996)
Repayment of ESOP obligation (880,885) (172,155) (120,348)
Advances (repayments) from the Federal Home Loan Bank 8,534,838 (246,605) 9,748,028
Net proceeds from issuance of common stock 134,289 93,277 1,413,414
Dividends paid (1,208,625) (785,050) -
----------- ----------- -----------
Net cash provided (used) by financing activities 5,115,159 (10,416,544) 28,459,724
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 6,972,060 (9,172,088) (25,634,857)
Cash and cash equivalents at beginning of year 14,906,054 24,078,142 49,712,999
----------- ----------- -----------
Cash and cash equivalents at end of year $21,878,114 $14,906,054 $24,078,142
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Payments made during the period for:
Interest $17,666,029 $16,503,090 $19,262,868
Income taxes $ 2,389,500 $ 3,289,871 $ 3,967,122
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
Real estate foreclosures and related transfers $44,865 $70,627 $172,183
======= ======= ========
</TABLE>
The Company sold certain branches during 1993. In conjunction with that
transaction, assets sold, liabilities transferred and gain recognized were
as follows:
<TABLE>
<S> <C>
Deposits transferred $54,814,922
Premises and equipment sold, net (2,122,622)
Share loans sold (550,468)
Accrued interest and other liabilities transferred 176,206
Gain on sale (1,000,000)
-----------
Cash and cash equivalents transferred $51,318,038
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
65
<PAGE> 14
HERITAGE FEDERAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Heritage Federal Bancshares, Inc. (the Company)
and its wholly-owned subsidiary, Heritage Federal Bank for Savings (the
Bank) and the Bank's wholly-owned subsidiary, Citizens Financial
Corporation. All significant intercompany balances and transactions are
eliminated in consolidation.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash
and cash equivalents consist of federal funds sold, cash on hand, and due
from banks. Cash and due from banks includes interest-bearing deposits of
$5,592,680 and $2,295,206 at June 30, 1995 and 1994, respectively.
Federal funds sold included in cash equivalents have maturities ranging
from one to 14 days. The Bank maintained cash reserves required by the
Federal Reserve Bank amounting to $3,168,000 and $4,720,000 as of June
30, 1995 and 1994, respectively.
INVESTMENT SECURITIES - Effective July 1, 1994, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for
Certain Investments in Debt and Equity Securities. Investments in
certain debt and equity securities are classified as either
Held-to-Maturity (reported at amortized cost), Trading (reported at fair
value with unrealized gains and losses included in earnings), or
Available-for-Sale (reported at fair value with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity).
Premiums and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
Prior to the adoption of SFAS 115, investment securities were those
securities held for investment purposes which management determined they
had the ability and intent to hold to maturity. Investment securities
were stated at cost adjusted for amortization of premiums and accretion
of discounts.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities. These securities, which have been classified as
held-to-maturity in 1995, are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and
discounts are amortized using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Gains and losses on the sale of securities are determined using the
specific identification method.
66
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOANS RECEIVABLE - Loans receivable are stated at unpaid principal
balances, net of discounts, deferred loan origination fees, and the
allowance for loan losses.
Unearned discounts on mortgage loans purchased are amortized to interest
income using the interest method over the estimated average lives of the
loans.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure, on July 1, 1994. Under the new standards, a
loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral. The adoption of SFAS 114 and 118 resulted in no
additional provision for credit losses, at July 1, 1994.
At June 30, 1995, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS 114 totaled $2,111,000, and
these loans had a corresponding valuation allowance of $70,000. The
impaired loans at June 30, 1995, were measured for impairment using the
fair value of the collateral as all of these loans were collateral
dependent. For the year ended June 30, 1995, the average recorded
investment in impairment loans was approximately $1,943,000. The Company
recognized approximately $128,000 of interest on impaired loans during
the portion of the year that they were impaired.
The Company uses several factors in determining if a loan is impaired
under SFAS No. 114. The internal asset classification procedures include
a thorough review of significant loans and lending relationships and
include the accumulation of related data. This data includes loan
payment status, borrowers' financial data and borrowers' operating
factors such as cash flows, operating income or loss, etc.
The allowance for loan losses is increased by charges against income and
decreased by chargeoffs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' ability to repay, estimated
value of any underlying collateral, and current economic conditions.
While management believes that it has established the allowance in
accordance with generally accepted accounting principles and has taken
into account the views of its regulators and the current economic
environment, there can be no assurance that in the future the Bank's
regulators or its economic environment will not require further increases
in the allowance.
The allowance for credit losses is established through charges to
earnings in the form of a provision for credit losses. Increases and
decreases in the allowance due to changes in the measurement of the
impaired loans are included in the provision for credit losses. Loans
continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is
considered probable.
67
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and
subsequent recoveries, if any, are credited to the allowance.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS - Loans, including
impaired loans, are generally classified as nonaccrual if they are past
due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process
of collection. If a loan or a portion of a loan is classified as
doubtful or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding,
except in the case of loans with scheduled amortizations where the
payment is generally applied to the oldest payment due. When the future
collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a nonaccrual loan
had been partially charged off, recognition of interest on a cash basis
is limited to that which would have been recognized on the recorded loan
balance at the contractual interest rate. Receipts in excess of that
amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
DISCOUNTS ON LOANS ACQUIRED THROUGH MERGERS - Discounts on loans acquired
through mergers are accreted into income principally on the interest
method over the remaining contractual terms of the respective loans,
adjusted for expected prepayments.
68
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS - Loan fees are
accounted for in accordance with Statement of Financial Accounting
Standards (SFAS) No. 91. Loan fees and certain direct loan origination
costs are deferred, and the net fee or cost is recognized in the
statement of income using the interest method over the contractual life
of the loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience. Commitment fees and costs relating to
commitments whose likelihood of exercise is remote are recognized over
the commitment period on a straight-line basis. If the commitment is
subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the
life of the loan as an adjustment of yield. The Bank ceases amortization
of net deferred fees on loans which are contractually 90 days or more
past due or where management has determined that such amounts may be
uncollectible.
REAL ESTATE OWNED - Real estate properties acquired through loan
foreclosure or deed in lieu of foreclosure and properties classified as
in substance foreclosures are initially recorded at the lower of the
related loan balance, less any specific allowance for loss, or fair value
at the date of foreclosure. Costs subsequently incurred relating to
development and improvement of property are capitalized, whereas costs
relating to holding property are expensed. In substance foreclosed
properties are those properties where the borrower retains title but has
little or no remaining equity in the property considering its fair value;
where repayment can only be expected to come from the operation or sale
of the property; and where the borrower has effectively abandoned control
of the property or it is doubtful that the borrower will be able to
rebuild equity in the property. Property acquired by deed in lieu of
foreclosure results when a borrower voluntarily transfers title to the
Bank in full settlement of the related debt in an attempt to avoid
foreclosure.
Valuations are periodically performed by management and an allowance for
losses is established by a charge to operations if the carrying value of
a property exceeds its estimated fair value.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the
related assets. Amortization is computed on the straight-line method
over the term of the lease or the life of the assets, whichever is
shorter.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLES - The Bank is amortizing the excess of cost over fair value
of net assets acquired (goodwill) through business combinations at a
constant rate when applied to the interest-earning assets, through June
1996, which is the estimated remaining life of the long-term
interest-earning assets. During 1993, $637,000 of goodwill relating to
the branches sold was written-off. Other intangibles amounting to
$447,482 and $514,604 at June 30, 1995 and 1994, respectively, consist of
value related to a branch network acquired in 1981, which is being
amortized straight line through 2001; value assigned to the management in
place in the 1981 acquisition, which is being amortized straight line
over the remaining service life of the managers through 2001; and value
assigned to core deposits acquired in 1986, which is being amortized
straight line through 1996.
TRUST ASSETS - Assets held by the Bank in trust capacities are not
included in the accompanying consolidated statements of financial
condition, because such items are not assets of the Bank.
69
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
INCOME TAXES - Effective July 1, 1993, the Company adopted the provisions
of the Financial Accounting Standards Board Statement No. 109 (Statement
109), Accounting for Income Taxes, on a prospective basis for the fiscal
year ending June 30, 1994. The adoption of Statement 109 resulted in an
increase of the Company's deferred income tax asset of $764,255. Prior
to that date, the Company followed Statement of Financial Accounting
Standards No. 96, Accounting for Income Taxes (Statement 96). Statements
109 and 96 require the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income
taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes
the enactment date.
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER
On March 30, 1992, the Bank converted from a mutual savings bank to a
capital stock savings bank. The Bank issued all of its outstanding
capital stock to Heritage Federal Bancshares, Inc., a holding company for
Heritage Federal Bank for Savings. Heritage Federal Bancshares, Inc.
consummated a public offering of 2,990,000 shares of common stock (after
giving effect to stock splits) which generated net proceeds of
$16,048,290 after conversion costs totaling $1,144,210. The Bank
received 99% of the net proceeds in exchange for the stock it issued to
the holding company.
At the time of conversion, the Bank established a liquidation account in
an amount equal to the Bank's net worth for the benefit of eligible
account holders at the time of conversion. The liquidation account will
be reduced annually to the extent that eligible account holders have
reduced their eligible deposits, and shall cease upon the closing of the
accounts, and shall never be increased. In the event of liquidation of
the Bank, such person shall be entitled, after all payments to creditors,
to a distribution from the liquidation account before any distribution to
stockholders.
Federal regulations adopted by the Office of Thrift Supervision (OTS)
impose certain limitations on the payment of dividends and other capital
distributions, including stock repurchases, by the Bank. Based upon
current OTS regulations and its capital structure at June 30, 1995, the
Bank may make capital distributions during a year up to the greater of
(i) 100% of its net earnings to date during the calendar year plus an
amount equal to one-half of the amount by which its total
capital-to-assets ratio exceeded its fully phased-in capital-to-assets
ratio at the beginning of the calendar year or (ii) 75% of its net income
during the most recent four-quarter period. At June 30, 1995,
approximately $19,850,000 was available for payment of dividends from the
Bank to the Company under the above mentioned OTS restrictions. Capital
distributions by the Bank are further subject to 30-day advance written
notice to the OTS.
The Company's charter authorizes 2,000,000 shares of preferred stock of
the Company, of $1.00 par value. The Company's charter expressly vests
in the Board of Directors of the Company the authority to issue the
preferred stock in one or more series and to determine, to the extent
permitted by law prior to the issuance of the preferred stock (or any
series of the preferred stock), the relative rights, limitations, and
preferences of the preferred stock or any such series.
70
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
2. CONVERSION TO STOCK SAVINGS BANK, FORMATION OF HOLDING COMPANY, SALE OF
COMMON STOCK AND MERGER, continued
In February 1995, the Company entered into a merger agreement with First
American Corporation (FAC). All of the outstanding shares of the Company
stock will be exchanged for common shares of FAC in a transaction that
will be accounted for as a pooling of interest. The transaction is
expected to be consummated during the Company's second fiscal quarter.
3. SECURITIES
At June 30, 1995, securities have been classified in the consolidated
financial statements according to management's intent. The carrying
amount of securities and their approximate market values at June 30, 1995
were as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations $ 20,077,586 $ 139,223 $ 3,614 $ 20,213,195
============= =========== =========== =============
Held-to-maturity:
U.S. government and agencies $ 71,685,619 $ 307,843 $ 1,068,462 $ 70,925,000
Collateralized mortgage
obligations 14,942,023 484,692 93,715 15,333,000
------------- ----------- ----------- -------------
86,627,642 792,535 1,162,177 86,258,000
------------- ----------- ----------- -------------
Mortgage-backed securities:
GNMA Certificates 49,076,676 189,729 623,405 48,643,000
FNMA Certificates 12,826,298 14,157 205,455 12,635,000
FHLMC Certificates 22,091,685 71,897 429,582 21,734,000
------------- ----------- ----------- -------------
83,994,659 275,783 1,258,442 83,012,000
------------- ----------- ----------- -------------
$ 170,622,301 $ 1,068,318 $ 2,420,619 $ 169,270,000
============= =========== =========== =============
</TABLE>
71
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
3. SECURITIES, continued
Investment securities and mortgage-backed securities at June 30, 1994
were summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Book Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government and agencies $ 75,181,904 $270,072 $2,102,976 $ 73,349,000
Collateralized mortgage
obligations 5,614,505 7,370 216,875 5,405,000
------------ -------- ---------- ------------
80,796,409 277,442 2,319,851 78,754,000
------------ -------- ---------- ------------
Mortgage-backed securities:
GNMA Certificates 52,390,756 10,508 2,866,264 49,535,000
FHLMC Certificates 25,810,401 58,079 823,480 25,045,000
FNMA Certificates 14,356,656 4,520 544,176 13,817,000
------------ -------- ---------- ------------
92,557,813 73,107 4,233,920 88,397,000
------------ -------- ---------- ------------
$173,354,222 $350,549 $6,553,771 $167,151,000
============ ======== ========== ============
</TABLE>
Debt securities at June 30, 1995 will mature on the following schedule:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------------ ----------------------
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 7,048,291 $ 7,072,000 $ 5,966,753 $ 6,017,000
Due after one year through
five years 13,029,295 13,141,195 56,275,626 55,467,000
Due after five years through
ten years - - 31,994,678 31,742,000
Due after ten years - - 76,385,244 76,044,000
----------- ----------- ------------ ------------
$20,077,586 $20,213,195 $170,622,301 $169,270,000
=========== =========== ============ ============
</TABLE>
The amortized cost and approximate market value of mortgage-backed
securities at June 30, 1995, by contractual maturities are shown in the
above table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
The weighted average interest yield for all securities was approximately
6.35% at June 30, 1995 and 5.69% at June 30, 1994.
Investment securities carried in the consolidated statements of financial
condition at $23,850,000 and $19,760,000 as of June 30, 1995 and 1994,
respectively, were pledged to secure public deposits.
72
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans secured by first mortgages on real estate:
Principal balances:
One to four single family residential $239,624,145 $251,144,767
Construction loans, gross commitment 7,044,838 11,219,927
Partially guaranteed by VA or insured by FHA 804,254 998,812
Other conventional 32,549,777 32,177,760
Other 1,431,052 1,746,064
------------ ------------
281,454,066 297,287,330
Less:
Discounts on loans acquired through mergers 1,013,821 1,767,348
Allowance for loan losses 1,222,676 1,222,676
Undisbursed portion of construction loans 2,436,442 3,732,820
Net deferred loan origination fees 871,853 1,192,445
------------ ------------
Total first mortgage loans 275,909,274 289,372,041
------------ ------------
Consumer and other loans:
Principal balances:
Secured by deposits 2,224,023 2,429,921
Education 6,216 10,213
Home equity and second mortgage 13,050,389 10,600,812
Credit card 535,134 595,452
Other consumer and commercial 7,666,405 6,823,118
------------ ------------
23,482,167 20,459,516
Less:
Net deferred loan origination fees (costs) 21,894 (39,945)
Allowance for loan losses 1,103,992 1,055,962
Loans-in-process 732,242 115,915
------------ ------------
Total consumer and other loans 21,624,039 19,327,584
------------ ------------
Loans receivable, net $297,533,313 $308,699,625
============ ============
Weighted average contractual yield 8.18% 7.38%
============ ============
</TABLE>
73
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE, continued
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,278,638 $2,387,673 $2,338,314
Provisions charged against income 82,247 487,346 595,140
Chargeoffs, net of recoveries (34,217) (596,381) (545,781)
---------- ---------- ----------
Balance at end of year $2,326,668 $2,278,638 $2,387,673
========== ========== ==========
</TABLE>
The following is a summary of the principal balances of loans on
nonaccrual status and loans past due ninety days or more:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans contractually past due 90 days or more
and/or on nonaccrual status:
Residential $178,000 $271,000
Consumer and commercial 47,000 194,000
-------- --------
$225,000 $465,000
======== ========
</TABLE>
During the years ended June 30, 1995, 1994, and 1993, interest income of
approximately $17,000, $22,000, and $106,000, respectively, was not
recorded related to loans accounted for on a nonaccrual basis.
In the ordinary course of business, the Bank makes loans to directors and
officers and their related interests. Loans to directors and officers
and their related interests are as follows:
<TABLE>
<S> <C>
Balance at June 30, 1993 $1,640,199
Advances 702,860
Repayments (346,402)
Separation of officer with loans (43,363)
----------
Balance at June 30, 1994 1,953,294
Advances 381,926
Repayments (545,673)
----------
Balance at June 30, 1995 $1,789,547
==========
</TABLE>
74
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
4. LOANS RECEIVABLE, continued
The Bank offers an unsecured $100,000 line of credit to each of its seven
non-employee directors. Amounts outstanding against line of credit
agreements with the two directors who have accepted the credit line were
$99,878 and $99,971 at June 30, 1995 and 1994, respectively. The
directors may retain their lines of credit after they leave the board, so
long as they continue to meet the normal credit requirements of the Bank.
5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The approximate unpaid
principal balances of these loans were $7,821,000 and $9,905,000 at June
30, 1995 and 1994, respectively.
6. INTEREST RECEIVABLE
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Securities available-for-sale $ 352,072 $ -
Securities held-to-maturity 1,533,030 -
Investment securities - 1,255,288
Mortgage-backed securities - 488,815
Loans receivable 1,781,205 1,702,413
---------- ----------
$3,666,307 $3,446,516
========== ==========
</TABLE>
7. REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $262,322 $284,947 $201,330
Provision charged against income 1,051 72,991 251,825
Chargeoffs (51,602) (95,616) (168,208)
-------- -------- --------
Balance at end of year $211,771 $262,322 $284,947
======== ======== ========
</TABLE>
75
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
8. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 1,587,801 $ 1,540,381
Office buildings and leasehold improvements 8,935,532 8,831,100
Furniture, fixtures, and equipment 4,363,695 5,526,720
Automobiles 105,765 93,017
----------- -----------
14,992,793 15,991,218
Less accumulated depreciation and amortization 8,206,898 9,314,754
----------- -----------
Premises and equipment, net $ 6,785,895 $ 6,676,464
=========== ===========
</TABLE>
9. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 10,574,976 2.4% $ 8,395,930 1.9%
Demand and NOW accounts at 2.25% 56,407,635 12.5 64,671,094 14.3
SuperNow at 2.50% 7,514,508 1.7 10,916,498 2.4
Money market at 3.31% 17,844,834 4.0 24,135,360 5.4
Passbook savings at 2.75% 68,433,425 15.2 91,440,876 20.3
------------ ----- ------------- -----
160,775,378 35.8 199,559,758 44.3
------------ ----- ------------- -----
Certificates of deposit:
2.00 to 2.50% $ 1,016,523 .2 $ 1,466,043 .3
2.51 to 3.00% 701,623 .2 2,367,612 .5
3.01 to 3.50% 2,850 .0 85,027,440 18.9
3.51 to 4.00% 13,693,624 3.0 56,385,354 12.5
4.01 to 4.50% 53,029,316 11.8 38,661,139 8.6
4.51 to 5.00% 56,907,063 12.7 27,079,048 6.0
5.01 to 5.50% 33,348,110 7.4 18,379,993 4.1
5.51 to 6.00% 34,780,123 7.8 15,273,215 3.4
6.01 to 6.50% 52,314,919 11.6 1,246,910 .3
6.51 to 7.00% 39,678,704 8.8 2,320,911 .5
7.01 to 7.50% 2,376,130 .5 1,123,279 .2
7.51 to 8.00% 222,920 .1 1,480,020 .3
8.01 to 8.50% 296,088 .1 286,531 .1
8.51 to 9.00% 99,110 .0 92,491 .0
9.01 to 9.50% 75,496 .0 68,864 .0
------------ ----- ------------- -----
288,542,599 64.2 251,258,850 55.7
------------ ----- ------------- -----
$449,317,977 100.0% $450,818,608 100.0%
============ ===== ============ =====
</TABLE>
76
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
9. DEPOSITS, continued
The aggregate amount of jumbo certificates of deposit with a minimum
denomination greater than $100,000 was $17,250,670 and $9,264,566 at June
30, 1995 and 1994, respectively.
At June 30, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year ending June 30
-------------------
<S> <C>
1996 $221,752,925
1997 41,336,160
1998 16,498,383
Later 8,955,131
------------
$288,542,599
============
</TABLE>
Interest expense on deposits for the years ended June 30, 1995, 1994 and
1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Demand, Money Market, NOW, and SuperNOW $ 2,338,807 $ 2,361,347 $ 2,517,330
Passbook savings 2,175,733 2,550,798 2,746,998
Time deposits 12,314,926 10,934,623 13,609,634
----------- ----------- -----------
$16,829,466 $15,846,768 $18,873,962
=========== =========== ===========
</TABLE>
77
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
10. ADVANCES FROM FEDERAL HOME LOAN BANK
Federal Home Loan Bank advances consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Variable rate advance which reprices monthly based on the one month
London Interbank Offering Rate (LIBOR) plus 5 basis points (6.1203%
at June 30, 1995), with interest only due monthly, and principal
due on October 14, 2004 $10,000,000 $ -
8.1% fixed rate advance payable in monthly principal and interest
payments of $865 through February, 2006 74,005 78,207
6.0% fixed rate advance payable in monthly principal and interest
payments of $45,830, due through November 1, 2002 3,256,279 4,265,337
Variable rate advance which reprices monthly based on the one
month London Interbank Offering Rate (LIBOR) (6.0625% at June 30,
1995), with interest only due monthly, and principal due on
November 14, 1997 492,000 536,000
5.15% fixed rate advance payable in monthly principal and interest
payments of $53,400, due through October 1, 2003 4,299,637 4,707,539
----------- ----------
$18,121,921 $9,587,083
=========== ==========
</TABLE>
These advances are collateralized by a blanket pledge of qualifying
mortgage loans totaling $27,279,181 at June 30, 1995.
11. INCOME TAXES
Income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $2,358,402 $3,485,409 $3,691,634
Deferred 654,476 (47,280) (268,381)
Charge-in-lieu of taxes 262,227 248,529 528,381
Change in effective tax rate on
temporary differences (129,439) (184,695) -
---------- ---------- ----------
$3,145,666 $3,501,963 $3,951,634
========== ========== ==========
</TABLE>
Included in the above are state income taxes of $393,037, $457,561, and
$473,310 in 1995, 1994, and 1993, respectively.
78
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
11. INCOME TAXES, continued
The differences between income tax expense and the expected amounts
computed by applying the federal income tax rate to income before income
tax expense are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Income tax expense
at statutory rate $2,928,257 34.0% $3,300,104 34.0% $3,217,710 34.0%
Increases (decreases) in
tax resulting from:
Interest on tax-free
investments (25,442) (.3) (23,708) (.2) (34,565) (.4)
Purchase method of
accounting in
conjunction with
mergers 143,777 1.7 178,614 1.8 435,221 4.6
Change in effective rate on
temporary differences (129,439) (1.5) (184,695) (1.9) - -
Other, net (30,891) .1 (44,053) (.5) 20,883 .2
State income taxes, net
of Federal benefit 259,404 2.5 275,701 2.9 312,385 3.4
---------- ---- ---------- ---- ---------- ----
Actual income tax expense $3,145,666 36.5% $3,501,963 36.1% $3,951,634 41.8%
========== ==== ========== ==== ========== ====
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and
as measured by tax laws and regulations. The sources of these temporary
differences are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Excess of book over tax basis of equipment $(288,614) $ (221,276)
Discounts on loans acquired through mergers 385,252 616,765
Allowance for loan losses 450,075 783,880
Federal Home Loan Bank stock (288,221) (177,595)
Deferred loan fees (125,159) 187,354
Deferred compensation 833,322 290,202
Unrealized appreciation on available-for-sale securities (51,530) -
Other (17,611) (22,192)
--------- ----------
$ 897,514 $1,457,138
========= ==========
</TABLE>
79
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
11. INCOME TAXES, continued
The Bank qualifies under provisions of the Internal Revenue Code which
permit it to deduct from income an allowance for bad debts based on
approximately 8% of taxable income before such deduction, or actual
chargeoffs. As of June 30, 1995, the Company has taken aggregate bad
debt deductions of approximately $4,647,000 for income tax purposes under
the percentage of taxable income method for which no provisions for
federal income tax have been made in the financial statements. This
amount may be used only for absorbing losses for tax purposes. It is not
related to amounts of losses actually anticipated and the additions
thereto have not been charged against income.
12. COMPENSATION AND BENEFITS
PENSION PLAN
Substantially all employees of the Bank and its subsidiary are covered by
a noncontributory defined benefit pension plan. The plan calls for
benefits to be paid to all eligible employees at retirement based
primarily upon years of service with the Bank and compensation paid in
the five consecutive years when earnings were the greatest within the ten
year period preceding retirement. Plan assets consist primarily of fixed
income and equity securities and money market instruments.
The following sets forth the funded status of the plan as of June 30,
1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $2,112,692 $1,981,368
Nonvested benefits 57,092 60,645
---------- ----------
Accumulated benefit obligations $2,169,784 $2,042,013
========== ==========
Projected benefit obligations $3,167,095 $3,110,004
Fair value of assets held in the plan 2,697,472 2,631,386
---------- ----------
Fair value of plan assets under projected
benefit obligations (469,623) (478,618)
Net unrecognized loss from past experience
different than assumed 817,537 960,278
Unrecognized prior service cost (119,620) 43,730
Unrecognized net asset as of July 1, 1987 (253,209) (274,309)
---------- ----------
Prepaid (accrued) pension cost $ (24,915) $ 251,081
========== ==========
</TABLE>
The change in projected benefit obligations resulted from additions for
such factors as interest on the beginning balance and current year
service cost, less distributions to participants.
80
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
12. COMPENSATION AND BENEFITS, continued
Pension expense for the years ended June 30, 1995, 1994, and 1993,
includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost of the current period $128,817 $ 110,807 $ 116,232
Interest cost on the projected benefit obligations 230,242 202,372 179,720
Actual return on assets held in the plan (192,957) 36,410 (34,726)
Net amortization and deferral (48,877) (307,182) (251,987)
-------- --------- ---------
$117,225 $ 42,407 $ 9,239
======== ========= =========
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligations is 8.0%, the assumed rate of increase in future compensation
levels is 5.0%, and the expected long-term rate of return on assets is
9.5%. The Bank uses the straight-line method of amortization of
unrecognized gains and losses.
THRIFT AND PROFIT SHARING PLAN
The Bank has a thrift and profit sharing plan for substantially all
employees who have completed at least one year of service. The plan has
been amended to comply with the regulations of the Tax Equity and Fiscal
Responsibility Act, Code Section 401(k), the Retirement Equity Act of
1984, the Deficit Reduction Act of 1984, the Tax Reform Act of 1986, and
the Revenue Reconciliation Act of 1993.
Under these regulations, the Bank agrees to match an employee's
contribution equal to 5% of the employee's salary, although the employee
may contribute up to 10%. The expense for this plan for the years ended
June 30, 1995, 1994, and 1993 was approximately $154,000, $128,000 and
$116,000, respectively.
81
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
13. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Heritage Federal Bancshares, Inc.
(parent company only) as of June 30, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Condensed Balance Sheets
------------------------
Assets
------
<S> <C> <C>
Cash $ 724,287 $ 1,044,132
Investment in subsidiary 33,841,080 29,147,192
Other assets 56,321 7,796
----------- -----------
Total assets $34,621,688 $30,199,120
=========== ===========
Liabilities
-----------
Accounts payable $ 105,591 $ 73,082
Employee Stock Ownership Plan obligation - 880,885
----------- -----------
Total liabilities 105,591 953,967
----------- -----------
Stockholders' Equity
--------------------
Common stock 3,186,158 3,172,826
Additional paid-in capital 16,509,491 16,108,095
Retained earnings 15,812,195 11,555,235
Net unrealized appreciation on available-for-sale securities 84,079 -
Employee Stock Ownership Plan obligation (720,765) (880,885)
Unearned compensation of Management Recognition Plan (355,061) (710,118)
----------- -----------
Total stockholders' equity 34,516,097 29,245,153
----------- -----------
Total liabilities and stockholders' equity $34,621,688 $30,199,120
=========== ===========
</TABLE>
82
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
13. PARENT COMPANY FINANCIAL INFORMATION, continued
<TABLE>
<CAPTION>
Condensed Statements of Income
------------------------------
1995 1994
---- ----
<S> <C> <C>
Revenue:
Equity in earnings of subsidiary $ 6,043,382 $ 7,484,815
Loan interest income 30,837 -
----------- -----------
Total revenue 6,074,219 7,484,815
----------- -----------
Expenses
Management fees 572,340 636,442
Legal fees 237,039 143,167
Other 154,339 80,949
----------- -----------
Total expenses 963,718 860,558
----------- -----------
Income before income taxes 5,110,501 6,624,257
Income tax benefit (356,353) (344,223)
----------- -----------
Net income $ 5,466,854 $ 6,968,480
=========== ===========
Condensed Statements of Cash Flows
----------------------------------
Cash flows from operating activities:
Net income $ 5,466,854 $ 6,968,480
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in earnings of subsidiary (6,043,382) (7,484,815)
Increase (decrease) in other liabilities 32,507 (77,337)
----------- -----------
Net cash used by operating activities (544,021) (593,672)
----------- -----------
Cash flows from investing activities:
Dividends from subsidiary 2,000,000 2,000,000
Advances to ESOP (720,765) -
Decrease in other assets 19,277 43,246
----------- -----------
Net cash provided by investing activities 1,298,512 2,043,246
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 134,289 93,277
Dividend payments (1,208,625) (785,050)
----------- -----------
Net cash used by financing activities (1,074,336) (691,773)
----------- -----------
Net increase (decrease) in cash (319,845) 757,801
Cash at beginning of year 1,044,132 286,331
----------- -----------
Cash at end of year $ 724,287 $ 1,044,132
=========== ===========
</TABLE>
83
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
14. CITIZENS FINANCIAL CORPORATION
Summarized financial information of the Bank's wholly-owned service
corporation, Citizens Financial Corporation, is as follows:
<TABLE>
<CAPTION>
June 30,
--------
1995 1994
---- ----
Balance Sheets
--------------
<S> <C> <C>
Assets $1,842,612 $1,758,357
========== ==========
Accrued expenses and other liabilities $ 54,175 $ 117,204
Capital stock, paid-in capital and retained earnings 1,788,437 1,641,153
---------- ----------
$1,842,612 $1,758,357
========== ==========
<CAPTION>
Statements of Earnings
----------------------
Years ended June 30,
--------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income $301,775 $310,776 $181,202
Expenses 154,491 155,956 100,573
-------- -------- --------
Net earnings $147,284 $154,820 $ 80,629
======== ======== ========
</TABLE>
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the statements of financial condition. The
contract or notional amounts of these instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Bank uses the same credit policies in
making these commitments and conditional obligations as it does for
on-balance-sheet instruments.
84
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND SIGNIFICANT GROUP
CONCENTRATION OF CREDIT RISK, continued
Outstanding lines of credit balances were $1,682,944 and $1,685,212 at
June 30, 1995 and 1994, respectively. Commitments to originate or
purchase loans were approximately $1,733,000 and $5,195,000 at June 30,
1995 and 1994, respectively. The commitments exclude approved, but
unused, home equity lines of credit of $3,492,558 and $3,523,810 in 1995
and 1994, respectively. The commitments to originate or purchase loans
at June 30, 1995, were composed of variable rate loans of $1,204,000 and
fixed rate loans of $529,000. The fixed rate loans had interest rates
ranging from 6.5% to 9.25%.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include trade accounts
receivable; property, plant, and equipment; and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. At June 30,
1995, the unused amount of letters of credit issued totaled $212,602.
Most of the Bank's business activity is with customers located within the
state of Tennessee. A majority of the loans are collateralized by
residential or commercial real estate or other personal property. The
loans are expected to be repaid from cash flow or proceeds from the sale
of selected assets of the borrowers. The Bank grants residential,
consumer, and commercial loans to customers throughout the eastern
portion of the state of Tennessee.
85
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
16. EMPLOYEE STOCK OWNERSHIP PLAN OBLIGATION
In conjunction with converting to a stock ownership form, the Company and
the Bank established an Employee Stock Ownership Plan (ESOP), under which
the Bank makes annual contributions to a trust for the benefit of
eligible employees. To be eligible, an employee must be 21 years of age
and have completed at least one year of service. The contributions may
be in the form of cash, other property, or common shares of the Company.
The amount of the annual contribution is at the discretion of the Board
of Directors of the Bank. Initially, the ESOP acquired 209,300 shares of
the Company's common stock financed by $1,203,475 in borrowings by the
ESOP. The Board of Directors intends to contribute to the Plan an amount
equal to the required principal and interest payments related to the ESOP
loan.
During 1995, the ESOP refinanced its notes payable with borrowings from
the Company. The new loan, which has essentially the same terms as the
prior borrowing, is payable in quarterly principal payments of $30,087
plus interest at the lender's base rate through March 30, 2002. At June
30, 1995, the loan bore interest at 9.00%. The plan is noncontributory
and there is no past service liability. The principal balance of the
ESOP loan was $720,765 at June 30, 1995 and $880,885 at June 30, 1994.
The Company is using the dividends paid on unallocated shares held by the
ESOP to reduce the outstanding debt. The financial statements for the
years ended June 30, 1995, 1994 and 1993 include compensation expense of
$91,241, $120,348 and $120,348 and interest expense of $37,592, $63,613
and $74,407, respectively, related to the ESOP.
The ESOP debt agreement contains certain affirmative financial covenants
related to the Bank's operations and financial position. The Bank is in
compliance with all such covenants.
In prior years, the Company had guaranteed the repayment of the ESOP debt
to the outside lender and, accordingly, recorded the debt on its balance
sheet with a corresponding contra-equity account.
Future minimum principal payments due to the Company related to the
Employee Stock Ownership Plan obligation are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------
<S> <C>
1996 $120,348
1997 120,348
1998 120,348
1999 120,348
2000 120,348
Thereafter 119,025
--------
$720,765
========
</TABLE>
86
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results of operations for the
years ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
1995:
Interest income $8,640,565 $8,959,429 $9,074,420 $9,304,480
Interest expense 4,049,674 4,338,990 4,468,926 4,939,906
---------- ---------- ---------- ----------
Net interest income 4,590,891 4,620,439 4,605,494 4,364,574
Provision for loan losses 20,591 2,501 30,920 28,235
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,570,300 4,617,938 4,574,574 4,336,339
---------- ---------- ---------- ----------
Other income 719,009 682,585 701,777 651,600
General and administrative expenses 3,112,009 3,143,617 3,104,945 2,881,031
---------- ---------- ---------- ----------
Income before income taxes 2,177,300 2,156,906 2,171,406 2,106,908
Income tax expense 769,853 689,759 798,920 887,134
---------- ---------- ---------- ----------
Net income $1,407,447 $1,467,147 $1,372,486 $1,219,774
========== ========== ========== ==========
Net income per share $ 0.41 $ 0.43 $ 0.39 $ 0.35
========== ========== ========== ==========
1994:
Interest income $9,181,104 $8,986,173 $8,679,829 $8,703,564
Interest expense 4,309,713 4,198,871 3,997,124 3,981,573
---------- ---------- ---------- ----------
Net interest income 4,871,391 4,787,302 4,682,705 4,721,991
Provision for loan losses 216,652 212,519 45,295 12,880
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,654,739 4,574,783 4,637,410 4,709,111
---------- ---------- ---------- ----------
Other income 556,673 586,449 702,434 638,265
General and administrative expenses 3,049,639 3,021,942 2,415,619 2,866,476
---------- ---------- ---------- ----------
Income before income taxes 2,161,773 2,139,290 2,924,225 2,480,900
Income tax expense 863,870 828,453 969,150 840,490
---------- ---------- ---------- ----------
Net income before accounting change 1,297,903 1,310,837 1,955,075 1,640,410
Accounting change 764,255 - - -
---------- ---------- ---------- ----------
Net income after accounting change $2,062,158 $1,310,837 $1,955,075 $1,640,410
========== ========== ========== ==========
Net income per share $ .61 $ .39 $ .58 $ .49
========== ========== ========== ==========
</TABLE>
87
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
18. STOCK OPTION AND AWARD PLANS
1992 STOCK OPTION PLAN
The Company has adopted a stock option plan for the benefit of employees
of the Bank and nonemployee directors of the Company. The number of
shares of common stock authorized and awarded under the 1992 stock option
plan was 299,000, equal to 10% of the total number of shares issued in the
Company's public offering. The option exercise price of $5.75 per share
is equal to 100% of the fair market value of the common stock on the date
of grant. The option term is ten years. Options issued to employees of
the Bank in connection with the conversion became exercisable over a three
year period ending in March 1995. Options issued to nonemployee directors
of the Company are immediately exercisable. During 1993, a former
director exercised options for 14,950 shares at an exercise price of $5.75
per share. During 1994, 2,728 options were exercised at an exercise price
of $5.75 per share. During 1995, 8,377 options were exercised at an
exercise price of $5.75 per share.
MANAGEMENT RECOGNITION PLAN (MRP)
The Bank issued 89,700 shares of common stock to a MRP Trust created
during 1993. All of these shares, with a market value of $1,065,187 on
the date of award, have been awarded to certain executive officers as
restricted stock which will vest over the three year period ending March
1996. Compensation expense in the amount of $355,057, $201,060 and
$154,009 was recognized during 1995, 1994 and 1993, respectively, related
to these awards. The plan contains provisions providing for forfeiture of
unvested shares in the event of termination, and vesting in the event of
death, disability, retirement or a change in control.
The shares issued to the MRP Trust have been recorded as outstanding
shares, and the unvested portion has been recorded as unearned
compensation through a contra-equity account.
INCENTIVE COMPENSATION PLANS
The Company has established an incentive compensation plan for certain
officers. The plan provides for annual cash bonuses, restricted stock
awards and stock options based upon base annual compensation and certain
operating results. For the year ended June 30, 1995, compensation in the
aggregate amount of $510,228 was recorded, including awards of 3,348
shares of common stock which will vest over three years and options on
14,350 shares of common stock exercisable at $13.00 related to discounted
option plans. In 1994, the compensation recorded under these plans
aggregated $442,464, including awards of 5,073 shares of common stock
which will vest over three years and 30,735 options on shares of common
stock exercisable at $8.72 related to discounted option plans. In 1993,
the compensation recorded under these plans aggregated $404,463 including
awards of 5,672 shares of common stock. In addition, in 1995, 1994 and
1993 participants were granted stock options for 6,696 shares exercisable
at $26.00 per share, 10,149 shares exercisable at $17.44 per share, and
11,352 shares exercisable at $14.25 per share, respectively.
88
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
18. STOCK OPTION AND AWARD PLANS, continued
The Company has established an incentive compensation plan for nonemployee
directors. This unfunded plan provides benefits in the form of
performance stock options for shares of common stock. The number of
shares received, exercisable at 50% of the fair market value on the date
of the grant, is determined based on the amount of director fees deferred
during the year by each director. Director compensation recorded for 1995
related to this plan amounted to $177,250, representing 13,635 shares at
an exercise price of $13.00 per share. Director compensation recorded for
1994 related to this plan amounted to $134,650, representing 15,446 shares
at an exercise price of $8.72 per share.
In 1994, the Company adopted a new Director Option Plan that was approved
by the shareholders at the Annual Meeting in October. The plan provides
for automatic grants to each director of options to purchase 4,000 shares
of common stock annually at the fair market value on the date of the
grant. At June 30, 1995, no options had been exercised and 28,000 options
are exercisable at $20.25 per share and 28,000 options are exercisable at
$15.19 per share.
19. EARNINGS PER SHARE
On July 20, 1994, Heritage Federal Bancshares, Inc. declared a four for
three stock split for all shares outstanding as of August 5, 1994, to be
paid on August 26, 1994, to be effected as a stock dividend. On August
18, 1993, Heritage Federal Bancshares, Inc. declared a three for two stock
split for all shares outstanding as of September 8, 1993 to be effected as
a stock dividend. This stock split was paid September 30, 1993. All
references to the outstanding number of shares and earnings per share
amounts have been restated to reflect the splits.
Stock options are regarded as common stock equivalents. Common stock
equivalents are computed using the treasury stock method.
Following are weighted average shares outstanding for computation of
earnings per share for 1995, 1994, and 1993 after adjusting for stock
splits:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Shares issued and outstanding 3,179,737 3,171,216 3,099,422
Common stock equivalents computed by
the treasury stock method-options 284,079 200,856 209,633
--------- --------- ---------
3,463,816 3,372,072 3,309,055
========= ========= =========
</TABLE>
89
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
20. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107 (Statement 107)
requires disclosures of the estimated fair value of an entity's financial
instrument assets and liabilities. For the Company, as for most
financial institutions, the great bulk of its assets and liabilities are
considered financial instruments as defined in Statement 107. However,
many of such instruments lack an available trading market, as
characterized by a willing buyer and seller engaging in an exchange
transaction. Also, it is the Company's general practice and intent to
hold its financial instruments to maturity and not to engage in trading
or sales activities. Therefore, the Company used estimations and present
value calculations to prepare this disclosure.
Changes in the assumptions or methodologies used to estimate fair values
may materially affect the estimated amounts. Also, management is
concerned that there may not be reasonable comparability between
institutions due to the wide range of permitted assumptions and
methodologies in the absence of active markets. This lack of uniformity
gives rise to a high degree of subjectivity in estimating financial
instrument fair values.
Fair values have been estimated using data which management considered
the best available, and estimation methodologies deemed suitable for the
pertinent category of financial instrument. The estimation methodologies
and resulting fair values, and recorded carrying amounts at June 30, 1995
and 1994, were as follows:
Cash and cash equivalents are by definition short-term and do not
present any unanticipated credit issues. Therefore, the carrying
amount is a reasonable estimate of fair value. The estimated fair
values of securities are provided in Note 3 to the financial
statements. These are based on quoted market prices, when available.
If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
The fair value of the net loan portfolio has been estimated using
present value cash flow discounted at an interest rate adjusted for
servicing costs and giving consideration to estimated prepayment risk
and credit loss factors.
<TABLE>
<CAPTION>
1995 1994
------------------------------- -------------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
----- ------ ----- ------
<S> <C> <C> <C> <C>
1 - 4 family mortgages $247,984,000 $247,238,858 $259,692,000 $261,813,285
Consumer 23,226,000 23,482,167 20,214,000 20,459,516
Non-Residential 33,969,000 34,215,208 33,906,000 35,474,045
------------ ------------ ------------ ------------
$305,179,000 $304,936,233 $313,812,000 $317,746,846
============ ============ ============ ============
</TABLE>
90
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
20. FAIR VALUES OF FINANCIAL INSTRUMENTS, continued
Fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on
demand), totaling $160,775,378 and $199,559,758 in 1995 and 1994,
respectively. Under Statement 107, the fair value of deposits with
no stated maturity is equal to the amount payable on demand.
Therefore, the fair value estimates for these products do not reflect
the benefits that the Bank receives from the low-cost, long-term
funding they provide. These benefits are significant. There is no
material difference between the carrying amount of deposit
liabilities with stated maturities and their estimated fair value
since the majority of the liabilities mature within one year.
The fair value of certificates of deposits and advances from the
Federal Home Loan Bank is estimated by discounting the future cash
flows using the current rates offered for similar deposits and
advances with the same remaining maturities. The carrying value and
estimated fair values of certificates of deposit and Federal Home
Loan Bank advances at June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Certificates of deposits:
Carrying amount $288,542,599 $251,258,850
Estimated fair value $290,144,000 $252,205,000
Advances from Federal Home Loan Bank:
Carrying amount $ 18,121,921 $ 9,587,083
Estimated fair value $ 17,852,000 $ 8,992,000
</TABLE>
In 1994, there was no material difference between the carrying amount and
estimated fair value of the obligation to the Employee Stock Ownership
Plan because it bore interest at a variable rate equivalent to a current
market rate.
There is no material difference between the carrying amount and estimated
fair value of off-balance sheet items totaling $3,415,944 in 1995 and
$6,880,212 in 1994, which are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
The Company's remaining assets and liabilities are not considered
financial instruments.
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery, and Enforcement Act
(FIRREA), which was signed into law in 1989, imposed stringent capital
requirements upon savings institutions. In addition, FIRREA included
provisions for changes in the federal regulatory structure for savings
institutions including a new deposit insurance system, increased deposit
premiums and restricted investment activities with respect to
noninvestment grade corporate debt and certain other investments. FIRREA
also increased the required ratio of housing-related assets in order to
qualify as a qualified thrift lender under federal regulations.
91
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
_____________________________________________________
21. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT, continued
The Bank must satisfy three capital standards, as set by the Office of
Thrift Supervision ("the OTS"). These standards include a ratio of core
capital to adjusted total assets of 3.0%, a tangible capital standard
expressed as 1.5% of total adjusted assets, and a combination of core and
"supplementary" capital equal to 8.0% of risk-weighted assets. The OTS
recently finalized regulations that add an interest rate risk component
to capital requirements under certain circumstances. The Bank does not
expect that this regulation will require it to reduce its capital
materially for purposes of determining compliance with its risk-based
capital requirement. In addition, the OTS has recently adopted
regulations that impose certain restrictions on savings associations that
have a total risk-based capital ratio that is less than 8.0%, a ratio of
Tier 1 capital (or core capital) to risk-weighted assets of less than
4.0%, or a ratio of Tier 1 capital to adjusted total assets of less than
4.0% (or 3.0% if the institution receives the highest rating under the
OTS examination rating system).
The following is a reconciliation of the Bank's net worth at June 30,
1995, under generally accepted accounting principles (GAAP) to regulatory
capital requirements:
<TABLE>
<CAPTION>
Regulatory - Unaudited (Rounded)
--------------------------------------------------------
Tangible Tier 1/Core Risk-based
capital capital capital
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $52,378,000 9.93% $52,378,000 9.92% $52,378,000 24.16%
Add:
General valuation
allowances - - 2,247,000 1.03
Deduct:
Goodwill 780,000 (.15) 333,000 (.06) 333,000 (.15)
Unrealized gains on
available-for-sale
securities 84,000 (.01) 84,000 (.01) 84,000 (.04)
----------- ---- ----------- ---- ----------- -----
Regulatory capital -
computed 51,514,000 9.77 51,961,000 9.85 54,208,000 25.00
Minimum capital
requirements 7,909,000 1.50 15,832,000 3.00 17,345,000 8.00
----------- ---- ----------- ---- ----------- -----
Regulatory capital -
excess $43,605,000 8.27% $36,129,000 6.85% $36,863,000 17.00%
=========== ==== =========== ==== =========== =====
</TABLE>
92
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HERITAGE FEDERAL BANCSHARES, INC.
September 21, 1995 By: /s/ William E. Kreis
----------------------------------------
William E. Kreis
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ William E. Kreis September 21, 1995
- ---------------------------------------------------
William E. Kreis
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ William F. Richmond September 21, 1995
- ---------------------------------------------------
William F. Richmond
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
/s/ Sam H. Anderson September 21, 1995
- ---------------------------------------------------
Sam H. Anderson
Chairman of the Board
(Director)
/s/ John C. Bracy September 21, 1995
- ---------------------------------------------------
John C. Bracy
(Director)
/s/ Clyde W. Craven September 21, 1995
- ---------------------------------------------------
Clyde W. Craven
(Director)
/s/ Robert C. Fox September 21, 1995
- ---------------------------------------------------
Robert C. Fox
(Director)
/s/ Thomas E. LaGuardia, Jr. September 21, 1995
- ---------------------------------------------------
Thomas E. LaGuardia, Jr.
(Director)
/s/ Richard A. Manahan September 21, 1995
- ---------------------------------------------------
Richard A. Manahan
(Director)
/s/ C. Mack Patton September 21, 1995
- ---------------------------------------------------
C. Mack Patton
(Director)
<PAGE> 1
EXHIBIT 15
The Board of Directors
First American Corporation
With respect to this Registration Statement on Form S-4, we acknowledge our
awareness of the use therein of our report dated April 20, 1995 and our report
dated July 20, 1995, except for Note 6, as to which the date is September 22,
1995, related to our reviews of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such reports are not
considered part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
/s/ KPMG Peat Marwick LLP
Nashville, Tennessee
September 28, 1995
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
First American Corporation:
We consent to the use of our audit report dated January 20, 1995 on the
consolidated financial statements of First American Corporation and subsidiaries
as of December 31, 1994 and 1993, and for each of the years in the three-year
period ended December 31, 1994 incorporated herein by reference and the
reference to our firm under the heading "Experts" in this Registration Statement
on Form S-4. Our report dated January 20, 1995 contains an explanatory paragraph
that refers to changes in accounting principles related to the adoption in 1993
of the provisions of the Financial Accounting Standards Board's Statements of
Financial Accounting Standards No. 109, Accounting for Income Taxes; No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions; No. 112,
Employers' Accounting for Postemployment Benefits; and No. 115, Accounting for
Certain Investments in Debt and Equity Securities.
/s/ KPMG Peat Marwick LLP
Nashville, Tennessee
September 28, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of First American
Corporation on Form S-4 (File No. 33-___________) of our report dated August 1,
1995, on our audits of the consolidated financial statements of Heritage
Federal Bancshares, Inc. and Subsidiary as of June 30, 1995 and 1994 and for
each of the three years in the period ended June 30, 1995. We also consent to
the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
September 27, 1995
<PAGE> 1
EXHIBIT 23.4
TRIDENT FINANCIAL CORPORATION
Investment Bankers and Financial Advisors
TELECOPIER: 4601 SIX FORKS ROAD POST OFFICE BOX 19047
(919) 767 1870 RALEIGH, NORTH CAROLINA 27609 RALEIGH, NORTH CAROLINA 27619
(919) 781-8900
September 25, 1995
LETTER OF CONSENT
Board of Directors
First American Corporation
First American Center
Nashville, TN 37237-0700
Board of Directors
Heritage Federal Bancshares, Inc.
4105 Fort Henry Drive
Kingsport, TN 37663
Gentlemen:
We hereby consent to the use of our firm's name in the Form S-4
Registration Statement which includes First American Corporation's Prospectus
and Heritage Federal Bancshares, Inc.'s Proxy Statement and do further consent
to the references therein to our fairness opinion being filed as an Exhibit to
the Form S-4.
Sincerely,
/s/ John F. Schramm
John F. Schramm
Senior Vice President
JFS/sbl
8-7-3
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 9, 1995 /s/ SAMUEL E. BEALL, III
--------------------------------------------
Samuel E. Beall, III
</TABLE>
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 4, 1995 /s/ DENNIS C. BOTTORFF
--------------------------------------------
Dennis C. Bottorff
</TABLE>
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 6, 1995 /s/ EARNEST W. DEAVENPORT, JR.
--------------------------------------------
Earnest W. Deavenport, Jr.
</TABLE>
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 7, 1995 /s/ T. SCOTT FILLEBROWN
--------------------------------------------
T. Scott Fillebrown
</TABLE>
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 13, 1995 /s/ GENE C. KOONCE
--------------------------------------------
Gene C. Koonce
</TABLE>
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 7, 1995 /s/ JAMES A. HASLAM, II
--------------------------------------------
James A. Haslam, II
</TABLE>
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 9, 1995 /s/ JAMES R. MARTIN
--------------------------------------------
James R. Martin
</TABLE>
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 6, 1995 /s/ ROBERT A. McCABE, JR.
--------------------------------------------
Robert A. McCabe, Jr.
</TABLE>
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 7, 1995 /s/ WILLIAM O. McCOY
--------------------------------------------
William O. McCoy
</TABLE>
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 4, 1995 /s/ DALE W. POLLEY
--------------------------------------------
Dale W. Polley
</TABLE>
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 6, 1995 /s/ ROSCOE R. ROBINSON
--------------------------------------------
Dr. Roscoe R. Robinson
</TABLE>
<PAGE> 12
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 8, 1995 /s/ CAL TURNER, JR.
--------------------------------------------
Cal Turner, Jr.
</TABLE>
<PAGE> 13
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 8, 1995 /s/ TED H. WELCH
--------------------------------------------
Ted H. Welch
</TABLE>
<PAGE> 14
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 4, 1995 /s/ DAVID K. WILSON
--------------------------------------------
David K. Wilson
</TABLE>
<PAGE> 15
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws of
the State of Tennessee ("Company"), hereby constitutes and appoints MARY NEIL
PRICE and MARTIN E. SIMMONS and each of them (with full power of each of them to
act alone), his true and lawful attorney-in-fact and agent for him and on his
behalf and in his name, place and stead, in any and all capacities, to sign,
execute and file with the Securities and Exchange Commission, the Office of
Thrift Supervision, or any other governmental or regulatory authority, one or
more Registration Statements on Form S-4 or such other appropriate form (as any
of such attorneys may determine) and all amendments (including post-effective
amendments) thereto, with all exhibits and any and all documents required to be
filed with respect thereto, relating to the registration of shares of the
Company's common stock under the Securities Act of 1933 and under the rules and
regulations of the Office of Thrift Supervision in connection with the Company's
acquisition of Charter Federal Savings Bank and Heritage Federal Bancshares,
Inc., granting unto said attorneys and each of them full power and authority to
do and to perform each and every act and thing requisite and necessary to be
done in order to effectuate the same as fully to all intents and purposes as he
himself might or could do if personally present, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has hereunto
set his hand as of the date specified.
<TABLE>
<S> <C>
Dated: August 8, 1995 /s/ WILLIAM S. WIRE, II
--------------------------------------------
William S. Wire, II
</TABLE>
<PAGE> 16
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws
of the State of Tennessee ("Company"), hereby constitutes and appoints MARY
NEIL PRICE and MARTIN E. SIMMONS and each of them (with full power of each of
them to act alone), his true and lawful attorney-in-fact and agent for him and
on his behalf and in his name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission, the Office
of Thrift Supervision, or any other governmental or regulatory authority, one
or more Registration Statements on Form S-4 or such other appropriate form (as
any of such attorneys may determine) and all amendments (including
post-effective amendments) thereto, with all exhibits and any and all documents
required to be filed with respect thereto, relating to the registration of
shares of the Company's common stock under the Securities Act of 1933 and under
the rules and regulations of the Office of Thrift Supervision in connection
with the Company's acquisition of Charter Federal Savings Bank and Heritage
Federal Bancshares, Inc., granting unto said attorneys and each of them full
power and authority to do and to perform each and every act and thing requisite
and necessary to be done in order to effectuate the same as fully to all
intents and purposes as he himself might or could do if personally present,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has
hereunto set his hand as of the date specified.
Dated: August 21, 1995 /s/ Reginald D. Dickson
--------------- -----------------------
Reginald D. Dickson
<PAGE> 17
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws
of the State of Tennessee ("Company"), hereby constitutes and appoints MARY
NEIL PRICE AND MARTIN E. SIMMONS and each of them (with full power of each of
them to act alone), his true and lawful attorney-in-fact and agent for him and
on his behalf and in his name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission, the Office
of Thrift Supervision, or any other governmental or regulatory authority, one
or more Registration Statements on Form S-4 or such other appropriate form (as
any of such attorneys may determine) and all amendments (including
post-effective amendments) thereto, with all exhibits and any and all documents
required to be filed with respect thereto, relating to the registration of
shares of the Company's common stock under the Securities Act of 1933 and under
the rules and regulations of the Office of Thrift Supervision in connection
with the Company's acquisition of Charter Federal Savings Bank and Heritage
Federal Bancshares, Inc., granting unto said attorneys and each of them full
power and authority to do and to perform each and every act and thing requisite
and necessary to be done in order to effectuate the same as fully to all
intents and purposes as he himself might or could do if personally present,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has
hereunto set his hand as of the date specified.
Dated: August 7, 1995 /s/ Martha R. Ingram
-------------- --------------------
Martha R. Ingram
<PAGE> 18
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or
officer of First American Corporation, a corporation organized under the laws
of the State of Tennessee ("Company"), hereby constitutes and appoints MARY
NEIL PRICE and MARTIN E. SIMMONS and each of them (with full power of each of
them to act alone), his true and lawful attorney-in-fact and agent for him and
on his behalf and in his name, place and stead, in any and all capacities, to
sign, execute and file with the Securities and Exchange Commission, the Office
of Thrift Supervision, or any other governmental or regulatory authority, one
or more Registration Statements on Form S-4 or such other appropriate form (as
any of such attorneys may determine) and all amendments (including
post-effective amendments) thereto, with all exhibits and any and all documents
required to be filed with respect thereto, relating to the registration of
shares of the Company's common stock under the Securities Act of 1933 and under
the rules and regulations of the Office of Thrift Supervision in connection
with the Company's acquisition of Charter Federal Savings Bank and Heritage
Federal Bancshares, Inc., granting unto said attorneys and each of them full
power and authority to do and to perform each and every act and thing requisite
and necessary to be done in order to effectuate the same as fully to all
intents and purposes as he himself might or could do if personally present,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned director and/or officer has
hereunto set his hand as of the date specified.
Dated: August 15, 1995 /s/ Walter G. Knestrick
--------------- -----------------------
Walter G. Knestrick
<PAGE> 1
EXHIBIT 99.1
REVOCABLE PROXY
HERITAGE FEDERAL BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS
OCTOBER 30, 1995
The undersigned hereby appoints Sam H. Anderson, Jr., C. Mack Patton and
William E. Kreis of Heritage Federal Bancshares, Inc. ("Heritage") or any
successors, with full powers of substitution, to act as attorneys and proxies
for the undersigned to vote all shares of the Common Stock of Heritage which the
undersigned is entitled to vote at the Special Meeting of Shareholders (the
"Meeting"), to be held in the Training Room of the Heritage Federal Bank
Building, 220 Broad Street, Kingsport, Tennessee, on Monday, October 30, 1995,
at 1:00 p.m. and at any and all adjournments thereof, as follows:
1. The approval of the Agreement and Plan of Merger (the "Merger Agreement") by
and between Heritage and First American Corporation ("First American") which
provides for the merger of Heritage with and into First American pursuant to
which shareholders will receive for each share of Heritage's common stock, $1.00
par value (the "HFB Common Stock") shares of First American common stock, $5.00
par value ("FAC Common Stock"), with a value equal to $28.00 so long as the
average closing sales price of FAC Common Stock for the 20 consecutive
trading-day period ending on and including the third business day prior to the
closing of the Merger is between $25.50 and $34.50; if such average closing
sales price is $25.50 or less, each stockholder of Heritage will receive 1.098
shares of FAC Common Stock for each share of HFB Common Stock owned, and if such
average closing sales price is $34.50 or greater, each Heritage stockholder will
receive 0.8116 share of FAC Common Stock for each share of the HFB Common Stock
owned, all as more fully described in the Prospectus/Proxy Statement delivered
herewith.
FOR / / AGAINST / / ABSTAIN / /
2. The approval of an amendment to Article XIV of the Charter of Heritage,
which currently prohibits the acquisition of beneficial ownership of more than
10% of any class of equity security of Heritage, to provide a specific exception
for the proposed transaction with First American described in Item 1 above, all
as more fully described in the Prospectus/Proxy Statement delivered herewith.
FOR / / AGAINST / / ABSTAIN / /
3. The adjournment of the Meeting to a later date, if necessary, to solicit
additional proxies in the event insufficient shares are present in person or by
proxy at the Meeting to approve the Agreement, all as more fully described in
the Prospectus/Proxy Statement herewith.
FOR / / AGAINST / / ABSTAIN / /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSITIONS.
- --------------------------------------------------------------------------------
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT THE MEETING, INCLUDING MATTERS RELATING TO THE CONDUCT OF THE
MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN ACCORDANCE
WITH THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT
TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE
MEETING.
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Meeting or at any
adjournment thereof and after notification to the Secretary of Heritage at the
Meeting of the stockholder'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 from Heritage prior to the execution of
this proxy of the Notice of Meeting and the Prospectus/Proxy Statement. The
undersigned hereby revokes any and all proxies heretofore given, with respect to
the undersigned's share of HFB Common Stock.
Dated: , 1995
-----------------------
------------------------------------
PRINT NAME OF STOCKHOLDER
------------------------------------
SIGNATURE OF STOCKHOLDER
Please sign exactly as your name
appears on this card. When signing
as attorney, executor,
administrator, trustee or guardian,
please give your full title. If
shares are held jointly, each holder
should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
